(Recasts with IMF approval of aid tranche, changes dateline,
WASHINGTON Aug 29 The International Monetary
Fund signed off on its first review of Ukraine's $17 billion
loan program on Friday, but warned risks loomed ahead as long as
Kiev continued to fight a pro-Russian separatist rebellion in
The IMF board's approval confirms Ukraine is on track so far
with most of the bailout's conditions, and allows the
disbursement of $1.7 billion the former Soviet bloc country
needs to shore up its depleted foreign currency reserves and
support the state budget.
"Downside risks to the program remain very high," IMF
Managing Director Christine Lagarde said in a statement. "The
program success hinges on a timely resolution of the conflict in
the east, as well as on the authorities' strong policy
performance and adherence to the planned reforms."
The IMF praised the government's commitment to economic
reforms despite the ongoing conflict. But it said Kiev was still
not able to meet some of the program targets, including for the
state budget, the level of net international reserves at the
central bank, and the deficit of Naftogaz, the state-run oil and
Ukraine's previous two IMF programs were suspended after the
government did not do as promised, such as raising natural gas
The IMF also agreed to Ukraine's request to combine the next
two reviews of the program, which would likely total around $2.2
billion, since the recent disbursement was somewhat delayed.
"(Ukraine's) strong policy record despite the much
worse-than-expected environment is encouraging in light of the
implementation problems that derailed previous programs and thus
augurs well for the authorities' ability to keep the program on
track," Lagarde said.
"However, the escalating conflict in the east and ongoing
geopolitical tensions have weighed heavily on the economy and
society, causing a deeper recession and deviations from program
targets in the short term," she said.
Ukrainian troops and pro-Russian rebels have been fighting
since April in the heavily industrialised regions of Donetsk and
Luhansk, which together contributed nearly 17 percent of
Ukrainian gross domestic product in 2013.
"The (revenue) that we haven't been receiving from Donetsk
and Luhansk is miniscule compared with the billions we are
spending on war," Ukrainian Prime Minister Arseny Yatseniuk said
at a government meeting earlier on Friday.
"For us it is critically important to get a positive
decision from the IMF and we've done everything (to achieve)
this," he said.
Ukraine received its first tranche of slightly more than $3
billion in May under the loan program.
Analysts have said the Ukrainian economy will slide deeper
into recession this year, despite the IMF aid deal, as the
rebellion cripples activity in the industrial east and scares
off foreign investors.
During its last visit to Kiev in July, the IMF downgraded
its growth forecast for this year to a 6.5 percent contraction,
from 5 percent previously.
(Reporting by Anna Yukhananov in Washington, additional
reporting by Pavel Polityuk in Kiev; Writing by Alessandra
Prentice; Editing by Crispian Balmer and Tom Brown)