$15.6 billion for Ukraine from the IMF. What should Ukraine do for this?

The IMF has approved a comprehensive four-year cooperation programme with Ukraine worth $15.6 billion. What has Ukraine promised to deliver (and not to do), and why is the approval of this programme a great success for the Ukrainian government? CES economist Maksym Samoiliuk analysed the situation.

Just a few months ago, the possibility of a new IMF programme for Ukraine did not look certain. We needed a long-term programme, and the IMF did not have the appropriate procedures for financing countries in a similar situation to ours.

Unconventional Support

The IMF created a new policy that made it possible to provide more financing to countries in fragile situations due to external factors, such as a full-scale invasion by an unreliable neighbour.

The Fund’s new lending programme for Ukraine is divided into two phases:

• the first will last from 2023 to 2024 and will be aimed at strengthening Ukraine’s macroeconomic resilience in the wake of the war;
• the second phase will include large-scale reforms to facilitate the country’s recovery and economic development.

The IMF considers various scenarios for the development of the Ukrainian economy but pays most attention to the pessimistic scenario. This is primarily due to the significant military uncertainty in Ukraine. This means that the IMF programme is more risk-resilient.

This is a feature of the wartime economy when war dictates the need to apply military approaches: prepare for the worst, and hope for the best.

In 2023, Ukraine is due to receive $4.5 billion from the IMF, $2.7 billion of which has already been disbursed. In the future, the programme will help mobilise funding from other international partners and organisations – a total of $115 billion over the next four years.

As always, the IMF’s support for Ukraine is conditional on the Ukrainian government fulfilling its reform and public administration commitments. In total, the current programme includes 19 structural beacons in various sectors.

This should not be perceived as some whim of the Fund. These commitments are what we as a country need first and foremost and what will bring Ukraine closer to Euro-Atlantic integration.

Fiscal Policy

The IMF programme focuses on budget and tax policy.

Ukraine promises to refrain from any tax policy or administrative measures that could adversely affect tax revenues in 2023 and beyond. This means there will be no radical tax reforms that could jeopardise budget revenues, at least in the near future.

Given that half of the budget is spent on the army, and foreign financial assistance is needed to cover the other half, this requirement is more than adequate.

Moreover, a bill to increase spending on the army by another half a trillion hryvnias is awaiting the president’s signature. The adoption of these changes is described as the first “structural beacon” (a specific condition with a clear deadline) of the programme to bring Ukraine’s budget to a more realistic level.

An essential aspect of the programme is the reintroduction of medium-term budgetary planning, which will allow for better planning of revenues and expenditures over a three-year period. Such planning, which took Ukraine 10 years to develop, began to be introduced shortly before the full-scale invasion.

The war changed the plans. The IMF notes that budget planning is not possible in the current environment, so that the first full-fledged medium-term plan will be drawn up for 2026-2028.

An important aspect is to improve the culture of paying taxes to reduce tax debt. The programme states that the tax debt of economically active taxpayers reaches 1.5% of GDP. By the end of August 2023, the State Tax Service should prepare an action plan to reduce this debt gradually.

In November 2022, independent experts conducted a survey of taxpayers’ attitudes and satisfaction with the Tax Service; such surveys (and responses to key issues) should be made annually and extended to the Customs Service.

Social Policy and Tariffs

The IMF programme assumes that social expenditures in Ukraine remain protected to the extent possible in a time of war. A ceiling has been set on state budget expenditures on social programmes in the coming years to help protect social expenditures.

To identify further ways of reforming social policy, the government, together with the World Bank, has prepared a concept note on the social protection system, which states that the social assistance system should become more targeted, adequate and efficient. It is not yet known what measures are envisaged to achieve this.

The IMF programme envisages a gradual increase in gas and electricity tariffs to ensure the sustainability of the energy sector. At the same time, vulnerable households will be reimbursed for their costs – the same subsidies that need to become more well-thought-out and efficient.

Raising tariffs may be another populist scaremonger, but the reality is that this step is long-awaited and overdue. A country at war, whose energy system is constantly suffering from Russia’s terrorist attacks, cannot afford to finance cheap energy for those who are able to pay for it.

The vulnerable population must receive subsidies.

If something is not addressed, one day it will happen on its own, but in a way that no one will like, so measures such as tariff increases should be implemented in a controlled and timely manner.

Monetary policy and banks

The IMF notes in its programme that Ukraine’s monetary policy during the war was generally successful. In particular, fixing the exchange rate was an important step, and there are no prerequisites for abandoning the fixed exchange rate.

However, the NBU should prepare to return to the pre-war float over time, but this will not happen soon.

Ukraine has also committed to continuing its rejection of monetary financing of the budget, i.e. covering expenditures by printing hryvnia. In 2022, the NBU printed UAH 400 billion, but this was a necessary step caused by the war.

Monetary financing should continue to be a measure of last resort, used only in extreme need cases.

Concerning banks, Ukraine should align its actions with the strategy of reducing state ownership in the banking sector. Any further nationalisations of banks should be coordinated with the IMF, as they are necessary for national security and financial sector stability.

The Ukrainian government has pledged not to impede the return of PrivatBank’s assets, which were owned by Ihor Kolomoyskyi and Gennadiy Bogolyubov at the time of nationalisation in 2016.

In general, the IMF programme is quite extensive and includes various additional measures in the sectors mentioned above, as well as anti-corruption policies to improve the governance of state-owned enterprises.

Cooperation with the IMF is not a “silver bullet” that will provide Ukraine with unprecedented economic growth during the war. However, the implementation of the programme will allow our country to withstand the war economically and meet the victory with opportunities for further development.

Source: Forbes.