Russia’s invasion of Ukraine has prompted unprecedented levels of military assistance from the West. But Ukraine needs more than weapons: it needs a financial lifeline. The inadequacy of the international response has revealed that developed countries and international financial institutions (IFIs), including the International Monetary Fund (IMF), are not prepared to deal with the financial challenges and global impacts of such an affront to international law.
The IMF and other IFIs have designed their financing instruments to aid countries that have enacted bad but improvable economic and financial policies, have experienced an exogenous crisis against a backdrop of a semi-predictable future, need a relatively small amount of support, or temporarily lack a functioning government. Ukraine does not fit neatly into any of these categories, and its situation shows that the international community urgently needs new instruments for financial assistance.
Making Progress Before the Invasion
Before February, Ukraine was on a largely positive economic trajectory. Starting in 2014, Ukrainian leaders adopted a set of laws and policies supporting sound banking and financial systems. Ukraine’s debt was sustainable, and the country had a clear path to long-term economic growth. While many other countries had significantly increased their debt-to-GDP ratios during the coronavirus pandemic, Ukraine’s ratio had fallen below 50 percent in 2021. The National Bank of Ukraine (NBU) was successfully implementing inflation targeting and, after cleaning up the banking sector, took steps to improve oversight in the insurance segment of the financial market. Ukraine overhauled its anti-corruption institutions and enacted new policies to prevent corruption. Although there was still a lot of work to be done, Ukraine had made great strides since 2014 in implementing reforms aimed at preventing corruption.
This suite of reforms not only helped Ukraine receive multiple rounds of financial assistance from the IMF, United States, and EU, but they also brought Ukraine gradually closer to its long-held dream of EU candidate status. Moreover, these reforms greatly improved Ukraine’s national resilience. The government, NBU, and other state institutions continued to operate effectively once Russia’s invasion began on February 24, making important decisions within hours that enabled the country to sustain government operations and ensured stability in the banking sector.
The (So Far) Inadequate Response
In the days after the invasion, the government and the NBU began talks with international partners on the need for financing—after all, wars are expensive. The IMF was quick to provide Ukraine with $1.4 billion, and the EU provided a concessional loan of 600 million euros in March and the same amount in May. Both entities later slowed the disbursement of assistance, but the United States was effective and efficient in providing financing to Ukraine in the form of grants, which are better for the country’s debt sustainability.
According to the IMF’s April assessment, Ukraine requires $5 billion in monthly financial assistance from international partners, including the IFIs, to sustain government functions. But monthly aid has not reached this target. Moreover, the assistance committed so far has been disbursed in an irregular manner, hindering the government’s ability to budget responsibly. This then requires the NBU to continue directly financing the budget, which undermines Ukraine’s macroeconomic sustainability in the short and long run.
Despite the economic pressures, Ukraine continued to make payments to external creditors before bondholders agreed in August on a two-year freeze on Ukraine’s Eurobonds. However, the IMF did not extend a similar deferral, so Ukraine was on track to pay back more than it was receiving from the IMF in 2022. In October, the IMF provided an additional $1.3 billion under a new emergency financing instrument called the Food Shock Window. But the net effect on Ukraine’s fiscal situation is minimal: the IMF’s total 2022 financing to Ukraine—$2.7 billion—only marginally exceeds the $2.4 billion payment Ukraine had to make to the IMF.
Recognizing the inadequacy of the international financial response, in July, the NBU governor announced talks with the IMF on a new large program for Ukraine aimed at generating $15 billion to $20 billion of additional support. The government included the program in its budget for 2023, which was approved with an assumption that Ukraine will receive $38 billion in external financing next year to finance priority spending.
Wartime Ukraine Doesn’t Fit the IFI Mold
However, talks on the new IMF fiscal support program are slow. Countries seeking IMF support of any significance require a debt sustainability plan, which is not possible for Ukraine at the moment. Efforts to secure G7 guarantees for this concessional loan are also hardly promising so far. And the IMF’s long-standing reticence to deploy resources in countries at war has the perverse effect of punishing Ukraine for Russian aggression. The situation suggests that the IMF is unable to react fast enough to the unexpected economic hardship that Ukraine has found itself in, even though it is a lender of last resort for countries with macroeconomic and balance-of-payments problems.
On the ground in Kyiv and across Ukraine, the situation is increasingly urgent. Civil society organizations have added their voices to the request for international support. A consortium of Ukrainian NGOs known as #RRR4U, or Resilience, Reconstruction and Relief for Ukraine, sent a letter to the IMF with a plea to cut through the red tape and approve the new program.
New Tools for New Problems
But the civil society coalition also offers another idea: the IMF could consider the rapid creation of a new mechanism of support for situations like Ukraine’s, namely an “External Shock Facility.” Building on the template of the Food Shock Window, this mechanism could be offered when a country was implementing sound macroeconomic policies before an external shock; the country was then faced with a force majeure type situation, such as military aggression by a foreign power or a massive natural disaster; and the government is operational, effective, and ready to implement the required set of policies and comply with accountability principles. The program would be front-loaded with money, have streamlined conditionalities, and have long maturity with a grace period of interest payments.
Ukraine can serve as a pilot program for this new instrument. It then could be elaborated into a standard emergency support option to address other narrowly defined situations of externally driven economic crises that would otherwise challenge the IMF’s formal programs and typical requirements and conditions. It would help other countries in such difficult situations as the one Ukraine faces. The new IMF Program Monitoring with Board Involvement (PMB), for which there is only staff-level agreement, is a good start toward elaborating a sound macro-policy framework that has the potential to attract more support from international donors. But the PMB does not guarantee additional funding.
No Silver Bullets
Upgrading IFIs’ capacity to act as a backstop is not enough to keep Ukraine afloat. Ukraine also needs much more financial assistance from the EU, which has been slow, inadequate, and irregular in its aid, especially when compared to the United States.
As of October, Ukraine had received only 3 billion of the 9-billion-euro macro-financial assistance program approved at the beginning of the summer. The EU has promised to disburse only 3 billion more by the end of the year, despite previous EU commitments to provide the full amount by then. Last month, the European Commission proposed an 18-billion-euro package of support, consisting of regular monthly disbursements of roughly 1.5 billion euros for 2023. The European Parliament has greenlit the proposal, which now goes to the European Council for approval.
Ukraine urgently needs this regular and predictable financing, but if past experience is anything to go by, the road between statements, approval, and actual disbursements will be long, with many decisions and obstacles along the way. If disbursements are delayed, Ukraine might face a fiscal gap in early 2023, which would jeopardize priority spending areas such as social welfare and pensions.
It’s really expensive to fight a war against a larger, brutal aggressor. Ukraine’s GDP is expected to drop by about 30 percent in 2022, and tax revenues cover only half of the government expenditures. Ukraine appreciates all the support its international partners have provided, but it needs more financing—and stable and predictable disbursements. At the IMF/World Bank annual meetings in mid-October, Ukrainian officials had many meetings with foreign counterparts and IFI representatives, but so far, there are no firm new commitments or planned disbursements. Meanwhile, Ukraine’s military and society continue to fight for the fundamental principles of international law, and for the freedom that all people deserve. Ukraine is not the first country in such a predicament, and it won’t be the last one. Global financial institutions must be better equipped with the tools to respond.