The International Monetary Fund announced today the approval of a $1.7 billion loan installment to Ukraine despite uncertainty about the country’s debt sustainability and a conflict with separatist forces.

The IMF executive board backed the release of the loan, part of a four-year $17.5 billion support program awarded in March as Ukraine’s economy neared collapse after more than a year of civil war. An initial $5 billion disbursement was released at the time.

The IMF said in a statement the rescue program is to "support the government’s economic program, which aims to put the economy on the path to recovery, restore external sustainability, strengthen public finances, and support economic growth by advancing structural and governance reforms, while protecting the most vulnerable." 

The IMF originally conditioned its Ukraine aid program on the country achieving a deal with private creditors that would reduce its debt payment burden by 15.3 billion over the coming four years.

Kiev has sought a write-off of some of the debt but the Ad Hoc Committee of Ukraine’s Bondholders – mainly four US investment and hedge funds – say that lengthening the payment period on the debt would be enough to achieve the goals.

Cash-trapped Ukraine moved a step closer earlier today to avoiding a devastating default thanks to a new offer that would see its creditors accept a small debt write-off.

The proposal that sources said was submitted by Franklin Templeton and three other US financial titans to Kiev this week is still far short of the bond value reduction sought by the war-torn former Soviet state.

Still, it represents the first concession from the lenders – under intense pressure from the IMF and its biggest stakeholder, the United States, to help Kiev’s new pro-Western government stand up to what they view as Russian aggression.

The Eurobond holders who own about two-thirds of Ukraine’s debt have balked at Kiev’s request to accept a 40 per cent cut to the face value of their original investment.

A source familiar with the discussions, however, said the Ad-hoc Committee of Noteholders to Ukraine was now ready to accept a cut of up to 10 percent.