The Board of Executive Directors of the International Monetary Fund (IMF) has completed the first review of the Extended Funding Facility (EFF) program for Ukraine and approved the immediate release of the second tranche of SDR 663.9 million (about $890 million) to be used for budget support.
“Officials have made significant progress in meeting their EFF commitments under difficult conditions, meeting all applicable quantitative performance criteria by the end of April and structural benchmarks by the end of June, and remain highly committed to the program,” the fund said in a release Thursday on its website.
At the same time, the fund noted that sustained accountability and momentum for reforms are needed to ensure macroeconomic and financial stability in the difficult period ahead.
“This includes maintaining a solid tax revenue base (including by refraining from measures that could undermine the tax base), supporting sustainable disinflation and exchange rate stability, maintaining a healthy banking sector, and advancing critical governance and anti-corruption reforms, including on asset declarations, financial monitoring and the Specialized Anti-Corruption Prosecution Service (SAP),” the release specified.
The IMF added that it is also crucial that external financing of the budget and reconstruction projects continue on concessional terms, compatible with financial and debt sustainability.
Fiscal policy efforts should also focus on developing a National Revenue Strategy (NRS) that will anchor much-needed revenue mobilization to support reconstruction and social spending, it was pointed out. “Restoring the legal framework for midterm budget preparation, budget credibility, and debt management is also critical, coupled with measures to increase fiscal transparency and strengthen public investment management,” the Fund noted.
Commenting on the financing strategy and debt sustainability, the IMF stated that external support for the budget will continue to make up the bulk of budget financing, although mobilizing domestic financing along with avoiding issuance is still important.
The Fund added that in addition to the March 2023 commitment by the Ukraine Creditors Group (CCG) to restructure part of the official debt, there is a credible process for resolving external commercial debt, according to Fund staff.
Speaking of monetary and exchange rate policy, the IMF stressed that the program aims to further support sustainable disinflation and exchange rate stability, including by maintaining an adequate level of foreign exchange reserves while prudently managing wartime excess liquidity.
“As soon as conditions permit, the program will support a transition to a more flexible exchange rate, a further loosening of exchange controls, and a return to an inflation-targeting system,” the Fund pointed out without any specification of timing.
In the financial sector, the IMF called for continued vigilance, given that the true state of the banking system remains unclear and risks of further shocks, including nationalization of banks, remain. She said bank diagnostics, banking supervision reform, state bank governance and contingency planning remain high priorities.
The fund also stressed the importance of governance and anti-corruption reforms needed to quickly restore living standards and pave the way for EU accession, as well as build public and donor confidence, including in the postwar period.
“It will also be important to pursue a comprehensive strategy for critical spending during recovery and reconstruction, including on energy and procurement,” the IMF added.
As reported, the IMF and Ukraine reached a staff-level agreement on an updated set of economic and financial policies as part of the first review of the four-year $15.6 billion EFF program on May 30.
It was noted that all the quantitative performance criteria at the end of April and structural benchmarks at the end of May had been met, paving the way for the IMF board of directors to consider granting Ukraine the second tranche of the EFF program of about $900 million (SDR663.9 million).
The program was approved on March 31 this year, and the first tranche of $2.7 billion was allocated in early April as well. The program’s schedule assumes that Ukraine will receive three tranches of SDR664 million (about $900 million) after the first tranche in mid-June and October of this year and in late February of the following year based on the first, second and third revisions, when the fulfillment of obligations is estimated for the end of April, June and December of this year, respectively.
