The International Monetary Fund has released a report on the results of the first review of Ukraine's Extended Fund Facility (EFF) programme, worth $15.6 billion. The document bears the technical title "IMF Country Report No. 23/248". Essentially, it is an updated Memorandum between Ukraine and the IMF, which includes some changes in Ukraine's commitments to the fund, as well as a macro forecast for the Ukrainian economy.
The IMF mission began its work on the first review of the Extended Fund Facility programme on May 23. The Ministry of Finance reported that representatives from the Ministry of Finance, Ministry of Justice, National Bank, and other relevant authorities and institutions responsible for economic, energy, and anti-corruption issues participated on behalf of Ukraine in this process.
On June 19, one month later, Prime Minister Denys Shmygal announced during a government meeting that Ukraine had taken on a series of new commitments as a result of the review.
"During today's Cabinet of Ministers meeting, we are making a crucial decision for the macro-financial stability of the country. We approve the updated Letter of Intent and Memorandum with the IMF regarding economic and financial policies. These documents contain Ukraine's commitments that we are already implementing and will continue to implement in the future. This includes improvements in the business climate, strengthening the rule of law, and the fight against corruption," said Shmygal.
He also added that Ukraine is soon expected to receive the second tranche of funding from the IMF. The size of this tranche amounted to $890 million, and the funds arrived in the state budget at the beginning of July. In total, the IMF has allocated $3.6 billion to our country under the EFF programme since the beginning of 2023.
Mind looked into what has changed in the agreements between Ukraine and the IMF.
What does the updated macro forecast from the IMF represent? The memorandum's text traditionally includes a detailed assessment of the state of the Ukrainian economy and a macroeconomic forecast up to 2033.
In general, the current IMF expectations do not significantly differ from what the fund predicted for Ukraine in March. The GDP forecast for 2023 remains in the range from minus 3% to plus 1%, as before. Economic recovery will only begin in 2024-2025. The estimate for the real GDP in 2023 has been improved by over 7% to 6500 billion hryvnias.
The IMF is more optimistic about the state budget deficit, which, taking into account international financing, will amount to 19.1% of GDP in 2023 (compared to 20.4% of GDP in March). Without foreign support, the deficit will be 25.8% of GDP (previously 28.2% of GDP).
The IMF has significantly improved its inflation expectations, reducing them from 20% to 15.5% by the end of 2023. Those figures are in line with the National Bank's estimates.
Forecasts for tax revenues have remained mostly unchanged. For the year 2023, the state budget is expected to receive slightly less than 2.2 trillion hryvnias through taxes. The major contributors to this amount will be personal income tax (655 billion hryvnias), value-added tax (617 billion hryvnias), excise taxes (173 billion hryvnias), and the unified social contribution (507 billion hryvnias), which, although not technically a tax, is included in the overall tax base.
The IMF also predicts a revival of international trade. The estimation for commodity exports in 2023 has improved by 7% compared to March, and imports are expected to rise by almost 9%. However, the balance of trade in goods will still be deeply negative, exceeding $27 billion.
By the end of 2023, the government debt is projected to reach 88% of GDP, which is almost 10 percentage points higher than in 2022. As for foreign direct investments, there is no optimism as there will be a net outflow of $600 million in 2023.
Ukraine's key macroeconomic indicators for 2023
| Indicators | March version of the memorandum with the IMF | July version of the memorandum with the IMF |
| Real GDP | from -3% to +1% | from -3% to +1% |
| Nominal GDP | 6050 billion UAH | 6500 billion UAH |
| State budget deficit (including grants) | -20.4% of GDP | -19.1% of GDP |
| External financing | 19.8% of GDP | 17.1% of GDP |
| Tax revenues to the state budget | UAH 2190 billion | UAH 2198 billion |
| Exports | $33 billion | $35.3 billion |
| Imports | $57.5 billion | $62.5 billion |
| NBU foreign gold and exchange reserves (end of 2023) | $29.6 billion | $30.5 billion |
| Inflation (end of 2023) | 20% | 15,5% |
| Direct investments (net) | -$400 million | -$600 million |
Source: IMF data
How does the fund assess the stability of the Ukrainian economy? Commenting on its assessments and forecasts, the IMF has put forward the following points:
What will happen with public finances in 2024? According to the IMF, security and defence will remain the most significant items in government spending. At the same time, there will be some reorientation of budgetary resources towards social needs and the recovery and resolution of the consequences of military actions.
