WASHINGTON - The International Monetary Fund approved a US$17 billion (S$21.31 million) aid deal for Ukraine on Wednesday, even as Kiev fought to prevent pro-Moscow separatists from grabbing another chunk of the country.
Greenlighting a rescue programme for an interim government which took power after an uprising two months ago, IMF chief Christine Lagarde said it was crucial to strengthen Kiev's economy.
"Urgent action was necessary," the Fund's managing director said, after her executive board's approved of the plan.
"Deep-seated vulnerabilities together with political shock have led to a major crisis in Ukraine," she warned.
"The economy is in recession, fiscal balances have deteriorated, and the financial sector is under significant stress." The global crisis lender's decision opens the way for an immediate deployment of US$3.2 billion to Kiev, which the Fund said has pledged to implement tough reforms.
Those include slashing subsidies for fuel, cutting a large fiscal deficit, getting more control on salary increases, reducing corruption, and strengthening a frail banking system.
The plan also assumes a quick resolution to the country's fight with Russia over some US$2.2 billion owed to Gazprom, and agreeing a new price for gas purchases from the Russian energy giant.
Some of the money from the IMF loan could go toward repaying Gazprom.
"Decisive measures were taken by Ukraine and decisive measures have just been taken by the IMF," Lagarde said.
But Lagarde conceded that the rescue of Ukraine - which totals $27 billion with additional aid from the World Bank, the European Union and others - faces with deep challenges, especially geopolitical.
"Risks to the programme are high. In particular, further escalation of tensions with Russia and unrest in the east of the country pose a substantial risk to the economic outlook." "We're trying to mitigate the risks as much as we can," she said.
The Fund has moved quickly to aid the country, under immense economic and political pressure since February's overthrow of the pro-Russia government of president Viktor Yanukovych.
It warned that the Ukraine economy faces a 5.0 per cent contraction this year, even with external support.
Austerity, reforms crucial
The IMF has been wary about lending to Ukraine after two previous loan plans since 2008 failed because of the government's failure to meet reform conditions set by the global crisis lender.
Prime Minister Arseniy Yatsenyuk has promised to implement new IMF-proposed reforms, including the fuel price hike that will be unpopular and politically difficult.
The IMF points out that natural gas prices in Ukraine are half those of Russia, which produces and exports gas, and less than a quarter of Poland's.
Reza Moghadam, director of the IMF's European Department, said some fiscal austerity is necessary to stabilize government finances.
Without a "moderate" amount of austerity, he said, the combined deficit of the government and the state energy company Naftogaz would rise to an "impossible-to-finance" 12 per cent of GDP.
"The authorities see the programme as a historical break with a past marked by crony capitalism, pervasive corruption, and poor governance which weighed heavily on the economy," he said.
"They believe that there is a window of opportunity for bold and ambitious reforms." At the same time, the ongoing siege in economically important eastern Ukraine poses a more immediate danger.
Moscow has already engineered the secession of Crimea, which Russia then annexed, and Russian forces are massed on Ukraine's border, threatening to join pro-Moscow secessionists in the east.
On Wednesday, Kiev said its forces were on "full combat alert" against a possible Russian invasion.
But authorities admitted they were "helpless" to prevent pro-Kremlin insurgents tightening their grip on the eastern region.
Adding fuel to the situation are Russia's threats to cut off gas supplies to Ukraine, and the heightened sanctions against Russia by the US and Europe.
"On the geopolitical front, clearly, the bilateral support and the cooperation of all parties will be extremely helpful to reinforce the position of the economy of Ukraine," Lagarde said.
"Anything that undermines the economic situation of the country will jeopardize the implementation of the programme." j