Tranche, reforms, and new conditions: Ukraine-IMF agreements for 2024

The International Monetary Fund's Board of Directors approved the second review of the program on Monday, December 11, paving the way for the disbursement of another tranche to Ukraine. Of the $900 million allocated, $900 million will go to the National Bank and then be directed to the State Treasury to cover the budget deficit. Since the start of the full-scale war, Ukraine's total credit from the IMF will amount to $5.9 billion.

The first installment of $1.4 billion was received in March last year under an emergency funding program. Subsequently, a monitoring program without disbursement was adopted. In March 2023, a credit program of $15.6 billion over four years commenced, with Ukraine set to receive $4.5 billion in 2023. The first tranche was $2.7 billion, and two others, including the one approved on December 11, are each $900 million.

This week, the final tranche under the European Union's macro-financial assistance program of €1.5 billion is expected. Last week, Ukraine fulfilled the last conditions for receiving these funds by passing three necessary laws: on the independence of the Specialized Anti-Corruption Prosecutor's Office (No. 10060), on the criminalization of smuggling (No. 5420), and on the improvement of the judge selection process (No. 10140-d).

According to Roksolana Pidlasa, Chair of the Budget Committee of the Rada, this should be sufficient to meet all social and humanitarian obligations by the end of the year, alleviating concerns about budget financing for the current year.

New IMF conditions

Next year, Ukraine plans to receive $5.4 billion from the IMF in four tranches. The updated memorandum with the IMF includes 12 new "structural benchmarks" primarily related to anti-corruption measures and financial management oversight.

Among other things, the effectiveness of tax incentives needs to be assessed, financial risks of companies most affected by military actions must be identified, a strategy for implementing investment projects needs to be prepared, and medium-term planning introduced. An audit of district heating companies for their debts to Naftogaz Ukraine is also part of the conditions.

One notable condition is the retention of the government's controlling stake in banks owned by the Ministry of Finance. Any nationalized non-systemic banks can only be transferred to the Deposit Guarantee Fund for recovery. This condition practically means that Ukrposhta cannot establish its bank based on the assets of PIN bank. Currently, the shares of PIN bank, 88.89% of which were confiscated from Russian entrepreneur Yevgeny Giner in 2022, are under the management of the Asset Recovery and Management Agency (ARMA), and according to the terms of the IMF funding program, these shares can only be transferred to the Fund.

Discussing other program conditions, the approval of the law on the reboot of the Bureau of Economic Security (BEB) is noteworthy. According to the memorandum, the document must be adopted by the end of June, clearly defining BEB's functions and strengthening its analytical component for investigating financial and economic crimes, reporting to the Ministry of Finance.

Another condition is the creation of a new court to replace the liquidated KDAC – the Kyiv District Administrative Court. Currently, its functions are performed by the Kyiv District Administrative Court. However, by summer, a draft law for the new entity, tasked with resolving disputes involving central government bodies, needs to be prepared.

Deputy Head of the Office of the President Andrii Smyrnov hopes that if the Higher Qualification Commission of Judges of Ukraine prioritizes the selection of new judges for the new court, the process will not be delayed. As of now, the practical aspects of creating the new court have not been discussed.

Former Deputy Head of the Anti-Corruption Committee of the Rada Yaroslav Yurchyshyn mentioned that several scenarios are being considered for the replacement of the liquidated OASK – either restarting it with new judges or redistributing its powers.

The likelihood of U.S. funding by the end of the year is extremely low

If funds from the IMF and the EU do come through this year, Ukraine won't be able to receive the $3.3 billion from the US in December. Congress and the White House have yet to find a compromise for voting on the strengthening of immigration policies, a matter directly linked to the prospects of Ukraine's financing not only this year but also in the next.

The Biden administration is willing to compromise on resolving the issue of border protection with Mexico to provide assistance to Ukraine. However, even if the US Congress manages to pass a resolution before the Christmas holidays, the actual allocation of funds by the New Year will be technically impossible. Nevertheless, in such a scenario, the Ukrainian government can still manage budgetary expenditures at the beginning of the year, particularly through the use of remaining funds in treasury accounts.

There was a possibility earlier that the IMF might postpone financing for Ukraine due to the delay in the decision on the allocation of US funds. The support program for Ukraine is comprehensive, involving not only the IMF but also the US and the EU. However, the decision to disburse funds by the Fund should not be interpreted as an increased likelihood of approval by the United States. Most likely, the IMF decided not to escalate tension on this issue, according to Vitalii Vavryshchuk, Head of the Macro Research Department at the ICU Group.

"In general, the IMF is in a situation where not approving a new review is simply impossible, despite the open questions regarding the volumes of international assistance for 2024. Postponing the consideration would increase tension and create a certain pessimism in Ukraine," said the expert.

Vavryshchuk sees the decision to disburse the tranche as the IMF's readiness to take on the risks that not all the planned government aid will come through for Ukraine next year.