Ukraine has successfully passed the eighth review of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) program, which has now passed the half-way mark. However, Russia’s ongoing war in Ukraine has created further shocks which the program may have limited capacity to absorb.
Despite slippages in reforms under the four-year program, Ukraine’s authorities have still succeeded in stabilizing the economy and drastically increasing domestic revenues. But defense against Russia’s full-scale invasion dictates its own laws of resourcefulness, posing Ukraine a new challenge – the 2025 Supplementary Budget.
Ukraine’s Ministry of Finance has prepared a plan to accumulate additional Hr.400 billion ($9.5 billion) as per the request of the Armed Forces of Ukraine (AFU) and the defense bloc. “Although the economy has remained broadly resilient, strains from the war are weighing on recovery, [while] war-driven risks to fiscal spending are materializing and structural reform momentum has slowed. Peace talks have yet to yield outcomes. The goal of restoring medium-term external viability by the end of the program could become challenging if there are any further shocks, including from a more prolonged and/or more intense war and the time needed to implement the program policies,” the IMF staff wrote in its eighth memorandum, following the program’s review.
Apart from war-related risks, the IMF has also laid out a more detailed list of reforms necessary to boost Ukraine’s financial markets during and after the war.
Special focus has been placed on the weak national stock market regulator, which failed to complete the adoption of its own strategic planning goals, with a third of its most experienced staff resigning in the past year.
In addition to recommendations to strengthen financial markets, the IMF has urged Ukraine to improve the role of the exchange rate as a shock absorber. Ukraine’s central bank is controlling the exchange rate so as not to risk putting the rate on a long leash like in pre-war times. The list also includes the continuation of anti-corruption measures which the authorities failed to complete for at least one previous review period.
However, all policy reforms are eclipsed by defense spending needs, which are becoming harder and harder for Ukraine, even with increased revenues. Western partners are hesitating to provide Ukraine with enough aid to stop Russia’s illegal invasion once and for all.
Threat to Ukraine’s 2025 defense budget
The EFF program is the first in IMF program history granted to a country actively at war. The decision required the IMF to change its rules to allow lending to countries facing “exceptionally high uncertainty.”
Ukraine received access to about $15.5 billion, disbursed in tranches spanning 48 months and approved on March 31, 2023. More than half of this timeline has now passed, yet the ongoing war continues to be the main challenge, despite economists hoping it would have ended sooner.
The current circumstances are creating an anxious tone from IMF staff, voiced in a new memorandum following the eighth review. “The war could intensify or become more prolonged, adversely impacting economic outcomes underlying program assumptions, and the ability to restore sustainability,” IMF staff wrote.
The EFF program was designed to help Ukraine absorb the shocks created by Russia’s invasion and increase domestic revenues in the face of greater defense spending and debt needs. Progress has been made, but the duration and intensity of the war continues to put pressure on the drained economy.
The challenging situation is also exacerbated by ceasefire efforts failing. “Despite efforts for a ceasefire, the evolution of the war remains subject to exceptionally high uncertainty,” according to IMF staff.
The certainty and sustainability of peace is a key factor to allow Ukraine’s economy to fully recover. This is yet to materialize in 2025, as Ukraine needs to find additional Hr. 400 billion ($9.5 billion) for increased procurement of frontline equipment, defense tech solutions, veteran policies and the preparation of future military professionals at high school stage.
Increased spending jeopardizes efforts Ukraine has made over the program, increasing its economy in size despite losses. It also risks medium-term debt, as Ukraine may need to borrow more. Western partners are less eager to provide grants in favor of loans.
The IMF’s financing program ends in 2027, posing more uncertainty for if the war continues over an extended period.
“Tail risks remain, and the current four-year program has limited time to absorb further shocks, including from a more prolonged and intense war, while still being able to implement the policies needed to achieve medium-term external viability by the end of the program,” the IMF wrote.
Among many assumptions, the IMF has calculated the possibility of a longer and more intense war winding down by the second quarter of 2026. Ukraine will then have access to further buffers such as lending backed by Russia’s assets, but it also means it will have less room for contingency financing.
As the EFF program reaches its end, IMF staff are worried that the program will not help Ukraine achieve sustainability given the protracted nature of Russia’s invasion. This doesn’t mean the economy will end – it means Ukraine risks having more financing needs that will be hard to maintain with the current level of debt, as well as having time and effort to implement the necessary recovery and macroeconomic stability policies.
“Defense expenditure needs for 2025 have increased, necessitating a Supplementary
Budget. This budget has been integrated into the macro framework, including mitigating measures to lessen the overall effect on the deficit, although it has inevitably further eroded buffers built under the program. Any further shocks will require fully counterbalancing measures,” IMF staff wrote.
