IMF Approves Bailout Plan for Ukraine; Economic Reform and Cease-fire among Requirements

Following the recent application for an IMF loan by the Ukrainian government, International Monetary Fund officials announced on Thursday that a potential bailout wouldonly be possible in the case of a continued cease-fire with the pro-Russia separatists.

The IMF gave the green light on Wednesday to a $17.5billion loan program for Ukraine, of which $5bn are to be sent immediately tohelp put the Ukrainian economy on the path towards recovery. The four-year loan approved under the IMF’s Extended Fund Facility sees the immediate dispatch of the $5bn, half of which is destined for budget support.

IMF managing-director Christine Lagarde said “The program is ambitious and involves risks, notably those stemming from the conflict in the east of the country,”and expressed hope that the ceasefire will be holding. The fund’s supervisors will be keeping a close eye on Ukrainian reforms and officials clearly stated further disbursements will be made based on the country’s commitment to enforce energy reforms.

Ukraine has been in a deep economic recession since the ousting of former president Viktor Yanukovich in late 2013. The conflict in the eastern Donbas region with Russian-backed separatists has only deepened the crisis. Earlier this week, Ukraine borrowed $215m from the World Bank in order to be able to implement its healthcare reform.

The head of the IMF mission for Ukraine, NikolayGueorguiev, said that an economic reform programwas developed by the Ukrainian government in response to the many threats the country’s economy is facing. In regards to this program, Lagarde said “The Ukrainian authorities continue to demonstrate a strong commitment to reform. They have maintained fiscal discipline in very difficult conditions; allowed the exchange rate to adjust; and have increased retail end-user prices for gas.”

After a stunning 5.5 percent GDP shrink in 2014, IMF analysts believe Ukraine’s economy is getting back on the right track and is expected to grow by 2 percent as early as next year.If Ukraine wants to receive the next cash tranche, negotiations with the fund will have to be over by June this year, and their success relies on the continuation of economic reform, as also as on the stability of the cease-fire. In the worst case scenario, the country’s debt-GDP ratio could reach 200% until the end of the year, resulting in immediate bankruptcy.

IMF’s move is seen by many political analysts as a strategic move by the Western world to protect the former Soviet republic against a potential invasion by Russia. After a pro-Western government went into power in Kiev in 2013, announcing the nation’s commitment to embark a European path, “little green men” – Russian backed militants – began appearing in the country. Moscow annexed Crimea in March of last year, with president Putin recently admitting to the media that the invasion was premeditated and part of an older Kremlin plan.

The bailout plan was met with discontent in the Russian media. State-backed news agency Russia Today quoted a former head of the National Bank of Ukraine, Sergei Arbuzov, claiming that Ukraine’s “debt will become even larger” as a result of the IMF agreement, also suggesting it will be a heavy blow for the country’s poor population.

Kiev’s energy sector performance is a concerning issue for many European Union countries. Twenty-percent of the natural gas coming from Russia towards Europe runs through pipelines found within the Ukrainian territory, and their physical integrity might be affected by the ongoing conflict in Eastern Ukraine.