IMF talks about currency and inflation in Ukraine

From Dow Jones Newswires

A more flexible currency would help Ukraine control consumer prices, the International Monetary Fund said Monday.

Ukraine's economy should grow about 4.5% this year, or just slightly faster than in 2006. Inflation is picking up, projected to average 13.6% in 2007 after 12.9% last year, the IMF said in a press summary of its annual review of the economy.

Intervention to maintain a currency peg is now building foreign currency reserves and expanding the money supply, the IMF said.

The IMF "considered that a gradual move toward greater exchange rate flexibility would facilitate external adjustment and help improve control of inflation," it said.

More currency flexibility would also curb dollarization of the financial system and encourage development of markets to hedge foreign exchange risk, the IMF said. The government could support exchange rate flexibility by eliminating the foreign-exchange transaction tax, the Fund said.

The IMF praised the government for meeting a series of tight budget deficit targets which has reduced public debt as a share of the economy to an estimated 17% of GDP at the end of 2006. This compares with more than (USD 21.93) 60% in 1999.

The IMF also urged the government to step up regulation and oversight of the banking system. A long-lived credit boom, with real credit growth averaging more than 40% for the past five years, has made banks and households more vulnerable to financial market shifts.

Raising growth and living standards over the long term will require Ukraine to improve its investment climate, the IMF said.

The IMF "particularly noted the need to adopt legislation to strengthen investor rights, clarify inconsistencies between the economic and civil codes, reactivate a transparent and fair privatization process, and reform the energy sector."