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Ukraine's government proposes to narrow the country's budget deficit to 1.4 percent of gross domestic product next year from around 2 percent as it seeks to lower Europe's highest inflation rate.

The 2009 draft budget assumes economic growth of 6 percent and inflation of 9.5 percent, Finance Minister Viktor Pynzenyk said at a cabinet meeting today. Revenue is forecast at 285 billion hryvnias ($59.74 billion) next year, while spending is estimated at 302.4 billion hryvnias, he said.

Ukraine wants to bring inflation below 10 percent to spur growth and raise living standards in the former Soviet republic, where around 8 percent of the population lives in poverty. Government spending this year helped boost the inflation rate to a record 31.1 percent in May, prompting Standard & Poor's to cut the country's credit rating.

Inflation has been at 10 percent or above since 2003. Organizations including the International Monetary Fund have urged Ukraine to run a budget surplus to quell price growth.

The government expects to use proceeds from the sale of state assets to help reduce the budget deficit but the state property fund hasn't yet approved the list of companies to be sold, Pynzenyk said cash advance. Global financial turbulence will also make it difficult to borrow abroad, he said.

New Borrowing

“Ukraine will need to repay a record amount of its previous debt, which totals 28.2 billions hryvnias, next year,'' said Pynzenyk. “We will need to borrow money for that too and our new borrowing will be on worse terms than the existing ones.''

Ukraine's economy is expected to grow 6.5 percent this year, helped by investments, domestic consumption and exports. Its 2009 expansion may be undermined by a decline in world prices for steel, which makes more than 40 percent of Ukrainian exports, Pynzenyk said.

The budget also assumes that the natural gas price will increase by 40 percent next year, Roman Zhukovskyi, President Viktor Yushchenko's representative in the government, said before the meeting. Ukraine depends on Russia for more than 71 percent of its natural gas supplies.

The cabinet must submit next year's draft budget to parliament for three readings by Sept. 15.

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