UPDATE 2-Ukraine may need bigger bailout if conflict continues in 2015 -IMF

Tue Sep 2, 2014 12:05pm EDT

(Adds details, background)

By Anna Yukhananov

WASHINGTON, Sept 2 (Reuters) - Ukraine may need as much as $19 billion in additional funds from donors if its conflict with pro-Russian separatists continues during 2015, the International Monetary Fund warned on Tuesday.

Even under Kiev's current $17 billion IMF bailout, the Fund said Ukraine will not be able to meet all of its targets due to the ongoing fighting and an intensified gas dispute with Russia, which supplies the bulk of Ukraine's natural gas needs.

Nevertheless, it said the money planned under the program is largely sufficient for now as long as the fighting between the government in Kiev and the rebels in the eastern part of the country subsides in the "coming months."

The momentum in the five-month war shifted last week decisively in favor of the rebels, who are now advancing on a major port as they seek to throw off rule from Kiev. Western countries accuse Moscow of sending troops into Ukraine, a charge Russia denies.

Kiev will now face a $3.5 billion funding shortfall for this year and next due to the fighting, but the IMF said the government should be able to cover most of it with planned debt issues and an expected $900 million in further donor support.

In a detailed review of Ukraine's progress and the state of its economy, the IMF painted a dire picture of a country trying to reform everything from banking management to the legal system, while also boosting spending on fighting in the eastern regions of Donetsk and Luhansk.

Those regions together accounted for 23 percent of Ukraine's industrial production and 14.5 percent of its retail trade in the first quarter. The IMF said it expects gross domestic product in eastern Ukraine to decline by 15 to 20 percent this year, compared to a 6.5 percent decline for the country as a whole.

But outside analysts predict Ukraine's economy may contract by up to 8 percent this year, and are starting to brace for some form of debt restructuring on Ukrainian bonds.

The Fund, which provided a bailout to Kiev as part of an overall $27 billion international rescue, said it would relax some conditions for Ukraine going forward, including for the government's budget deficit and the level of central bank reserves.

In return, Kiev would have to make up for the shortfall elsewhere, including by doing a better job of collecting payments for Naftogaz, the state-run oil and gas company.

The IMF also predicted the government would have to spend more money to restructure the banking sector and support Naftogaz, adding to government debt.

In addition, it warned that Ukraine's reforms may become more difficult if the country calls early elections.

The Fund on Friday confirmed Kiev was on track with most of the loan's conditions so far, allowing the disbursement of $1.7 billion. It said the next disbursement, of about $2.7 billion, would come in mid-December if Kiev complies with the loan conditions. (Reporting by Anna Yukhananov; Editing by Paul Simao)