Western lenders may regret forcing Ukraine to turn to the IMF
Read more of our recent coverage of the Ukraine war War is tearing apart Ukraine’s economy. Last year the country’s GDP fell by 30%; a ballooning budget deficit forced the central bank to print billions of hryvnia and devalue the currency. On March 21st the IMF announced Ukraine would receive the seventh-biggest bail-out in the fund’s 79-year history.
The country is set to receive $15.6bn over the next four years through an emergency programme that may be approved by the IMF’s board (on which Russia has a seat) next week. Although a huge sum for the fund, this is still nowhere near enough for Ukraine. The country estimates that to continue financing the war this year, it will need $39.5bn more than it expects to receive from tax and aid, a shortfall equivalent to 9% of GDP.
The IMF is expected to release at most $5bn this year. The rest, it says, should come from the likes of America, Europe and the World Bank. Such donors have stumped up at least $34bn in grants and loans at cheap interest rates since the war began.
The hope is that the IMF’s involvement, which includes a stress test of Ukraine’s economy and its debts, will coax them into providing more. Even if Ukraine cobbles enough together to fill the gap, there is the matter of repayment. Borrowing from the IMF is expensive—more so than from other donors.
As a middle-income country, Ukraine has to pay a basic interest rate of 3.5%. Every time it receives a disbursement, the fund charges an additional half a percentage point for administrative costs. And because Ukraine is borrowing so much, it is liable for surcharges.
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