Ukraine may require additional external financing of about $19 billion by the end of next year if the conflict in its eastern regions rages on through 2015, the International Monetary Fund said.
“Should the conflict not begin to subside soon, the program strategy would need to be reconsidered and viability would depend critically on the availability of significantly larger assistance from Ukraine’s international partners,” the lender said today in a staff report on its website.
The Washington-based IMF approved a $17 billion bailout loan in May to help Ukraine stay afloat. That program assumes the conflict will ebb in the coming months.
Ukraine’s shrinking economy has been undermined by the conflict, which is centered on the nation’s industrial heartland in the Donetsk and Luhansk regions. The fighting intensified last week as the government in Kiev said Russia had deployed troops to help buoy a five-month insurgency. Russia, which is facing further sanctions from the European Union as early as this week, has repeatedly denied involvement.
Gross domestic product will decline 6.5 percent this year before rising 1 percent in 2015, the IMF predicts. This year’s budget deficit, including state energy company NAK Naftogaz Ukrainy, may total 10.1 percent of GDP, it forecasts.
“A further intensification of the conflict or its extension beyond the next few months could generate a deeper recession, larger fiscal pressure, further capital outflows and international reserves losses,” according to the lender.
If the war continues through the end of 2015, the economy will shrink 7.3 percent this year and 4.2 percent next, it said.
The yield on Ukrainian government bonds due 2017 surged 77 basis points to 13.50 percent, the highest level since May 13, data compiled by Bloomberg show. The hryvnia slid for the first time in five sessions, losing 1.6 percent to 12.73 per dollar.
Ukraine plans to tap international markets this year and may receive $900 million in bilateral loans, according to the IMF. The fund urged the central bank to increase reserves, which it sees at $16.2 billion by Dec. 31. The central bank plans to boost reserves by $1 billion by year-end.
“Efforts to accumulate reserves -- including by allowing further exchange-rate depreciation if needed -- are paramount for program success,” the IMF said.