March 21, 2017 / 11:48 AM / 9 months ago

UPDATE 2-Ukrainian economy to feel the squeeze of economic blockade

(Adds central bank deputy, analyst comments)

By Pavel Polityuk

KIEV, March 21 (Reuters) - Ukraine’s decision to impose an economic blockade on territory held by Russian-backed separatists will drag down economic growth to 1.9 percent this year from an earlier estimate of 2.8 percent, the central bank said on Tuesday.

President Petro Poroshenko announced last week that Ukraine would halt cargo traffic with rebel-held areas, formalising an existing blockade launched in January by activists.

The move prompted the International Monetary Fund to delay disbursing another aid tranche to Ukraine’s war-torn economy - part of a $17.5 billion bailout programme - until the impact of the blockade has been assessed.

The government has previously played down the delay, saying the IMF’s decision was “slightly postponed”, and Deputy Central Bank Governor Oleg Churiy said on Tuesday it could come as early as next week.

“The National Bank considers it technically possible to hold a meeting of the IMF Executive Board before the end of March on the allocation of the fourth tranche to Ukraine,” he said.

The revised forecasts underlined the damage to Ukraine caused by the blockade, which cuts off the supply of coal and steel that Ukrainian industry still buys from rebel territory despite an insurgency that has killed more than 10,000 people.

The separatists have retaliated by seizing control of businesses registered in Ukraine, including those owned by the country’s richest man, Rinat Akhmetov.

Ukraine’s economy plunged into recession after the outbreak of separatist fighting in the eastern Donbass region in 2014, and was helped back to its feet with aid from the IMF, the United States and the European Union among others.

The disbursement of previous IMF aid tranches snagged on Kiev’s patchy performance in meeting conditions for the bailout, including tackling corruption.

Kiev expects more than $5 billion of IMF money this year.

“It does show that the assumption that the IMF will pay the remaining $5 billion this year is an unsafe assumption,” Chris Weafer, senior partner at Macro-Advisory consultancy, told a conference in London on Monday after the IMF delay.

“The IMF are looking at the changing situation in Ukraine and assessing investment risk just like corporate and portfolio investors.”

The central bank on Tuesday also revised the 2017 current account deficit forecast to $4.3 billion from $3.5 billion and year-end foreign exchange reserves to $20.8 billion from $21.3 billion. The inflation forecast was unchanged at 9.1 percent.

It also said the effect of the blockade on the local hryvnia currency would be limited. (Additional reporting by Sujata Rao in London, writing by Matthias Williams,; editing by Ed Osmond)

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