Crisis-stricken Ukraine expects to get an agreement on an emergency loan from the International Monetary Fund as early as Wednesday, Ukrainian Prime Minister Yulia Tymoshenko said.
Tymoshenko confirmed on her Web site Wednesday that the Ukraine finance ministry is in permanent talks with the fund on the loan, and that the conditions are almost agreed.
The IMF declined to comment on the discussions of the conditions of the loan, which Ukraine's officials has said could total up to $14 billion, which is a small portion of Ukraine's overall external financing requirement of around $55 billion in 2008.
However, the IMF has a further $240 billion of funds that it can draw on to provide extra assistance.
The IMF typically provides two types of loans: a standby arrangement, or SBA, which provides regular disbursements on a pre-agreed timetable with strict conditions applied, and a precautionary arrangement, which gives access to emergency funding, without any pre-agreed timetable and strict conditions.
"While early intervention by the IMF should avert a full-blown balance-of-payments crisis, macroeconomic fundamentals in Ukraine may remain weak for some time to come," said Neil Shearing, emerging Europe economist at Capital Economics.
Meeting stiff fiscal and monetary conditions may prove difficult for the government, which is facing yet another election December and is dependent on imported natural gas, the price of which is dictated by Russia.
Tymoshenko said Wednesday that the government will cut its administrative spending by 20% and won't increase pensions and state salaries above the inflation level, which is expected to hit about 19% in 2008.
Tymoshenko said the government was also proposing partially nationalizing some troubled Ukrainian banks, buying new shares in these banks in return for government aid. She promised to double the maximum compensation for individual deposits to 100,000 hryvnas ($17,746).
Tymoshenko also expects to fill the state coffers with proceeds from privatization, which has been all but stopped in the recent years.
The National Bank is also ready for drastic measures to combat the crisis.
In a recent interview, the head of the council of the National Bank, Petro Poroshenko, said his institution isn't going to save every bank in the country.
"Taxpayers should not pay for the reckless credit policy of the bankers," he said. He also called for a zero-deficit budget, but expressed fears that it would be difficult as the country heads for elections.
Analysts predict a difficult road to recovery.
"Ukraine's quarrelsome politicians seem to realize that their nation is in danger and to be ready to swallow the bitter pill of the IMF emergency program," Anders Aslund, senior fellow at the Peterson Institute for International Economics, said in a note.
Unlike many other countries, Ukraine's troubles started not in the banking sector, but in industry.
High metal prices, Ukraine's main export, fueled the country's economic growth of more than 7% for eight straight years.
But the recent sharp drop in metals prices delivered a sharp blow to the economy. Only 19 out of 36 blast furnaces are working at full capacity this month, and metal companies have cut production by a quarter.
Ukraine also is vulnerable to Russian energy pricing. Metal and mining companies depend on natural gas from Central Asia, which Ukraine buys from Russia.
The budget for 2009 envisages the price at $260 for 1,000 cubic meters, but the talks on the price with Russia's OAO Gazprom (OGZPY) are in very early stages, while the gas monopoly indicated that the price might be as high as $400 for 1,000 cubic meters.
"The price will definitely be higher than we had expected, and this may lead to bankruptcies of the companies which consume a lot of gas," said Bohdan Sokolovskiy, who advises Ukraine's president on energy security.