- International Monetary Fund (IMF) staff and the Ukrainian authorities have reached staff level agreement (SLA) on the Sixth Review of the 4-year Extended Fund Facility (EFF) Arrangement. Subject to approval by the IMF Executive Board, Ukraine would have access to about US$1.1 billion (SDR 834.9 million), bringing total disbursements under the program to US$9.8 billion.
- Program performance remains strong. The authorities met all end-September quantitative performance criteria (QPCs) and the structural benchmarks for the review. Understandings were also reached on a set of policies and reforms to sustain macroeconomic stability as the war continues.
- The outlook remains exceptionally uncertain and Russia's war in Ukraine continues to take a heavy toll on Ukraine's people, economy, and infrastructure. Despite the challenging environment, the program remains on track on the back of critical external support, including the G7's ERA Initiative that is expected to provide US$50 billion in financing to Ukraine.
Kyiv, Ukraine: An International Monetary Fund (IMF) team led by Mr. Gavin Gray held discussions in Kyiv with the Ukrainian authorities during November 11-18, 2024 on the Sixth Review of the country's 4-year Extended Fund Facility (EFF) Arrangement. Upon the conclusion of the discussions, Mr. Gray issued the following statement:
"IMF staff and the Ukrainian authorities have reached staff-level agreement on the Sixth 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 the IMF continues to provide a strong anchor for the authorities' economic program in times of exceptionally high uncertainty. Program performance remains strong thanks to the authorities' prudent policies, with all quantitative performance criteria for end-September met, as well as the structural benchmarks due for this review.
"The economy has continued to show resilience despite the devastating challenges arising from Russia's war in Ukraine, which has now lasted 1,000 days. Real GDP growth is expected at 4 percent in 2024, but a slowdown to 2.5-3.5 percent is forecast for 2025, reflecting headwinds from energy infrastructure damage and labor shortages. As expected, inflation has picked up, reaching 9.7 percent y/y in October, mainly due to strengthening food and labor costs, but inflation expectations remain well anchored. Gross international reserves amounted to US$36.6 billion at end-October 2024, supported by continued large external official support. However, risks remain exceptionally high given uncertainty on the intensity and duration of the war, including from the continued attacks on energy infrastructure.
"The 2024 supplementary and 2025 budgets are in line with program parameters. The 2025 budget deficit is expected to reach 19 percent of GDP, reflecting continued spending needs due to the ongoing war. It also incorporates the package of tax measures approved by the Rada, with an expected yield on the order of 1.6 percent of GDP in 2025. Enactment of the tax package is a requirement for the review, and will help ensure that the government has the resources needed to meet critical spending needs. Financing this deficit will require significant external support, notably from the crucial G7 ERA Initiative, finalization of which is critical to support macroeconomic stability. Risks to the budget remain high and the authorities should continue to stand ready to respond to fiscal shocks with offsetting measures, in particular broad-based, durable, and efficient revenue measures, such as an increase in the main VAT rate.
Going forward the authorities should continue efforts to mobilize domestic revenues, and in this regard implementation of the National Revenue Strategy (NRS), including reducing tax evasion and increasing compliance, remains a key pillar of restoring fiscal sustainability, improving the business climate, and meeting EU accession criteria. The authorities should accelerate reforms to the state customs service and the Economic Security Bureau (ESBU), in particular the appointment of new heads of the two institutions, as planned when legislation was enacted earlier this year.
Restoring debt sustainability hinges on the revenue-based fiscal adjustment under the program, external financing on concessional terms, and implementation of the authorities' debt restructuring strategy. Completing expeditiously and in line with the program's debt sustainability objectives the treatment of the remaining external commercial claims, including the GDP warrants, is critical to create fiscal space for meeting spending needs in 2025 and beyond.
"Given upside risks to inflation, the pause in the easing cycle remains appropriate, and further action could be warranted should inflation accelerate or inflation expectations deteriorate; the scope for easing could resume as inflationary pressures unwind. The exchange rate should continue to act as a shock absorber and adjust to market fundamentals, while ensuring that adequate reserves are maintained, particularly in view of risks to the outlook. The judicious and staged approach to FX liberalization, supported by continued close monitoring, should continue in line with the National Bank of Ukraine's strategy and consistent with the overall policy mix.
"The independence, competence, and credibility of anti-corruption and judicial institutions should continue to be enhanced. The recent parliamentary adoption of the law reforming the Accounting Chamber of Ukraine is a welcome step in this direction. Strengthening the criminal procedural code and establishing a new high administrative court are key near-term priorities. Timely completion and publication of the inaugural external audit report of the National Anti-corruption Bureau of Ukraine (NABU) will contribute to effective anti-corruption enforcement. The full supervisory board of Ukrenergo is expected to be restored in early December, with independent evaluations of the supervisory boards of key energy SOEs to be undertaken in the first quarter of 2025.
"The financial sector is stable and liquid, with reforms continuing apace despite challenges under Martial Law. To preserve financial stability and enhance preparedness for potential shocks, priorities include strengthening the bank rehabilitation framework, contingency planning and risk-based supervision.
"The mission met with Prime Minister Shmyhal, Finance Minister Marchenko, National Bank of Ukraine Governor Pyshnyy, other government ministers, public officials, and civil society. The mission thanks them and their technical staff for their excellent collaboration and constructive discussions."
