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

The IMF says its just-announced $17 billion rescue program forUkraine would have to be overhauled if the country loses control of theeconomically important eastern region to pro-Russian separatists.The International Monetary Fund's official report on the emergency loan, releasedThursday, concedes that there are deep risks to its successful implementation,including the quickly eroding economy, corruption, and the current and futuregovernment's ability to implement much-needed reforms.But it also says the challenge Kiev faces in maintaining control of the pro-Moscoweast is a threat to the entire loan program."Ukraine -- and the authorities' program -- is facing unprecedented risks," the reportadmits."Traditionally, policy implementation risks have been significant in Ukraine, andthe issue may resurface with the coming presidential elections in May 2014. In the Moreover, it added, "Should the central government lose effective control over theEast, the program will need to be re-designed."The highly industrialized eastern region is crucial to the country's economy, thethree provinces of Donetsk, Lugansk, and Kharkiv accounting for about 21.5 percentof 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 akey building in the eastern city of Donetsk and mass pro-Russia rallies were heldthere 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 WorldBank and the European Union aimed at strengthening the country under the its newpro-Western government. But the Fund's report makes clear that if the government loses control of the east, itwould further erode Kiev's finances and damage Ukraine's ability to attractinvestment.That could mean that the country would have to raise even money from donors, itsaid.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 impactto the government's needs.After February's overthrow of the corrupt, pro-Russia government of presidentViktor Yanukovych, the IMF sped through the new loan with strong support fromthe United States and the European Union, despite the rapidly deteriorating securitysituation 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 IMFloan programs.The IMF requires substantial cuts to government spending and fuel subsidies, astrong attack on corruption, and other policies that amount to a program ofpolitically tough austerity.The IMF itself pointed to the risks that the winner of the May 25 presidentialelection might try to renegotiate the requirements of the program."If strong support is not delivered and reform momentum is lost, the full force ofthe current crisis could devastate Ukraine, perpetuating the vicious dynamic of badpolicies 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 questionsabout its viability.In written comments to the board, he said the projections for the Ukraine economyand government finances appear to be overoptimistic and that some programassumptions "seem to have already been refuted by reality." Without more support from other sources, the IMF could be taking on "an excessiveshare of the of the burden in a situation of unprecedented risks," he said.