Ukraine, economics: IMF loan, Nov 2021

Second SBA loan instalment will ease concerns on government’s financing position

(for the EIU) 

On November 22nd the IMF board signed off on a first review of Ukraine’s economic performance under a stand-by arrangement (SBA) agreed in mid-2020, releasing to the government an additional US$700m loan instalment, and taking the total disbursement under the US$5bn facility to US$2.8bn. The date for programme completion was extended by six months to the middle of 2022. 

Volodymyr Zelenskyi, the Ukrainian president, welcomed the news and said that the additional funds would be used to support the stability of the financial sector and to tackle the ongoing Covid health emergency.

Alongside the central aim of reconciling public finances with debt sustainability goals, SBA loan conditions tie further disbursements to progress on reforms, to ensure the independence of the National Bank of Ukraine (NBU, the central bank), to improve governance of the banking sector, and to reform the judiciary, a key provision for improving the protection of property rights.

Disbursement of the second instalment had been held up by delays on some of these reforms. However, with the passage of legislation in the Verkhovna Rada (parliament) to address concerns over judicial corruption and to bolster the position of the National Anti-Corruption Bureau of Ukraine (NABU), in July and October, respectively, the government seems to have done enough to secure the release of this tranche.

An SBA is loan facility developed by the IMF to help countries to overcome temporary financing difficulties that might otherwise inflict lasting economic damage. In Ukraine’s case, these difficulties have been exacerbated by the shock to the global economy from the Covid pandemic.

An abrupt reining in of Ukraine’s budget deficit, alongside a large debt-rescheduling deal, were considered key policy successes during the crisis of 2014-15. Last year, however, the budget deficit widened sharply again, to the equivalent of 5% of GDP, while the level of public debt climbed above 60% of GDP. Although the government deficit is likely to narrow somewhat this year amid modest economic recovery, helping to keep the level of public debt steady, the additional resources from the IMF will reassure investors over the government’s capacity to meet its debt-service obligations in the immediate term, helping to keep its borrowing costs down by limiting the risk component.

Traditionally, however, Ukrainian elites have tended to go along with the economic reforms proposed by the international financial institutions (IFIs), such as the IMF, in time of crisis, but then to halt or reverse such reforms when external financial aid is no longer essential.

With the incidence of Covid cases surging again in Ukraine amid low levels of vaccination, and with regional tensions mounting—linked to the migrant crisis on the Belarus-EU border, and to the build-up of Russia troops in Crimea and on Ukraine’s eastern border—disbursement of second SBA loan instalment is a steadying win for the Zelenskyi administration and will ease investors‘ concerns over government’s short-term financing position.

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