Ukraine and the International Monetary Fund agree on a loan package worth $15.6 billion

FRANKFURT, Germany (AP) — Ukraine and the International Monetary Fund have agreed on a $15.6 billion loan package aimed at shoring up government finances, which are under severe strain due to… Russian invasion and leverage more support by reassuring allies that Ukraine is pursuing strong economic policies.

Ukraine’s Finance Ministry said on Wednesday that the program “will help mobilize financing from Ukraine’s international partners, as well as maintain macro-financial stability and ensure the course of post-war reconstruction after Ukraine’s victory in the war against the aggressor.”

The IMF said in a statement on Tuesday that the loan program would last for four years, with the focus for the first 12 to 18 months on helping Ukraine plug its huge budget deficit and easing pressure to finance spending by printing money at the central bank.

The remainder of the program will focus on supporting Ukraine’s bid for European Union membership and post-war reconstruction.

The IMF deal is expected to benefit more money for Ukraine as it provides evidence to potential donor governments, including in the Group of Seven democracies and the European Union, that Ukraine’s government is pursuing sound economic policies.

The agreement, which still needs approval by the IMF’s executive board, “is expected to help mobilize large-scale concessional financing from donors and international partners for Ukraine over the life of the programme,” said Gavin Gray, IMF mission chief. Ukraine said in a statement.

Ukrainian President Volodymyr Zelensky speaks during a joint press conference with Japanese Prime Minister Fumio Kishida in Kiev, Ukraine, Tuesday, March 21, 2023. (AP Photo/Efrem Lukatsky)

The International Monetary Fund said that the Ukrainian authorities demonstrated their commitment to a healthy economic policy and achieved all the goals agreed upon during the initial consultations. The loan program goes beyond the IMF’s previous practice by lending to a country at war, under new rules that allow assistance under “extremely high uncertainty” conditions.

Ukraine has dramatically increased military spending while the economy will contract by about 30% in 2022, hitting tax revenues.

The result was a huge budget deficit that was covered by external financing from the United States, the European Union, and other allies. Foreign aid helped the country end its dependence on money printed by the central bank and lent to the government, an emergency step deemed necessary early in the war, but which could fuel inflation and destabilize the country’s currency if prolonged.

Before the war, Ukraine had made progress reforming its banking system and making government contracting more transparent. But Ukraine still ranks 122 out of 180 countries on Transparency International’s Corruption Perceptions Index. Its pre-war economy was characterized by political participation by wealthy individuals known as oligarchy and slow progress in improving a legal system seen as too open to political influence.

But the IMF said after initial consultations that the government “made progress on reforms to strengthen governance, combat corruption and the rule of law, and lay the foundations for post-war growth, although the reform agenda in these areas remains prominent.”

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