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

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

November 10, 2023

• 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 second review of the 4-year Extended Fund Facility (EFF) Arrangement. The SLA is subject to approval by the IMF Executive Board.
• All quantitative performance criteria for end-June and indicative targets for end-September were met. The majority of structural benchmarks were also met, paving the way for the Executive Board’s consideration, which would enable disbursement of about US$900 million (SDR 663.9 million).
• The IMF staff and the Ukrainian authorities also held discussions on the 2023 Article IV consultation, which focused on medium-term policies to lay the groundwork for a sustained, resilient, and green recovery on its path to European Union (EU) accession.
• The Ukrainian economy continues to show remarkable resilience, and recent economic developments point to a stronger-than-expected economic recovery in 2023, with continued, albeit softer growth in 2024. However, the outlook remains extremely uncertain as exceptionally high war-related uncertainty persists.

Warsaw, Poland: An International Monetary Fund (IMF) team led by Mr. Gavin Gray held discussions in Warsaw with Ukrainian officials, during November 6-10, 2023, on the second review of the country’s 4-year EFF Arrangement and the 2023 Article IV consultation. 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 second 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 31. The IMF-supported arrangement forms part of a much larger international support package for Ukraine that now totals around US$122 billion. The EFF continues to provide a strong anchor for the authorities’ economic program, and program performance has been broadly on track despite the extremely challenging backdrop. All quantitative performance criteria for end-June and indicative targets for end-September were met The majority of structural benchmarks were also met, while a few others are completed with some delay or are underway, reflecting the authorities’ continuing commitment to the overall reform agenda

“The war in Ukraine continues to have a devastating impact on the population and the economy as attacks on critical infrastructure and air strikes continue countrywide. Furthermore, Russia’s termination of the Black Sea Grain Initiative and destruction of ports have impeded Ukraine’s exports. Despite this, macroeconomic and financial stability have been maintained, thanks to prudent policymaking as well as steady and timely external support. The Ukrainian economy continues to show remarkable resilience and further signs of stabilization as recent economic developments point to a stronger-than-expected economic recovery in 2023 and a substantial disinflation, amid strong reserves and a stable foreign exchange market. IMF staff have therefore upgraded real GDP growth for 2023 to 4.5 percent (from the previous range of 1-3 percent when the EFF first review was completed). However, growth is expected to soften to a range of 3-4 percent in 2024 as the war continues, and downside risks to the outlook remain exceptionally high. 

“An extremely challenging environment for public finances persists: the fiscal deficit remains very high, reflecting the economic and social cost of the war, entailing large financing needs. To help meet these spending needs while preserving debt sustainability, key priorities include enacting the law to fully restore tax audits and launching the National Revenue Strategy (NRS) in December as planned. The authorities need to stand ready to take additional revenue measures and should continue their efforts to mobilize financing from the domestic bond market. Timely disbursement of committed external support will be critical for budget financing and macroeconomic stability.

“The authorities should proceed with the planned commercial debt operations in the timeline envisaged, consistent with the aim of restoring debt sustainability in line with program parameters. Preserving sustainability will also require seeking new borrowing on the most concessional terms possible and delivering a revenue-based medium-term fiscal adjustment.

“The National Bank of Ukraine’s (NBU’s) recent move to managed exchange rate flexibility, in line with its Strategy, has proceeded successfully. It is a welcome step toward restoring the pre-war monetary policy framework and helps strengthen the resilience of the economy to external shocks.

“The financial system remains stable, liquid and highly provisioned thanks to extensive emergency measures, but continued vigilance is warranted given war-related uncertainty. Bank diagnostics, reforms to banking oversight, strengthening the governance of state-owned banks (SOBs), and contingency planning remain high priorities.

“Steadfast implementation of structural reforms, including in governance, anti-corruption and public investment management, will be crucial in laying the foundations for strong and sustained growth, and support Ukraine on its path to EU accession. The recent adoption of legislation to restore asset declarations and align the AML/CFT law with the Financial Action Task Force (FATF) standards are important achievements. Momentum on the governance front should be sustained, and legislation to strengthen the autonomy of the Specialized Anti-corruption Prosecutor’s Office (SAPO) should be adopted in December as planned. Meanwhile, efforts to strengthen the governance of state-owned enterprises should continue. In addition, to support anticipated recovery and reconstruction spending, it will be important to ensure mechanisms for managing donor funding are integrated in budget processes, and in line with best practices on public financial management and transparency.

“The IMF staff and the Ukrainian authorities also held discussions for the 2023 Article IV consultation, which focused on medium-term policies to lay the groundwork for a sustained, resilient, and green recovery and support Ukraine on its path to the EU accession. Whereas the war has had a significant impact on productive capacity, Ukraine has major upside potential once the war tapers off, depending on policy and reform choices and the availability of financing. Well-managed post-war reconstruction coupled with decisive reforms (including on public investment management, governance, and business environment) in the context of EU accession could stimulate the return of migrants and investment flows needed to set the economy on a sustainably stronger growth footing and help to achieve Ukraine’s broader development goals. In this regard, the mission welcomes the start of EU accession talks.

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