* Lender sees 8 pct contraction in economy this year
* Also sees it contracting by 1 percent in 2015
* Separatist conflict in industrial east is main factor
(Recasts, add new material and quotes)
By Natalia Zinets
KIEV, Oct 2 Ukraine's military conflict with
pro-Russian separatists in the industrial east will force the
Kiev government to shelve hopes of resuming economic growth
until 2016, the World Bank said on Thursday.
The international lender said Ukraine's economy was likely
to shrink by 8 percent this year and contract further in 2015
because of the effect of the war in the east, the centre of much
of its steel, chemicals and coal output.
The World Bank had previously expected Ukraine's gross
domestic product would contract by 5 percent this year and then
grow 2.5 percent next year. It now anticipates the economy will
contract by 1 percent in 2015.
"Disruption in economic activity in the east has resulted in
a sharper GDP decline. We project that GDP will be an 8 percent
decline in 2014," Qimiao Fan, the World Bank's chief
representative for Ukraine, told reporters.
A ceasefire between Ukrainian government forces and the
pro-Moscow rebels took effect on Sept. 5 but the truce has been
shaky, prone to violations. Ten people were killed by a burst of
shelling in Donetsk on Wednesday.
The bank's forecast was a further downbeat assessment for
the economy because of the conflict. It has hit production of
key industrial sectors such as steel and energy in the Donetsk
and Luhansk regions, hardest hit by fighting in which about
3,500 people have been killed, according to U.N. estimates.
"The share of these two regions in GDP is about 16 percent,"
Fan said. Donetsk and Luhansk accounted for about a quarter of
Ukrainian industrial output, 7 percent of the agricultural
sector and 27 percent of exports, he said.
The government itself forecasts a 6 percent decline in GDP
in 2014, but a growth of between 0.3 and 2 percent in 2015.
The central bank has said the economy would shrink by as
much as 10 percent this year, while the International Monetary
Fund has predicted a 6.5 percent contraction.
Ukraine's GDP will continue to decline in the first half of
the next year as a result of war destruction of infrastructure,
a World Bank economist, Anastasia Golovach, said at the same
She said Ukraine's economy might start to recover in the
second half of next year if the situation in the east did not
worsen and the government continued to implement macroeconomic
measures agreed with the IMF under a $17-billion stand-by
programme approved in April.
These measures include a tough fiscal policy and a flexible
exchange rate. The government has significantly cut budget
expenditure and let the Ukrainian hryvnia float, though the
currency has lost about 40 percent of its value against the
dollar since the start of the year.
"The hryvnia devaluation ought to make a positive impact on
the exports. We see an increase in exports as the key factor of
resumed economic growth in the second half of next year,"
But structural overhauls and other reforms were needed in
order to see sustainable growth at 3.5 percent in 2016, she
"If the government carries out structural reforms and it
improves the investment climate we will see internal and
external sources of investments and that will be the engine of
growth in 2016," Golovach said.
Prime Minister Arseny Yatseniuk said at a meeting with
foreign investors on Thursday that the implementation of the IMF
programme was the government's priority.
(Reporting By Natalia Zinets; Editing by Richard Balmforth/Mark