November 20, 2014 / 5:13 PM / 3 years ago

UPDATE 1-Further EU financial aid to Ukraine will hinge on reforms - EU envoy

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By Natalia Zinets

KIEV, Nov 20 (Reuters) - The scale of further European Union finanical aid to Ukraine will depend on the government's ability to push through promised reforms, the EU envoy said on Thursday, as the central bank forecast the war-torn economy shrinking 4.3 percent in 2015.

International lenders, together with the European Union, have already offered billions of dollars to support the Ukrainian economy, which is reeling from the cost of fighting a separatist rebellion following the ousting of a government known for corruption and economic mismanagement.

Kiev promised to crack down on corrupt practices and reform state institutions in exchange for the $27-billion international funding package, but has since warned it may need more funds due to the financial burden of the war.

The exact level of further EU assistance will depend on the will of the government to push through reforms critical to long-term stability, EU Ambassador to Ukraine Jan Tombinski said at an investment forum organised by CFA Society Ukraine.

"The scale of our engagement depends closely on the determination of the Ukrainian side to run through the programme of reforms ... We measure the determination mainly through implementation, not through adoption of legislative acts," he said.

Prime Minister Arseny Yatseniuk last week promised reform would be a key focus of the new government, due to be formed in the coming weeks.

However he warned that the economy was unlikely to grow before 2016, a forecast corroborated by central bank chief Valeria Gontareva on Thursday who said gross domestic product would fall 4.3 percent next year.

The World Bank's chief representative for Ukraine, Qimiao Fan, said the top priority should be the gas sector and state energy firm Naftogaz.

"The deficit of Naftogaz is more than three times as much as the (national) budget deficit... with tariff increases and the restructuring of Naftogaz you can actually kill three or even four birds with one stone," Fan said.

Naftogaz is a significant burden on Ukraine's finances - the finance ministry has had to issue 97 billion hryvnias ($6.4 billion) in local bonds to recapitalise the company this year.

The central bank's Gontareva said the economy would shrink 7.5 percent this year, following zero growth in 2013. She increased the inflation forecast for 2014 to 25 percent from 19, the highest level since 2005.

1 US dollar = 15.1000 Ukraine hryvnia Reporting by Natalia Zinets; Writing By Alessandra Prentice

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