IMF approves new $1.7bn loan tranche to Kiev, plays down debt and security concerns

© Soe Zeya Tun
Kiev is going to receive a new tranche of the $17.5 billion loan from the IMF despite concerns over its growing national debt and shaky truce in eastern Ukraine torn apart by civil war. In return, the IMF expects Kiev to put its economy “on the path to recovery.”

Ukraine is going to get the approved $1.7 billion, a tenth of the $17.5 billion financial assistance program adopted by the IMF executive board in March.

Back in March, Kiev already got $5 billion of initial disbursement under the IMF financial assistance program. The policy of the Washington-based institution, representing 188 countries, implies that the IMF would provide financial assistance only to a country that is “sustainable with high probability” of repaying debt.

The IMF assistance program to Ukraine is designed for a period of four years and implies financial assistance to the Kiev authorities to be confirmed gradually, in return for implemented reforms in Ukraine, aimed, according to the IMF statement, to “put the economy on the path to recovery” and “strengthen public finances.”

“Ukraine has been an incredibly encouraging situation,” IMF managing director Christine Lagarde said earlier this week. “We have seen political determination to change the face of Ukraine,” she said.

READ MORE: Ukraine’s public debt to hit 95% of GDP by year end – National Bank

Kiev has welcomed the new tranche, promising to use it for the replenishment of reserves at the National Bank.

“The new tranche will encourage growth in the economy and reassure financial markets both domestically and internationally,” the Ukrainian Finance Ministry said in a statement.

The economic situation in Ukraine is harsh, however. The country's national debt is expected to reach 135 percent of GDP this year, which means it will practically double from last year’s 70 percent.

After Ukrainian President Viktor Yanukovych was ousted in early 2014, the country’s new government initiated a number of tough economic programs designed by the IMF, which include sharp increases in utility charges, major cuts to social programs and other unpopular measures.

A large number of workers have either lost their jobs or have to wait for months to get their wages paid.

But the IMF's first deputy managing director, David Lipton, believes that the Ukrainian authorities have made a “strong start” in implementing promised economic reforms.

“The momentum needs to be sustained, as significant structural and institutional reforms are still needed to address economic imbalances that held Ukraine back in the past,” Lipton said.

READ MORE: Creditors offer Ukraine 5% debt write-down - media

To lessen the financial burden on the country, Kiev authorities have recently asked international credit organizations to write off as much as 40 percent of the country’s debt. The creditors, headed by US investment firm Franklin Templeton, only agreed to cut 5 percent.

Within the coming four years, Kiev will have to pay $15.3 billion to private creditors, the IMF said.

“In the event that talks with private creditors stall, and Ukraine determines that it cannot service this debt, the Fund could continue to lend to Ukraine consistent with its Lending-into-Arrears Policy,” Lipton said.

In turn, US Treasury Secretary Jacob Lew said that Washington “strongly supported” the IMF's decision to loan a new tranche to Ukraine.

“We urge the creditors participating in the ongoing debt operation to reach a timely agreement with the Ukrainian authorities that fully satisfies the criteria outlined in Ukraine's IMF program - including the debt sustainability target,” Lew said.