Ukrainian Prime Minister Yulia Tymoshenko has been reluctant to raise utility bills and cap social spending ahead of fall elections. And little wonder, with elderly women picketing over their meager pensions and demonstrators chanting "No!" on the city's main square.
Yet that is precisely what the International Monetary Fund wants her to do _ to control government spending as a condition of $16.4 billion in loans to rescue the country's financial system from the world economic crisis.
Ukraine's dilemma may soon be faced by more governments. The Washington, D.C.-based international organization is playing a key role in efforts to support the world economy, and emerged from last week's Group of 20 summit in London with commitments to triple its lending resources to $750 billion.
The new money _ if all is actually contributed by IMF member countries _ will increase the IMF's financial muscle but raises the question of how it will use those new resources to help struggling governments _ and whether it will soften its conditions.
Painful as IMF conditions can be, the details of Ukraine's case _ including the IMF dropping an initial demand for a balanced budget _ suggest the fund, now run by French Socialist Dominique Strauss-Kahn, may be more willing than in past crises to ease its penny-pinching conditions in the face of public outrage and a severe recession.
Turkey could be a major test case about whether the IMF has changed. Its economic leaders are set to meet with an IMF delegation soon after the two agreed to resume talks on a new loan at last week's G-20 meeting.
They had begun talks about a new deal in January but differences over the conditions attached to the loan limited any progress. Turkey has argued that it cannot cut spending while its economy is shrinking, even though a deal could boost investor confidence _ in the last quarter of 2008, the Turkish economy contracted by a massive 6.2 percent.
Though some stability has emerged in both developed financial markets and emerging markets over the last few weeks, most commentators think that at least some of the IMF's new money will eventually have to be used _ mostly in the countries that emerged from the Soviet Union's orbit just 20 years ago.
Analysts said controversy over IMF rescue plans in Asia and Latin America _ especially in Argentina _ in the late 1990s and the early 2000s means that countries there may be less likely to seek its help. Countries like Venezuela, Ecuador and Argentina may be more tempted to first turn to China, Russia or sovereign wealth funds for financial assistance.
So far, five countries in Eastern Europe _ Hungary, Latvia, Ukraine, Serbia and Romania _ have already been forced to turn to the IMF. More assistance is expected to follow as around $500 billion of external debt is due to mature this year alone. Poland may take advantage of a flexible credit line from the IMF, which has been created to allow better-run economies to get access to money with fewer strings attached. Bulgaria has not sought help but has serious external financing needs.
"The IMF has been chastened after the Asia crisis and the Argentina default and will now be more flexible to emerging Europe," said Neil Shearing, emerging markets economist at Capital Economics.
Shearing said there's a general understanding within the IMF that the countries of Eastern Europe _ just 20 years into their transition from communist rule _ have weaker governments and institutions, "making it difficult to push through reforms."
Strauss-Kahn said last week that IMF resources "are there to be used and to be used we needed to have the tools, which are adapted to the new situation. That's why we created this new facility which is a precautionary facility for countries that have a good track record and for which we don't ask for any changes in economic policies as a precondition."
Ukraine desperately needs the money. Most of the IMF aid will go toward preventing the national currency, the hryvna, from sliding even further after a 40 percent drop against the dollar since the crisis hit last fall.
The aid will also go toward recapitalizing the country's top banks, squeezed by mass withdrawals of deposits and an expected wave of defaults on foreign currency loans.
Experts agree that some of the reform requirements put forward by the IMF are good news, such as a floating instead of fixed exchange rates and making the central bank more independent of the government.
But Prime Minister Tymoshenko has been reluctant to take the difficult step of capping already meager monthly pensions of 913 hryvna ($115) and hiking utilities bills ahead of presidential elections in October _ in which she is expected to be a candidate.
The IMF _ which expects the Ukrainian economy to shrink by at least 6 percent this year, after nearly a decade of 7 percent growth _ initially asked the government to adopt a balanced budget by slashing spending on social programs. However, it later backed down and said it would allow a deficit equal to 3 percent of economic output, given the scale of the economic downturn.
The IMF has encountered similar controversies in Serbia, where discussions originally focused on a 6 percent solidarity tax that would have hit everyone. After outrage and fears people would just stop paying tax, the government agreed to a 10 percent cut in the payroll for government workers instead.
In Hungary, the government agreed to eliminate extra pension payments and automatic annual bonuses for public employees, an increase in the retirement age, lower subsidies for farmers, and the suspension of subsidies for home buyers. Latvia has seen sharp cutbacks in pay for public workers.
In Ukraine, even a three percent deficit will be painful. The IMF-backed reform package that has to be adopted for the second $1.9 billion loan installment to go through includes gradually raising the retirement age, from the 60 years for men and 55 for women, and increasing pension fund deductions for small businesses. It also will likely mean raising heating and hot water bills for households as the government will have to cut subsidies in the energy sector.
The IMF counters that an austere spending plan is necessary to stem inflation, which hit 22.3 percent last year and is forecast at 16.4 percent this year by the World Bank.
"Everything they are asking for is quite reasonable and flexible, the main controversy is the budget deficit," said Anastasia Golovach, an economist with Renaissance Capital Ukraine investment bank. "If government spending is prudent, they cannot support growth."
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Associated Press writers Dusan Stojanovic in Belgrade, Pablo Gorondi in Budapest, and Harry Dunphy in Washington, D.C. contributed to this report.
