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IMF Country Report No. 24/366

UKRAINE

SIXTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUESTS FOR MODIFICATION OF A PERFORMANCE CRITERION, AND FINANCING ASSURANCES REVIEW—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE ALTERNATE EXECUTIVE DIRECTOR FOR UKRAINE

December 2024

In the context of the Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of a Performance Criterion, and Financing Assurances Review, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on December 20, 2024, following discussions that ended on November 18, 2024, with the officials of Ukraine on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 11, 2024.

• A Supplementary Information updating information on recent developments.

• A Statement by the Alternate Executive Director for Ukraine.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2024 International Monetary Fund

Press Release

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PR 24/493

IMF Executive Board Completes the Sixth Review of the Extended Arrangement under the Extended Fund Facility for Ukraine

FOR IMMEDIATE RELEASE

• The IMF Board today completed the Sixth Review of the Extended Arrangement under the Extended Fund Facility (EFF) for Ukraine, enabling a disbursement of about US$1.1 billion (SDR 834.9 million) to Ukraine, which will be channeled for budget support.

• Ukraine’s economy remains resilient, and performance remains strong under the EFF despite challenging conditions. The authorities met all end-September quantitative performance criteria and structural benchmarks.

• Sustained reform momentum, progress at domestic revenue mobilization, and timely disbursement of external support are necessary to safeguard macroeconomic stability, restore fiscal and debt sustainability, and improve governance.

Washington, DC—December 20, 2024: The Executive Board of the International Monetary Fund (IMF) today completed the Sixth Review of the EFF, enabling the authorities to draw US$1.1 billion (SDR 834.9 million), which will be channeled by the authorities for budget support. This will bring the total disbursements under the IMF-supported program to US$9.8 billion.

Ukraine’s 48-month EFF, with access of SDR 11.6 billion (equivalent to US$15.5 billion, or about 577 percent of quota), was approved on March 31, 2023, and forms part of a US$148 billion support package for Ukraine. The authorities’ IMF-supported program helps anchor policies that sustain fiscal, external, and macro-financial stability at a time of exceptionally high uncertainty. The EFF aims to support the economic recovery, enhance governance, and strengthen institutions with the aim of promoting long-term growth in the context of reconstruction and Ukraine’s path to EU accession.

Ukraine’s performance under its program remains strong. All end-September and continuous quantitative performance criteria and indicative targets were met. The authorities have also completed a prior action on the enactment of the package of tax measures, have met all endOctober structural benchmarks due by the Sixth Review and three of the end-December benchmarks.

Economic growth in 2024 has been upgraded given better than expected resilience to the energy shocks. However, a slowdown is expected in 2025 due to an increasingly tight labor market, the impact of Russian attacks on Ukrainian energy infrastructure, and continued uncertainty about the war. Inflation has risen recently, mainly due to food prices, while inflation expectations remain well anchored. Adequate reserves have been sustained by continued sizeable external support. Overall, the outlook remains subject to exceptionally high uncertainty.

Following the Executive Board discussion on Ukraine, Ms. Kristalina Georgieva, Managing Director of the IMF, issued the following statement¹:

“Russia’s war in Ukraine continues to take a devastating social and economic toll on Ukraine. Despite the war, macroeconomic stability is being preserved through skillful policymaking by the Ukrainian authorities as well as substantial external support. The economy has remained resilient, reflecting the continued adaptability of households and firms, although risks are tilted to the downside due to headwinds from attacks on energy infrastructure and a tight labor market. Preparedness and contingency planning are key to enable appropriate policy action should risks materialize.

The program remains fully financed with a cumulative external financing envelope of US$148 billion in the baseline and US$177 billion in the downside over the 4-year program period, including commitments from the G7’s Extraordinary Revenue Acceleration Loans for Ukraine (ERA) initiative. Full, timely and predictable external support—on terms consistent with debt sustainability—remains essential to maintaining full program financing and safeguarding stability.

A tax package and 2025 Budget in line with the program baseline have been enacted, but there are few remaining buffers and strict budget execution will be key. Continued progress at domestic revenue mobilization is imperative for Ukraine to meet its high priority spending needs and to restore fiscal sustainability. Strong implementation of the National Revenue Strategy and customs reform will help raise further revenues, improve compliance, combat evasion, and support EU accession.

After completing the Eurobond exchange in August, the authorities are now focusing on reaching agreement with other holders of external commercial claims, including GDP warrants, in line with their strategy. A swift agreement in line with the program’s debt sustainability objectives would reduce fiscal risks and create space for critical spending needs.

