IMF: $17 bn loan would need overhaul if Ukraine loses east

The IMF says its just-announced $17 billion rescue program for Ukraine would have to be overhauled if the country loses control of the economically important eastern region to pro-Russian separatists. The International Monetary Fund's official report on the emergency loan, released Thursday, concedes that there are deep risks to its successful implementation, including the quickly eroding economy, corruption, and the current and future government's ability to implement much-needed reforms. But it also says the challenge Kiev faces in maintaining control of the pro-Moscow east is a threat to the entire loan program. "Ukraine -- and the authorities' program -- is facing unprecedented risks," the report admits. "Traditionally, policy implementation risks have been significant in Ukraine, and the issue may resurface with the coming presidential elections in May 2014. In the same vein, vested interests could be expected to resist governance reforms." Moreover, it added, "Should the central government lose effective control over the East, the program will need to be re-designed." The highly industrialized eastern region is crucial to the country's economy, the three provinces of Donetsk, Lugansk, and Kharkiv accounting for about 21.5 percent of GDP and 30 percent of total industrial production. On Wednesday -- the same day the IMF formally approved its financial rescue -- Ukraine's interim President Oleksandr Turchynov said the government was "helpless" to prevent insurgents taking control of official buildings in the region. The revolt gained more ground on Thursday. Petrol bomb hurling miltants seized a key building in the eastern city of Donetsk and mass pro-Russia rallies were held there and in Crimea, the Ukraine region already annexed by Moscow. The IMF program is part of a larger $27 billion deal involving loans from the World Bank and the European Union aimed at strengthening the country under the its new pro-Western government. But the Fund's report makes clear that if the government loses control of the east, it would further erode Kiev's finances and damage Ukraine's ability to attract investment. That could mean that the country would have to raise even money from donors, it said. On the other hand, the report says, the loss of Crimea to Russia -- which is not recognized by the West or other major powers -- does not have a significant impact to the government's needs. After February's overthrow of the corrupt, pro-Russia government of president Viktor Yanukovych, the IMF sped through the new loan with strong support from the United States and the European Union, despite the rapidly deteriorating security situation in the country. The report acknowledged deep risks in the overall situation, especially after past Ukraine governments have failed to implement reforms under two previous IMF loan programs. The IMF requires substantial cuts to government spending and fuel subsidies, a strong attack on corruption, and other policies that amount to a program of politically tough austerity. The IMF itself pointed to the risks that the winner of the May 25 presidential election might try to renegotiate the requirements of the program. "If strong support is not delivered and reform momentum is lost, the full force of the current crisis could devastate Ukraine, perpetuating the vicious dynamic of bad policies followed by catastrophic crises." Paulo Nogueira Batista, the IMF executive director for Brazil and ten other countries, said Thursday that he voted in support of the loan but raised numerous questions about its viability. In written comments to the board, he said the projections for the Ukraine economy and government finances appear to be overoptimistic and that some program assumptions "seem to have already been refuted by reality." Without more support from other sources, the IMF could be taking on "an excessive share of the of the burden in a situation of unprecedented risks," he said.