You're reading: IMF approves $1.39 billion tranche for Ukraine

  The Executive Board of the International Monetary Fund (IMF) on Friday completed the first review of how Ukraine fulfils the economic program backed by the Stand-By Arrangement (SBA) and approved the SBA second tranche worth SDR 914.67 million ($1.39 billion), the IMF said in a statement.

The IMF says that the SBA worth SDR 10.97 billion ($16.67 billion) was approved on April 30, 2014, to support the Ukrainian government’s economic, which aims to restore macroeconomic stability, strengthen economic governance and transparency, and launch sound and sustainable economic growth while protecting the vulnerable groups.

After the allocation of the second tranche, the total sum of the SBA assistance is SDR 2.97 billion ($4.51 billion) at the moment.

While commenting the second tranche, Ukrainian Prime Minister Arseniy Yatseniuk wrote on Twitter: “[The] IMF has just passed a unanimous decision to allocate the next tranche of budget support to Ukraine. A welcome sign of support and confidence.”

Ukraine’s Finance Ministry in turn reported that $1 billion of the second tranche would be funneled into the national budget, and about $400 million would be transferred to the National Bank of Ukraine. The ministry said that the IMF loan had been raised at 3% per annum with 0.15% once-paid commission for reservation and a service charge set at 0.5% of the sum of the tranche. The repayment of each tranche starts after a three-year grace period (when only interest is paid every quarter) and is split into equal parts per quarter in two years.

In completing the review, the IMF Executive Board approved waivers of nonobservance of performance criteria related to international reserve accumulation and the cash deficit of the general government on the basis of corrective actions taken. The Board also approved waivers of applicability of performance criteria related to the cash deficit of the general government, the cumulative change in net domestic assets of the central bank and publicly guaranteed debt. In addition, the Board approved the Ukrainian authorities’ request for merging the remaining two reviews scheduled for 2014, while keeping the total financing under the arrangement unchanged.

“The Ukrainian authorities have firmly implemented policies to stabilize the economy and revive growth. This strong policy record despite the much worse-than-expected environment is encouraging in light of the implementation problems that derailed previous programs and thus augurs well for the authorities’ ability to keep the program on track. However, the escalating conflict in the East and ongoing geopolitical tensions have weighed heavily on the economy and society, causing a deeper recession and deviations from program targets in the short term, in particular on the central bank’s net international reserves and the budget and Naftogaz deficits,” the IMF’s statement quoted IMF Managing Director Christine Lagarde as saying.

According to her, to compensate for these deviations, the authorities have committed to a strong policy package. Specifically, they will take steps to accumulate international reserves, tighten the fiscal stance in 2015–16 relative to the initial program targets, and step up efforts to put Naftogaz on a sound financial footing by improving bill collections and adjusting energy prices as needed.

“The authorities recognize the importance of maintaining exchange rate flexibility and refocusing monetary policy on price stability. They will remove administrative exchange restrictions and controls gradually at a pace consistent with macroeconomic and financial stability,” she said.

“The financial sector reform program has proceeded as scheduled. The regulatory and supervisory framework is being enhanced, bank diagnostics are on track, and the capacity of the Deposit Guarantee Fund to fulfill its mandate is being strengthened. Efforts also continue to strengthen banks’ capacity to resolve bad loans, including incentive schemes for voluntary debt restructuring,” she added.

According to Lagarde, the authorities remain committed to fiscal consolidation. They have adopted a supplementary budget to meet the revised deficit target. Efforts in this regard will focus on spending restraint and fiscal reforms to reverse the debt dynamics, while improving social safety nets. In addition, after a temporary increase in the Naftogaz deficit, the authorities are taking steps to return to the programmed deficit reduction path already in 2015.

She says that the authorities intend to press ahead with critical structural reforms to address governance issues and improve the business climate. Work continues on the establishment of a strong anti-corruption agency, enhancing the anti-money laundering framework, and simplifying the regulatory environment.

“Downside risks to the program remain very high. The program success hinges on a timely resolution of the conflict in the East, as well as on the authorities’ strong policy performance and adherence to the planned reforms. The authorities’ program continues to be an appropriate response to the existing challenges and constraints. Financial and technical assistance from the international community in support of Ukraine reform efforts are indispensable for achieving macroeconomic stabilization and reviving growth,” she added.