IMF Board Approves $15.6 Billion Loan for Ukraine Amid War

The International Monetary Fund’s board signed off on a $15.6 billion aid package for Ukraine, the final approval for the institution’s first-ever loan to a nation at war.

(Bloomberg) — The International Monetary Fund’s board signed off on a $15.6 billion aid package for Ukraine, the final approval for the institution’s first-ever loan to a nation at war.

The executive board on Friday approved the four-year loan, and it will immediately disburse about $2.7 billion, the Washington-based lender said in a statement. The program aims to bolster the country’s economy, strengthen its institutions and promote long-term growth and reconstruction after the war.

A group of Ukraine’s creditors supported the unprecedented deal, which required the IMF to change its lending rules, with assurances that they’d extend a debt-repayment standstill for the duration of the program. The creditors — Canada, France, Germany, Japan, the UK and the US — urged other bilateral and private lenders to help restore debt sustainability for Ukraine, whose economy has shrunk by about a third after Russia’s invasion last year.

The IMF loan is part of a $115 billion international package that includes $80 billion from multilateral and bilateral donors and $20 billion of debt-relief commitments.

The loan will be divided into two phases. In the first, lasting 12 to 18 months, Ukraine will take measures to strengthen fiscal, external, price and financial stability, including eliminating monetary financing.

The second phase would shift to more expansive reforms to bolster macroeconomic stability and support the nation’s recovery and reconstruction, including in light of Ukraine’s goal of European Union accession. During this period, Ukraine would be expected to revert to pre-war policy frameworks, including a flexible exchange rate and inflation-targeting regime, according to the IMF.

Exceptional Risks

“The program has been appropriately designed to resolve Ukraine’s balance-of-payments problem and restore medium-term external viability in both a baseline and downside scenario,” First Deputy Managing Director Gita Gopinath said, noting risks to the facility “are exceptionally high.”

Group of Seven countries as well as Belgium, Lithuania, the Netherlands, Poland, Slovak Republic, and Spain have agreed to provide additional resources if Ukraine should have trouble repaying its loans from the IMF.

In the baseline scenario, the war would taper off by mid-2024, while in the downside scenario it would extend to the end of 2025, IMF officials said in a briefing. The program is designed to work even if the economic circumstances are worse than in the baseline scenario, the officials said.

Loan Reviews

IMF staff forecasts for Ukraine’s economy this year range from a 3% contraction to 1% expansion, after a slump of 30% in 2022.

Among the reforms in the program, the Ukrainian authorities are committed to a targeted restoration of the asset declarations, a transparency and anti-corruption measure that had been suspended since the start of the war, and the IMF will be working with them on that, the officials said.

IMF officials said that they expect the first review of the program, which would allow for the next disbursement of funds, to come in June or July, with a second review in October or November.

The Russian invasion, launched over a year ago, has laid waste to Ukraine’s export economy and infrastructure, killing thousands of people and driving more than a third of a pre-war population of 40 million from their homes.

The financing arrangement is an upgrade, with previous IMF funds distributed via rapid financing instruments that didn’t involve conditions. Kyiv began negotiating a full loan program with the lender in June, striking a four-month non-cash deal in an intermediary stage in December. 

Economic Difficulties

Ukraine’s economic collapse last year wiped out the budget’s revenue base and forcing the government to rely on international aid. The government targeted at least $38 billion from foreign donors this year to plug the fiscal gap, with a deficit amounting to some $3 billion a month.

Ukraine’s Finance Ministry planned on receiving $28 billion in grants and loans from the US and the European Union, with the rest coming from bilateral loans from other states and the IMF.

In a statement, US Treasury Secretary Janet Yellen said that she commended Ukraine’s efforts to pursue broad-based structural reforms and strongly supports the program’s measures aimed at securing economic and financial stability.

“The program’s policies and reforms will support economic growth, strengthen good governance and anti-corruption efforts, and set the foundation for longer-term reconstruction,” she said.

(Updates with more details on program starting in seventh paragraph.)

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