Each credit agreement between Ukraine and the International Monetary Fund (IMF) is accompanied by a memorandum. This is a document that describes in detail the economic realities of the debtor (which is Ukraine), as well as the obligations that our state has assumed before the Fund.
In general, the IMF is quite conservative about the prospects of the Ukrainian economy. The main problem is that Ukraine is deep in debt and will need hundreds of billions of dollars to eliminate the consequences of the war. And although the fund, together with other international partners, is ready to provide financial support, the Ukrainian authorities will have to make enormous efforts to mobilize domestic resources for the post-war recovery of the economy and create fertile ground for investment. Edition All discussed the main points of the memorandum with the IMF and what the new loan from the fund for $15,6 billion obliges Ukraine to do.
Main macro forecasts from the IMF.
Several dozen pages of the memorandum are devoted to the situation in the Ukrainian economy and the assessment of its key indicators. In general, the forecasting horizon covers the period up to 2030. However, since the program of cooperation between Ukraine and the IMF is designed for four years, we will analyze this period in detail.
- Acceleration of economic growth will begin no earlier than 2025. In 2023, according to the IMF's calculations, Ukraine's GDP will at worst fall by another 3% (after falling by more than 30% in 2022), at best it will symbolically grow by 1%. In 2024, GDP growth will be 3,2%, in 2025–2027 – 6,5%, 5% and 4%, respectively.
2. Inflation in 2023 (annualized) will be 20%, which is not much less than in 2022 (26,6%). The growth of consumer prices will reach its target level of about 5% per year no earlier than 2027.
3. The deficit of the state budget will be significant for quite a long time. For comparison, let's take 2021 as a starting point, when the budget deficit (excluding external grants) was 4% of GDP. In 2023, the deficit to GDP will be 28,2%, in 2024 - 22%, in 2025 - 12%, and only in 2026-2027 will it decrease to an almost pre-war level of 4,6-6,5% of GDP.
4. Due to such a deficit, Ukraine will, as before, be heavily dependent on external financing. In 2023, its share of GDP will be 19,8%, in 2024 - 17,7%, in 2026 - 9,5%. At the same time, according to IMF forecasts, in 2023, Ukrainian national debt will exceed the mark of 98% (in 2022 it was 82%), and in 2024 it will exceed 100% and will remain above this limit until 2027 inclusive.
5. The amount of tax revenues in the next few years will be in the range of 36–39% of GDP. The basis of the tax part of state budget revenues will be personal income tax and profit tax (10-12% of GDP), as well as consumption taxes, primarily VAT and excise duties (13-15% of GDP).
6. Foreign trade will remain deeply deficient. The negative balance of export-import of goods from $25 billion in 2023 will reach $35 billion in 2027. The reason is that imports will grow faster than exports. And all because it will take a lot of money and a lot of time to rebuild the destroyed factories. Therefore, according to IMF estimates, the foreign trade deficit will not be significantly reduced even by 2030.
7. Ukraine should not expect an investment boom, if the fund's calculations are to be believed. Foreign direct investment in 2023-2024 will be at best 0,4% of GDP, in 2025 - 2,4%, and in 2026-2027 will approach 5%.
The IMF's alternative "bad" scenario indicates that the state of the Ukrainian economy directly depends on how the situation at the front will develop. Moreover, if we proceed from the baseline scenario, on which all the above forecasts are based, the end or at least the cessation of hostilities should take place in the middle of 2024.
At the same time, the fund considers the risk of further escalation of the military conflict to be extremely high, which in turn will lead to a worsening of the macroeconomic situation. These are new destructions of production, disruption of logistics chains, stagnation of foreign trade, another wave of outflow of refugees abroad, complete freezing of investments (although they are, in fact, absent).
In this case, the second, unfavorable, scenario (downside scenario) for the Ukrainian economy may be realized. It consists in the fact that the fall in GDP will continue and in 2023 the collapse will reach 10%, and in 2024 - 2%. GDP growth of at least 4% is possible no earlier than 2027. Inflation in 2023 (annualized) will accelerate to 32,5%, and in 2024 it will be 20%.
State budget deficit in 2023 (excluding grant support) will increase to 35,4% of GDP, in 2024 it will decrease, but not much, to 32,2%. The need for external financing of Ukraine in 2023–2024 will be at the level of 21–22% of GDP. This is twice as high as in 2022.
