The International Monetary Fund (IMF) has approved a second installment of loans for Ukraine despite uncertainties raised by the country's heavy debts and conflict with Russian-backed separatist forces.
The IMF executive board said on July 31 that it would immediately disburse $1.7 billion, part of a $17.5 billion support program awarded in March that is linked to economic reforms that Ukraine has started to carry out.
David Lipton, the IMF's first deputy managing director, said that the Ukrainian authorities had made a "strong start" on a tough reform program requiring it to simultaneously tackle debt, corruption, and inefficiencies in its governance.
"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," he said.
Ukraine welcomed the new loan, saying it will be used to replenish the National Bank's depleted reserves.
"The new tranche will encourage growth in the economy and reassure financial markets both domestically and internationally," the Ukrainian finance ministry said.
But the task is Herculean. Deprived of the heart of its industrial sector in the eastern part of the country, which has been seized by Russian-backed rebels, the Ukrainian economy is expected to plunge deeper into recession this year. The government is projecting a huge 9.5 percent contraction in output.
As the economy shrinks, the country's debt appears on course to reach nearly 135 percent of output this year, compared with about 70 percent in 2014.
Under its charter, the IMF can only provide financing if a country's debt is "sustainable with high probability" -- a test that seems increasingly out of reach for Ukraine.
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 from private creditors over the coming four years.
But debt negotiations with Ukraine's biggest creditors in the past four months so far have produced no concrete results.
The creditors, led by U.S. investment firm Franklin Templeton, this week proposed a debt reduction of 10 percent, far below the 40 percent "haircut" sought by Kyiv.
Ukraine warned the creditors on July 31 that the end of next week is the "absolute last deadline" for a debt restructuring deal.
After next week, Ukraine has said it could impose a "moratorium" on debt payments -- another word for default. Ukraine says it would be unable to make a $500 million bond payment coming due on September 23.
Lipton reiterated that the IMF is prepared to continue its loan program even if debt negotiations with private creditors flounder.
"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.
U.S. Treasury Secretary Jacob Lew said the United States "strongly supported" the IMF's latest disbursement to Ukraine.
Like the IMF, the Treasury has been pressuring Ukraine's creditors to reduce their demands.
"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 overall has been pleased with Ukraine's progress, given the many obstacles the struggling country faces.
IMF Director Christine Lagarde this week contrasted Kyiv's strong efforts to enact reforms with the lack of cooperation from Greek authorities. The IMF has been more lenient toward Ukraine as a result.
Ukraine's biggest worry is a $3 billion Eurobond that Russia purchased in 2013 after a now-deposed Ukrainian government bowed to Kremlin pressure and rejected an association pact with the European Union.
Moscow has refused to join the debt negotiations and demands the full amount back by a December 20 deadline.
Western investment houses, despite as yet unresolved differences with Kyiv over how much of its debts can be paid, have been taking a far more compromising stand than Moscow.