IMF approves USD 17 billion aid for Ukraine

Posted at 05/01/14 7:46 AM

WASHINGTON - The International Monetary Fund approved Wednesday a $17 billion aid deal for Ukraine, even as Kiev fights to prevent pro-Moscow separatists from hiving off another chunk of the country.

The IMF executive board's green light opens the way for an immediate deployment of $3.2 billion to Kiev, which faces deep fiscal problems, compounding its political crisis.

"Urgent action was necessary," said IMF Managing Director Christine Lagarde.

"Decisive measures were taken by Ukraine and decisive measures have just been taken by the IMF."

But Lagarde conceded that the rescue of Ukraine, which totals $27 billion when counting the additional aid from the World Bank, the European Union and others, is faced with deep risks, especially geopolitical.

"We're trying to mitigate the risks as much as we can," she said.

The IMF said the two-year program "aims to restore macroeconomic stability, strengthen economic governance and transparency, and launch sound and sustainable economic growth, while protecting the most vulnerable."

The Fund has moved quickly to aid the country, under immense economic and political pressure since the February ouster of the pro-Russia government of president Viktor Yanukovych.

The Fund warned that the Ukraine economy faces a 5.0 percent contraction this year, even with the external support.

Some of the initial disbursements could be turned around to pay off an outstanding $2.2 billion bill for natural gas from Russia, which has threatened to cut off fuel supplies to its former Soviet republic.

In addition, the country already owes the IMF under previous loan programs and the Fund's new loan could be tapped to repay off that.

- Reforms needed -

The IMF has been wary about lending to Ukraine after two previous loan plans since 2008 failed because of the government's lack of adherence to reform conditions set by the global crisis lender.

New Prime Minister Arseniy Yatsenyuk has promised to implement the IMF-proposed reforms, including a fuel hike that will be unpopular and politically difficult.

Even so, Lagarde acknowledged that one of the threats to the new program is "implementation risk" -- that the government won't do what it needs to do to earn subsequent disbursements from the loan.

And the ongoing siege in economically important eastern Ukraine poses a more immediate risk. Moscow has already engineered the secession of the Crimea region, which Russia then annexed, and Russian forces are now massed near Ukraine's border, threatening to support pro-Moscow secessionists in the east.

On Wednesday, Kiev said its forces were on "full combat alert" against a possible Russian invasion. But Ukraine authorities admitted they were "helpless" to prevent pro-Kremlin insurgents tightening their grip on the eastern region.

Adding fuel to the situation are Russia's threats to cut off gas supplies to Ukraine, and the heightened sanctions against Russia by the US and Europe.

"On the geopolitical front, clearly, the bilateral support and the cooperation of all parties will be extremely helpful to reinforce the position of the economy of Ukraine," Lagarde said.

She said the IMF is strongly encouraging Ukraine and Russia to negotiate a settlement over the outstanding fuel bill and future supplies.

"Anything that undermines the economic situation of the country will jeopardize the implementation of the program."