IMF approves USD 17.5 bln Ukraine loan, USD 5 bln immediate tranche

The executive board of the International Monetary Fund (IMF) approved on March 11 a four-year, USD 17.5 bln extended arrangement under an extended fund facility for Ukraine. The approval of the extended arrangement under the EFF enables the immediate disbursement of about USD 5 billion, with USD 2.7 billion being allocated for fiscal support. Further disbursements will be based on standard quarterly reviews and performance criteria.

The updated program maintains traditional measures of securing financial sustainability, strengthening public finances and advancing structural reforms. In addition, the Ukrainian government is committed to maintaining a flexible exchange rate, consolidating public finances, boosting energy prices, strengthening social security mechanisms and conducting reforms to improve the business climate.

The IMF anticipates GDP to fall 5.5% GDP in 2015, the C/A deficit to narrow to 1.5% of GDP, gross international reserves to grow to 3.3 months of imports and the state debt to reach 94% of GDP by the end of 2015. Recovery is expected to start only in 2016.

Alexander Paraschiy: The long-awaited news on the IMF loan approval no doubt will have a positive effect on hryvnia confidence and Ukraine’s solvency perception. Still, the sum of the first wire (USD 5 billion) is much lower than Ukrainian authorities requested. In particular, Finance Minister Natalie Jaresko hoped for USD 10 billion in the first installment. So the amount of the first tranche reflects the West’s ongoing concern on Ukraine’s lack of structural reforms and pervasive corruption. The IMF made it clear once again that future tranches will arrive only in exchange for reforms, which should stimulate the authorities to move further with their commitments, no matter how painful.

In essence, the IMF money is crucial but not a sufficient condition for stabilizing the otherwise volatile economic situation. The funds will secure all external repayments Ukraine owes to creditors in the nearest future. Also the funds will underpin gross reserves and reduce the need for foreign currency purchases, such as debt servicing needs. At the same time, the funds will not protect the national currency from devaluation if the authorities do not stick to their committed deficit limits. To put it differently, the IMF has given Ukraine a chance to achieve stabilization but not without significant efforts by the authorities themselves.