Ukraine Braces for IMF Pressure to Devalue Currency, Cut Rates

Ukrainian officials are expecting the International Monetary Fund this week to push it to devalue its currency faster, cut interest rates and strengthen its tax-raising efforts to fill the country’s budget gap, according to people familiar with the situation.

IMF staff visiting Kyiv are expected to pressure the war-torn country to pursue those steps to continue receiving financial support, as they undertake a scheduled review of a $15.6 billion loan program, Ukrainian officials with the knowledge of the topic for preliminary discussions with the fund. They spoke before the meetings began on Wednesday and asked not to be identified as the talks are private.

The result of the review could unlock a $1.1 billion disbursement to Ukraine if the fund’s staff determines Ukraine is hitting program targets and has sufficient funds and policies lined up to meet its financing needs.

The National Bank of Ukraine, however, is reluctant to let the hryvnia weaken further. The currency has already lost more than 10% since October, when it ended a fixed-exchange rate imposed in the wake of Russia’s full-scale invasion. The move would challenge the central bank’s ability to maintain price stability, the people said.

A depreciation, as well as higher taxes, would also be politically damaging as the population is struggling with the fallout from a war with Russia.

The IMF, as well as Ukraine’s central bank and finance ministry, declined to comment.

Ukraine has relied on international support for weapons and financing to sustain its efforts to repel Russian forces, which invaded the country in February 2022. A surprise push by Ukraine’s military into Russia’s Kursk region has done little to tilt the war toward a resolution, with Russia dug into Ukraine’s east and raining down a punishing barrage of missile strikes across the country.

Ukraine’s government finances have been supported by about $122 billion in international assistance from the US, the European Union and other allies, as well as the IMF. But the nation still faces a $15 billion budget gap next year, which has not yet been filled by financial commitments from donors, according to recent estimates from the Prime Minister Denys Shmyhal.

To help plug that hole, the IMF plans to urge Ukraine’s central bank to devalue the hryvnia at a faster pace and ease its monetary policy amid moderate inflation, according to the people. These steps are meant to balloon Ukraine’s budget revenues in the local currency and make borrowing cheaper for the finance ministry.

In discussions before this week’s meetings, the people added, IMF also criticized the government’s plan to raise several taxes as being too lenient and urged President Volodymr Zelenskiy’s government to consider increasing a broader range of duties. One possible proposal is to raise the value added tax from its current 20%, they said.

On Tuesday, Ukraine’s parliament failed to pass legislation that would increase the so-called “military levy” on personal income and expand it to individuals doing business as well, reflecting the unpopularity of such steps among citizens enduring wartime mobilizations, government corruption concerns, regular blackouts due to airstrikes and higher power prices.

Separately, Ukraine is also slated to get further support from $50 billion in loans funded by profits from frozen Russian central bank assets. The Group of Seven, which is spearheading the effort, is aiming to get funds flowing by the end of the year, although the US and EU are still finalizing details.

Source:norvanreports.com