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IMF says crisis strikes big blow to Ukraine's economy

The International Monetary Fund warned on Friday that the pro-Russia uprising engulfing Ukraine's economically-vital eastern rustbelt had delivered a "notable" blow that will force its economy to shrink faster than feared.

KIEV: The International Monetary Fund warned on Friday that the pro-Russia uprising engulfing Ukraine's economically-vital eastern rustbelt had delivered a "notable" blow that will force its economy to shrink faster than feared.

The Fund said upon completing its latest review of Kiev's compliance with the terms of a US$17.0 billion (12.6 billion euro) two-year rescue that Ukraine was facing new economic headwinds that had not been foreseen when the programme was unveiled at the start of May. It said the economy would probably shrink by 6.5 rather than the 5.0 per cent in 2014 because of shortfalls in revenue collection in crisis-hit regions and higher spending on defence.

The IMF added that its programme's success now hinged not only on Kiev's ability to adopt urgent but unpopular belt-tightening measures but also "crucially on the assumption that the conflict will begin to subside in the coming months."

The Fund's country mission chief added that the new pro-Western leaders were doing a good job meeting commitments that could see the quick release of a second loan instalment of US$1.4 billion.

"The conflict is putting increasing strain on the program and a number of key elements of the macroeconomic framework have had to be revised," Nikolay Gueorguiev said in a statement.

"Economic prospects have deteriorated notably, and GDP (gross domestic product) is now expected to contract by 6.5 per cent this year, compared to 5 per cent when the programme was adopted," he said. "A shortfall in revenue collections in the East, higher security spending, and lower-than-expected debt collection by Naftogaz will cause fiscal and quasi-fiscal deficits and financing needs to rise above the programmed path."

Gueorguiev added that higher-than-expected capital outflows were also putting the country's currency and budget forecasts in peril.

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