On 31 March 2023, the Executive Board of the International Monetary Fund (IMF) approved a 48-month extended arrangement for Ukraine under the Extended Fund Facility (EFF) with an amount of SDR 11.6 billion (or about USD 15.6 billion).
This arrangement is part of a USD 115 billion total support package for Ukraine from international partners. Respective financial assurances from the international partners were obtained during the recent months as a result of the joint efforts of the President of Ukraine, Ukrainian government, NBU, and IMF.
The IMF Executive Board’s decision allows the immediate disbursement of around SDR 2 billion (or USD 2.7 billion). Next disbursements will be conditional on the results of quarterly reviews. This year, Ukraine may receive three disbursements for the total amount of SDR 3.3 billion (USD 4.5 billion).
The key objective of the new IMF-supported program is to sustain fiscal, external, price, and financial stability at a time of exceptionally high uncertainty, restore debt sustainability on a forward-looking basis in both a baseline and downside scenario.
The program also aims to promote reforms and strengthen institutions to stimulate sustainable long-term economic growth in the context of post-war reconstruction and Ukraine’s path to EU accession.
In view of the exceptionally high uncertainty due to the war russia is waging on Ukraine, the EFF program envisions a two-phased approach.
In the first phase, our efforts will be centered around maintaining macroeconomic and financial stability during the wartime, in order to strengthen Ukraine’s capacity on its way to Victory.
In particular, the monetary policy will focus on sustaining steady disinflation and exchange rate stability, while maintaining adequate foreign exchange reserves. Once conditions permit, the NBU will start gradual transition toward a more flexible exchange rate, ease FX restrictions, and return to an inflation targeting framework. Steps in each of these directions will be taken according to the respective strategy that we will prepare as a structural benchmark under the program.
The NBU will also make efforts to manage liquidity, induce competition among banks for term deposits, and thereby strengthen monetary transmission and increase the attractiveness of hryvnia assets, which is an important prerequisite to steady disinflation.
The NBU will take measures contributing to long-term financial stability. Once conditions have stabilized, the NBU will undertake bank diagnostics to have a well-balanced and consistent asset quality review. To better understand current banking system conditions and to inform supervisory priorities, the NBU will undertake an asset valuation and solvency assessment of banks comprising 90 percent of banking system assets by end-December 2023.
Financial sector strategy is expected to be updated by end-June 2023 to implement a safe and prompt unwinding of financial sector emergency measures, while concurrently restoring accounting and prudential norms. The strategy will describe the future priorities for the financial system and public sector authorities in particular. The key elements of the strategy are the following:
- coordinated steps to safely unwind exceptional measures
- diagnostics to quantify bank asset values and NPL resolution priorities
- a framework to safely address any potential vulnerabilities
- a prioritized action plan to monitor and tackle high NPL levels
- well-developed contingency plans to respond to potential further shocks
- prioritized transposition of EU banking norms
- coordination arrangements among key stakeholders.
In addition, the NBU will continue to put efforts to strengthen banking regulation and supervision, aligning Ukrainian regulations with the EU acquis, and will promptly move to the application of a risk-based approach in banking supervision.
The second, post-war, phase of the program will shift focus to more ambitious structural reforms to entrench macroeconomic stability, support the recovery and early post-war reconstruction, and enhance resilience and higher long-term growth, including in the context of Ukraine’s EU accession goals.
The NBU is expected to return to the pre-war monetary policy framework, including, in particular, a floating exchange rate and inflation targeting.
An important element of the program is sustaining the financial autonomy of the NBU and abstaining from the monetary financing of the state budget. The program defines that the budget deficit should be fully financed by inflows from international partners and the government's borrowings in the domestic market. Even in case of unexpected shortfalls or delays in external financing, additional measures will be employed, such as drawing down the government deposit surplus or borrowing additional funds from the sovereign debt market before turning to monetary financing from the NBU as a last resort option.
The IMF noted the successful actions of the Ukrainian authorities in ensuring macroeconomic and financial stability even in face of unprecedented challenges of a full-scale war.
Strong performance under the Program Monitoring with Board Involvement has clearly demonstrated the ability of Ukrainian authorities to implement sound economic policies despite these challenging circumstances.
“The new IMF-supported program will be a green light for large-scale financing from international donors and partners for the reconstruction of Ukraine. But the program means more than that. It means, primarily, the extraordinary support of Ukraine by the world in the long term and the recognition of our ability to act effectively even in times of great uncertainty. The program offers the opportunity to reduce the level of uncertainty, accelerate return to the normal operation of the economy and the financial market, and move on towards reconstruction.
This confirms that the country's development, its commitment to quality reforms and European integration cannot be stopped; no matter how much the enemy wants it. The terms of the program correspond to our values, because they will help save and reconstruct Ukraine under any scenario out of a million options offered by uncertainty. I congratulate the Ukrainian team and thank our partners!" said NBU Governor Andriy Pyshnyy.
The decision of the IMF Executive Board to approve the new Extended Fund Facility program was preceded by a Staff-Level Agreement (SLA) reached on 21 March 2023.