The state budget will still depend on external financing, which will reach 14.5% of GDP. However, the volume of internal borrowing (through military bonds) will be five times smaller, amounting to 3.3% of GDP.
Meanwhile, the IMF believes that the Ukrainian government should make more efforts to mobilise internal resources. The Fund reminds: banks have a substantial reserve of accumulated free liquidity that can be directed towards a good cause – assisting the state budget and the economy as a whole.
In connection with this, the IMF recommends improving coordination between the Ministry of Finance and the NBU to more effectively determine financing needs, manage the overall government debt, and minimise the risks of currency emission.
Although the IMF does not rule out the possibility of monetary financing of the budget, such a step can only be taken by the National Bank and the Ministry of Finance in extreme situations. For example, in case of a lack of external assistance or in acute need of funds that cannot be covered by existing resources.
How does Ukraine complete its “homework” from the IMF? The text of the memorandum contains a table with 23 structural benchmarks. These are a set of agreed-upon legislative changes and strategic tasks that Ukraine must adopt/implement during 2023-2024.
From this list, five points already have the "Achieved" status. These include the second amendment to the state budget, which the parliament carried out at the end of April; the preparation of a plan to eliminate gaps in the tax legislation undermining the revenues to the state budget; the adoption of amendments to the Budget Code and related regulatory acts to increase transparency and consider special accounts.
With some delay, the Verkhovna Rada approved Bill 8401 (another structural benchmark), which provides for the cancellation of the 2% preferential tax rate for the unified tax, restoration of tax audits, and the return of penalty sanctions for taxpayers.
Additionally, the National Bank recently presented a strategy for easing currency restrictions and transitioning to a floating exchange rate. This was also one of the structural benchmarks, but the IMF has not yet marked it as completed. This might be due to the fact that the memorandum text was prepared before the NBU presented its strategy.
Among the structural benchmarks that Ukraine is obligated to fulfil in the second half of the year are as follows:
What other obligations did Ukraine take on with the IMF? As mentioned above, following the review of the EFF programme, new structural benchmarks have been added. There are four in total:
What does all this mean for Ukraine and its economy? The IMF explicitly states that one of the most crucial conditions for sustainable post-war growth in Ukraine must be a comprehensive reform programme, which includes strengthening the rule of law, establishing independent and robust anti-corruption institutions, and creating equal opportunities for businesses. All these measures will be crucial for attracting long-term investments in the country's reconstruction (besides continuous donor support) to improve the living standards of citizens and ensure Ukraine's successful accession to the EU.
The message is clear: the Ukrainian government needs to pay more attention to rational management of state finances, fighting corruption, and not rely solely on international aid. In other words, no one will be able to inject $40-50 billion into Ukraine every year.
So, clearly, there will be a strengthening of tax policies and a search for additional sources to replenish the state budget. For example, the IMF has once again hinted that the simplified tax system is a “harmful” phenomenon that allows people to evade paying taxes. Therefore, it cannot be ruled out that sooner or later, lawmakers will discuss dismantling or significantly reducing the simplified taxation system.
Furthermore, the Ministry of Finance and the National Bank of Ukraine will have to address the issue of the state debt seriously, considering how to reduce it in the future and how to deal with those creditors who are not providing funding for free (which amounts to about half of them).
So, the IMF's forecasts bring some relief and hope for growth in 2024. However, this growth will be challenging, and reliance should primarily be on the country's own efforts. As time goes on, external support will likely diminish. It's evident.