Press Release No. 24/55

IMF and Ukrainian Authorities Reach Staff Level Agreement on the Third Review of the Extended Fund Facility (EFF) Arrangement

February 22, 2024

• The International Monetary Fund (IMF) staff and the Ukrainian authorities have reached staff-level agreement (SLA) on an updated set of economic and financial policies for the third review of the 4-year Extended Fund Facility (EFF) Arrangement. The SLA is subject to approval by the IMF Executive Board.
• With all structural benchmarks and all but one quantitative performance criteria met, staff assesses the program to be broadly on track. This would pave the way for Executive Board consideration, which would enable disbursement of about US$880 million (SDR 663.9 million).
• The Ukraine economy experienced a positive dynamic of strong growth, declining inflation and strengthening reserves in 2023, but the outlook for 2024 remains highly uncertain as the war continues.

Warsaw, Poland: An International Monetary Fund (IMF) team led by Mr. Gavin Gray held discussions in Warsaw with Ukrainian officials, during February 17-22, 2024, on the third review of the country’s 4-year EFF Arrangement. At the conclusion of the discussions, Mr. Gray issued the following statement:

“I am pleased to announce that IMF staff and the Ukrainian authorities have reached staff-level agreement on the third review of the EFF. The agreement is subject to approval by the IMF Executive Board, with Board consideration expected in the coming weeks.

“Ukraine’s four-year EFF Arrangement, with access of about US$15.6 billion (SDR 11.6 billion) was approved on March 2023, and forms part of a US$122 billion international support package for Ukraine through early 2027. The EFF continues to provide a strong anchor for the authorities’ economic program in times of exceptionally high uncertainty. Performance under the program has been strong despite the challenges of the war—the authorities met all but one of the quantitative performance criteria—a small miss on tax revenues owing to border blockades—and all four structural benchmarks due for the review.

“Two years after Russia’s invasion of Ukraine, the human and economic fallout from the war continues to mount. The latest Rapid Damage and Needs Assessment (RDNA-3) estimates reconstruction needs at US$486 billion. The authorities have skillfully maintained macroeconomic and financial stability, which, together with significant external financing, has enabled a stronger-than-expected economic recovery in 2023: growth is estimated at 5 percent with upside risks, amid declining inflation and robust reserves. However, the war and delays in external financing are weighing on confidence, and growth in 2024 is expected to soften to between 3-4 percent.

“Fiscal financing needs remain very high in 2024, reflecting war-related spending pressures. The 2024 budget remains the appropriate short-term anchor for fiscal policies, and in this context, efforts should focus on ensuring adequate revenues, prioritizing expenditures, and tapping domestic market liquidity. The authorities stand ready to swiftly respond to shocks, and have already taken measures to address liquidity strains that emerged at the start of the year due to external financing delays. Importantly, timely disbursement of committed external support, projected at US$38 billion in 2024, is critical for budget financing and sustaining macroeconomic stability.

“Preparations for the treatment of external commercial debt are advancing, and it is essential to complete this by mid-2024 and consistent with program parameters. This, together with assurances from official sector creditors and donors (of highly concessional exceptional financing over the program period), and a revenue-based medium-term fiscal adjustment (that builds on the recently-launched National Revenue Strategy (NRS)), will be critical to restoring debt sustainability.

“The FX market continues to be broadly stable following the shift to an exchange rate regime of managed flexibility in October 2023; under the regime, the exchange rate should serve as a shock absorber and safeguard external stability. The easing of FX controls should be done judiciously and gradually in line with the NBU’s Strategy.

“The financial system remains stable and liquid, though continued vigilance is warranted given war-related uncertainty. The National Bank of Ukraine’s (NBU) recent Resilience Assessment and prompt action to close capital shortfalls have been welcome steps to preserve stability. Priorities ahead include strengthening supervision and financial safety nets, financial market infrastructure deepening, including of the payment system, and resume the regular Resilience Assessment and, when conditions allow, completing an independent asset quality review.

“The authorities remain committed to wide-ranging structural reforms in order to preserve macroeconomic stability, support development goals and pursue a path to EU accession.

The NRS should anchor tax policy and administration reforms to help raise adequate revenues to support these goals. Measures that adversely affect the revenue base need to be avoided.

· Work to prepare the 2025-27 budget declaration will soon be underway and will need to reconcile still sizable spending needs with the need to increasingly rely on domestic resources. Moreover, the implementation of medium-term budget framework in conjunction with public investment management reforms will help strengthen the link between national development goals, investment priorities and available resources.

· Fiscal risks need to be carefully monitored, including from state-owned enterprises, to ensure that public resources are well spent and debt sustainability is preserved, with the finance ministry playing a key gatekeeper role. Oversight over the 5-7-9 subsidized lending program needs to be strengthened to enhance targeting given constrained budget resources and ringfence financial sector risks. Robust implementation of the recently approved corporate governance law will be essential to strengthening the SOE sector.

· Recent governance-related reforms, such as adoption of the law reforming the Specialized Anti-corruption Prosecutor’s Office (SAPO) in December 2023, are major achievements, and sustaining the reform momentum in this area, such as creating a new administrative court, will be essential to strengthening public and donor confidence to support the recovery.

“The mission met with Finance Minister Marchenko, National Bank of Ukraine Governor Pyshnyy, and other senior public officials, and would like to thank them for the close collaboration and open and constructive discussions.”