An International Monetary Fund (IMF) mission on Wednesday begins discussions with Ukraine’s representatives on a new full-fledged support program involving funding from the Fund.
“The IMF mission led by Gavin Gray begins discussions today with representatives of the Ukrainian authorities on a potential program to be supported by the IMF,” Vahram Stepanian, IMF Resident Representative in Ukraine, said in a statement.
Earlier, Ukrainian Finance Minister Sergei Marchenko announced the work of the IMF mission from March 8 to 15 in Warsaw.
“There we will agree on the terms and conditions, and filling, and volumes, and so on. Now it’s a little early to talk about specific details, because there are a lot of issues of internal discussion of the Fund,” said the head of the Ministry of Finance on March 1.
“I think we will find the necessary solutions so that in April we could have a full-fledged program with the Fund,” said Marchenko.
According to him, so far we are talking about a four-year program, whose task is to make the necessary policy adjustments so that Ukraine, which today spends 50% of its budget on military expenditures and the other 50% financed by the aid of partners, after the war came to a level of “more or less” self-sufficiency.
“The Fund does not yet put forward unbearable conditions that we cannot fulfill. We are talking about program, basic things: ensuring monetary and fiscal stability; reduction of the budget deficit and ensuring an acceptable level of burden on the budget and also good public administration and ensuring best corporate practices. And we are talking about anti-corruption programs, which have traditionally been part of IMF programs,” explained the head of the Ministry of Finance.
Prime Minister Denis Shmygal stated that the amount of the program may amount to $15 billion, of which Ukraine would like to receive $5 billion this year.
As earlier reported, last autumn, when the IMF was not ready to provide substantial financing at once, Ukraine requested a four-month Monitoring Program with Board of Directors (PMB) from the Fund, which the Fund approved on December 20.
An IMF mission concluded in Warsaw on Feb. 17, resulting in a statement that a staff-level agreement (SLA) had been reached to end that program early and move forward with preparations for a new, expanded program involving financing.
Kiev hopes that in the beginning of the second quarter of 2023, the PMB will be replaced by a multiyear extended funding program EFF amounting to about $15 billion, which can cover the gap in covering the $ 38 billion deficit of the state budget-2023, which is now, according to about $5-10 billion.
French Economy Minister Bruno Le Maire on Monday called on the IMF to provide EUR 15 billion in aid to Ukraine and tighten economic sanctions against Russia ahead of the G20 financial meeting this week in India, French Le Figaro writes.
“In addition to the support that Europe provides, in addition to the support that the G7 countries provide, it is important that the IMF mobilizes for Ukraine,” Bruno Le Maire said, marking the “sad anniversary” of the war in Ukraine.
“We are working on the IMF Program for Ukraine, which could amount to about EUR 15 billion over four years,” the French minister said.
According to the publication, citing a source in the IMF, Ukraine will be able to demand financial support, since the Fund believes that the Ukrainian authorities have shown “solid” work within the “Monitoring Program.”
According to the French minister, “economic sanctions are effective” because “they made it possible to almost halve Russia’s oil revenues, they made it possible to completely disrupt Russian production chains, especially in such strategic industries as aviation or automobiles.”
On Friday, February 24, a meeting of finance ministers and heads of central banks of the G20 countries will be held in Bangalore (India).
International Monetary Fund (IMF) staff and Ukraine’s official authorities reached a staff-level agreement (SLA – staff-level agreement) on the first and final review under the Monitoring Program with Board of Directors (PMB).
“This agreement, which is subject to IMF management approval, paves the way for the start of discussions on a full-fledged program supported by the Fund,” the IMF said in a statement Friday evening following the mission.
As reported, Ukraine, amid the IMF’s reluctance to immediately allocate significant funding last fall, requested a four-month PMB Monitoring Program from the Fund, which the Fund approved on December 20. Kiev hopes that this program, which does not involve financing, will be replaced by the Extended Funding Facility (EFF) at the beginning of the second quarter of 2023, which may partially cover the gap in covering the $38 billion deficit in the state budget 2023, which now amounts to about $10 billion.
The IMF mission on the first revision of the program worked in Warsaw on February 13-17. It discussed medium-term macroeconomic indicators, fiscal policy, the structure of financing, financial sector policies, and governance.
“Thanks to the joint efforts of the government and the National Bank of Ukraine, all the quantitative and indicative indicators for the end of December, as well as all five structural benchmarks for the end of January were fulfilled. They included the government’s submission of a package of tax bills, the adoption of measures by the Ministry of Finance on the settlement of overdue debts, the development of a conceptual plan for the social protection system, the creation of the Naftogaz NAB and the agreement of key elements of the banking sector diagnosis,” said Gavin Gray, IMF mission chief.
According to him, the timely provision of significant external support is critical to macroeconomic stability and large-scale disbursements will remain necessary in 2023 and beyond to cover financing needs and ensure stability.
Gray also said that efforts to expand issuance in the domestic bond market should continue to help ensure a stable financing structure and eliminate reliance on monetary financing.
The IMF expects the public sector to play an important role in the recovery, and measures to improve the efficiency and transparency of public finance and governance will be critical.
The Fund also pointed out that the economy contracted by 30% in 2022, less than previously expected, and inflation has begun to slow. At the same time, the short-term outlook has worsened since the PMB approval in December, including due to attacks on critical infrastructure. Nevertheless, the economy is adjusting, and a gradual recovery is expected over the course of the year.
