The International Monetary Fund has again retreated from a tax condition it set for Ukraine’s $8.1 billion loan program, backing off after only one of four required draft tax laws cleared parliament. The fund approved the next $685.5 million tranche and the IMF Executive Board should now have its final vote to complete the first review – even as Russia launched mass attacks on Kyiv that disrupted the mission itself.
Will this success last for long?
After the new $8.1 billion IMF program began, the failed vote on tax amendments risked not just the broader donor financing that looks to the Fund as a credibility marker.
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The Fund had previously dropped a VAT measure on self-employed workers during the April IMF Spring Meetings. Of the four tax bills tied to the first review, only one – the extension of the military levy – has cleared parliament; the rest remain stalled, unsigned, or unsubmitted.
Among the completed benchmarks, Ukraine appointed a new head of customs and improved nominations to state-owned banks’ supervisory boards, though it completed these with a slight delay. Ukraine extended the military levy – a tax needed to finance the army – for another three years.
But President Volodymyr Zelensky has not signed the bill imposing taxes on income earned through digital platforms such as Uklon, Bolt, and OLX, a step required to make the legislation legal. The simplified VAT registration measure was never submitted to parliament. And legislation to introduce VAT on international parcels valued under €150 ($176) has been repeatedly left unreviewed by lawmakers despite being registered.
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“Honestly, 70-80% of this mission was about the fiscal issues. … The IMF didn’t have any major issues to discuss about exchange rate or financial sector,” a person familiar with the matter told Kyiv Post.
What’s behind the IMF’s ‘flexibility’
“The Fund is showing considerable flexibility, reflecting its understanding of the unprecedented challenges Ukraine is facing as a result of Russia’s war. Most important is that EU money is now flowing in. But the flexible approach cannot be sustained indefinitely, particularly in the absence of clear parliamentary willingness to advance the necessary tax measures,” a well-informed source told Kyiv Post.
Ukraine received a €2.8 billion ($3.2 billion) payment from the EU under the Ukraine Facility program in June, and expects nearly $10 billion from the Ukraine Support Loan in the second quarter, according to the KSE Institute’s Ukraine Financial Support Tracker.
This time, the IMF mission conducted its review under fire. Russia launched nearly two dozen ballistic missiles and more than 600 drones at Kyiv and other cities on June 2 and June 14-15, coinciding with the mission’s visit. Some IMF officials still traveled to Ukraine to meet with officials in person, NBU Governor Andriy Pyshny said at a June 18 monetary briefing.
“Against the backdrop of the escalating situation in Kyiv, the IMF mission team changed plans at the last minute and decided to work remotely. But the management decided they should spend the final three days in Ukraine after all,” a person familiar with the matter told Kyiv Post.
In a press release, IMF staff wrote that it had reached a staff-level agreement, including a revised timeline for agreed reforms. Bloomberg reported that the IMF has agreed to remove the VAT customs exemption for parcels until July. The IMF Executive Board has not yet voted on Ukraine’s first tranche at the time of publishing.
Of the 12 paragraphs in the press release, the IMF dedicated three to fiscal reforms – more than any other topic. Commitments under the program include expanding taxation on foreign parcels, closing a loophole that the Fund says encourages non-essential imports, curbing abuse of the simplified tax regime, and tackling transfer pricing that allows companies to avoid paying taxes in Ukraine.
“They are very disappointed, I would even say furious. Meanwhile, the government’s mood is very positive – they are sure they have convinced the IMF without having all things done,” a second person familiar with talks told Kyiv Post.
The government views tax amendments as an unpopular move but is confident the IMF has made a political decision to keep the program with Ukraine. Separately, Ukraine passed two laws required to unlock the World Bank’s Development Policy Operation (DPO), which the Bank approved on Monday, worth $3.39 billion.
But one bill tied to the DPO – draft legislation on Ukraine’s accession to the Single Euro Payments Area (SEPA) – has yet to clear parliament’s committee stage.
Lawmakers stalled it over concerns that a required centralized registry of individual bank accounts could be abused by law enforcement to target Ukrainians.
“This concern undermines the benefits of SEPA for Ukrainian businesses, which is around €70-100 million [$82-117 million] in saved fees,” a Kyiv Post government source said.
Ukraine is facing the second review in September. By then, the Fund must pin down the size of Ukraine’s 2027 financing gap together with Ukrainian officials. “I am pretty sure there will be a need for additional money, given Russia’s continued attack on Ukrainian infrastructure,” the well-informed source told Kyiv Post.
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