KIEV, May 14 – Prime Minister Yulia Tymoshenko, facing a shortfall in budget revenue this year, plans to resort to international borrowing to raise cash needed to fund her populist Soviet-era depositor bailout campaign.

The plan, however, increases the risk of further accelerating inflation, which has been already running at record levels over the past 10 years, posing a threat to the manufacturing sector.

Finance Minister Viktor Pynzenyk, who had been so far opposing the international borrowing amid inflation concerns, said the government approved the plan on Wednesday.

“The [2008] budget allows the borrowing, but the government’s resolution was needed to go ahead,” Pynzenyk said. “The size of the borrowing is defined by the budget.”

Ukraine seeks to borrow about $1.6 billion from international capital markets in 2008, up from $1.2 billion borrowed in 2007, according to figures in the 2008 budget.

Last year Ukraine tapped the markets with two issues of eurobonds, including a five-year $500 million paper at 6.385% in June 2007 and a 10-year $700 million paper at 6.75% in November 2007.

The shift in Pynzenyk’s position towards accepting the borrowing shows the government is desperate for cash amid stalled privatization effort, while Tymoshenko has been under pressure to raise money to continue the bailout campaign.

The government is facing a shortfall of 9 billion hryvnias, or about $1.8 billion, so far this year, according to figures cited by Tymoshenko allies.

Tymoshenko has been hoping to raise $1 billion from selling Odessa Portside Plant, a lucrative producer and exporter of mineral fertilizers and ammonia, but President Viktor Yushchenko has suspended the sell-off citing security reasons.

The failure to raise cash jeopardizes Tymoshenko’s depositor bailout and may undermine her public support rating ahead of presidential election due late next year.

Tymoshenko pledged in January to redeem more than 120 billion hryvnias in failed Soviet-era bank deposits during the next two years, before the next presidential election, of which 20 billion hryvnias was supposed to be redeemed in 2008.

The bailout campaign was apparently designed to help her boost the rating ahead of the election, but the campaign had also aggravated inflation in Ukraine.

Ukraine’s 12-month inflation breached a 30% threshold in April rising to 30.2% between April and April 2007, one of the worst such indicators in the world, excluding crisis-stricken countries like Zimbabwe.

Any international borrowing by the government in this situation, as opposed to domestic borrowing, poses a major risk for the economy by further boosting inflation, analysts warned.

The government, which will raise hard currency from the issue of Eurobonds, will seek to immediately sell it for hryvnias to the National Bank of Ukraine to be able to continue the bailout.

But this would further increase supply of hryvnias in the economy and will most likely add upward pressure on consumer prices, analysts said. (tl/ez)