Inflation has accelerated more than expected in recent months, and the recent tightening of monetary policy was appropriate; the NBU should stand ready to take further action should inflation expectations deteriorate. Allowing exchange rate flexibility will help strengthen the resilience of the economy to external shocks while safeguarding reserves.

The financial sector remains stable, but vigilance is needed given heightened risks. Progress on strengthening bank resolution and risk-based supervision, stress-testing frameworks and contingency planning should be sustained.

Reform momentum in anticorruption and governance needs to be sustained. In particular, the authorities need to advance the creation of a new court for high public disputes, and amend the criminal procedure code.”

^{Table 1.}

Ukraine: Selected Economic and Social Indicators, 2021–27

Sources: Ukrainian authorities; World Bank, World Development Indicators; and IMF staff estimates. 1/ GDP is compiled as per SNA 2008 and excludes territories that are or were in direct combat zones and temporarily occupied by Russia (consistent with the TMU). 2/ The general government includes the central and local governments and the social funds. 3/ Based on World Bank estimates.

^{Table 1.}

Ukraine: Selected Economic and Social Indicators, 2021–27

Sources: Ukrainian authorities; World Bank, World Development Indicators; and IMF staff estimates. 1/ GDP is compiled as per SNA 2008 and excludes territories that are or were in direct combat zones and temporarily occupied by Russia (consistent with the TMU). 2/ The general government includes the central and local governments and the social funds. 3/ Based on World Bank estimates.

View Table

^{Table 1.}

Ukraine: Selected Economic and Social Indicators, 2021–27

Sources: Ukrainian authorities; World Bank, World Development Indicators; and IMF staff estimates. 1/ GDP is compiled as per SNA 2008 and excludes territories that are or were in direct combat zones and temporarily occupied by Russia (consistent with the TMU). 2/ The general government includes the central and local governments and the social funds. 3/ Based on World Bank estimates.

Title page

UKRAINE

SIXTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUESTS FOR MODIFICATION OF A PERFORMANCE CRITERION, AND FINANCING ASSURANCES REVIEW

December 11, 2024

EXECUTIVE SUMMARY

Context: This program review is taking place as Ukraine approaches a critical juncture. Conditions of exceptionally high uncertainty remain as Russia’s war in Ukraine continues. Amid continuing attacks on energy infrastructure, comprehensive efforts to prepare for the ongoing winter, including the heating season, are underway. The social, humanitarian, and economic costs remain staggering and have only risen further. Abroad, political transitions or election cycles in key partners for Ukraine may trigger renewed efforts to end the war, as well as changes in the degree or modalities of international support, adding to the uncertainty around the outlook. Despite the risks and challenges, recent developments support completion of the review. First, the authorities have steadfastly implemented reforms despite the war, including enacting a tax package supporting the restoration of fiscal and debt sustainability. Second, the G7 has agreed on the US$50 billion Extraordinary Revenue Acceleration Loans for Ukraine (ERA) Initiative, and is finalizing its modalities, fulfilling an essential component of the program’s financing.

Outlook and risks: The economy has remained resilient despite the immense challenges. Recent activity indicators have been stronger than expected, resulting in an upgrade of the 2024 growth forecast, though a moderation is expected next year due to strains from labor and energy shortages. Inflation is slightly above expectations, and vigilance is warranted should pressures persist. Based on available information, the medium-term outlook is little changed compared to the Fifth Review. Risks remain exceptionally high particularly arising from uncertainty about the outlook for the war, including how it ends. Repeated attacks on energy infrastructure also remain a high risk; while the authorities’ preparedness is a strong mitigant, sustained infrastructure damage could take a further humanitarian and economic toll. Finally, reform fatigue is a risk at a time when the momentum is needed on a wide-ranging set of transformative reforms.

Focus of the review: With limited changes to the outlook and overall strong performance under the program, the discussions underscored the importance of:

• Finalizing the 2025 Budget in line with program parameters, including a critical tax package, and ensuring that it is aligned with available financing. Deepening efforts on domestic revenue mobilization to ensure a durable return to fiscal and debt sustainability, and continuing efforts on fiscal structural reforms, including in the priority areas of public financial management, medium-term budgeting, and expenditure policies.

