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By Bloomberg View

Economic assumptions in Ukraine’s $17.5 billion International Monetary Fund bailout are “relatively optimistic” and meeting them requires cutting the country’s debt burden, Finance Minister Natalie Jaresko said.

The agreement signed last month with the Washington-based lender forecasts the return of economic growth next year, inflation slowing to less than 10 percent and the hryvnia staying between 22-24 per dollar in the next four years. The estimates are based on a truce holding between government troops and pro-Russian insurgents in the nation’s easternmost regions and are subject to social and banking risks, Jaresko said in an interview in London on Tuesday.

“We’re facing a situation on every front that is unpredictable,” she said. Matching the forecasts “requires us lifting the burden of this debt off the shoulders of the Ukrainian people and off the shoulders of our budget.”

The country is striving to meet terms of the IMF-led aid and is negotiating with bondholders to restructure its debt. The economy may have declined as much as 7-10 percent this quarter from a year ago, dragged down by the cost of the yearlong conflict with separatists, Jaresko said.

Inflation may now be “just under” 30 percent, she said. Consumer prices prices rose 34.5 percent in February from the same month of 2014.

The IMF program foresees gross domestic product contracting 5.5 percent this year and expanding 2 percent in 2016. The inflation forecast is 27 percent for this year. Jaresko declined to give alternative projections for a worst-case scenario.

‘Potential Shocks’

“The forecast assumes a modicum of stability in all of those areas,” she said. “I don’t have a different projection. What I can tell you is that there are multiple potential shocks.”

The hryvnia, the worst perfomer this year among more than 170 currencies tracked by Bloomberg, weakened 2.7 percent to 23.25 per dollar as of 2:45 p.m. in Kiev. Ukraine’s $2.6 billion of bonds due in July 2017 declined by 0.6 cent on Tuesday to 38.56 cents on the dollar, a record-low on closing basis, taking the yield to 62.70 percent.

“The fundamental value of hryvnia is probably right where it should be now,” Jaresko said. “I think that narrow band is possible, but only if we have stability.”

While a truce brokered last month by the leaders of Russia, Germany, Ukraine and France has reduced the violence, the government in Kiev and pro-Russian separatists accuse each other of breaching the deal. The attacks threaten to revive fighting and deepen the worst standoff between Russia, the U.S. and Europe since the fall of the Iron Curtain.

‘Realistic Hope’

“If the violence is maintained at this level or less it’s realistic to hope that we can accomplish everything,” she said.

Social risks stem from austerity measures including a gradual increase in utility prices the government is carrying out in line with the terms of its IMF loan, Jaresko said.

The steps may become “too painful for the people” and trigger a reaction she said. Jaresko said this so far hasn’t occurred and Ukrainians have been “extraordinarily patient.”

A “very seriously weak” banking industry poses the biggest risk to the economy, Jaresko said. A “shock” affecting lenders can’t be ruled out and “that would cause us quite a bit of economic pain,” she said.

Politically, there is a great degree of stability, which is evident in President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk working closely together to pass legislation, she said. Even so, local elections in the autumn and possible disputes among the five parties that make up the ruling coalition might disrupt this balance.

“The five factions share a pro-European perspective, they share and anti-Yanukovych regime perspective, but they don’t necessarily share across the board an economic-pol