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IMF Clears $1 Billion Ukraine Loan Tranche After Year Delay

Updated on
  • Move set to unlock additional aid from U.S., European Union
  • Ukraine targeting another $1.3 billion from fund by year-end

The International Monetary Fund approved a $1 billion aid tranche for Ukraine, resuming disbursements from the former Soviet republic’s $17.5 billion bailout after a yearlong delay and paving the way for further financial assistance from the U.S. and the European Union.

The Washington-based lender’s executive board cleared the transfer at a meeting Wednesday, having decreased the amount from an originally planned $1.7 billion because some conditions weren’t met. The move unlocks international assistance, including a $1 billion U.S. loan guarantee and 600 million euros ($674 million) from the EU.

The eastern European nation, battered by a two-year military conflict with Russian-backed separatists, is relying on international aid to replenish its foreign reserves and help sustain recovery from a recession. The government that emerged after deadly street protests in 2014 has struggled to deliver the large-scale reform sought by the IMF, particularly in fighting graft, leading to delays in the flow of external financing.

“A sustainable recovery requires completing the structural transformation of the economy, where much remains to be done, including combating corruption and improving governance,” IMF Managing Director Christine Lagarde said in an e-mailed statement. “Creating a level-playing field and ensuring equal application of the rule of law is essential to raise investment. A decisive start needs to be made with the restructuring and divestiture of state-owned enterprises, and prosecuting high-level corruption cases.”

The aid approval could help halt a plunge in the hryvnia, which has lost 5.1 percent against the dollar this quarter amid an upsurge in violence in the country’s eastern conflict zone and threats by Russian President Vladimir Putin over the Crimean peninsula he annexed in 2014. Ukraine’s currency gained 0.9 percent to 26.105 per dollar Thursday in the capital, Kiev.

The latest tranche will boost Ukraine’s foreign reserves, the National Bank of Ukraine said Thursday on its website. It sees another IMF transfer of $1.3 billion, which together with other international aid will bolster the stockpile to $17.2 billion by year-end. The inflow of funds and lower inflation risks allowed the bank to cut its benchmark interest rate by 50 basis points to 15 percent on Thursday.

‘Window of Possibility’

The IMF’s decision “opens a window of possibility for attracting foreign investment,” President Petro Poroshenko said in a statement on his website. “This will help preserve hryvnia stability, reinforce macroeconomic stabilization and support the first shoots of economic growth.”

The government is set to approve a draft 2017 budget Thursday, allowing it to be submitted to parliament. It envisages economic growth of 3 percent after this year’s projected 1 percent expansion. It assumes a budget deficit of 3.5 percent of gross domestic product. Ukraine may get $5.4 billion from the IMF next year, according to the central bank.

“Further progress in fiscal reforms is key to ensure medium-term sustainability,” Lagarde said. The government should improve tax and customs functions and proceed with a pension overhaul to help narrow the budget shortfall and lower public debt, she said.

Russia, which is locked in a spat with its neighbor over a $3 billion unpaid debt, had opposed the IMF’s latest transfer to Ukraine but didn’t have sufficient voting power on the board to block it. Lagarde called for a “prompt” resolution of the issue.

(Updates with central bank starting in sixth paragraph.)
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