WASHINGTON – Ukraine won staff backing for a US$15.6 billion (S$20.9 billion) loan from the International Monetary Fund (IMF), setting up the first loan to a nation at war in the institution’s 77-year history.

The IMF and the government in Kyiv reached a staff-level agreement on a comprehensive loan programme over four years, the Washington-based lender said in an e-mailed statement on Tuesday.

The agreement is expected to be finalised with the approval of the IMF board in coming weeks.

The programme will be divided into two phases.

In the first, lasting 12 to 18 months, Ukraine will take measures to “strengthen fiscal, external, price and financial stability”, including eliminating monetary financing.

The second phase would shift to more expansive reforms to bolster macroeconomic stability and support the nation’s recovery and reconstruction, including in light of Ukraine’s goal of European Union accession.

During this period, Ukraine “would be expected to revert to pre-war policy frameworks, including a flexible exchange rate and inflation targeting regime”, the IMF said.

IMF staff forecasts for Ukraine’s economy in 2023 range from a 3 per cent contraction to 1 per cent expansion, after a slump of 30 per cent in 2022.

‘Severe damage’

“A gradual economic recovery is expected over the coming quarters, as activity recovers from the severe damage to critical infrastructure, although headwinds persist, including the risk of further escalation in the conflict,” Mr Gavin Gray, who led the IMF’s mission, said in a statement. 

The unprecedented agreement required the IMF to change its policies.

The Russian invasion, launched over a year ago, has laid waste to Ukraine’s export economy and infrastructure, killing thousands of people and driving more than a third of a pre-war population of 40 million from their homes.

The financing arrangement is an upgrade, with previous IMF funds distributed via rapid financing instruments that did not involve conditions.

Kyiv began negotiating a full loan programme with the lender in June, striking a four-month non-cash deal in an intermediary stage in December. 

“In conditions of a record budget deficit, this programme will help us finance all crucial expenditures, preserve microfinancial stability and enhance our cooperation with the other international partners,” Ukraine’s Prime Minister Denys Shmyhal said on his Telegram channel.

Ukraine’s economy collapsed by about a third in 2022, wiping out the budget’s revenue base and forcing the government to rely on international aid.

The government targeted at least US$38 billion from foreign donors in 2023 to plug the fiscal gap, with a deficit amounting to some US$3 billion a month. 

Ukraine’s Finance Ministry planned on receiving US$28 billion in grants and loans from the US and the EU, with the rest coming from bilateral loans from other states and the IMF. 

Treasury Secretary Janet Yellen hailed the agreement. The US is the IMF’s biggest shareholder.

“An ambitious and appropriately conditioned IMF programme is critical to underpin Ukraine’s reform efforts, including to strengthen good governance and address risks of corruption, and provide much needed financial support,” said Dr Yellen.

“It will also bolster the economic assistance that the United States and our partners have provided.” BLOOMBERG