bne -

Talks over a new stand-by deal for Ukraine could resume next month, the International Monetary Fund said on February 12 as it left Kyiv following initial negotiations. However, the Washington-based lender warned that the economy still faces "serious challenges".

Christopher Jarvis, IMF mission chief for Ukraine, insisted in a statement as the team left that Kyiv's continued refusal to change key policies is loading further risk onto the economy by slowing growth and exposing it to potential shocks.

"Large subsidies on gas and heating for households continue to undermine Ukraine's budget and its balance of payments," Jarvis says. "In the absence of corrective policies our forecast for 2013 is growth of 0-1% and a high current account deficit that leaves Ukraine vulnerable to shocks."

Ukraine's subisdised gas tariffs have been the key issue ever since the IMF froze the last stand-by programme in 2011, and Jarvis hinted that the lender will continue to insist Kyiv adjusts them before going forwards. "With better policies Ukraine can achieve better outcomes," he continued. "We expect the mission to return to Kiev in March to continue the discussions."

The forecast that the economy will remain sluggish through 2013 (the EBRD also recently downgraded its growth outlook for the country to 1%) is at odds with the 3% growth that the government says it expects - a prediction Tim Ash of Standard Bank calls "pie in the sky".

"The government is clearly eager to spin all this in a positive way, i.e. to play the IMF game some more so as to keep investors sweet, but as Jarvis mentioned there are still significant policy differences between the two sides - likely gas prices, FX policy and macro assumptions underlying the budget," Ash writes. "I would tend to think that there is a high risk of a delays - depending on market financing available. If the government has to go to the IMF for a programme, they will want to delay this until after the annual heating season ends in April, so that if they have to increase gas prices as a prior action for a new programme then at least the political hit can be delayed somewhat."

By way of contrast to the warnings, officials in Kyiv painted a picture in which the IMF is heading back to Washington to dot the i's and cross the t's before putting its hand in its pocket. They offered no clue as to what concessions Ukraine could offer to the lender, reports Reuters.

"The (IMF) mission will carry out technical work in Washington and prepare the next round of talks," Vitaly Lukyanenko, a spokesman for Prime Minister Mykola Azarov, said. "The mission is studying Ukraine's fiscal, exchange rate, monetary and energy policies." Asked whether a memorandum on a new loan deal had been drafted, Lukyanenko said: "We are not at that stage yet."

Economy Minister Ihor Prasolov told reporters he expects another "technical" IMF mission to visit Kyiv soon, followed by a third mission which would be ready to finalise the loan talks. "The (third) mission will arrive ... in late March, and we, on both sides, will be more prepared to move towards drafting a memorandum and we will prepare for its signing."