IMF approves $17.5bn bailout package for Ukraine

In February, the IMF pledged the multibillion aid package to Ukraine over the next four years in additional to the $17 billion aid package in April 2014

Without the IMF funds, Ukraine’s economy would likely collapse, as the economic situation is very fragile. Despite a ceasefire, bursts of fighting continue in the country’s east, and Kiev continues the costly war against anti-government forces.

Ukraine’s economy is expected to contract five percent this year, as about seven percent of its territory has either joined Russia or is engulfed in civil war, despite two separate ceasefire agreements. Kiev has allocated more than five percent of its 2015 budget to defense spending.

Ukraine’s central reserves have fallen dangerously below $5.5 billion, and the national currency, the hryvnia, has lost more than half its value in 2015.

The weakening currency has led to massive inflation, which has reached 272 percent by some estimates. Officially, it is 28.5 percent in annual terms. Ukraine also has outstanding Russian energy debts it must pay if it wants to continue receiving natural gas.

In return for the IMF funds, Ukraine has embarked on tough economic reforms, which include cutting pensions, raising the retirement age, trimming the state budget, and getting rid of wasteful gas subsidies. Slashing subsidies will be painful for households, who could see their heating bills more than triple. The government is also taking steps to prevent tax fraud and corruption.

READ MORE: Ukraine agrees tough austerity package to gain $17.5bn IMF bailout

In addition to IMF funds, the US has guaranteed $2 billion in Eurobonds, the EU has promised a €2.2 billion loan, and other Western allies- Germany, Japan, and Canada- have also pledged multimillion dollar aid packages. This brings total aid to Kiev- including IMF funds to more than $40 billion.

Ukraine has to pay about $10 billion to service its debt this year, including corporate and sovereign loans and bonds, according to the Institute of International Finance, a financial group based in Washington.