* 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 (Reuters) - 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 news conference.
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,” Golovach said.
But structural overhauls and other reforms were needed in order to see sustainable growth at 3.5 percent in 2016, she said.
“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 Heinrich)