Amid War, Ukraine Is Maintaining Macroeconomic Stability and Embarking on Reforms

IMF News, April 5, 2023

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Russia’s invasion continues to have a devastating economic and social impact on Ukraine.
Gross domestic product contracted by around 30 percent in 2022.
Civilian casualties are mounting and more than a third of the population has been displaced.
A large swathe of the country’s infrastructure has been destroyed.
Despite skillful policymaking by the authorities to maintain overall economic and financial stability, public debt has soared, and the fiscal deficit ballooned to accommodate additional defense and security spending.

On March 31, the IMF’s Executive Board approved a financial arrangement for Ukraine amounting to $15.6 billion over the four years through 2027.
The arrangement under the Extended Fund Facility (EFF) is part of an international $115-billion financial package for the same four-year period.
The EFF is the third and final stage of a strategy developed with the authorities:
- First stage: emergency financing totaling $2.7 billion through the Rapid Financing Instrument in 2022.
- Second stage: a four-month Program Monitoring with Board Involvement (PMB), approved in December 2023.
- Authorities’ strong performance under the PMB paved the way to the full-fledged IMF program.

Ukraine qualifies for the Fund’s new policy on upper-credit-tranche lending under exceptionally high uncertainty.
Multiple outcomes are plausible because of uncertainty about when the war will end.
Baseline scenario:
- Assumes that the war winds down in the first half of next year and is followed by a period of measured investment and reconstruction.
Downside scenario:
- Assumes that war intensifies and lasts longer.
- Would weigh on economic activity more than is assumed under the baseline, discourage people who have left the country from returning, and inflict further infrastructure damage.

Aim: secure macroeconomic and financial stability, catalyze external financing, and provide a framework for structural policies that lay the foundations for post-war recovery, reconstruction and eventual accession to the European Union.

Fiscal policy:
- Near term focus: ensuring adequate resources for priority spending, maintaining a strong tax revenue base, and preserving fiscal and debt sustainability.
- Medium term focus: developing a national revenue strategy, gradually restoring the medium-term budget framework, and strengthening public investment management to support early reconstruction and social spending.

Monetary and exchange rate policies:
- Key priorities: support steady disinflation and exchange rate stability, maintain adequate level foreign-exchange reserves, and prudently manage the wartime liquidity surplus.

Financial sector:
- Policies to preserve financial stability and prepare for the postwar recovery, including contingency planning, bank diagnostics, and tackling troubled banks and non-performing assets.

Governance and growth:
- Establishment of independent and effective anti-corruption institutions to improve governance, promote public trust and donor confidence in future reconstruction.
- Deepening integration with the EU single market and implementing the EU accession requirements to deliver institutional and structural reforms.

Financing strategy and debt sustainability:
- Program will help restore debt sustainability through treatments of both official and external commercial debt.
- Debt treatments, together with significant concessional external financing and higher domestic financing from debt sales, will help the authorities meet their financing needs over the program period.

After the war, Ukraine will need high rates of economic growth over a sustained period to rebuild productive capacity and recover living standards as swiftly as possible.
Reconstruction requirements:
- Unprecedented investment and rebuilding of human capital.
- The public sector will play an important role; measures to improve governance will facilitate donor financing.
- A large part of investment will have to come from private sources, largely foreign.
The IMF program will support the authorities as they implement critical reforms to support reconstruction and the path to European Union accession.

Source: IMF — Amid War, Ukraine Is Maintaining Macroeconomic Stability and Embarking on Reforms (April 5, 2023).