“Fiscal policy in 2023 should take into account higher spending needs. Strengthening tax revenues, including by improving revenue management and restoring tax policy to its prewar state, remains a priority. In addition, Ukraine faces the enormous task of creating fiscal space for war-related recovery and a stronger social safety net, leaving no room for measures that undermine tax revenues,” the Fund noted.
According to the IMF, the NBU has reacted prudently to excess liquidity in the banking system, including by raising reserve requirements and increasing the attractiveness of local currency assets to ensure price and external stability.
“With the outbreak of war, the far-reaching emergency measures imposed under martial law helped maintain financial stability. Now preparations are underway for the gradual lifting of emergency measures in order to bring norms in line with international standards. The NBU is prioritizing updating its financial sector strategy, a key element of which will be an independent assessment of banks’ assets when conditions allow,” the Fund pointed out.
According to his staff, a full-fledged program with the IMF would support the Ukrainian government’s efforts to join the EU. In particular, reform initiatives aimed at improving private sector productivity and competitiveness should be advanced to help lay the groundwork for sustainable post-war growth amid moves toward EU accession.
“The authorities are making progress on reforms to strengthen governance, fight corruption and the rule of law, and lay the foundations for post-war growth, although the reform agenda in these areas remains significant… The private sector is also expected to contribute to recovery efforts,” the release also noted.
The IMF staff’s main scenario under the Monitoring Program with the Board of Directors (PMB) suggests that Ukraine will need to purchase 5 billion cubic meters of gas in 2023, spread evenly over 12 months.
According to the schedule presented in the documents, without imports, Ukraine will leave this heating season with reserves of 6 billion cubic meters and by the next heating season will only be able to increase them to 8.5 billion cubic meters, which will cause their fall to 6 billion cubic meters by the beginning of 2024.
At the same time, taking into account imports, gas reserves at the end of this heating season will be only slightly below 9 billion cubic meters, and by the next will increase to almost 14 billion cubic meters, which is only about 0.5 billion cubic meters less than at the beginning of this season.
“To help Naftogaz meet the associated increase in financing needs, the government is already providing budget support to the company through an implicit subsidy in the form of lost revenues from rent payments for gas, which is estimated at about UAH 145 billion ($3.5 billion) for 2023,” the materials on the Fund’s website to the PMB indicate.
At the same time, IMF experts suggest that more support is likely to be needed, including as compensation for utility service obligations due to the fixing of the retail gas price at 7.4 UAH per cubic meter – well below the import parity price.
They added that the Heating Utility Company (HUC) and Gas Transmission System Operator (GTSO), whose liquidity suffers due to lower transit fees and low capacity usage, may also need support.
“In general, according to staff estimates, up to UAH 150 billion ($3.6 billion) in the form of additional financial support to Naftogaz, UGTSU and TKE may be required in 2023,” the IMF experts said.
The Executive Board of the International Monetary Fund (IMF), following the discussion of Program Monitoring with Board involvement (PMB) for Ukraine, previously approved at the IMF management, declares that this four-month program is designed to help Ukraine maintain stability and catalyze donor financing amid very large balance of payment needs and exceptionally high risks.
“The PMB is tailored to Ukraine’s exceptional circumstances, to help the authorities implement prudent macroeconomic policies during this particularly difficult period and catalyze donor financing. Large and predictable external financial support will be critical for the success of the authorities’ strategy, and frontloaded disbursements would help address strains in early 2023,” IMF First Deputy Managing Director and Acting Chair Ms. Gita Gopinath said.
“Key measures under the PMB include enhancing revenue mobilization and reviving the domestic debt market, preparing a financial sector strategy, and enhancing transparency and governance,” the fund said.
“Notwithstanding all these strains, the authorities have largely managed to maintain macroeconomic and financial stability, and they are committed to continue adapting policies to fast changing circumstances, including in the case of a severe downside scenario. Balance of payment needs remain very large and risks are exceedingly high,” Gita Gopinath stated.
“The PMB focuses on a targeted set of policy actions to support macroeconomic and financial stability. This will require enhancing revenue mobilization, containing monetary financing and therefore reviving domestic debt markets. At the same time, the PMB seeks to promote transparency and preserve hard-won gains from past Fund-supported programs, including in the areas of independence of the National Bank of Ukraine and, more broadly, governance and anti-corruption. Strong implementation of the PMB should help pave the way toward a possible full-fledged IMF-supported program,” she said.
Canada has transferred 500 million Canadian dollars to the administered account of the International Monetary Fund for Ukraine, and the Netherlands – EUR200 million, IMF Managing Director Kristalina Georgieva said.
“Thank you, Canada, for a new contribution of CAD 500 million to the Administered Account for Ukraine. This is Canada’s third contribution to the account, which supports efforts to help stabilize the Ukrainian economy,” she said on Twitter.
“I am delighted to see another member of the international community joining the efforts to help stabilize the Ukrainian economy using the Administered Account for Ukraine. Thank you, the Netherlands, for your EUR 200 million contribution,” she said.
As reported, Canada is transferring to Ukraine as a loan through the IMF in the amount of CAD500 million received from the issuance of special five-year sovereign bonds in support of Ukraine.
In early July this year, the Netherlands announced its decision to allocate another EUR200 million to Ukraine through the IMF account.
