Staff members of the International Monetary Fund (IMF) and Ukrainian authorities have reached a staff-level agreement (SLA) on the sixth review of the four-year Extended Fund Facility (EFF) program, which, pending approval by the IMF Board, will grant Ukraine access to approximately $1.1 billion (SDR 834.9 million), according to a statement from the head of the Fund's mission, Gavin Gray, following its work in Kyiv from November 11 to 18.
"The authorities have met all quantitative performance criteria (QPC) as of the end of September and the structural benchmarks for the review. Agreements have also been reached on a number of policies and reforms to maintain macroeconomic stability amid the ongoing war," the release states.
At the same time, the Fund pointed to exceptionally uncertain prospects as Russia's war against Ukraine continues to inflict significant damage on the Ukrainian people, economy, and infrastructure.
"Despite the challenging conditions, the program remains on track to achieve its goals thanks to critical external support, including the G7 ERA initiative, which is expected to provide Ukraine with $50 billion in funding," the IMF noted.
The Fund has upgraded its growth forecast for Ukraine's economy this year to 4% from 3% following the fifth program review, while maintaining it in the range of 2.5-3.5% for 2025. The IMF believes that the negative consequences of the destruction of energy infrastructure and a labor shortage will be the main constraints on economic growth.
It is indicated that the increase in military expenditures in the 2024 state budget through tax hikes, particularly the military levy (draft law No. 11416-d), and greater issuance of government bonds are in line with the parameters of the EFF program.
"The budget deficit for 2025 is expected to reach 19% of GDP, reflecting ongoing spending needs due to the ongoing war. It also includes a package of tax measures approved by the Rada, with expected revenues of around 1.6% of GDP in 2025. The adoption of this tax package is a prerequisite for the review and will help provide the government with the resources necessary to meet critical spending needs," the release notes.
The IMF indicates that financing the deficit will require significant external support, and the G7 initiative to provide $50 billion under the ERA will play an important role in this. Fund representatives added that risks to the state budget remain high, and Ukrainian authorities must be prepared to respond to fiscal shocks with compensatory measures, including a potential increase in the value-added tax.
The IMF emphasized that authorities should continue efforts to mobilize domestic revenues, which will be aided by the implementation of the National Revenue Strategy (NRS) and the acceleration of reforms in the State Customs Service and the Bureau of Economic Security (BEB).
"Restoring an acceptable level of debt depends on fiscal adjustment based on revenues within the program, external financing on concessional terms, and the authorities' strategy for debt restructuring," the publication states.
According to Fund representatives, resolving Ukraine's outstanding external commercial claims, including GDP warrants, is crucial for creating fiscal space to meet spending needs in 2025 and beyond.
The IMF considers it reasonable to maintain the key interest rate at the current level of 13% per annum, given heightened inflation risks, and allows for a rate increase as a justified step in the event of accelerating inflation or worsening inflation expectations.
"A prudent and gradual approach to exchange rate liberalization, supported by continuous careful monitoring, should continue in accordance with the strategy of the National Bank of Ukraine and the overall policy framework," the Fund commented on its position regarding the National Bank's exchange rate strategy.
"The financial sector is stable and liquid, and reforms are ongoing despite the challenges posed by martial law. To maintain financial stability and enhance readiness for potential shocks, priorities include strengthening the banking recovery system, contingency planning, and risk-based supervision," the IMF stated.
The mission also emphasized that Ukraine should continue efforts to enhance the independence, competence, and authority of anti-corruption and judicial institutions. In particular, the timely completion and publication of the report on the inaugural external audit of the National Anti-Corruption Bureau of Ukraine (NABU) will contribute to effective anti-corruption efforts.
The IMF noted the recently adopted law on reforming the Accounting Chamber and indicated that strengthening the criminal procedure code and establishing a new higher administrative court are key priorities in this area in the near term.
The release also states that the supervisory board of the NEK "Ukrenergo" should be fully restored by early December this year, and independent assessments of the supervisory boards of key state-owned energy enterprises will be conducted in the first quarter of 2025.
As reported, on October 23 of this year, following the fifth review of the EFF program launched in March 2023, Ukraine received its sixth tranche of $1.1 billion, raising total disbursements to $8.7 billion out of a total program volume of $15.6 billion.
The updated program, following the fifth review, included changes at Ukraine's request to the schedule of program reviews and the associated tranches. Previously, it envisioned only two reviews for 2025 – in early March and late August, with disbursements of $917.5 million each. Now, the schedule for the next year includes four quarterly reviews, similar to this year. The amount of the eighth tranche following the seventh review in March remains unchanged at $917.5 million, while the amounts for the subsequent three tranches next year will be $809.6 million, $539.8 million, and $445.3 million, respectively.