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

April 5, 2023

A new IMF program will support the authorities to stabilize the economy and help speed Ukraine’s recovery and reconstruction

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, while 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 our Extended Fund Facility (EFF) is part of an international $115-billion financial package, for the same four-year period, which is intended to support the authorities’ policies to stabilize the economy as the war continues and entrench more expansive reforms to speed recovery once war winds down.

The newly approved EFF is the third and final stage of a strategy developed with the authorities to support Ukraine. The first stage was emergency financing totaling $2.7 billion through the Rapid Financing Instrument in 2022. The second stage was a four-month Program Monitoring with Board Involvement (PMB), approved in December 2023. The authorities’ strong performance under the PMB paved the way to the full-fledged IMF program.

Exceptionally high uncertainty

Ukraine’s economic outlook is highly uncertain and the country qualifies for the Fund’s new policy on upper-credit-tranche lending under exceptionally high uncertainty. Unlike a standard IMF program, which is anchored around a central scenario, several outcomes are plausible in Ukraine, chiefly because of uncertainty about when the war will end.

Our 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. Our downside scenario assumes that war intensifies and lasts longer. This 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.

Economic policies

The authorities’ new IMF-supported program aims to 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. Specifically:

Fiscal policy. In the near term, the authorities’ fiscal policies will focus on ensuring adequate resources for priority spending, maintaining a strong tax revenue base, and preserving fiscal and debt sustainability. To support early reconstruction and social spending, the focus will shift over the medium term to developing a national revenue strategy, gradually restoring the medium-term budget framework and strengthening public investment management.

Monetary and exchange rate policies. A key priority is to support steady disinflation and exchange rate stability, including by maintaining adequate level foreign-exchange reserves, while prudently managing the wartime liquidity surplus.

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

Governance and growth. The establishment of independent and effective anti-corruption institutions will further improve governance and promote public trust and donor confidence in future reconstruction. Deepening integration with the EU single market and implementing the EU accession requirements will be crucial to bring to fruition long-sought institutional and structural reforms.

Financing strategy and debt sustainability. The authorities’ program will help restore debt sustainability through treatments of both official and external commercial debt. These 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 its productive capacity and recover living standards for its people as swiftly as possible. This will require unprecedented investment and rebuilding of human capital. The public sector will play an important role and measures to improve governance will facilitate donor financing. But 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.