Ukraine economy shrank 7.5% in 'worst year since WWII'

Kiev (AFP) - Ukraine's central bank chief on Tuesday said the strife-torn country's economy contracted by 7.5 percent and inflation soared in a year more painful than any since World War II.

Valeria Gontareva added however that the pro-Western leaders who rose to power in Kiev after the February ouster of a Moscow-backed president were optimistic about the chances of a gradual improvement next year and actual growth in 2016.

Gontareva's comments came a day after parliament approved an austerity budget that should help unlock emergency assistance from the International Monetary Fund and other global lenders within the next few months.

The central bank head -- criticised in the media for following IMF advice and allowing the hryvnia currency to depreciate by about 50 percent -- said the annual inflation rate had reached 21 percent by the end of November.

"No matter how sad it may sound, we have to say things as they are: our GDP fell by 7.5 percent and the currency's devaluation reached 50 percent," Gontareva said.

The government had earlier projected that the economy would shrink by up to five additional percentage points in 2015.

Gontareva confirmed the figure but also cautioned that inflation next year may reach 18 percent -- above the 13-percent target because of the government's decision to revoke subsidies and raise utility tariffs.

"Our country has not lived through such a difficult year since at least World War II," Gontareva told reporters.

"I think that what we have experienced this year will never happen again. Without question, we are looking forward to 2015 with optimism."

- Pinning hopes on IMF -

Ukraine's reserves more than halved in 2014 and dipped to less than $10 billion for the first time in five years as the authorities sought to prop up the hryvnia and fund their eight-month campaign against pro-Russian separatists in the industrial east.

Gontareva said a further $8.6 billion of the bank's reserves were spent on helping the state energy firm Naftogaz pay off its natural gas debts to Russia and strike new contracts with EU states.

The central bank's eventual decision to let the hryvnia float freely saw the currency slip from 8.24 to the dollar at the start of the year to 15.82 on Tuesday.

IMF managers admitted at the start of the month that Ukraine next year would need $15 billion on top of the $27-billion two-year package that global lenders pieced together in the spring.

But the Fund has delayed disbursing its last two tranches because of Kiev's inability to put together a coherent economic restructuring programme.

Gontareva said she expected those payments to be released shortly after an IMF team completes its next mission to Kiev in the second half of January.

- Ruble slide hurts trade -

The hryvnia and the Russian ruble have both lost about their half their value and turned into the year's two worst performing currencies in the world.

The ruble's depreciation has accelerated with the plunge in the global price paid for Russia's vital oil and natural gas exports.

But Russia has also been hurt by waves of sanctions imposed by the United States and the European Union over the Kremlin's annexation of Crimea and alleged support for the eastern Ukraine revolt.

Kiev rejects the Kremlin's denials of involvement and accuses President Vladimir Putin of trying to break his western neighbour apart.

Gontareva took the unusual step on Tuesday of admitting that she was "as a person, very happy to see what is happening to the Russian ruble".

But she added that the ruble's slide also made Ukrainian exports more expensive to Russian consumers and therefore hurt the country's businesses.

"In the past 11 months, Russia's share of our foreign trade has held steady at 21 percent," Gontareva said.

Ukraine's trade with the European Union is about equal to that with Russia.

It is expected to grow in the years ahead as Kiev looks to develop with Europe in the wake of this year's signing of a landmark EU trade and political association pact.

Prime Minister Arseniy Yatsenyuk told reporters on Tuesday that Russia "will stop being one of Ukraine's main trade partners in the very near future."