The International Monetary Fund has approved a $15.6 billion loan for Ukraine, after it secured backing from the agency last week, providing a major boost to help the war-torn country's government maintain financial stability and support economic recovery.
The four-year Extended Fund Facility (EFF) is part of an overall support package worth $115 billion and is aimed at helping Kyiv resolve its balance-of-payment problem and restore external viability in the medium term, the Washington-based fund said in a statement on Friday.
Ukraine and the IMF reached a staff-level agreement on a comprehensive loan programme on March 21.
The broader package is projected to mobilise large-scale concessional financing from Ukraine’s international donors and partners, including the Group of Seven and the EU, it said.
The loan merited approval because Ukraine's government was able to meet the IMF's benchmarks amid "challenging circumstances", Gita Gopinath, the IMF's first deputy managing director, wrote in the statement.
The EFF comprises "measures to anchor macroeconomic and financial stability as well as to undertake critical structural reforms as the war continues", she said.
This will be followed by "more ambitious structural reforms to restore medium-term external viability, support sustained growth and post-war reconstruction, and facilitate Ukraine’s path to EU accession".
Russia began its military offensive in Ukraine in February 2022, plunging the latter into a deep economic and political crisis.
The Eastern European country's economy shrank by 30 per cent last year and the fluidity of the conflict means an uncertain economic outlook, with a range of outcomes that range from a 3 per cent contraction to a 1 per cent expansion in real gross domestic product growth for 2023, the fund said.
This is in line with government data released in January that showed a 30.4 per cent decline in gross domestic product in 2022. Last year's figure was also the biggest annual GDP drop since Ukraine gained independence from the former Soviet Union in 1991, Economy Minister Yulia Svyrydenko said.
Damage to the country's infrastructure was estimated at $138 billion as of December 2022, equal to 70 per cent of gross domestic product in 2021, according to the Kyiv School of Economics.
Last month, Moody's Investors Service downgraded Ukraine's rating deeper into junk, or non-investment grade, territory as a result of the mounting pressure on its finances.
Moody's forecasts financing needs of about 20 per cent of GDP in 2023, which are expected to be mainly covered through donor support, and the remainder by issuances on the domestic market.
“Russia’s invasion of Ukraine continues to have a devastating economic and social impact. Activity contracted sharply last year, [much] of the country’s capital stock has been destroyed, and poverty is on the rise," Ms Gopinath said.
"The authorities have nevertheless managed to maintain overall macroeconomic and financial stability, thanks to skilful policymaking and substantial external support."
The IMF programme will be divided into two phases. During the first stage, which runs from a year to 18 months, Ukraine will take measures to “strengthen fiscal, external, price and financial stability”.
The measures are intended to improve its revenue collection and eliminate monetary financing.
The second phase would shift to more expansive reforms to boost macroeconomic stability, support the country’s recovery and reconstruction, as well as “enhance resilience and higher long-term growth” in the context of Ukraine’s EU accession goals.
Ukraine applied for EU membership in February 2022 and was granted candidate status in June. The country has to fulfill certain conditions to be granted official membership.
The European Council has "acknowledged the considerable effort that Ukraine has made under very difficult circumstances to meet the objectives underpinning its candidate status", it said.
In the near term, Ukraine's fiscal policies are expected to focus on ensuring adequate resources for priority spending, maintaining a strong tax revenue base and preserving fiscal and debt sustainability, while measures that erode tax revenue should be avoided, the IMF said.
"The authorities will also take steps to improve fiscal transparency and risk management and strengthen public investment management," the fund said.
"The authorities’ programme would help restore debt sustainability on a forward-looking basis through treatments of both official and external commercial debt."