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

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The head of the IMF has urged Ukraine’s allies to rapidly unlock tens of billions of dollars for the country, as she warned delays in providing the extra funding would jeopardise Kyiv’s tentative economic recovery.

Kyiv can manage a likely short-term funding gap of “a couple of months,” said Kristalina Georgieva in an interview, praising the authorities after they had “revitalised the economy”, tamed inflation and strengthened Ukraine’s tax base. 

But with the US and EU still haggling over financing packages for the country, she said Ukraine’s economic revival would be endangered if it is forced to “adjust” to an absence of fresh financial support. Further delays could force Kyiv to return to destabilising policies such as printing money, as it did a few months after Russia’s invasion last year.

“What is important is not to prolong this period, because then it would put more pressure on Ukraine to adjust . . . right at the time when the country has turned towards better prospects for the economy,” said Georgieva during a visit to South Korea. 

“Work will continue in the US and Europe [on the aid packages]. Ultimately, I remain optimistic they will secure the funding.”

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 $41bn in budgetary support from its allies next year, according to a budget passed last month. It is counting on $18bn from the EU, $8.5bn from the US, $5.4bn from the IMF, $1.5bn from other development banks and $1bn from the UK. 

The US Congress on Wednesday failed to approve a $60bn funding package even after President Volodymyr Zelenskyy travelled to the capital to lobby lawmakers. Two days later, EU leaders at a Brussels summit failed to strike a deal on a long-planned €50bn, 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 $2bn 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 around $15.6bn 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. 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 programme”, in a podcast for the Official Monetary and Financial Institutions Forum.

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


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