IMF announces tentative $14-$18 billion assistance for Ukraine

SOURCE: Government of Ukraine

The International Monetary Fund has tentatively agreed to provide $14 billion to $18 billion to Ukraine over the next two years. 

Ukraine’s economy has been battered due to high government deficits – running at 9% of GDP this year – and political turmoil. The country’s credit rating was downgraded last month by Standard & Poor’s, which warned the Ukraine was at risk of default.

Read more: S&P downgrades Ukraine’s credit rating, warns country may default due to political turmoil

The bailout package will have to be approved by IMF’s Executive Board in April.

“Following the intense economic and political turbulence of recent months, Ukraine has achieved some stability, but faces difficult challenges,” said Nikolay Gueorguiev, IMF’s Mission Chief for Ukraine. “Nonetheless, the economic outlook remains difficult, with the economy falling back into recession. With no market access at present, large foreign debt repayments loom in 2014-15.”

But in exchange for the bailout, Ukraine must adopt a series of reforms, particularly to its financial and energy sectors. In addition, Kyiv must adopt some austerity measures to bring down its fiscal deficit from 9% of GDP this year to 2.5% of GDP by 2016.

The IMF reforms include the need for Ukraine to stabilize its currency, hryvnia, which has been devalued significantly since the deadly end to the EuroMaidan protests in February.

Ukraine will also need to raise gas and heating prices to ensure “full cost recovery” for the state-owned Naftogaz. (Russia, which annexed Crimea earlier this month, has announced significant price increase of its natural gas to Ukraine.)

According to Kyiv Post, Naftogaz has announced a 50% hike in energy fees for households beginning in May.

The price hikes will hit the pocketbooks of those with fixed incomes, such as seniors and pensioners, but the IMF reforms did call for subsidies to “to mitigate the impact on the most vulnerable.”

Acting Prime Minister Arseniy Yatsenyuk asked the parliament to support tax hikes on tobacco, alcohol, oil and gas extraction, and to impose budget cuts to help control Ukraine’s deficits.

“Ukraine needs to move on to tough and unpopular reforms, which should have been done many years ago,” Yatsenyuk was quoted by the Kyiv Post. 

The White House praised the IMF agreement as a ” a powerful sign of support from the international community for the Ukrainian government” and noted that, if successful, the IMF bailout could “unlock roughly $27 billion in total support” from the international community.

“The IMF program will be a central component of a package of assistance to support Ukraine as it implements reforms and conducts free and fair elections that will allow all the Ukrainian people to determine the future of their country.  We are working alongside international partners, including the World Bank and the European Bank for Reconstruction and Development (EBRD), to disburse rapid additional assistance to complement the IMF program and ease Ukraine’s economic transition, particularly for the most vulnerable,” according to the White House statement. 

The Senate is expected to vote today on a $1 billion aid package for Ukraine.

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