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

Ukraine and the International Monetary Fund have agreed on a $15.6 billion loan package aimed at shoring up government finances severely strained by Russia’s invasion and leveraging even more support by reassuring allies that Ukraine is pursuing strong economic policies and fighting corruption.

Ukraine’s finance ministry said Wednesday that the program will “help to mobilize financing from Ukraine’s international partners, as well as to maintain macrofinancial stability and ensure the path to post-war reconstruction after Ukrainian victory in the war against the aggressor.”

The loan program will run for four years, with the first 12 to 18 months focusing on helping Ukraine close its massive budget deficit and easing the pressure to print money to use for spending, the IMF said in a statement Tuesday. Printing money to fund people’s pensions, state salaries and basic services can make things worse by fueling inflation and destabilizing the currency.

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 leverage even more money for Ukraine because it provides evidence to potential donor governments, including in the Group of Seven major democracies and the European Union, that Ukraine’s government is following sound economic policies.

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

The Washington-based IMF said Ukrainian authorities demonstrated their commitment to healthy economic policy and met all agreed-upon goals during a preliminary consultation. The loan program goes beyond previous IMF practice by lending to a country at war, under new rules that allowed assistance due to circumstances of “exceptionally high uncertainty.”

Ukraine massively increased military spending while the economy shrank by around 30% in 2022, hitting tax revenue. The result was a huge budget deficit that has been covered by outside financing from the U.S., the EU and other allies. The aid has helped the country end its excessive reliance on money printed by the central bank and loaned to the government, an emergency step considered necessary early in the war but that could fuel inflation and send the currency plunging if prolonged.

Before the war, Ukraine had made progress in reforming its banking system and making government contracts more transparent. But it still ranked 122 out of 180 countries on Transparency International’s corruption perceptions index.

Its pre-war economy was characterized by political involvement from wealthy individuals known as oligarchs and by slow progress on improving the legal system perceived as too open to political influence.

The IMF, however, said that after the preliminary consultations, the government has “made progress in reforms to strengthen governance, anti-corruption and rule of law, and lay the foundations for post-war growth, although the agenda of reforms in these areas remains significant.”

Several senior officials, including deputy ministers and governors of front-line regions, were fired in January after allegations of corruption, some related to military spending, embarrassed the government. President Volodymyr Zelensky was elected in 2019 on an anti-establishment, anti-corruption platform.

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