The International Monetary Fund has approved a $17bn two-year loan programme for Ukraine, as Kiev continues to fight pro-Moscow separatists in the east of the country.
Wednesday’s action by the IMF’s 24-member executive board, which includes representatives from Russia and the United States, opens the way for an immediate release of $3.2bn to Ukraine, which faces deep fiscal problems in addition to months of political crisis.
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The loans are subject to IMF demands that Ukraine cuts subsidies for fuel, reduces its large deficit, controls pay rises, reduces corruption, and reforms its banking system.
Pro-Moscow separatists seized government offices in more Ukrainian towns on Wednesday, a further sign that authorities in Kiev are losing control of the country's eastern industrial heartland that borders Russia.
The unrest in the east follows months of upheaval from anti-government protests and Russia's subsequent annexation of the Crimea region, which had already pushed Ukraine's economy to the brink of bankruptcy.
Christine Lagarde, IMF managing director and chair, said: “Deep-seated vulnerabilities—together with political shocks—have led to a major crisis in Ukraine. The economy is in recession, fiscal balances have deteriorated, and the financial sector is under significant stress.
“Risks to the programme are high. In particular, further escalation of tensions with Russia and unrest in the east of the country pose a substantial risk to the economic outlook."
The international organisation has warned that the Ukraine economy faces a 5 percent contraction this year, even with the two-year loan deal.
Some of the initial disbursements could be turned around to pay off an outstanding $2.2bn bill for natural gas from Russia, which has threatened to cut off fuel supplies to its former Soviet republic, according to the AFP news agency.
The country already owes the IMF money under previous loan programmes. but the new loan could be used to repay off that.
Subsidy cuts urged
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 body.
It has insisted on the reduction of huge fuel subsidies and improved efforts against widespread corruption in the government.
The Ukrainian government, in power until elections are held on May 25, has already promised to raise natural gas prices by more than 50 percent from Thursday.
However, the overthrow of the pro-Russia government of President Viktor Yanukovich in February, and the installation of a pro-Western interim government that pledged reforms, opened the door to a new loan programme.
Acting Prime Minister Arseniy Yatsenyuk has promised to implement the IMF-proposed reforms, including a fuel hike that will be unpopular and politically difficult to enact.