Washington: The International Monetary Fund (IMF) approved on Friday the next instalment of its massive loan to Ukraine despite uncertainty about the sustainability of the country’s debt and its conflict with separatist forces.

The IMF executive board, which represents 188 member nations, gave a green light to the immediate disbursement of $1.7 billion (Dh6.24 billion), part of a support programme awarded in March that has caused internal strains in the Washington-based institution.

In total, the IMF has pledged $17.5 billion in financial assistance over four years in exchange for drastic measures by the government to restore public finances, hammered by recession and the loss of part of its territory to pro-Russian separatists.

The new instalment, after an initial $5 billion disbursement released in March, comes after the IMF completed its first review of the government’s progress under the loan package, which aims to “put the economy on the path to recovery” and “strengthen public finances”, the IMF said in a statement.

David Lipton, the IMF’s first deputy managing director, said that the Ukrainian authorities had made a “strong start” in implementing their economic program.

“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 in a separate statement.

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

“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.

But the task is Herculean. Deprived of the heart of its industrial sector in the eastern part of the country, lost to separatists, the Ukrainian economy is expected to plunge deeper into recession this year — a 9.5 per cent contraction the government estimates.

As gross domestic product shrinks, the country’s debt appears on course to reach nearly 135 per cent of GDP this year, compared with about 70 per cent in 2014.

Under its policy, the IMF can only provide financing if a country’s debt is “sustainable with high probability.”

Difficult debt talks

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 with private creditors over the coming four years.

But the difficult debt negotiations, under way for the past several weeks, have so far produced no concrete results and increase the risk of a Ukrainian default that could further drive away investors.

The creditors, led by US investment firm Franklin Templeton, have proposed a debt reduction of 10 per cent, according to a source familiar with the discussions, far below the 40 per cent “haircut” sought by Kiev.

Lipton reiterated that the Fund was prepared to continue its program even if debt negotiations with private creditors founder.

“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,” he said.

US Treasury Secretary Jacob Lew said the US “strongly supported” the IMF’s latest disbursement 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.

The IMF points to Kiev’s “commitment” in implementing reforms, in contrast with the lack of cooperation from the Greek authorities, for the apparent difference in its approach to the two heavily indebted countries.

Since the ouster of Ukraine’s pro-Russian president Viktor Yanukovych in early 2014, the IMF can rely on a pro-West government which has been more willing to tackle tough programmes, including an increase in gas prices.

The IMF notably has been able to count on the Ukrainian finance minister, Natalie Jaresko, an American who worked at the US State Department and became a Ukrainian citizen just before taking her post.

“Ukraine has been an incredibly encouraging situation,” Christine Lagarde, the IMF managing director, said this week.

“We have seen political determination to change the face of Ukraine.”