IMF, Ukraine reach preliminary agreement on latest EFF program review

MOSCOW. Nov 13 (Interfax) - Representatives of the International Monetary Fund (IMF) and the Ukrainian authorities have reached a staff-level agreement (SLA) on an updated set of economic and financial policies for the second review of the four-year Extended Fund Facility (EFF) program, Ukrainian media reported, citing an IMF press release.

"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 $900 million (SDR663.9 million)," the IMF said.

The head of the IMF mission, Gavin Gray said in the press release that the SLA is subject to approval by the IMF's executive board, which is expected to consider it "in the coming weeks."

The IMF mission 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 the country's path to European Union accession, the Fund said.

"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," the IMF said, adding that the outlook nonetheless "remains extremely uncertain."

Gray recalled that the EFF program of about $15.6 billion (SDR11.6 billion) that was approved on March 31, 2023 is part of a much larger international support package for Ukraine that now totals around $122 billion, up from the initially declared $115 billion.

"The EFF continues to provide a strong anchor for the authorities' economic program [...]," he said.

"An extremely challenging environment for public finances persists: the fiscal deficit remains very high [...]. To help meet these spending needs while preserving debt sustainability, key priorities include enacting the law to fully restore tax audits [that was passed by parliament on November 9] and launching the National Revenue Strategy (NRS) in December as planned," Gray said.

He said the authorities need to be ready to take additional revenue measures and should continue efforts to mobilize financing from the domestic bond market. "Timely disbursement of committed external support will be critical for budget financing and macroeconomic stability," he added.

"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," Gray said. He previously recommended that Ukraine hold negotiations with Eurobond holders on a new restructuring in the first half of the year.

He praised the National Bank of Ukraine's (NBU) recent move to managed exchange rate flexibility, saying this "helps strengthen the resilience of the economy to external shocks."

Ukraine's "financial system remains stable, liquid and highly provisioned thanks to extensive emergency measures, but continued vigilance is warranted," Gray said. "Bank diagnostics, reforms to banking oversight, strengthening the governance of state-owned banks (SOBs), and contingency planning remain high priorities," he said.

"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," Gray said.

Efforts to strengthen the governance of state-owned enterprises should also continue, and in order 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, he said.

NBU governor Andrei Pyshny said on social media that the IMF board meeting will be held within a month and Ukraine expects the release of the third tranche of the EFF, which will increase overall support from the IMF to about $4.5 billion in 2023.

He said the NBU remains focused on bank diagnostics, reforming bank oversight and strengthening corporate governance at state banks.

Additional measures to ensure budget revenues also need to be worked out, and in this regard it is important to further increase the capacity of the domestic debt market, Pyshny said.

The four-year EFF for Ukraine was approved on March 31, 2023 and the first tranche of $2.7 billion was released in early April. The program calls for the release of another three tranches of 664 billion SDR (about $914 million at current exchange rate) after IMF missions assess Ukraine's fulfilment of obligations as of the end of April, June and December. The country received the second tranche in July.