Ukraine’s economic recovery depends on extra allied aid, warns IMF chief

The failure by the US and EU to secure extra long-term financial support for Kyiv comes after Ukraine’s counteroffensive against Russia failed to liberate significant amounts of land and as Moscow steps up aerial attacks on infrastructure.

Ukraine needs $US41 billion ($61 billion) in budgetary support from its allies next year, according to a budget passed last month. It is counting on $US18 billion from the EU, $US8.5 billion from the US, $US5.4 billion from the IMF, $US1.5 billion from other development banks and $US1 billion from the UK.

The US Congress earlier this month failed to approve a $US60 billion funding package even after President Volodymyr Zelensky travelled to the capital to lobby legislators.

Two days later, EU leaders at a Brussels summit failed to strike a deal on a long-planned €50 billion ($81 billion), four-year funding plan for Ukraine after Hungary’s premier Viktor Orbán vetoed the proposal.

If a deal is not struck on the extra money, Ukraine’s finance ministry could be forced to take harsh action to fill a financing gap.

A senior Western official said Ukraine “had a bit of flexibility” and could “probably get through January and February” with disbursements from the IMF and World Bank, which is due to send $US2 billion next month, and borrowing from domestic banks.
But after that, Kyiv would have to either slash spending or, more likely, resort to monetary financing by the central bank, which would risk a hyperinflationary surge and a destabilisation of the country’s financial system.

In the months following Russia’s full-scale invasion in February 2022, Ukraine was forced to burn through foreign exchange reserves while the central bank undertook purchases of government bonds to plug a financing gap. The economy shrank by nearly a third.

Ukraine’s budgetary position has since strengthened through allies’ disbursement of tens of billions of dollars in financing. In March, the IMF approved a 48-month support deal for Ukraine, offering access to about $US15.6 billion in financing.

In an assessment this month, the fund found that Ukraine’s macroeconomic indicators had been “stronger than expected”, as it lifted its growth projection for 2023 to 4.5 per cent, with an expansion of 3-4 per cent predicted in 2024.

Ms Georgieva said inflation, which peaked at 26 per cent at the end of last year but has fallen back to 5.5 per cent, was “under wraps”.

Sanaa Nadeem, the IMF’s deputy mission chief for Ukraine, said last week large-scale monetary financing “could really unwind hard-won stabilisation achieved under the program”, in a podcast for the Official Monetary and Financial Institutions Forum.

Ms Georgieva said Ukraine had done its part to earn the support of its friends. “They have taken tough actions to keep macroeconomic and financial stability. The IMF has done its part, we have engaged very deeply with Ukraine. We need Ukraine’s partners to do their part – both the US and Europe.”

Additional reporting by Claire Jones in Washington

Financial Times