A four-year extended arrangement under the Extended Fund Facility (EFF) amounting to $17.5 billion approved by the International Monetary Fund (IMF) Executive Board for Ukraine is subject to exceptional risks, especially those arising from the conflict in the East, First Deputy Managing Director and Acting Chair David Lipton has said.

"On the other hand, the crisis provides an opportunity for the government to make a decisive break from the past," he said in comments to the decision of the IMF Executive Board's decision published late on Thursday.

He said that the implementation risks are being mitigated by a critical set of measures adopted as prior actions and by securing broad political support for program objectives and policies. These should help unlock sizable international official assistance and private capital inflows.

Lipton said that notwithstanding a strong policy-led adjustment effort in 2014, the Ukrainian economy continues to be affected by the conflict in the East and the attendant loss of confidence.

"The deep recession and sharp exchange rate depreciation aggravated existing vulnerabilities, weakened bank balance sheets, and raised public debt," he said.

"The authorities recognize that the resolute implementation of the program is critical to restore confidence and growth, bring inflation to single digits, keep external deficits manageable, and replenish international reserves," he said.

"The authorities recognize that the best support for the hryvnia is the restoration of confidence through strong policies and reforms," Lipton said.

"While program policies are taking hold, the authorities plan to maintain monetary policy rates positive in real terms to anchor inflation expectations, and remove capital controls and restrictions at an appropriately calibrated pace as the balance of payments improves," reads the report.

"The authorities are determined to stabilize the financial system, maintain confidence in banks, and strengthen financial regulation and supervision," the IMF representative said.

He added that by recognizing the need for fiscal consolidation, the authorities have launched an expenditure-led adjustment and frontloaded energy price increases to reduce quasi-fiscal losses and set debt on a firm downward path. Policies to underpin the fiscal adjustment include improving the pension system’s sustainability, reforming public employment, and reforming the healthcare and education systems.

"The planned debt operation would also help secure program financing and restore debt sustainability with high probability. A successful debt operation with high participation will be a key consideration to proceed with the first program review," Lipton said.

"The authorities plan to eliminate the large quasi-fiscal losses of Naftogaz by 2017 by undertaking bold measures to increase tariffs, improve collection rates, and fundamentally restructure the company," the IMF representative said.

Funding to protect the most vulnerable from the impact of the energy price increases will be raised to alleviate social costs and build support for the reforms, he added.

"Addressing deep-rooted structural problems is critical to create an enabling environment for investment and private sector activity… A comprehensive strategy to reform state-owned enterprises is important to enhance efficiency and reduce fiscal risks," he said.