By Sabina Zawadzki
KIEV, Oct 26 (Reuters) - Ukrainian Prime Minister Yulia Tymoshenko asked her rival, President Viktor Yushchenko, to veto a law raising the minimum wage by more than 20 percent; a bill that has posed an obstacle to further funds from the IMF. The International Monetary Fund said on Sunday Ukraine must veto the law passed by parliament last week and endorse several unspecified "corrective" measures before it could release a tranche of $3.8 billion out of the $16.4 billion bailout.
IMF funds have proved to be a lifeline for Ukraine, whose economy is expected to shrink by up to 15 percent this year after its heavy industries cut production, exports plummeted and the hryvnia currency plunged in value.
A document attached to Tymoshenko's formal letter to Yushchenko, made public on Monday, said the wage increases to the end of next year would cost the budget close to an additional $10 billion. "To fulfil this law it will be necessary either to borrow -- which will not be possible at such a level -- or to make redundant 1.6 million state workers ... which amounts to 45 percent of all (state workers)," the document said.
Only Yushchenko can veto the parliamentary bill, yet to be signed by the assembly's speaker and sent to his office.
Renaissance Capital notes that "the ball is now in President Viktor Yushchenko's court" and that the president may be under pressure to veto the law given his criticism of what he saw as the IMF's leniency towards the government's "populism".
"We think the possibility that Yushchenko will veto the law is growing. If he does not, we think the cabinet may try to challenge the parliament's decision on minimum wages in court," the brokerage said.
Parliament could still overturn any veto, but would need a two-thirds majority to do so.
Parliament already managed to do that with a bill committing the central bank to place $1.2 billion of profits it had not yet made into this year's budget. [ID:nLF669617]
The IMF had said before it was displeased with that bill, as well as the government's failure to raise household gas prices; a measure that would have boosted the finances of state energy firm Naftogaz which currently saps large funds from the budget.
GOOD NEWS?
The IMF did not say on Sunday whether it had accepted the status quo and the central bank profits bill and gas prices.
The IMF has already disbursed more than $10 billion to Ukraine which has helped the central bank fight to stem currency depreciation and the government to pay back foreign debts.
Yushchenko and Tymoshenko have turned from allies to bitter rivals ahead of a January presidential election and their squabbling has twice almost jeopardised the IMF programme.
Several analysts have doubted the IMF would release the fourth tranche by the end of the year because, ahead of the election, politicians may be tempted to push through social spending measures such as the wages bill. Given this, the IMF's brief statement from Sunday was good news, signalling a probability that it would disburse the funds, Goldman Sachs said in a research note.
"It is our impression that most market participants have been assuming that the programme would go off track, so this should be a positive surprise and could lead to a tightening of Ukrainian sovereign spreads," it said. (Editing by Jon Hemming)