UPDATE 2-Ukraine appeals to IMF over cost of conflict in east

Wed Jun 25, 2014 7:58am EDT

(Releads with strain of defence spending)

KIEV, June 25 (Reuters) - Ukraine asked the IMF on Wednesday to take into account the extra financial burden of fighting an insurgency in the east as it decides on further disbursement of aid under a $17 billion bailout programme.

The ex-Soviet republic received a first tranche of about $3.2 billion from a two-year aid package to shore up depleted foreign currency reserves and support the state budget. An International Monetary Fund mission is now in Kiev to review economic performance before disbursing a second slice of aid.

Prime Minister Arseny Yatseniuk said on Wednesday that he had "fairly positive hopes" that Ukraine would receive the second tranche because the government was fulfilling all necessary criteria.

But he added that he hoped the Fund would take into account the strain on the state budget caused by unforeseen defence expenditure in the conflict with pro-Russian rebels in the east.

"At the start of talks with the IMF ... nobody was expecting such large expenditure on defence and security," Yatseniuk told a government meeting.

"Our partners from the IMF will take into account all the new challenges and complexities that exist in Ukraine," he said.

The two main regions of the rebel uprising, around Donetsk and Luhansk, together account for nearly 18 percent of Ukrainian gross domestic product (GDP).

To qualify for IMF aid, Ukraine agreed to abide by conditions including meeting deficit-reduction targets, raising the price of gas to households and industry and allowing the national currency, the hryvnia, to float.

"I have fairly positive hopes. We are fulfilling all the criteria despite all the difficulties," Yatseniuk said.

The IMF mission, which is scheduled to stay until July 3, will conduct a first review of the economic programme as well as Ukraine's future objectives. (Reporting by Pavel Polityuk; Writing by Alessandra Prentice; Editing by Richard Balmforth/Ruth Pitchford)

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