International Monetary Fund

International Monetary Fund or IMF. Created in 1944 and headquartered in Washington, DC, an international organization which helps member countries with balance-of-payments problems so as to maintain their credit-worthiness by lending them money subject to the Fund’s conditions. In the case of Ukraine, the conditions have required reform and liberalization of the economy, reduction of the expenditure budget, and radical diminution of the government’s involvement in the economy. Ukraine joined the IMF on 3 September 1992. Convincing the IMF to support Ukraine was largely accomplished in 1993 through the efforts of Viktor Pynzenyk, but the credibility of its case was then weakened by President Leonid Kravchuk’s lack of support for the re-appointment of Leonid Kuchma as prime minister. Ukraine only began to benefit from IMF assistance in 1994 when the new president, Kuchma, promised to move ahead with economic reform neglected by his predecessor.

For post-Soviet countries the IMF created in 1993 a Systemic Transformation Facility (STF), under which on 26 October 1994 Ukraine was awarded 249.3 million Special Drawing Rights (SDR). A second such drawing in the identical amount was approved in April 1995, along with a so-called stand-by credit for one year in the amount of SDR 997.3 million. A nine-month stand-by credit of SDR 598.2 million was approved in May 1996. In August 1997, another one-year stand-by credit of SDR 398.9 million followed. On 4 September 1998, the IMF approved a three-year Extended Fund Facility (EFF) credit in the amount of SDR 1,645.55 million in support of Ukraine’s 1998–2001 economic program, augmented by a further SDR of 274.4 million on 27 May 1999, for a grand total of SDR 1,919.95 million (US$2.6 billion, approximately). By 31 December 1999, Ukraine had drawn SDR 2,529 million, repaid 484.36 million, for a net outstanding use of IMF credit of SDR 2,045.62 million, or nearly 150 per cent of its allotted quota. At the beginning of 2000, the IMF was Ukraine’s largest creditor. By 30 April 2001, the outstanding amount was down to SDR 1,452.9 million, and by March 2004, was reduced further to SDR 1.201 billion (approximately US$1.766 billion).

Faced with foreign loan repayments of US$3 billion due in 2000, Ukraine’s difficulties were further complicated by the IMF’s suspension of payouts in September 1999 pending passage through parliament of a balanced budget for 2000. In addition, there were reports that, despite close monitoring, IMF credits had been misused and information misreported by government officials in 1997–8. The resulting audit found no such misuse, but that delayed loan payments even more, prolonging Ukraine’s debtor’s agony and threatening a debt default. At the end of the year 2000, after Ukraine had paid back US $100 million ahead of schedule and passed a balanced budget for 2001 together with other measures, the IMF released SDR 190.1 (US$246) million. Due to lack of further progress towards a normal market economy, however, another tranche of US$187 million out of the total loan of US$2.6 billion due in March 2001 was withheld. Resumption of good relations was critical, both to receive loans from other institutions such as the European Bank for Reconstruction and Development (EBRD) and World Bank, as well as to encourage foreign private investment. Ukraine’s schedule of repayments to the IMF for 2004–8 was to be in the range of SDR 127 to 292 million annually, although economy minister Valerii Khoroshkovsky announced in September 2003 that the IMF had agreed to Ukraine’s paying off its debt within two years.

Impacting on the sphere of domestic politics, Ukraine’s relationship with the IMF especially raised objections from the left wing of the political spectrum, in particular the Communist Party of Ukraine. But blocked loans also irritated the centrist government’s senior ministers and even the president himself.

In January 2002, disbursement of another tranche of US$370 million was likewise delayed pending IMF clarification as to whether Ukraine was meeting its obligations. When these commitments went further unmet, the IMF withheld disbursement of its August 2002 tranche altogether. By then, Ukraine had received about US$1.5 billion in total. The IMF’s critical stance towards Ukraine continued into 2003, requiring further administrative and structural reform as well as an increase in the amount of private capital in the economy. In March 2004, however, the IMF approved a one-year credit facility of SDR 411.6 million (approximately US$605 million), praising Ukraine for having achieved economic recovery and macroeconomic stability, taming inflation, having a good balance of payments, and replenishing its international reserves. The degree to which Ukraine has indeed improved its economic performance along IMF guidelines has varied from time to time and was always a matter of political debate.

In 2004–5, Ukraine did not draw on any of the 411.6 million SDRs to which it was entitled. The global financial crisis of 2008 had a severe impact on the Ukrainian economy with inflation cresting at 31 percent. In the fall of 2008, the government requested and the IMF approved emergency funding in the form of a Stand-By Arrangement (SBA) amounting to $16.4 billion over two years. The IMF’s conditions included only basic requirements without insisting on needed structural reforms. In 2009, the IMF SBA was derailed by the government of Viktor Yanukovych as it increased social spending in a populist gesture to gain votes in the 2010 presidential elections.

As president, Viktor Yanukovych at first complied with IMF requirements, which facilitated Ukraine’s obtaining a Stand-By Arrangement of $15 billion over two and a half years. He increased the price of gas for domestic consumers. This was accomplished by negotiating a lower price for the supply of gas from the Russian Federation in exchange for the extension of Russia’s lease on the Black Sea Fleet port in Sevastopol to 2042. Instead of reducing the budget deficit, Yanukovych’s government increased it. From 2011, no efforts were made to pursue economic reforms. The IMF’s insistence on fiscal responsibility, a flexible exchange rate, and reform to the energy sector were ignored. Economic output was brought to a standstill. President Yanukovych’s ministers continued to lobby the IMF assuming that Ukraine owed no reciprocal responsibility for its support.

