IMF approves $1.3bn emergency funding for Ukraine to help meet fiscal requirements

The International Monetary Fund has approved the release of $1.3 billion in emergency funding for Ukraine, to help the war-stricken country meet its "urgent" economic requirements. The IMF signalled that it will continue its support to ensure fiscal stability.

This disbursement, which is under the new food shock window of the IMF's Rapid Financing Instrument, aims to meet balance of payments needs ― including a gap created by a large cereal export shortfall ― while playing a "catalytic role" for further financial support from Ukraine’s creditors and donors, the Washington-based fund said on Saturday. While the impact of the war on Ukraine's economic activity has been devastating, causing inflation to rise sharply, significantly disrupting trade and dragging the fiscal deficit to unprecedented highs, the IMF acknowledged Kyiv's efforts in maintaining some stability, managing director Kristalina Georgieva wrote.

"The Ukrainian authorities deserve considerable credit for having maintained an important degree of macro-financial stability in these extremely challenging circumstances," she said.

"As the economy adapts to the now prolonged war, key macroeconomic policies have been geared toward safeguarding priority expenditures, easing pressure on the hryvnia and international reserves, and preserving financial stability."

Russia began its military offensive in Ukraine in late February, plunging the latter into a deep economic and political crisis.

Ukraine's GDP is expected to contract by practically half in 2022, the World Bank has estimated, but this would still depend on the magnitude of damage and how prolonged the conflict would be.

The International Institute of Finance had a more conservative estimate, saying that the Eastern European country's economy would shrink by about 35 per cent this year — the same projection as the IMF's — with the monthly fiscal gap seen between $3bn to $10bn.

Ratings agencies S&P and Fitch had already downgraded Ukraine's long-term foreign currency rating to default territory after a majority of the war-torn country’s bondholders agreed to a debt restructuring plan in August.

Investors representing around 75 per cent of $19.6bn worth of Ukraine's foreign bonds agreed to defer coupon and principal payments until 2024, with a majority also approving a request to amend the terms of payments on gross domestic product warrants, which are linked to economic growth.

Meanwhile, Russia's economy, which has already plunged into a recession following international sanctions for its aggression, is projected to slump by more than 11 per cent this year, the World Bank said.

The conflict is also affecting economies around the world, with emerging markets and developing countries in Europe and Central Asia expected to bear the brunt, the Washington-based lender added.

As Ukraine will continue to face risks and uncertainties due to the current situation, the IMF said assessing with sufficient precision what is needed to ensure the sustainability of its debt would be challenging, but the "balance of probabilities suggests that there are higher risks of debt being unsustainable".

Ms Georgieva said the majority of Ukraine's official bilateral creditors and donors have signalled that they intend to continue financially supporting Ukraine to help achieve a balanced growth path and medium-term external viability.

"In order to allay the risks to the fund from lending to Ukraine under these circumstances, these bilateral creditors and donors have reaffirmed their recognition of the fund's preferred creditor status in respect of the amounts outstanding to Ukraine," she added.