IMF agrees $17.5 billion facility with Ukraine to give total aid package of $40 billion

(Business New Europe – bne.eu – Kateryna Illyashenko in Kyiv – February 12, 2015)

The International Monetary Fund (IMF) has tentatively agreed a $17.5bn extended fund facility with Ukraine, part of an overall $40bn funding package for the country over the next four years, the fund’s managing director, Christine Lagarde, said on February 12.

The package will go some way to assuaging growing fears among investors that the country is heading towards a default as the year-long conflict with pro-Russian separatists in the nation’s east ravages the economy and drains precious resources. “The hope will be to send a signal to [Russian President Vladimir] Putin and to Ukrainians that the West stands behind Ukraine and will not let it fail financially,” Timothy Ash of Standard Bank said in a note to investors.

Lagarde announced that the IMF team, which has been working in Kyiv since January 8, has reached a staff-level agreement with the Ukrainian government on a new economic reform programme that “would be supported by an Extended Fund Facility of SDR12.35bn [about $17.5bn, €15.5bn] from the IMF, as well as by additional resources from the international community.”

“I intend to recommend this programme for consideration to the IMF Executive Board. This new four-year arrangement would support immediate economic stabilization in Ukraine as well as a set of bold policy reforms aimed at restoring robust growth over the medium term and improving living standards for the Ukrainian people,” she said.

Lagarde noted that the Ukrainian authorities have proved their commitment to reform. “Over the past year, despite the challenging environment, the Ukrainian authorities have clearly shown their commitment to ambitious reform on several key fronts. They have maintained strong fiscal discipline [a 2014 deficit of 4.6% of GDP versus a target of 5.8%]; they have adopted a flexible exchange rate regime; and they have significantly increased household gas prices to 56% of the import price and heating prices to about 40% of the import price in 2014. In addition, in the first such move in many years, they have begun to strengthen the country’s anti-corruption and anti-money laundering framework.”

In addition, Lagarde pointed out that the Ukrainian government is dedicated to further sizable energy tariff increases, restructuring of the banking system as well as reforms to the judicial system and implementation of anti-corruption measures. “The government is committed to front-loaded measures under the new programme – including further sizable energy tariff increases; bank restructuring; governance reforms of state-owned enterprises; and legal changes to implement the anti-corruption and judicial reform agenda. This programme will require the authorities’ steadfast determination to reform the economy. To help cushion the adjustment, especially for the poorest groups, measures are being taken to strengthen and better target the social safety net.”

The IMF managing director also admitted that the Ukrainian government intends to hold consultations with the holders of its sovereign debt with a view to improving medium-term sustainability. From these various sources taken together, a total financing package of around $40bn is estimated over the four-year period, she added.

Media previously reported that the IMF had identified a $15bn gap in Ukraine’s finances for 2015, despite Kyiv having a $17bn IMF stand-by credit facility, with $10bn promised from other donors.