ukraine dest-1680282894944
Damaged buildings amid Russia's attacks on Ukraine in Avdiivka, Donetsk region, on March 28, 2023. Image Credit: REUTERS

Washington: The International Monetary Fund’s board signed off on a $15.6 billion aid package for Ukraine, the final approval for the institution’s first-ever loan to a nation at war.

The executive board approved the four-year loan on Friday, according to a person familiar with the matter, who asked not to be identified before it’s announced publicly. The loan is the nation’s biggest since Russia launched attacks on the country in February 2022.

A group of Ukraine’s creditors supported the unprecedented deal, which required the IMF to change its lending rules, with assurances that they’d extend a debt repayment standstill for the duration of the programme. The creditors “- Canada, France, Germany, Japan, the UK and the US “- urged other bilateral and private lenders to help restore debt sustainability for Ukraine, whose economy has shrunk by about a third after war.

The programme will be divided into two phases. In the first, lasting 12-18 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, according to the IMF.

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

The unprecedented agreement required the IMF to change its policies. The war 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 didn’t involve conditions. Kyiv began negotiating a full loan program with the lender in June, striking a four-month non-cash deal in an intermediary stage in December.

Ukraine’s economy collapsed by about a third last year, wiping out the budget’s revenue base and forcing the government to rely on international aid. The government targeted at least $38 billion from foreign donors this year to plug the fiscal gap, with a deficit amounting to some $3 billion a month.

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