Prolonged war and financial shortages: How the IMF envisions Ukraine's future.
The financial and economic situation in Ukraine next year may be more challenging than it is currently, according to the IMF. If international aid falls short, the country will need to find resources internally. What could be the source of these funds, – investigated special correspondent of RBC-Ukraine Yuriy Doshchatov.
The scenario for the development of events in Ukraine, which the IMF considered negative last summer, has now become the baseline. It assumes the war will end in 2025, although in June the Fund viewed this possibility as occurring at the end of the current year.
This is stated in the updated memorandum of cooperation with the International Monetary Fund.
A new negative scenario with the war ending in 2026
According to the new negative scenario, the war will conclude by mid-2026. In this case, economic growth is projected at just 1% in 2024, and a decline in real GDP of 2.5% in 2025. Inflation is expected to rise to 12% this year, followed by a decrease to 10% in 2025 and 8% in 2026. This is despite the fact that the government planned the 2025 budget based on an expected GDP growth of 2.7% and inflation of 9.5%.
Increased defense needs will lead to a rise in the budget deficit in 2025 and 2026. To cover this deficit, an additional $35.7 billion will be required during this period.
"The updated cumulative financing gap in the downturn scenario is estimated at $187.1 billion, which is $35.7 billion higher than the baseline forecast for 2023–2027 ($151.4 billion). This necessitates additional steps to ensure debt sustainability," the memorandum states.
The need for funding can be met through increased external inflows and, of course, internal revenues.
Funding amounts will increase in 2025
Ukraine expects to receive $38.6 billion from international partners next year. In particular, from the European Union – $11.9 billion, EBRD – $3.1 billion, and from other allies – $19.1 billion.
The IMF has already increased the funding amount for 2025 by nearly $810 million and optimized the disbursement schedule. Instead of two tranches, Ukraine will receive four in the upcoming year.
Sources familiar with the negotiation process with the IMF say this adjustment was made to smooth out the inflow schedule a bit since initially, the loan amount planned for 2026 was larger than that for 2025. The increase in the number of tranches will ensure a more regular flow of international aid and reduce the risks of it being absent for several months, as was the case this year.
"When the EFF program was adopted in 2023, everyone was confident that the war would end in 2025, hence they planned a more intensive allocation of funds for 2023 – 2024. Whereas for 2025, there were only two reviews. Now there will be four," said the head of the Rada's finance committee, Daniil Getmantsev.
He also noted that the increase in the number of tranches will allow the Fund to impose more requirements on Ukraine and monitor their implementation more closely. Furthermore, Getmantsev connects the adjustment of the tranche schedule to funding from other partners.
"The IMF, in its updated forecast, assumes the continuation of the war throughout the next year. Therefore, it is also compelled to increase funding, albeit not proportionally to the EU and the USA. But this will be within the framework of the program (the program size for four years is $15.6 billion – ed.). To significantly increase funding from the Fund, the program needs to be completely revamped," said the deputy.
Promised funds are plentiful – guarantees are still lacking
As for funding from other external sources, the discussions on this matter are currently promising. The EU is finalizing work on providing Ukraine with a macro-financial assistance loan of up to €35 billion under the G7 initiative, secured by revenues from frozen Russian assets. The European Parliament and the EU Council have already approved this decision. The US is expressing readiness to provide Ukraine with up to $20 billion under the G7 loan framework. The UK has announced a loan of $3 billion for Ukraine. Decisions from other G7 participants – Canada and Japan – are also anticipated.
Considering that the US will provide up to $20 billion, along with amounts from the UK, Japan, and Canada, the loan amount from the EU may be less than €35 billion, since the total loan amount is limited to revenues from frozen assets, which is $50 billion. The conditions for obtaining these loan funds have not yet been defined – agreements will be signed with each lender separately.
Additionally, the Ukraine Facility program has been launched, with total support amounting to €50 billion by 2027. The US passed a law to support Ukraine for $61 billion back in April.
While there are many promises, it is difficult to predict which of them will be fulfilled and in what volume. "The risks of receiving external financing in full are present, but they are still less than last year (when the delay in financing was due to the lack of an approved US budget – ed.). The situation with the $50 billion loan from the profits of frozen Russian assets is moving towards its logical conclusion," Getmantsev noted.
He also does not rule out that the increase in funding from the IMF in 2025 might have been needed not just to safeguard Ukraine but also to provide additional motivation for other partners to increase support for the war-torn country.
If funds are insufficient – VAT may need to be raised
Ukraine's partners, for their part, are behaving cautiously, closely monitoring each other's actions. Neither the EU nor the US intends to take on inflated commitments – everyone wants to participate in aiding Ukraine proportionately. This is likely why decisions regarding lending to Ukraine were made almost simultaneously by Brussels and Washington.
However, if Ukraine is provided with financial assistance, creditor partners want the country to seek internal reserves for budget financing as well. This is clearly reflected in the latest version of the IMF memorandum. "To ensure budget execution, we will respond to revenue shortfalls or new expenditure requirements by increasing taxes. We consider raising the standard VAT rate as the most effective potential source of additional revenue at this stage," the Ukrainian side states in the document.
RBC-Ukraine has previously reported that raising the VAT by 2 percentage points to 22% was actively discussed during the revision of the IMF program. However, this has been avoided for now. But Ukraine has promised the Fund that the VAT rate will be raised if the situation does not develop according to the baseline scenario next year.
The head of the macroeconomic research department at ICU Group, Vitaliy Vavryshchuk, does not rule out that the demand to raise the VAT could arise sooner.
"Currently, raising the VAT is not part of the baseline scenario. But realistically speaking, the IMF may insist on raising the VAT in any case, to avoid having to do it in an emergency mode and retroactively, as was the case with the military levy," he commented to RBC-Ukraine.
Moreover, in the event of a negative scenario, a reintroduction of "certain currency control measures," which were previously applied during the war, may be required, as stated in the memorandum.
Sources from the publication familiar with the negotiation process say that this does not involve the introduction of a fixed exchange rate for the hryvnia. According to Vavryshchuk, it likely refers to restrictions on currency purchases and capital outflows abroad, for both legal entities and individuals.
"I believe that such measures may be introduced to reduce pressure on the currency market if external assistance is less than what is laid out in the baseline scenario. If reserves begin to 'melt,' then releasing currency out of the country as it is currently done will not be possible," he commented to the publication.
This is the forecast for the next year. Meanwhile, by the end of the current year, Ukraine expects to receive over two billion dollars from partners, including another IMF tranche of $1.1 billion in December. In total, of the $38 billion needed for 2024, according to the Ministry of Finance as of mid-October, $35.7 billion has already been received.