Press Release No. 23/249

IMF Executive Board Completes the First Review under the Extended Fund Facility (EFF) Arrangement for Ukraine

June 29, 2023

• The IMF Board completed today the first review of the extended arrangement under the Extended Fund Facility (EFF) for Ukraine, allowing the authorities to draw the equivalent of about US$890 million (SDR 663.9 million), which will be channeled for budget support. The EFF was approved by the IMF Board in March 2023, and forms part of a US$115 billion total support package for Ukraine.
• The authorities have made strong progress toward their commitments under the EFF under challenging conditions, meeting all applicable quantitative performance criteria through end-April and structural benchmarks through end-June, and remain highly committed to the program.
• Continued strong ownership and reform momentum are necessary to safeguard macroeconomic stability, enhance institutional reforms, and support reconstruction efforts, while facilitating Ukraine’s path to EU accession.

Ukraine’s 48-month EFF arrangement, with access of SDR 11.6 billion (equivalent to US$15.6 billion, or about 577 percent of quota), was approved on March 31, 2023 (see Press Release No. 23/101), and forms part of a US$115 billion support package for Ukraine. The authorities’ IMF-supported program aims to anchor policies that sustain fiscal, external, price and financial stability at a time of exceptionally high uncertainty, support the economic recovery, and enhance governance and strengthen institutions to promote long-term growth in the context of reconstruction and Ukraine’s path to EU accession.

Despite the war, the economy has been showing more resilience than expected following a sharp contraction in 2022. GDP growth has been upgraded to 1–3 percent in 2023 as domestic demand recovers, inflation is decelerating, and FX reserves are strong amid a stable FX market. Overall, macroeconomic and financial stability have been maintained, thanks to prudent policymaking as well as continuous and timely external support.

The authorities made strong progress in their commitments under the EFF amid difficult circumstances, meeting all continuous and end-April quantitative performance criteria. All structural benchmarks through end-June were also met, including to enact the second Supplementary Budget, strengthen the Budget Code, and complete inputs toward developing the National Revenue Strategy. The authorities’ commitment to the program remains firm.

Sustained ownership and reform momentum in the challenging period ahead are essential to safeguard macroeconomic and financial stability. This includes maintaining a strong tax revenue base (including by refraining from measures that would erode the tax base), supporting steady disinflation and exchange rate stability, supporting banking sector health, and advancing crucial governance and anti-corruption reforms, including with respect to asset declarations, AML/CFT and the Specialized Anti-Corruption Prosecutor’s Office (SAPO). It is also vital that external financing for budget support continues on appropriately concessional terms to safeguard macroeconomic stability and ensure that the financing of reconstruction projects is on terms consistent with fiscal and debt sustainability.

Following the Executive Board discussion on Ukraine, Ms. Kristalina Georgieva, Managing Director of the IMF, issued the following statement[1]:

Russia’s invasion of Ukraine continues to have a devastating economic and humanitarian impact. In addition to the continuing combat in Eastern and Southern parts of Ukraine, air raids on Kyiv and other population centers have been escalating since early May. The recent destruction of the Kakhovka dam is a reminder of the ongoing intensity of the war and associated challenges facing Ukraine. Spillovers to the global economy continue.

The Ukrainian economy is staging a gradual recovery, but risks are exceedingly high and exceptionally high uncertainty persists. After a sharp contraction in 2022, economic activity has been more resilient than expected, with growth upgraded to 1–3 percent in 2023 as domestic demand recovers. Inflation is decelerating, reserves are buoyant, and the FX market has been stable. Nevertheless, developments in the war remain the predominant risk, while significant external financing on concessional terms needs to continue to flow on a timely basis and policy slippages cannot be ruled out.

Despite the war, program performance has been strong under the First Review. All continuous and the quantitative performance criteria for end-April 2023 were met, as well as all six structural benchmarks through end-June 2023. The indicative targets on the overall budget balance and social spending, however, were missed due to higher defense spending and changes in the methodology for effecting social payments. Estimates of program external financing gaps remain broadly unchanged, as are medium- term assumptions about growth and financing.

In the near term, fiscal policies will continue to focus on ensuring adequate resources for priority spending, sustaining strong tax revenues, including by refraining from measures that would erode the tax base, and preserving fiscal and debt sustainability. The development of the National Revenue Strategy (NRS) is critical to mobilize revenues and support reconstruction and social spending. Restoring the legal framework for medium-term budget preparation, budget credibility and debt management is also important, combined with measures to improve fiscal transparency and strengthen public investment management.

The NBU’s conditions-based strategy is an appropriate basis for moving toward normalizing the monetary and exchange rate policy frameworks. Once conditions permit, it will be important to transition from the current exchange rate peg toward a flexible exchange rate, cautiously ease emergency FX measures, and return to an inflation targeting framework. Continued evidence of sustained disinflation and stability in the FX cash market provide scope for earlier easing in monetary policy.

