$15 billion for 4 years: Ukraine and the IMF reached an agreement at the staff level

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Ukraine and the International Monetary Fund have reached a staff-level agreement on a new program worth $15 billion over four years.

This was reported by the IMF press service based on the results of the mission in Warsaw on March 8-15.

The program provides access to 11.6 billion SDRs (about 15.6 billion dollars), or 577% of Ukraine’s quota in the IMF. This agreement is subject to approval by the IMF’s Executive Board, which is expected to be reviewed in the coming weeks, and will be supported by the Enhanced Financing Facility (EFF).

In addition, as the head of the mission, Gavin Gray, emphasized, the program “will help mobilize large-scale concessional financing from international donors and partners of Ukraine throughout the duration of the program.”

The program was designed in accordance with the Fund’s new lending policy under conditions of extremely high uncertainty, and donors, including the G7 countries and the EU, are expected to provide firm financial guarantees.

Currently, the Ukrainian economy is expected to gradually recover over the coming quarters, as activity resumes after Russian attacks on energy infrastructure. However, developing a single baseline forecast under conditions of uncertainty is an extremely difficult task.

“Based on this, the staff currently sees real GDP growth in 2023 in the range of -3 to +1 percent,” Gray added. The goals of the program are to support economic and financial stability, restore debt sustainability, and support Ukraine’s recovery on the way to joining the EU in the post-war period.

Two stages of the program

Given the extremely high uncertainty, the new program involves a two-stage approach:

• The first stage will continue during the first 12-18 months of the program will strengthen fiscal, external, price and financial stability.

It is about (i) strengthening of revenue mobilization, (ii) rejection of “money printing” and transition to financing from domestic debt markets (OVDP), and (iii) promotion of long-term financial stability, in particular through a deeper assessment of the state of the banking sector and support of the independence of the NBU .

It is noteworthy that the IMF emphasizes the avoidance of new measures that may lead to a decrease in tax revenues. In particular, we are talking about the introduction of new tax benefits for the payment of certain taxes.

It should be noted that currently a separate wing of supporters of radical tax reform has formed in the Ukrainian government, which provides for a significant reduction in the rates of key taxes – income tax, value added tax and personal income tax – up to 10% each.

The government also undertakes to continue reforms aimed at strengthening public administration and the anti-corruption framework, including by amending the legislation.

• At the second stage the focus will be on larger-scale reforms aimed at consolidating macroeconomic stability, supporting recovery and early reconstruction, and enhancing long-term sustainability and growth, including in the context of Ukraine’s EU accession goals.

By then, Ukraine is expected to return to pre-war fundamentals of economic policy, including a flexible exchange rate and an inflation targeting regime.

Fiscal policy will focus on critical structural reforms to consolidate medium-term revenues through the implementation of the National Income Strategy, as well as strengthening public financial management and implementing public investment management reforms to support post-war reconstruction.

Increasing competition in the vital energy sector and reducing quasi-fiscal liabilities will complement postwar reform efforts.

How did Ukraine work with the IMF after the start of the Great War?

Before the start of the Great War, Ukraine was in the IMF’s short-term stand-by program. February 23, 2022 in Ukraine started working mission of the International Monetary Fund. She had to assess the readiness of the state to receive the third tranche of the loan, 700 million dollars, within the framework of the program adopted in 2020.

Already after the beginning of the Russian invasion of Ukraine broke up stand-by program, the fund agreed to allocate instead 1.4 billion dollars emergency financing.

During 2022, Ukraine received another $1.3 billion emergency financing loan from the IMF.

At the end of 2022, the Ukrainian authorities agreed with the IMF on a monitoring program with the participation of the fund’s board of directors, developed specifically for Ukraine. At the time of the adoption of this program, the IMF was not yet ready to agree to a program that provided for financing to Ukraine, so the parties also agreed on such an intermediate option, but on the condition that the program with money be adopted in the future.

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