26 Feb 2024 09:39

IMF, Ukraine reach staff-level agreement on 3rd review of EFF Arrangement

MOSCOW. Feb 26 (Interfax) - The International Monetary Fund (IMF) officials and the Ukrainian authorities have reached a staff-level agreement (SLA) on an updated set of economic and financial policies for the third review of the four-year Extended Fund Facility (EFF) Arrangement, Ukrainian media quoted the IMF as saying in the early hours on Friday.

"I am pleased to announce that IMF staff and the Ukrainian authorities have reached staff-level agreement on the third review of the EFF. The agreement is subject to approval by the IMF Executive Board, with Board consideration expected in the coming weeks," the statement quoted head of the IMF mission in Ukraine Gavin Gray at the end of the mission's work in Warsaw on February 17-22 with Ukrainian officials.

It is noted that with all four structural benchmarks and all quantitative performance criteria except one (a small shortfall in tax revenue due to the border blockade) met, the staff assesses the program as generally in line with the schedule, which, if approved by the Executive Board, will enable disbursement of $880 million (SDR663.9 million) to Ukraine.

Gray noted that the authorities' maintenance of macroeconomic and financial stability, along with significant external financing, has ensured a stronger-than-expected economic recovery in 2023, with growth estimated at 5% or even higher amid declining inflation and robust reserves.

"However, the crisis and delays in external financing are weighing on confidence, and growth in 2024 is expected to soften to between 3-4 percent," Gray said.

He added that fiscal financing needs would remain very high in 2024, reflecting crisis-related spending pressures. Gray noted that the 2024 budget remains the appropriate short-term anchor for fiscal policies, and in this context, efforts should focus on ensuring adequate revenues, prioritizing expenditures and using domestic market liquidity.

Gray said that the authorities stand ready to swiftly respond to shocks and have already taken measures to address liquidity strains that emerged at the start of the year due to external financing delays, but highlighted the importance of timely disbursement of committed external support, projected at $38 billion in 2024, critical for budget financing and sustaining macroeconomic stability.

"Preparations for the treatment of external commercial debt are advancing, and it is essential to complete this by mid-2024 and consistent with program parameters. This, together with assurances from official sector creditors and donors (of highly concessional exceptional financing over the program period), and a revenue-based medium-term fiscal adjustment (that builds on the recently-launched National Revenue Strategy (NRS)), will be critical to restoring debt sustainability," Gray said.

He noted that the forex market continues to be broadly stable following the shift to an exchange rate regime of managed flexibility in October 2023, but under this regime, the exchange rate should serve as a shock absorber and guarantee external stability, while the easing of forex controls should be done judiciously and gradually in line with the National Bank of Ukraine (NBU)'s Strategy.

Gray noted that the financial system remains stable and liquid, though continued vigilance is warranted given crisis-related uncertainty. The NBU's recent resilience assessment and prompt action to address capital shortfalls have been welcome steps to preserve stability, he added. Priorities for the future include strengthening supervision and financial safety nets, deepening financial market infrastructure, including the payment system, as well as resuming the regular resilience assessment and, when conditions allow, completing an independent asset quality review, he said.

Gray said that the authorities remain committed to wide-ranging structural reforms in order to maintain macroeconomic stability, support development goals and pursue a path to EU accession.

Speaking about the reforms, Gray noted that the National Revenue Strategy should anchor tax policy and administration reforms to help raise revenues needed to support these goals, while measures that adversely affect the revenue base need to be avoided.

Work to prepare the 2025-2027 budget declaration will soon be underway, which will need to reconcile the still significant spending needs with the need to increasingly rely on domestic resources, Gray said. Moreover, the introduction of medium-term budget framework in conjunction with public investment management reforms will help strengthen the link between national development goals, investment priorities and available resources, he added.

Fiscal risks need to be carefully monitored, including from state-owned enterprises, to ensure that public resources are well spent and debt sustainability is preserved, with the Finance Ministry playing a key supervisory role, Gray said.

"Oversight over the 5-7-9 subsidized lending program needs to be strengthened to enhance targeting given constrained budget resources and ringfence financial sector risks. Robust implementation of the recently approved corporate governance law will be essential to strengthening the SOE sector," Gray said.

Gray noted that recent governance-related reforms, such as adoption of the law reforming the Specialized Anti-Corruption Prosecutor's Office (SAPO) in December 2023, are major achievements, and sustaining the reform momentum in this area, such as establishing a new administrative court, will be essential to building public and donor confidence to support the recovery.

As reported, the four-year EFF Arrangement totaling around $15.6 billion was approved on March 31, 2023, and is part of a $122 billion package of international support for Ukraine. The first $2.7-billion disbursement was earmarked in early April, with the second and third disbursements of SDR664 million (around $881 million - $890 million at the then exchange rate) earmarked in early July and mid-December 2023.

The program's planned schedule envisions another disbursement to Ukraine in March 2024, following the third review, when the fulfillment of obligations by the end of December 2023 is assessed. Three more disbursements are envisioned for 2024: SDR1.670 billion ($2.226 billion) in mid-June, followed by SDR835 million ($1113 million) each in early September and December. Two disbursements are scheduled for 2025: SDR684 million ($912 million) in early March and late August, followed by three more final disbursements of SDR966 million ($1.288 billion).