The International Monetary Fund board on Wednesday approved a two-year, $17 billion US loan package for cash-strapped Ukraine as it seeks to regain stability following Russia's annexation of Crimea.

The IMF aid pledged in March will allow the immediate disbursement of $3.2 billion US to Kyiv. It was hinged on economic reforms in Ukraine, including raising taxes, freezing the minimum wage and raising energy prices — all steps that could hit households hard and strain the interim government's tenuous hold on power.​ 

Ukraine's interim government finds itself caught between the demands of international creditors and a restive population that has endured decades of economic stagnation, corruption and mismanagement.

The IMF's decision to approve the $17 billion US loan paves the way for Ukraine to receive $15 billion US in additional assistance pledged by the World Bank, the European Union, Canada, Japan and other European entities, and $1 billion US in loan guarantees from the U.S. that Congress recently approved. As part of the deal, Ukraine will be required to use some of the $17 billion US loan to repay money it already owes the monetary fund.

Bailout program faces risks, IMF chief says

Ukraine, a nation of 46 million, is in turmoil after Russia annexed Crimea. Russian President Vladimir Putin has massed 40,000 troops on Russia's border with Ukraine in what many fear is the first step to an invasion. Russia's actions have created a standoff with the United States and many European nations.

"Today's final approval for the $17 billion IMF program marks a crucial milestone for Ukraine," Treasury Secretary Jacob Lew said in a statement. 

"The IMF program, in conjunction with bilateral assistance from the United States and other nations, will enable Ukraine to build on the progress already achieved to overcome deep-seated economic challenges and help the country return to a path of economic stability and growth.

However, IMF managing director Christine Lagarde admitted the program faces geopolitical risks, along with uncertainty about the government's ability to carry out the politically unpopular measures necessary to get its finances in order.

"On the implementation front, we are taking all the precautions we can in order to mitigate those risks," Lagarde told reporters after the board's decision.

'We believe that Ukraine has an opportunity to seize the moment, to break away from previous practices, both from the fiscal, from the monetary, and from the governance point of view'- Christine Lagarde, IMF managing director

The IMF's board decided to meet every two months for the next couple reviews of Ukraine's program, rather than following the typical three-month schedule, in order to closely track the government's continued commitment to economic reforms, such as floating the currency and cutting fiscal deficits.

"On the geopolitical front, clearly the bilateral international support, and the cooperation of all parties, will be extremely helpful to reinforce the position of the economy of Ukraine," Lagarde said.

Ukrainian authorities have said the economy will likely contract by 3 per cent by the end of this year as a result of the chaos and mismanagement. Economic output fell 1.1 per cent in the first three months of the year.

Russian sanctions may hurt Ukrainian economy

Kyiv is also in a dispute with Moscow over the price it will pay for natural gas exports in the future, and over money owed for prior gas purchases.

Ukraine's economy may further suffer if sanctions intensify on its neighbour Russia, a key market for Ukrainian exports. Western nations have placed visa bans and asset freezes on Russian individuals and companies over what they see as Russian meddling in Ukraine.

"Clearly on the front of sanctions, anything that undermines the economic situation of the country will jeopardize the implementation of the program, which is why we very strongly encourage the parties to negotiate, to come to terms," Lagarde said.

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Members of Ukraine's State Security Administration (top) clash with members of the Euromaidan movement's self-defence units during a rally in Kyiv on Wednesday. (Andrew Kravchenko/Reuters)

The political unrest makes it even more difficult for Ukraine to get its economy back into shape, even though the country's new government pledged to pursue politically unpopular reforms as a condition for receiving IMF aid.

Ukraine's previous two IMF programs were suspended after the government failed to follow through on promised reforms.

The IMF expects Ukraine to implement major reforms in its energy and financial sectors, including raising the price of gas for domestic consumers. The government, in power until elections on May 25, has already promised to raise gas prices by more than 50 per cent from this Thursday.

"(Ukraine) has demonstrated in the last few weeks that it can undertake comprehensive reforms and has actually addressed some of the issues that have been outstanding for a long time," Lagarde said. "We believe that Ukraine has an opportunity to seize the moment, to break away from previous practices, both from the fiscal, from the monetary, and from the governance point of view."

The decision from the IMF's 24-member board, which includes representatives from Russia and the United States, clears the way for an immediate disbursement of $3.2 billion US to Ukraine's cash-strapped government, allowing it to meet looming obligations and avoid a potential debt default. Of that first tranche, $2 billion will be targeted at supporting the budget.

With files from the Associated Press