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IMF: Further Conflict, Debt Dispute High Risk to Ukraine Recovery

FILE - Protesters, critical of the government's handling of the economy, are seen banging on empty barrels as they rally in downtown Kyiv, Ukraine, May 21, 2015.

Further separatist conflict and the possibility of protracted debt restructuring talks still pose "exceptionally high" risks to Ukraine's efforts to restore its financial stability, the International Monetary Fund said on Tuesday.

In a report by IMF staff released after the fund's first review of a $17.5 billion loan program, the IMF said the violent pro-Russian uprising in Ukraine's eastern territories was one of the greatest threats to the country's economy.

"Risks to the outlook remain exceptionally high," it said, listing the main risks as "uncertainty about the duration and depth of the conflict... prolongation of the discussions on the debt operation... and slippages in policy implementation."

Violence has continued despite a cease-fire agreement in February and casualties are reported almost daily.

Meanwhile, the IMF's broader bailout plan for Ukraine depends on Kyiv making $15 billion in savings by restructuring its debt, but talks with creditors have dragged on for over four months.

In a memorandum released by the IMF, Kyiv said it was "advancing discussions with creditors on a debt operation, which we aim to complete by late September 2015." This suggests Ukraine does not intend to make a $500 million debt payment due in September.

Ukraine's overall bailout package amounts to more than $40 billion. That includes the $17.5 billion of IMF loans, a further $7.5 billion in lending from other international organizations and the $15.3 billion that Ukrainian officials hope to gain from bondholders.

The IMF kept its forecasts for Ukraine's gross domestic product unchanged, seeing a 9 percent contraction in 2015 with inflation at 46 percent. In June, it downgraded its forecast from an expectation the economy would shrink 5.5 percent.