WASHINGTON, D.C. — The International Monetary Fund on Dec. 18 agreed to loan Ukraine up to $3.9 billion through the end of 2019 in a move that signaled confidence the country’s long-term outlook will improve despite current grim economic statistics.
Ukraine expects the first, approximately $1.4 billion, tranche of the loan, called a standby agreement, will be released by Dec. 25. The rest will follow if Ukraine meets specific criteria in six monthly reviews, including a budget deficit no higher than 2.5 percent of gross domestic product, which is expected to be $120 billion in 2018. Ukraine also met other demands, such as legislation to create an anti-corruption court, although the judges are still being selected. And Ukraine also raised domestic household gas prices closer to market levels.
David Lipton, first deputy managing director and acting chair of the IMF’s Executive Board, said Ukraine had restored macroeconomic stability and growth and praised “prudent fiscal and monetary policies” for reducing deficits and partly rebuilding foreign cash reserves.
In a statement released by the IMF, Lipton said: “A new standby arrangement will provide an anchor for the authorities’ economic policies during the coming year, preserving recent economic gains and paving the way for higher sustainable growth.”
He added that, together with help from the World Bank and the European Union, the IMF loan will help Ukraine meet its financing needs.
But he warned that Kyiv must not be tempted to use the money to increase public spending, abandon market prices for gas and heating tariffs or lower taxes.
2019 sees presidential elections in Ukraine on March 31.
The IMF insisted on raising the price of gas for domestic consumers closer to import market levels to reduce corruption in the sector and encourage less wasteful use of energy. President Petro Poroshenko’s rivals will likely try to blame him for the deeply unpopular price rises, which have been offset by subsidies to the poorest households.
“The authorities remain committed to fiscal discipline to place public debt firmly on a downward path,” said Lipton. “It will be important to resist pressures to increase spending or lower taxes, while renewing efforts to improve public financial management and revenue administration.”
Ukraine must press on with reforms
He said Ukraine’s government must press ahead with anti-corruption reforms, streamlining regulations, advancing land reform and privatizing large state-owned enterprises to attract investment.
The new 14-month agreement replaces a previous $17.5 billion loan program that kept Ukraine’s economy, looted by its previous Kremlin-backed President Viktor Yanukovych, afloat during the war that started after he was overthrown in a 2014 revolution and Russia invaded. But Ukraine failed to live up to its conditions for that loan program and received only about half of the amount, with the last installment in April 2017.
The IMF predicts Ukraine’s economic growth will fall from a projected 3.3 percent this year to to 2.7 percent in 2019, with inflation falling below 11 percent in 2019 from this year’s almost 12.
When approving the new loan, the IMF outlined an economic program for Ukraine with four priorities:
- Continuing the ongoing fiscal consolidation to keep public debt on a downward path.
- Further reducing inflation, while maintaining a flexible exchange rate regime.
- Strengthening the financial sector, promoting asset recovery, and reviving bank lending.
- Continuing structural reforms, particularly to improve tax administration, privatization and governance.
The prospect of receiving the IMF loan allowed Kyiv to offer bonds to service more than $7 billion in debt payments due in 2019. It has also opened the way for the European Union and other donors to disburse aid and loans.
World Bank also throws Ukraine a lifeline
Separately the World Bank approved a $750 million loan guarantee to enable Kyiv raise an estimated $1 billion in debt on international markets. Poroshenko, writing on Twitter, called it proof of Ukraine’s “tangible progress on the reform path.”
The World Bank hopes their move will help Ukraine press forward on reforms in banking, anti-corruption, agricultural land, pensions, utility subsidies, and healthcare.
“The World Bank welcomes the government’s commitment to these historic reforms to bolster economic growth, safeguard fiscal sustainability, and improve the effectiveness of social services,” said Cyril Muller, World Bank vice president for Europe and Central Asia. “These reforms aim to create greater opportunities and improve living standards for the people of Ukraine.”
Satu Kahkonen, World Bank country director for Ukraine, said the guarantee is “particularly important for raising adequate budget financing in an environment where financial conditions have tightened for emerging markets.”
