News.Kyiv.Me.

WASHINGTON–Ukraine’s currency and energy policies pose a grave
threat to the Ukrainian economy, and growth is projected to
remain flat at around 3.5% for the next five years, the
International Monetary Fund said Tuesday.

The country’s funding needs make it particularly vulnerable to
Europe’s ongoing debt crisis, IMF staff warned, cautioning that
the country’s outlook could worsen if hit with a euro shock,
further squeezing Kyiv’s ability to finance itself.

The IMF said its loan program for the country remains on hold as
Kyiv has failed to meet the basic terms for the bailout.

To shore up its economy, “The immediate tasks are to consolidate
fiscal adjustment, improve the monetary and exchange-rate policy
framework, strengthen banks’ balance sheets and step up
structural adjustment, especially in the energy sector,” IMF
staff said.

In particular, the IMF said Ukraine’s central bank needs to
loosen its tight grip on the hryvnia, and the government should
increase natural-gas prices to repair state-owned Naftogaz’s bad
balance sheet, which continues to be a drain on state finances.

With high current-account and budget deficits, unhealthy levels
of debt, very low reserves protection and high costs of
borrowing, “These policy settings expose Ukraine to serious
risks,” Fund staff said.

Although financing costs have risen this year, partly because of
the euro crisis, the deterioration in the sovereign-debt market
also reflects investor doubts about the creditworthiness and
credibility of domestic policies.

In the meantime, analysts warn that the country’s parliamentary
elections risk further weakening ties with the European Union and
pushing the country back into the political orbit of Moscow.

Write to Ian Talley at ian.talley@dowjones.com