The International Monetary Fund (IMF) is not convinced the Ukrainian government can achieve a 2012 budget deficit of 1.8% of GDP, and is suggesting that the authorities increase taxes on wealthy citizens, IMF mission chief Christopher Jarvis said at a Monday press conference in Kyiv.

The IMF is recommending that the cabinet of ministers consider the possibility of either reducing the number of tax breaks or limiting budget expenditures, Jarvis said.

Changes to the budget involve increasing spending on wages and pensions, and the plan is for increasing budget income to pay for that, he said. New measures will be needed to meet the government's deficit target of 1.8% of GDP, he said.

Increasing tariffs on gas and heating for households remains an important component for Ukraine achieving energy independence, Jarvis said. The IMF recommends substantially hiking tariffs and doing so regularly down the road as subsidies are done away with, but financial support is provided to the poorest members of society.

This step will serve to reduce the budget deficit of national oil and gas company Naftogaz Ukrainy and free up resources for investment in national production and enhance the efficient use of energy resources, he said.

Ukrainian consumers to this point pay just 20% of the cost of imported gas across the population, although gas-usage varies significantly among consumers, Jarvis said.

As for monetary policy, Jarvis said it should remain aimed at supporting pricing stability in the face of large external risks.

The view at the IMF is that great exchange rate flexibility will help to better adapt Ukraine to changes in economic conditions and will to a large extent protect the national economy from external shocks.

The financial sector has to strengthen for the resumption of crediting and supporting economic growth, Jarvis said.

Ukraine's banking sector has sufficient capital but requires further reforms, among which is reducing the amount of non-performing loans, he said.

The Ukrainian government has to support international and domestic investors' trust in the country's authorities, he said.

The IMF expects Ukraine's economy to grow 3% this year (real GDP was up 5.2% in 2011), as demand for the country's exports declines, he said.

The IMF mission Jarvis is leading is in Kyiv from May 21 to 28 with the aim of wrapping up discussions on the context of 2012 consultations per Article IV of the Fund's charter (obligations as regards the forex regime).

Ukraine's state budget for this year, with the most recent changes, has revenues at UAH 366.62 billion and spending at UAH 391.81 billion. The deficit cap is UAH 25.13 billion, or, according to the government's projections, 1.8% of GDP.

The official exchange rate for May 28: UAH 7.9925/$1.
 

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