The International Monetary Fund has approved a $17 billion aid deal for Ukraine, 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.
The rescue plan is part of a $27 billion bailout including the World Bank, European Union and others.
The IMF said the plan “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 warned though that the Ukraine economy faces a 5% contraction this year, even with the two-year loan programme.
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 programmes and the Fund’s new loan could be tapped to repay off that.
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.
The Fund has insisted on the reduction of huge fuel subsidies and other social aid, and efforts against widespread corruption in the government.
But the overthrow of the pro-Russia government of president Viktor Yanukovych in February, and the installation of a pro-Western interim government that pledged reforms, opened the door to a new loan programme.
New Prime Minister Arseniy Yatsenyuk has promised to implement the IMF-proposed reforms, including a fuel hike that will be unpopular and politically difficult.
So, with strong support from key shareholders the US and the European Union, the IMF moved quickly on the new aid plan.
But 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.
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.