The International Monetary Fund warned Ukraine yesterday that it might freeze assistance ahead of January`s hotly contested presidential election if populist wage and pension increases are introduced, according to Financial Times.
The warning comes as fears grow that Ukraine could sink deeper into political turmoil, following in the footsteps of other eastern European countries - most recently Romania - where governments have collapsed amid the economic downturn.
In a statement issued after talks with Ukrainian officials, the IMF said its decision to issue an additional $3.8bn (?2.5bn, £2.3bn) in aid would hang on "assurances that the wage and pension law approved by Ukraine`s parliament, which is at odds with the objectives of the authorities` programme, will be vetoed".
The statement was a clear signal to President Viktor Yushchenko, who has not yet clarified whether he will sign or veto the law.
Ukraine needs the aid to service a budget deficit and keep the country stable.
The law envisions some $1bn in wage and pension increases ahead of the January 2010 election, and nearly $10bn next year.
The move would increase Ukraine`s budget deficit from 6 to 8 per cent.
With gross domestic product plunging 18 per cent in the first half of 2009, and finances stretched to the limit, Ukraine`s government has stayed afloat thanks to nearly $11bn in IMF aid. Officials say the economy is starting to emerge from a deep recession, but insist they do not have funds for additional expenditure.
The IMF said: "The economic and financial situation in Ukraine is stabilising as a result of fund assistance and policies. Preserving these gains will require policy discipline and corrective actions in some areas."
Mr Yushchenko, whose popular support has sunk to single-digit levels, is not expected to be re-elected. He and other presidential candidates have, however, accused the IMF of being too soft on the government of his rival Yulia Tymoshenko. They have suggested the IMF could be supporting Ms Tymoshenko`s presidential bid by providing financial assistance in spite of the adoption of unpopular reforms.
The IMF has denied such allegations. Observers say reforms have stalled due to constant political bickering.
The presidential race, which formally kicked off last week, is considered by many to be wide open. But the two frontrunners are Ms Tymoshenko and Viktor Yanukovych, the former prime minister and Russia-backed candidate in the 2004 presidential election.
Like Mr Yushchenko, Ms Tymoshenko is pro-western and supports Ukraine`s bid to join the European Union. She has also positioned herself as a candidate who could harmonise relations with Russia, which soured under Mr Yushchenko`s presidency.