In these conditions, Ukraine has a difficult ongoing task: reforming the country amidst devastating drone, missile and cyber attacks. Most of these things have gone well, especially on the fiscal side, but rule of law reforms, stock market, and customs service reforms have stalled.
Impact of Russia’s war on Ukraine’s economic growth
“Macroeconomic stability has been preserved through skillful policymaking, as
well as substantial external support. The economy has remained resilient, but the war is
weighing on the outlook, with growth tempered by labor market strains and damage to energy infrastructure,” the IMF wrote in the fund’s memorandum.
The IMF has repeated praise for Ukraine’s authorities, and for good reason – Ukraine’s economy plowed through the shocks of the largest war since World War II, delivering a lesson of contingency planning learned by none other than the Bank of England. This includes recovering from a heavy toll on Ukraine’s GDP and printing money to counter the sudden enormous deficit of 18% of GDP to cover defense financing.
Ukraine keeps meeting quantitative conditionality, such as a higher floor for mobilized tax revenues. And Ukraine has expressed a commitment to do more, diminishing the abuse of taxpayers on “simplified” rules and tackling the untaxed shadow economy, making life in Ukraine more just for regular taxpayers.
Another commitment from Ukraine’s Ministry of Finance is to reform the work of the State Customs Service. This includes presenting a detailed plan to the IMF, increasing salaries of staff, buying new equipment, conducting training, and appointing a new head of the customs service by the end of 2025.
However, nothing is perfect. Ukraine’s economy is slowing down due to Russia’s persistent strikes of civilian and energy infrastructure. To make matters worse, climate change is again affecting the performance of exports. “Real GDP has expanded by 2.9 percent year on year in 2024. This is 0.6 percentage points below the Seventh Review forecast, as a smaller-than-expected harvest drove a contraction in Q4,” the IMF wrote. Poorer harvests due to climate factors have caused problems before, triggering an inflation spike in summer last year. Inflation initially reached 15.9% in May, exceeding the 15.5% key rate.
There is evidence that inflation has reached its peak, but April frosts kept the figure high. Ukraine’s central bank, the National Bank of Ukraine (NBU), has signaled that it will act decisively if inflation increases.
“Inflation is still expected to decline to 9 percent year on year by the end of 2025, due to an expected reversal in food price base effects in [the second half of] 2025, and tight monetary policy,” the IMF wrote.
Electricity generation is smaller than it used to be, but now the gas deficit – another problem caused by Russia’s attacks – is reducing domestic production capacity. “The 2025 GDP growth forecast is maintained at 2-3% year-over-year,” the IMF staff set out in its memorandum.
There is little expectation that the budget deficit will substantially decrease this year, as the IMF projects it to reach 22.1% of GDP in 2025.
The IMF has also criticized Ukraine’s over-reliance on foreign exchange interventions, urging the NBU to return to pre-war benchmarks: inflation targeting and the role of shock absorber in the exchange rate.
But in wartime, Ukraine’s banks are lending more cash to households and businesses and have doubled or tripled their level of capital and liquidity coverage ratios.
IMF flags populism as reform obstacle
What spoils the recovery strategy is the weak pace of reforms. In the eighth memorandum, the IMF warns about the rise of vested interests and populism that could negatively affect economic gains.
“Reform fatigue and challenges to the political consensus could pose significant headwinds.
Populist pressures and increased opposition from vested interests could make the authorities’ reform efforts, including through parliament, more difficult,” the IMF wrote.
What is the IMF referring to?
Ukraine has stalled in anti-corruption reforms, dragging in its work to amend the criminal procedures code because it is hard to gather political will for the policy, according to the memorandum.
Another IMF benchmark – appointing the new head of the Economic Security Bureau – has been completed, but the government needs to agree with the appointment, previously approved by the transparent competition process. Strengthening the anti-money laundering framework is also a priority.
Ukraine’s stock market is under fire from the IMF, after months of rescheduling the requirement deadlines. “Operational and governance weaknesses in the security markets regulator need to be tackled urgently,” IMF staff wrote in the fund’s memorandum.
What’s the deal?
In June, Ukraine’s National Securities and Stock Market Commission (NSSMC) was observed to be enabling a scheme allowing Ukrainian businesses to purchase foreign currency, evading the central bank’s wartime restrictions, according to Ekonomichna Pravda. The IMF also wrote that a third of the NSSMC’s most experienced staff in the past year had resigned, with salaries not high enough to attract new professionals. The institution’s performance is non-transparent in both economic analyst circles and the media. The NSSMC previously sent Kyiv Post contradictory information about completing the IMF benchmark, while the IMF still considered it to be incomplete.
To fix the problems, it is important that Ukraine’s government completes the review of the NSSMC Chair and Commissioners. Once complete, the NSSMC, together with the NBU, can prepare a prioritized roadmap for financial market infrastructure reforms to maximize attracting private capital, critically needed for recovery.