A woman walks in front of the main office of Prominvest bank in Kiev November 5, 2008.

The International Monetary Fund on Wednesday approved a $16.5 billion loan program for Ukraine that includes monetary and exchange rate policy shifts to ease strains from the global financial crisis.

The IMF said it would immediately disburse $4.5 billion to the government under the two-year loan agreement.

“The authorities’ program is designed to help stabilize the domestic financial system against a backdrop of global deleveraging and a domestic crisis of confidence, and to facilitate adjustment of the economy to a large terms-of-trade shock,” the IMF said in a statement.

“The authorities’ plan incorporates monetary and exchange rate policy shifts, banking recapitalization, and fiscal and incomes policy adjustments,” it added.

Murilo Portugal, IMF deputy managing director, said Ukraine’s economy, especially its banking system, was under severe stress, caused by a drop in global steel prices, the country’s main export, and the global financial turmoil.

He said Ukraine’s program would seek to restore financial and economic stability through a more flexible exchange rate regime with targeted interventions, so-called “preemptive” recapitalization of banks, and tighter monetary policy.

“The flexible exchange rate regime, backed by an appropriate monetary policy and foreign exchange intervention, will help absorb external shocks and avoid disorderly exchange market developments,” Portugal said in a statement.

“The recent unification of official and market exchange rates should increase clarity about the regime,” he added.

He said recently imposed exchange controls will be phased out as confidence returns to the economy.

Ukraine’s central bank has been intervening routinely since early October in the currency market, which lifted the hryvnia currency from historic lows last week. This week, the central bank began offering buy-sell rates for foreign currencies after previously intervening through only selling or buying a currency.

Portugal said as credit pressures abate, tighter monetary policy will be needed to guard against inflation.

He said the government’s target of a balanced 2009 budget will be kept under review, although it could be achieved through expenditure restraint and a phased increase in energy tariffs.

Portugal said “preemptive” bank recapitalization will ease liquidity pressures that could prolong and deepen Ukraine’s economic downturn.

“Decisive measures that have been taken to allocate public funds to recapitalize banks and to facilitate bank resolution processes will ensure that problems can be dealt with promptly,” Portugal said.

“A proactive strategy to resolve corporate and household debt problems will also be essential to reduce banking sector vulnerabilities,” he added.

Source: Reuters