In the wake of the Euromaidan Revolution in 2014, Ukraine’s economy descended into a full-fledged financial crisis. Real incomes were down; poverty and unemployment were up. Responding to an appeal from the new government of Arsenii Yatseniuk, the IMF provided a two-year Stand-By Arrangement offering $33 billion in international financial support, $17 billion supplied by the IMF itself. The program of assistance did not match up with the severity of Ukraine’s economic situation, made worse by the Russian Federation’s invasion of the Crimea followed by clandestine insurgency in the Donbas, and had to be redone. Despite adopting a law on transparent public procurement, making substantial cuts in public expenditures, and allowing the currency exchange rate to float, even more drastic actions were needed. These included abolishing subsidies to state-owned enterprises (SOEs), reducing pensions together with the size of the public service, and reforming the corrupt energy sector. As under previous administrations the rise in gas prices was prematurely halted due to pressure from vested interests as well as public opposition. A new Stand-By Arrangement of 2.8 billion SDRs for 14 months was agreed in October 2018 replacing the one that had been scheduled to end in March 2019. Another SBA of 3.6 billion SDRs ($5 billion) was arranged—for reducing the budget deficit incurred by the COVID-19 pandemic and for strengthening reforms—for the period June 2020 to December 2021.

Over the entire period from 1996 to 2020, the IMF approved a total of 48.7 billion SDRs in loans to Ukraine, of which 15.3 billion was disbursed, or approximately $27.8 billion US. The discrepancy between the amounts approved and drawn was due to Ukraine’s lack of fulfillment of the terms of the loans. Although Ukraine has been paying down its debt to the IMF, this indebtedness year by year has remained high—at between 50 and 70 per cent of total foreign (external) debt. Thus the generosity of the IMF simultaneously adds to Ukraine’s ongoing debt burden. In 2022, Ukraine’s remaining indebtedness to the IMF was estimated at just under $10 billion US.

The IMF aims to assist needy countries to transition into a market economy prioritizing the private sector, to achieve financial stability, to ensure economic growth, and to improve social conditions. At the same time, it promotes the adoption of economic reforms that will achieve macroeconomic stabilization and accelerated growth. With IMF prodding Ukraine has managed to achieve some degree of economic balance. This concerns in particular setting the exchange rate, correcting energy tariffs, strengthening social security, facilitating the conduct of business, and improving the climate for procurement, auditing, and investment. According to figures for the half-decade 2015–19, the banking system had been rationalized and the budget deficit reduced. The current account deficit had also been reduced and foreign reserves were up. Yet the macroeconomic situation has remained unstable. The state debt as a proportion of GDP—between 70 and 80 percent—was disadvantageous for a country in Ukraine’s circumstances. Ukraine’s lack of competitiveness on the global market was a particularly serious handicap, as was its vulnerability to global capital flows. Ukraine’s dependence on the IMF was a source of both strength and weakness.

Neither President Petro Poroshenko nor Volodymyr Zelensky appeared to take instructions from the IMF seriously, regarding it as a source of free money. Poroshenko under pressure from the IMF and the European Union established in 2015 three new anti-corruption agencies (ACAs), but only because Ukrainians in return would receive the benefit of visa-free travel to Europe. Once created, he allowed their effectiveness to be blocked and corruption to continue undisturbed. After years of prodding, an anti-corruption court was also set up in 2019, the reward for which was a $3.9 billion loan from the IMF. Western scholars noticed that reforms were actually being implemented when pressure on the Ukrainian government from international institutions was combined with vocal action from civil society below, but the efficacy of this ‘sandwich’ in promoting reforms was in fact episodic and transient. Zelensky incurred constant criticism from the IMF as well as the Venice Commission for being lax with tax avoidance, making a show of reforming the judiciary while preserving the status quo, procrastinating in appointing a special anti-corruption prosecutor, and promising to clamp down on corruption while basically going with the customary flow of Ukrainian politics. Perhaps the Russo-Ukrainian war would induce its president to adopt a less casual attitude towards the IMF and other international financial institutions.

In the then prevailing wartime conditions, the IMF resumed its programs of conditional assistance to Ukraine in March 2023. It was announced that the institution had approved a four-year EFF package in the amount of 11.6 billion SDR (approximately $15.6 billion US), of which 2 billion SDR ($2.7 billion) was available for immediate disbursement. It was part of an overall US$115 billion package of support for Ukraine. The aim was to maintain fiscal stability, support economic recovery, enhance governance, and—in the second phase—strengthen the institutional basis for macroeconomic stability. Among the conditions to be met by Ukraine were reform of pensions and social security as well as restoring the obligatory submission of asset declarations by government officials. In the same vein, in August 2023, President Volodymyr Zelensky signed a bill making budget policy more predictable and management of state debt sustainable, following IMF guidelines. The IMF’s review on the EFF arrangement of June 2023 commended the Ukrainian government for making progress in meeting its commitments and performance criteria despite the devastation inflicted on the country’s economy by the Russian Federation’s war. Following a visit by IMF Managing Director Kristalina Georgieva, the IMF re-opened its Kyiv offices on 4 October 2023.

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IMF website: http://www.imf.org

Bohdan Harasymiw

[This article was written in 2024.]