• Maintaining the current monetary stance, while standing ready to tighten should inflation expectations show signs of de-anchoring. As set out in the Monetary Policy Guidelines, ensuring that the exchange rate continues to play a shock absorbing role to prevent external imbalances and safeguard reserves, especially in view of near-term uncertainties. Continuing with the careful, conditions-based approach to FX liberalization, supported by strong monitoring of the effectiveness of measures.

• Being vigilant to financial stability risks, making progress on strengthening the bank rehabilitation framework, introducing risk-based supervision, updating stress testing frameworks, and contingency plans. Swift action to address critical operational challenges of the National Securities and Stock Market Commission (NSSMC) is also important.

• Progressing on reforms to strengthen governance and rule of law with the aim of tackling corruption, supporting EU accession, and supporting growth. Key near-term tasks include strengthening the criminal procedural code to assist anti-corruption institutions, adopting the law establishing the High Public Disputes Court (HPDC), and enacting legislation to reform the supreme audit institution (Accounting Chamber of Ukraine).

• Continuing efforts to prepare for the winter energy season and strengthening the independence and governance at the state-owned electricity transmission operator.

Program issues: The authorities met all the end-September quantitative performance criteria (QPCs) and delivered on all end-October structural benchmarks (SBs) for the Sixth Review, as well as one of the end-December benchmarks. The authorities are requesting to modify a QPC by raising the floor for net international reserves for end-March 2025, to reflect the positive outlook for international reserves in 2025Q1, consistent with their commitment to external sustainability. They are also proposing to add three SBs to (i) prepare a strategy for the NSSMC by end-January 2025; (ii) prepare and submit to parliament a draft law on financial sector critical third-party risk by end-May 2025; and (iii) complete and publish a third-party external assessment of the National Energy and Utilities Regulatory Commission (NEURC) by end-October 2025. Finally, the enactment of the package of tax measures is a prior action for this review.

Staff supports the completion of the Sixth Review under the Extended Arrangement, enabling a purchase of SDR 834.88 million (41.5 percent of quota).

Approved By

Uma Ramakrishnan (EUR) and S. Jay Peiris (SPR)

Contents

• CONTEXT AND RECENT DEVELOPMENTS

• A. Background and Focus of the Review

• B. Economic Performance

• C. Program Performance

• OUTLOOK AND RISKS

• A. Baseline Scenario

• B. Downside Scenario

• C. Risks to the Outlook

• D. Enterprise Risks

• POLICY DISCUSSIONS

• A. Macro-Fiscal Policies and Financing

• B. Fiscal Structural Reforms

• C. Monetary and Exchange Rate Policies

• D. Financial Sector

• E. Governance

• F. Energy

• PROGRAM ISSUES

• A. Conditionality

• B. Debt Sustainability, Lending into Arrears, and Financing Assurances Review

• C. Financing Needs and Assurances

• STAFF APPRAISAL

• FIGURES

• 1. Recent Economic Indicators

• 2. Recent Economic Policy Implementation

• 3. 2024 Fiscal Policy Implementation

• 4. Details on the 2025 Budget

• 5. Debt Restructuring Strategy

• 6. Indicative Structure for the ERA Initiative

• TABLES

• 1. Baseline Scenario Financing Gap and Sources, 2023Q2–2027Q1

• 2. Baseline Scenario Financing Gap and Sources, 12-Month Basis

• 3. Downside Scenario Financing Gap and Sources

• 4. Structural Benchmarks

• 5. Selected Economic and Social Indicators (Baseline Scenario), 2021–33

• 6a. General Government Finances (Baseline Scenario), 2021–33 (Billions of Ukrainian Hryvnia)

• 6b. General Government Finances (Baseline Scenario), 2021–33 (Percent of GDP)

• 7a. Balance of Payments (Baseline Scenario), 2021–33 (Billions of U.S. Dollars)

• 7b. Balance of Payments (Baseline Scenario), 2021–33 (Percent of GDP)

• 8. Gross External Financing Requirements and Sources (Baseline Scenario),2021–33

• 9. Monetary Accounts (Baseline Scenario), 2021–33

• 10. Indicators of Fund Credit (Baseline Scenario), 2024–33

• 11. EFF Schedule of Reviews and Available Purchases

• 12. Quantitative Performance Criteria and Indicative Targets

• ANNEXES

• I. Risk Assessment Matrix

• II. Sovereign Risk and Debt Sustainability Analysis

• III. Downside Scenario

• APPENDIX

• I. Letter of Intent

  • Attachment I. Memorandum of Economic and Financial Policies

  • Attachment II. Technical Memorandum of Understanding