Ukraine's overheated economy has suffered from the effects of the global financial meltdown [AFP]

The former Soviet republic's economy has been hurt by falling export values, rising inflation and the effects of the global financial meltdown.

The two-year agreement allows the Eastern European country of 46 million people to receive $4.5bn immediately in exchange for agreeing to a series of financial reforms.

Among them are agreements governing flexible exchange rates, higher funding for unemployment insurance and banking recapitalisation.

Ukraine's parliament approved on Friday legislation clearing  the way for the IMF loan, and establishing a stabilisation fund to help ailing banks and companies unable to service their foreign debts due to the worldwide financial crisis.

Guarantees for bank deposits will be increased so as to bolster confidence in the banking system, and the government will be able to take a stake in lenders if necessary.

In addition, Ukraine's budget will be tightened and spending cut.

Falling markets

Ukraine, located at the crossroads of Europe and Asia, has seen its overheated economy suffer in recent months along with other economies around the globe.

That's because falling world stock markets are causing many investors to withdraw money from emerging markets, sending currencies into a tailspin.

Ukraine's economy has been plagued by rising inflation, low foreign exchange reserves, a drying up of liquidity and reduced access to international financial markets.

In September, Ukraine's manufacturing sector contracted five per cent.

The IMF forecasts Ukraine will sink into recession next year, with economic output falling three per cent, but hopes the financing arrangement will temper inflation, which is expected at 25.5 per cent this year.

Meanwhile, tight credit from strapped banks and lending markets make it difficult for those countries to obtain financing on their own.

Bleak prospects

Olexandre Chlapak, a senior figure with the  presidential administration, said last month that Ukraine faced bleak prospects for the coming year.

It could expect "a fall in GDP, a drop of up to 40 per cent in  foreign demand for Ukrainian products, and zero industrial growth, or in the best case, two to three per cent."

If the global economy recovers in the second half of 2009, the IMF said the Ukrainian economy could reach a growth rate of five to six per cent in 2011.

The banking sector has been hit hard due to its increased  exposure to foreign loans since the Orange Revolution protests of 2004 brought to power a pro-Western leadership and economic reformers pressed for more European integration.

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