In our society, there is a widespread belief that the International Monetary Fund (IMF) is highly conservative and reluctant to modify its lending policies. Additionally, it’s commonly thought that the IMF imposes numerous requirements for credit programs. However, developments in the IMF’s lending strategy and Ukraine’s relationship with the Fund, both in 2015 and currently, in the light of the latest agreements on the new Extended Fund Facility program (EFF), challenge this view of the Fund.
As with any international organization, the IMF operates based on predetermined rules agreed upon by its member-countries. Despite this, the Fund has made significant modifications to its strategy and program documents related to lending terms for member countries on two occasions since 2015. These changes enabled Ukraine to enter into extended lending programs during the challenging period of military aggression and significant uncertainty. Each financial program was meticulously planned and evaluated to consider the potential benefits for the recipient country and the associated risks of repaying the Fund’s loan funds
The Fund’s credit tools evolved along with the global financial system’s development, and its modernization accelerated after the financial crisis of 2008. The Fund’s financial assistance programs have since become the primary method for aiding distressed economies. These programs have helped to prevent crises by creating financial buffers, enhancing macroeconomic policies, and lowering the risk levels. The IMF has also extended loans to a group of low-income countries on preferential terms, including a zero percent interest rate.
The International Monetary Fund (IMF) tailors the objectives of its support programs to the specific circumstances of each country. However, these objectives are grounded in general principles such as restoring the equilibrium through external and domestic price adjustments, enhancing competitiveness and productivity by removing market constraints and implementing institutional, legislative, and structural reforms. The support programs typically entail fiscal adjustments, improving the coordination of fiscal and monetary policies, decreasing the ratio of debt to the overall economy, restructuring the banking and non-banking sectors, and reinforcing the banking supervision and regulatory systems.
The world economic crisis of 2008-2009
The 2008-2009 crisis taught the Fund a key lesson – to bolster its own financial resources to play a more significant catalytic role in promoting financial stability, sustainable growth, and market confidence. During the crisis and post-crisis period of 2008-2013, the IMF approved credit support totaling 420 billion SDRs (Special Drawing Rights) for around two dozen countries, with Ukraine, Greece, Pakistan, and Egypt receiving the largest programs. The programs designed for crisis prevention and recovery exhausted most of the total quotas. The IMF acknowledged that in the event of future crises, its remaining resources might not be sufficient to help other countries. Therefore, in 2016, the Fund’s member countries doubled the amount of quotas as part of the fourteenth general review, greatly increasing the Fund’s lending capacity during and after a global financial crisis. This review also enhanced the Fund’s financial foundation by limiting the share of temporary resources.
The increase in the Fund’s resources proved useful in 2020 when the IMF quickly responded to the economic fallout of the COVID-19 pandemic by providing extensive financial assistance and debt relief to member countries. This aid included credit and debt relief programs financed by the Catastrophe Containment and Relief Trust (CCRT). Overall, the IMF disbursed approximately $250 billion to member countries, equivalent to one-quarter of its current lending capacity of $1 trillion.
The Fund’s decision-making
As a rule, the Fund’s experts in the relevant departments are responsible for preparing changes to the lending strategy. Meanwhile, teams of IMF specialists from the appropriate regional department (in Ukraine’s case, the European department) handle funding programs for individual countries. Personnel recommendations are presented to the Board of Directors, comprising 24 offices, with each office represented by a major country or a group of countries and holding a specific percentage of votes. The United States, with the largest share of votes (16.5%), also has veto power on significant issues requiring 85% of votes for approval. Most matters, including funding program endorsement, require 75% of the vote. Nonetheless, the Board of Directors’ internal culture promotes decision-making through consensus or, in some cases, overwhelming majority voting based on the practice of engaging in preliminary discussions and seeking compromise on contentious matters.
The period from document submission to the Board of Directors to the voting process generally takes approximately two weeks. However, certain intricate matters may require more time for a thorough examination.
Changes to the Fund’s procedures after 2014
After the Revolution of Dignity and the start of military aggression by Muscovy, Ukraine experienced a significant external balance disruption and a loss of macroeconomic stability. In response, Ukraine requested assistance from the IMF. However, at the time, the Fund’s rules only allowed approval of programs for countries with overdue debt to private lenders (known as the lending into arrears policy, LIA). Unfortunately, the international community interpreted Ukraine’s $3 billion debt to Muscovy, which was received by Yanukovych’s government at the end of 2013, as sovereign or intergovernmental debt. Therefore, the IMF developed and approved expanding the lending strategy to include entities with overdue sovereign debt (known as lending into official arrears, LIOA). This new strategy was based on the need for quick financial assistance and the inability to wait for consent from all creditors regarding restructuring, and the principle of “good faith,” requiring the recipient to show a willingness to find an understanding with all creditors.
The development and approval of this strategy by the IMF Board of Directors enabled the launch of Ukraine’s extended lending program (i.e., EFF) in 2015. This program required Ukrainian authorities to implement macroeconomic policies and structural reforms to enhance the business climate, attract investments, and promote economic growth. The reforms covered a wide range of areas, including the energy sector, governance, anti-corruption measures, judicial system reform, deregulation, and banking reform. Following the second review of the program in September 2016, the IMF mission reported significant progress in restoring macroeconomic stability and implementing structural reforms despite challenging circumstances. The Ukrainian economy improved, and the terms of the program agreed upon with the IMF proved to be primarily favorable for Ukraine.
Despite Muscovy’s efforts to obstruct Ukraine’s cooperation with the IMF in terms of funding programs and voting against all programs with Ukraine since 2014, their actions were of a purely political nature, and their relatively small share (2.59%) in the total number of votes prevented Muscovy from influencing Ukraine’s cooperation with the Fund.
Changes to the Fund’s procedures in 2022
Following the onset of Muscovy’s invasion in 2022, the IMF extended financial aid to Ukraine through two short-term programs amounting to a total of $2.7 billion. The next Monitoring Program has served as a prelude to the Extended Fund Facility worth $15.6 billion, with a low-interest rate and long-term repayment plan, which received approval from the IMF’s Board of Directors on March 31.
The Fund had to make changes to its lending strategy in order to approve the program, since the existing approach did not allow for the approval of a comprehensive program and long-term credit to a country at war, where there are high geopolitical and economic risks. The changes made to the credit programs involved loan repayment guarantees, where the financing received from the Fund will be insured by official bilateral creditors and donor countries. These changes are designed to be applied in cases of high risks and uncertainties associated with external shocks and outside the control of the borrowing country’s authorities.
The primary objectives of the recently approved program are to address the balance of payments issues, restore the financial sustainability of the economy over the medium term, and secure financial assurances to the Fund from the primary creditor nations of Ukraine. The program is expected to “open the doors” to financial support from other sources.
As part of the program, the Ukrainian government is committed to continuing anti-corruption, judicial, and customs reforms. It is also required that the authorities review macroeconomic parameters to ensure they are more realistic and develop a medium-term revenue strategy based on these parameters. Additionally, the government must refuse direct financing of the budget deficit by the NBU. The National Bank will prepare for a gradual transition to a more flexible exchange rate policy.
The EFF program will greatly enhance Ukraine’s economic stability in times of war and provide direction for economic policy.
Attention
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