Why did Ukraine receive 1.1 billion dollars from the IMF, and what was promised to be done in return?

On October 23, the state budget received another tranche of the International Monetary Fund (IMF) loan for 1.1 billion dollars. Based on the results of the fifth revision of the financing program of Ukraine. The fund again praised the Ukrainian government for skillfully managing the macroeconomic situation despite the war.

Cooperation with the IMF is crucial for attracting foreign financing to Ukraine’s budget. Why is the fund satisfied with the government’s performance, what’s its outlook for the future, and how have Ukraine’s commitments evolved?

Why does the IMF praise Ukraine?

The IMF continues to give the Ukrainian government positive assessments. The foundation says the government “skillfully and impressively” manages the macroeconomic situation despite all the obstacles caused by the war. 

It seems the “curse of the third tranche” in relations with the IMF has been broken. Previously, Ukraine had struggled to progress this far in IMF programs. Now, the authorities are demonstrating greater responsibility towards their obligations, and the IMF is more willing to overlook minor flaws and shortcomings.

The restructuring of private external debt, which Ukraine agreed on in the summer of 2024, was a significant success. This preserved debt sustainability and the possibility of further cooperation with the IMF. The fund notes that, if necessary, Ukraine can carry out another restructuring of this debt in the future. 

It seems that the request for increased funding from the IMF in 2025 will not be a problem. In this review of the program, Ukraine asked the fund to pay 1.25 billion dollars in 2025 instead of 2026-2027. This will provide an additional budgetary resource and help alleviate uncertainty about foreign financing.

What the IMF predicts for the coming years

The fund’s updated basic forecast for Ukraine predicts that the active phase of the war will continue until the fourth quarter of 2025. Under a negative scenario, the war could extend to mid-2026. Additionally, the IMF acknowledges the possibility of the conflict lasting even longer.

The basic scenario of the IMF foresees the growth of the real GDP of Ukraine by 3% by the end of 2024, by 2.5-3.5% in 2025, and, if the war’s intensity subsides by the end of 2025, by 5.3% and 4.5% in 2026 and 2027, respectively.

The negative scenario is noticeably more pessimistic. If the war lasts longer and the labor losses and destruction are greater, then GDP in 2024 will increase by 1%. In 2025, the economy will fall by 2.5%, and in 2026 there will be no growth. If this scenario is implemented, GDP will grow only in 2027 – by 4%.

These scenarios assume that G7 countries will honor their financial commitments to Ukraine, specifically providing $50 billion. Additionally, the government aims to access frozen Russian assets in 2024 to generate additional revenue.

The IMF believes that these funds should be extended until 2027. Therefore, a loan secured by Russian assets, while potentially helpful, is unlikely to significantly increase Ukraine’s long-term budget capacity.

If the budget faces a funding shortfall, the fund anticipates additional tax hikes. As a last resort, the IMF agreement permits the printing of up to UAH 50 billion in hryvnia per quarter to cover essential expenses.

The IMF sees an increase in the value-added tax rate as the main source of additional tax revenue. To complement this, the Ukrainian government should develop clear and transparent rules and procedures for monetary financing..

While martial law remains in effect, the government has no plans to increase gas and electricity tariffs. Meanwhile, the IMF expects a plan and timeline for gradual tariff liberalization for the population, to be implemented after the war.

How Ukraine’s obligations have changed in the new review

A key component of each review of the IMF program is the structural beacons, i.e. the commitments that Ukraine must fulfill in order to continue receiving financing from the fund. At each review, the IMF evaluates the implementation of beacons and may update them or add new ones.

Concerns arose prior to the fifth review as Ukraine failed to meet a key deadline. The independent audit of NABU, scheduled for completion by the end of September, was delayed due to the late appointment of auditors by the Cabinet of Ministers on September 3rd.

However, in this matter, the IMF met with the Ukrainian authorities and agreed to postpone the audit deadline to February 2025. Thus, the non-fulfilment of the lighthouse did not prevent Ukraine from receiving another tranche of financing.

The deadline for completing another legislative change, related to the cancellation of the ‘Lozovoy amendments,’ has been moved up. These amendments previously required the mandatory closure of criminal cases after a certain investigation period. The new deadline is now the end of 2024, rather than the end of October.

One important beacon is the National Bank’s assessment of risks to financial stability under various scenarios. This includes preparing an action plan for unforeseen situations. The NBU should complete this assessment by the end of October.

By the end of 2024, the Verkhovna Rada must reform the Accounting Chamber, a requirement emphasized by both the IMF and the United States.

By the end of 2024, it is necessary to solve “artificially created problems” in the energy sector, particularly by completing the formation of the supervisory board of “Ukrenergo.” Two independent members of this board resigned, citing political pressure after the authorities forced the dismissal of Volodymyr Kudrytskyi. The fund is also looking forward to strengthening the independence of the National Commission, which carries out state regulation in the spheres of energy and communal services.

In 2025, Ukraine will undertake to reform customs and implement a new law on the Bureau of Economic Security. Thus, by the end of February 2025, it will be necessary to elect a new director of the BEB, and by the end of June, the head of the State Customs Service and heads of all regional customs offices.

Additionally, fiscal sector obligations were added. The Ministry of Finance must verify state investment projects by January 2025, and the Cabinet of Ministers must approve the assessment methodology by February 2025.

By the end of April, the draft law on tax reporting for digital platform operators should be registered in the Verkhovna Rada. The IMF also expects that the Cabinet of Ministers will approve the budget declaration for 2026-2028 by the end of June.

Why cooperation with the IMF is important for Ukraine

The IMF notes that there is little room for financial modifications within the current credit program due to risks, primarily military.

The current IMF program began in the spring of 2023. Than, both Ukraine and the IMF held more optimistic forecasts for economic recovery and the war’s duration. In particular, it was expected that active hostilities would end in the first half of 2024. However, the war continues, and Ukraine’s need for funds does not decrease.

With foreign budget support drying up, the IMF program stands out as a near-certain and reliable source of financing. Geopolitical concerns in the US and resistance within the EU have made securing external aid increasingly challenging.

The implementation of the program is a prerequisite for both receiving tranches and securing support from bilateral donors. Therefore, Ukraine must timely fulfill its obligations to the fund and protect the positive reputation it has in the eyes of the IMF.

Source: Ekonomichna pravda. 

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