While financial stability has been skillfully preserved through comprehensive measures since the onset of war, risks remain elevated and could rapidly materialize. Further vigilance and preparations are needed to respond to the broad range of high-impact risks alongside implementation of the authorities’ comprehensive reform agenda envisioned in the financial sector strategy.

Reforms to strengthen governance, transparency and tackle corruption need to proceed without delay. Progress on strengthening governance and tackling corruption remain essential to convince foreign investors that there is a level playing field in Ukraine, and to assure donors that their resources will be well spent. These reforms are also critical for progress toward EU accession.

The extended arrangement for Ukraine continues to satisfy Fund policies governing the Fund’s financing assurances for UCT-financing under exceptionally high uncertainty. The program has been designed to achieve its objectives across a range of assumptions about the large-scale war and under two scenarios. The authorities continue to exhibit the capacity and commitment to implement the program.

A credible process of a debt treatment of external commercial claims is underway, and adequate financing assurances on debt relief and concessional financing during and after the program have been received from official bilateral creditors and donors to support debt sustainability both in the baseline and under a downside scenario. The assurance provided to the Fund by a significant group of Fund shareholders about Ukraine’s capacity to repay supports needed safeguards.

Annex

Russia’s invasion of Ukraine continues to have a severe impact on human and physical capital, and the environment, with loss of life, drop in living standards and rise in poverty, as well as damage to infrastructure. Nevertheless, the Ukrainian people have been resilient, and the authorities’ skillful policymaking and continued external support have helped support macroeconomic and financial stability.

In light of the significant balance of payments needs arising from the large exogenous shock of the war, the authorities requested a 48-month extended arrangement under the Extended Fund Facility (EFF) in March 2023, which forms part of a US$115 billion total financing package for Ukraine.

Program Summary

The authorities’ program for 2023-27, supported by the EFF, aims to help secure macroeconomic and financial stability, catalyze external financing, and provide a framework for structural policies that could lay the foundations for post-war recovery and reconstruction, including in the context of EU accession. The program involves a two-phased approach: the first phase focuses on securing macroeconomic stabilization and undertaking critical structural reforms while the war is still ongoing; the second phase once active combat has subsided sufficiently, will focus on further entrenching macroeconomic policies and embarking on a more expansive set of structural reforms to restore medium-term external viability, support sustained growth, and facilitate Ukraine’s path to EU accession. Ukraine is assessed to meet the five principal eligibility criteria under the Fund’s policy on Upper Credit Tranche (UCT) lending under exceptionally high uncertainty.

Fiscal policies.In the near term, fiscal policies will continue to focus on ensuring adequate resources for priority spending, maintaining a strong tax revenue base, including by refraining from measures that would erode the tax base, and preserving fiscal and debt sustainability. Efforts should focus on the development of the National Revenue Strategy (NRS) that would anchor much needed revenue mobilization to support reconstruction and social spending. Restoring the legal framework for medium-term budget preparation, budget credibility and debt management is also critical, combined with measures to improve fiscal transparency and strengthen public investment management.

Financing strategy and debt sustainability. External budget support will continue to constitute the bulk of fiscal financing, although mobilization of domestic financing along with the elimination of monetary financing remain important to meet the very large financing needs while preserving stability. The authorities are also taking steps to ensure debt sustainability on a forward-looking basis. In March 2023, the Group of Creditors for Ukraine (GCU) committed to a 2-step process involving an extension throughout the program period of the current debt standstill on official sector debt set to expire at end-December 2023, followed by a final debt treatment before the final review of the Extended Arrangement. In addition, staff assesses that there is a credible process in place for the treatment of external commercial debt. Moreover, highly concessional financing, including for reconstruction purposes, will remain critical over the medium term.

Monetary and exchange rate policies. The program aims to continue supporting steady disinflation and exchange rate stability, including through maintaining an adequate level of FX reserves, while prudently managing the wartime liquidity surplus. Once conditions permit, the program would support a transition toward a more flexible exchange rate, further easing FX controls, and return to an inflation targeting framework.

Financial sector. Although the financial system remains stable and liquid thanks to extensive emergency measures, continued vigilance is warranted given the true health of the banking system remains opaque, and the risks of further shocks persist, including bank nationalizations. Bank diagnostics, reforms to banking oversight, governance of state-owned banks (SOBs) and contingency planning remain high priorities. The National Bank of Ukraine (NBU), together with other financial sector regulators, is finalizing the next iteration of the financial sector strategy, which provides a coordinated vision and roadmap for the future of the financial system.

Governance and growth. Robust post-war growth and rigorous structural reforms, including on governance and anti-corruption, are needed to swiftly restore the population’s living standards and pave the path toward EU accession. Key legislative measures (e.g., restoration of asset declarations, AML standards, and strengthening anti-corruption prosecution) will help mitigate corruption risks during Martial Law and promote public trust and donor confidence, including in the post-war context. It will also be important to pursue an integrated strategy for critical spending during recovery and reconstruction, including on energy and procurement.

Table 1. Ukraine: Selected Economic and Social Indicators, 2021-27