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Ukraine, IMF have reached an agreement on a loan package worth $15.6 billion

Ukraine and IMF have finalized a $15.6 billion loan package to strengthen the government’s finances, which have been impacted by the Russian invasion. The loan will also help Ukraine garner additional support by showing its commitment to robust economic policies and anti-corruption measures.

Finance ministry of Ukraine said Wednesday that the program will “help to mobilize financing from Ukraine’s international partners, as well as to maintain macrofinancial stability and ensure the path to post-war reconstruction after Ukrainian victory in the war against the aggressor.”

According to a statement released by the IMF on Tuesday, the loan program, which amounts to $15.6 billion, will span over four years. The initial phase of 12 to 18 months will focus on assisting Ukraine in addressing its significant budget deficit and reducing the need to print money for expenditures, including pensions, state salaries, and basic services. Printing money can exacerbate inflation and destabilize the currency, thus amplifying the issue.

The remainder of the loan program will be dedicated to aiding Ukraine’s efforts towards European Union accession and aiding in post-war reconstruction.

The IMF agreement is anticipated to generate additional funds for Ukraine, as it demonstrates to potential donor governments (including the Group of Seven major democracies and the European Union) that the Ukrainian government is implementing effective economic policies.

The agreement is currently awaiting approval from the IMF’s executive board, “is expected to help mobilize large-scale concessional financing from Ukraine’s international donors and partners over the duration of the program,” Gavin Gray, the IMF’s mission chief for Ukraine, said in a statement.

The IMF, based in Washington, D.C., announced that during a preliminary consultation, Ukrainian authorities demonstrated their dedication to implementing effective economic policies and successfully met all previously established objectives. The loan program is distinct from past IMF practices, as it grants aid to a nation engaged in conflict under new regulations that permit assistance in cases of “exceedingly high uncertainty.”

In 2022, Ukraine’s economy contracted by approximately 30%, resulting in a decline in tax revenues, even as the nation dramatically increased its military spending.

As a consequence, Ukraine has encountered a significant budget deficit, which has been remedied through external financing from the United States, the European Union, and other allies. The assistance has aided in reducing the government’s excessive dependence on central bank-printed money loaned to the administration, which was regarded as a necessary emergency measure at the beginning of the war but could lead to inflation and a currency collapse if sustained for an extended period.

Prior to the conflict, Ukraine had made advances in the reformation of its banking system and the implementation of more transparent government contracts. However, its position on Transparency International’s corruption perceptions index was still relatively low, with a rank of 122 out of 180 countries.

Prior to the war, Ukraine’s economy was marked by political interference from affluent individuals referred to as oligarchs, and minimal advancement in improving the legal system, which was seen as excessively susceptible to political influence.

However, following the preliminary consultations, the IMF stated that the government has “made headway in implementing reforms that bolster governance, anti-corruption measures, and the rule of law, while also laying the groundwork for post-war expansion, though there is still a substantial reform agenda to address in these areas.”

Numerous high-ranking officials, including deputy ministers and governors of front-line territories, were dismissed in January due to corruption allegations, some related to military expenditures, which caused the government to be embarrassed. President Volodymyr Zelenskyy was elected in 2019 on an anti-establishment, anti-corruption platform.

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