Ukraine-IMF reaches staff-level agreement over a $15.6 billion loan to the nation at war

IMF staff forecasts for Ukraine’s economy this year range from a 3% contraction to a 1% expansion, after a slump of 30% in 2022. Ukraine-IMF reaches staff-level agreement over a $15.6 billion loan to the nation at war, setting up the first loan to a nation at war in the institution’s 77-year history.

The IMF and the government in Kyiv reached a staff-level agreement on a comprehensive loan program over four years, the Washington-based lender said in an emailed statement on Tuesday. The agreement is expected to be finalized with the approval of the IMF board in the coming weeks.

The program will be divided into two phases. In the first, lasting 12-18 months, Ukraine will take measures to “strengthen fiscal, external, price and financial stability,” including eliminating monetary financing. The second phase would shift to more expansive reforms to bolster macroeconomic stability and support the nation’s recovery and reconstruction, including in light of Ukraine’s goal of European Union accession. During this period, Ukraine “would be expected to revert to pre-war policy frameworks, including a flexible exchange rate and inflation targeting regime,” the IMF said.

International Monetary Fund staff forecasts for Ukraine’s economy this year range from a 3% contraction to a 1% expansion, after a slump of 30% in 2022.

“A gradual economic recovery is expected over the coming quarters, as activity recovers from the severe damage to critical infrastructure, although headwinds persist, including the risk of further escalation in the conflict,” Gavin Gray, who led the IMF’s mission, said in a statement.

The unprecedented agreement required the IMF to change its policies. The Russian invasion launched over a year ago, has laid waste to Ukraine’s export economy and infrastructure, killing thousands of people and driving more than a third of a pre-war population of 40 million from their homes. The financing arrangement is an upgrade, with previous IMF funds distributed via rapid financing instruments that didn’t involve conditions. Kyiv began negotiating a full loan program with the lender in June, striking a four-month non-cash deal in an intermediary stage in December.

“In conditions of a record budget deficit, this program will help us finance all crucial expenditures, preserve micro financial stability and enhance our cooperation with the other international partners,” Ukraine’s Prime Minister Denys Shmyhal said on his Telegram channel.

Ukraine’s economy collapsed by about a third last year, wiping out the budget’s revenue base and forcing the government to rely on international aid. The government targeted at least $38 billion from foreign donors this year to plug the fiscal gap, with a deficit amounting to some $3 billion a month.

Ukraine’s Finance Ministry planned on receiving $28 billion in grants and loans from the US and the European Union, with the rest coming from bilateral loans from other states and the IMF. Treasury Secretary Janet Yellen hailed the agreement. The US is the IMF’s biggest shareholder.

“An ambitious and appropriately conditioned IMF program is critical to underpin Ukraine’s reform efforts, including to strengthen good governance and address risks of corruption, and provide much needed financial support,” Yellen said. “It will also bolster the economic assistance that the United States and our partners have provided.”