With IMF loan locked in, Ukraine can direct state funds to war effort

By Rostyslav Averchuk

Lviv, Ukraine, Apr 4 (EFE).- Bolstered by the recently approved $15.6 billion International Monetary Fund loan program, Ukraine is now better equipped to meet the unprecedented expenditure needs required to cover its war effort and fulfill social obligations, despite the hit its economy has taken from the Russian invasion.

Ukraine’s foreign exchange reserves have reached $32 billion for the first time since 2010 after the country received the first $2.7 billion tranche of IMF money on Monday, the first deputy head of the country’s central bank Kateryna Rozkhova said.

Mykhailo Demkiv, financial analyst at the ICU investment company, told Efe that Ukraine’s “needs for 2023” were now “pretty much” covered.

Yet the role of the IMF loan program, which foresees the provision of $4.5 billion in loans in 2023 and $11.1 billion in 2024, is not limited to providing additional funding.

“It is going to serve as an assurance for major funders of Ukraine, such as the United States and the European Union, that the money of their taxpayers is going to be spent efficiently in Ukraine,” Demkiv added.

The IMF funds will help Ukraine fund its healthcare, education and other non-military expenditures. Kyiv has also pledged to enforce a number of measures to ensure budget and financial stability.

The IMF’s New Extended Fund Facility Arrangement is part of a support package worth some $115 billion promised to Ukraine by international donors.

The EU is also committed to providing 1.5 billion euros in loans each month in 2023, while the US has pledged to provide at least $7.4 billion by September.

With external funding covering its non-military expenses, Ukraine has been able to direct its state revenue to funding its war effort.

The share of defense expenditures has been roughly equal to half all its expenditures in the first months of the year and is now set to rise even further as active warfare is not expected to end in 2023.

Two weeks ago, Ukraine’s parliament voted to increase state defense expenditures by more than half a trillion UAH (about $14 billion) in 2023.

This covers soldier salaries, training and the purchase of technology such as drones.

In the first three months of 2023, the gap between state revenues and expenditures amounted to $6 billion (just under 30% of all expenditures). More than two thirds of borrowing had an external origin, including €4.5 billion of macrofinancial aid from the EU, while the country also received a $1.25 billion grant from the US.

The rest has been covered by the acquisition of domestic bonds by the country’s commercial banks, which have accumulated additional liquidity due to soldiers having little chance to spend their salaries.

This stands in contrast with much of 2022 when external funding was still insufficient and unpredictable, said Demkiv.

Domestic bonds were purchased directly by the National Bank then, which created additional inflationary pressure.

Ukraine’s memorandum with the IMF foresees instead that it would revert to this practice, equivalent to “printing money,” only as a measure of last resort.

After consumer prices rose by a hefty 26.6% in 2022, inflation is predicted to stay below 20% in 2023, with the central bank maintaining its key interest rate at 25% after a sharp raise last June.

Although the expected rise of debt-to-GDP ratio from some 50% in 2021 to about 90% in 2023 would normally cause preoccupation, loan terms have been largely favorable for the country, which has fighting for its very survival.