IMF approves $890 million funding tranche for Ukraine

Washington-based lender has upgraded country's 2023 growth forecast to between 1% and 3% as domestic demand recovers

A building damaged by a Russian missile in central Kramatorsk, Ukraine. Reuters
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The International Monetary Fund has approved an $890 million tranche of funding for Ukraine.

The IMF's board completed its first review on Thursday of the extended arrangement under the Extended Fund Facility (EFF) for Ukraine, allowing the authorities to draw the equivalent of about $890 million, pr 663.9 million in special drawing rights (SDR).

The funds are mainly to help support Ukraine's budget, the Washington-based lender said.

In March, Ukraine secured $15.6 billion from the IMF as part of a four-year comprehensive loan programme, which is part of the $115 billion total support package for the war-torn country.

"The authorities’ IMF-supported programme aims to anchor policies that sustain fiscal, external, price and financial stability at a time of exceptionally high uncertainty, [as well as] 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," the fund said.

Ukraine's economy shrank by about 29 per cent last year and the fluidity of the conflict means an uncertain economic outlook.

Damage to the country's infrastructure was estimated at $138 billion as of December 2022, equal to 70 per cent of its gross domestic product in 2021, according to the Kyiv School of Economics.

In February, 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.

In a report earlier this month, Fitch Ratings, which also maintains a non-investment-grade rating on Ukraine, projects that the country's economy will grow by 3.5 per cent in 2023 and 4 per cent in 2024.

Still, the IMF said Ukraine's economy "has been showing more resilience than expected", despite the war with Russia.

The fund has upgraded gross domestic product in the country to between 1 per cent and 3 per cent in 2023 as domestic demand recovers.

It expects inflation to slow and said foreign exchange reserves were strong.

Inflation is forecast to drop to about 18 per cent this year and drop further to 13 per cent in 2024, after hitting about 20 per cent in 2022.

"Overall, macroeconomic and financial stability have been maintained, thanks to prudent policymaking as well as continuous and timely external support," the IMF said.

"The authorities made strong progress ... sustained ownership and reform momentum in the challenging period ahead are essential to safeguard macroeconomic and financial stability."

Ukraine authorities need to maintain a strong tax revenue base, refrain from measures that would erode the tax base and take action that supports steady disinflation, exchange rate stability and the health of the banking sector.

Authorities need to also advance crucial governance and anti-corruption reforms, including measures to do with asset declarations, anti-money laundering and counter-terrorism financing, the IMF said.

"The Ukrainian economy is staging a gradual recovery but risks are exceedingly high and exceptionally high uncertainty persists," said IMF managing director Kristalina Georgieva.

"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."

While financial stability has been preserved, authorities need to be prepared to respond to the broad range of high-impact risks alongside measures to enforce the comprehensive reform agenda, Ms Georgieva said.

"Reforms to strengthen governance, transparency and tackle corruption need to proceed without delay," she said.

"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."

Updated: June 30, 2023, 6:41 AM