World Economy

Despite Heavy Debts Ukraine Gets $1.7b IMF Loan

Despite Heavy Debts Ukraine Gets $1.7b IMF LoanDespite Heavy Debts Ukraine Gets $1.7b IMF Loan

The International Monetary Fund has approved a second installment of loans for Ukraine despite uncertainties raised by the country’s heavy debts and conflict with Russian-backed separatist forces.

The IMF executive board said on July 31 that it would immediately disburse $1.7 billion, part of a $17.5 billion support program awarded in March that is linked to economic reforms that Ukraine has started to carry out, NewsNow reported.

David Lipton, the IMF’s first deputy managing director, said that the Ukrainian authorities had made a “strong start” on a tough reform program requiring it to simultaneously tackle debt, corruption, and inefficiencies in its governance.

“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,” he said.

Ukraine welcomed the new loan, saying it will be used to replenish the National Bank’s depleted reserves.

“The new tranche will encourage growth in the economy and reassure financial markets both domestically and internationally,” the Ukrainian finance ministry said.

But the task is Herculean. Deprived of the heart of its industrial sector in the eastern part of the country, which has been seized by Russian-backed rebels, the Ukrainian economy is expected to plunge deeper into recession this year. The government is projecting a huge 9.5 percent contraction in output.

As the economy shrinks, the country’s debt appears on course to reach nearly 135 percent of output this year, compared with about 70 percent in 2014.

Under its charter, the IMF can only provide financing if a country’s debt is “sustainable with high probability” -- a test that seems increasingly out of reach for Ukraine.

To resolve this headache and satisfy the United States, its largest shareholder, the IMF said that Ukraine needed to find $15.3 billion in debt relief from private creditors over the coming four years.

But debt negotiations with Ukraine’s biggest creditors in the past four months so far have produced no concrete results.

The creditors, led by US investment firm Franklin Templeton, this week proposed a debt reduction of 10%, far below the 40% “haircut” sought by Kyiv.

Ukraine warned the creditors on July 31 that the end of next week is the “absolute last deadline” for a debt restructuring deal.

After next week, Ukraine has said it could impose a “moratorium” on debt payments–another word for default. Ukraine says it would be unable to make a $500 million bond payment coming due on September 23.

Lipton reiterated that the IMF is prepared to continue its loan program even if debt negotiations with private creditors flounder.