The cumulative financing deficit under the adverse scenario will reach about $140 billion, which is about $25 billion more than the baseline forecast for 2023-2027. The IMF does not exclude that in this case extraordinary measures will have to be taken. These can be new types of taxes (surcharge to the current personal income tax rate, additional excise duties, etc.), as well as administrative intervention of the NBU in the domestic borrowing market, which will be manifested in the obligation of banks to buy a certain amount of government bonds to finance the budget deficit.
Therefore, the implementation of the second, unfavorable, scenario can postpone the recovery of Ukraine's economy for at least two to three years. And its dependence on external financing will grow even more, since the level of public debt may reach 2026% of GDP by 2027-150.
"Homework" from the IMF for Ukraine and its purpose.
Ukraine's commitments under the fund's new credit program are mostly focused on ensuring current and medium-term fiscal stability, as well as preparing the foundation for post-war economic recovery.
In particular, the Ukrainian side undertook, at the stage when active hostilities will decline, to take measures that will expand investment opportunities, strengthen the energy sector, allow a return to a flexible exchange rate, reduce dependence on external financing, and bring Ukrainian tax legislation closer to legislation of the European Union. The widespread fight against corruption as a "lighthouse" is also there. But this is a traditional clause that appears in every new memorandum.
Already before the summer, the parliament should vote on draft law No. 8401, the norms of which provide for the cancellation of the preferential rate at the level of 2% for payers of the single tax (it was introduced back in March 2022), the restoration of full-fledged tax audits and the return of fines for businesses for violations related to with the use of settlement transaction registrars (RRO) Also, the Cabinet of Ministers and deputies must solve the problem of accumulating tax debt, the share of which at the end of 2022 was 1,5% of GDP.
At the same time, the Ukrainian authorities assured the IMF that there will be no measures aimed "at reducing and undermining tax revenues" in the coming years. In other words, no reduced rates or benefits.
Moreover, the priority tasks of taking into account the filling of the state budget in the post-war period included plans to eliminate tax evasion practices using a simplified system (the so-called salary FOP), complete cleansing of the tax and customs authorities from systemic corruption, strengthening the fight against tax evaders (the Bureau should be reloaded economic security). A certain tax reform is also planned, which will allow "to balance the need to ensure the revenue base of the state budget with the interests of business and investors."
As early as 2023, Ukraine will move to medium-term budget planning, and when preparing the draft state budget for 2024, it will prepare a separate forecast of budget revenues and expenditures for 2025-2026. The national debt management strategy should be ready by September 2023.
In short, Ukraine undertakes to strengthen the domestic debt market, attracting not only banks (today they are one of the main buyers of OVDP), but also non-residents. The task is to prevent the emission and reduce the dependence of the state budget on foreign aid, replacing it with internal financing.
In parallel with this, the Ministry of Finance will prepare and submit to the Cabinet for approval the National Revenue Strategy for 2024-2030. This is a comprehensive document that will contain the main principles and directions of fiscal (tax, budget, debt) policy. The strategic goal is to accumulate all possible resources for post-war reconstruction.
You will have to do everything yourself.
The main conclusion that can be drawn after analyzing the memorandum with the IMF is that rapid economic growth after the end of the war should not be expected. At the same time, Ukraine needs to prepare for a long and difficult recovery. In more detail, the main results are as follows:
- The best scenario is a cessation of hostilities (or their freezing) somewhere in the middle of 2024, the worst is a protracted war that could continue for years and destroy the Ukrainian economy.
- Even with annual economic growth of 3–4%, by 2027 Ukraine will reach 75–80% of the GDP of 2021. That is, in five years we still will not be able to return to the pre-war state.
- Unfortunately, it is not worth counting on external investors. International aid (from the IMF in particular) is mainly intended to balance the state budget. At the same time, the volume of FDI, according to IMF estimates, will be in the range of $5–10 billion per year. This is very little considering that only the direct losses of Ukraine due to the war, according to estimates of the Kyiv School of Economics (KSE), reach almost $140 billion.
- It all boils down to the fact that the country will have to be rebuilt mostly on its own. Of course, the economy cannot be extracted from OGVZ alone. Therefore, there will be a strengthening of the role of the state apparatus, on the one hand (expansion of the powers of supervisory bodies), and an increase in fiscal pressure (increasing taxes) on the other. Moreover, it is likely that many tax innovations will be submitted under the pretext of the need to reform the tax system for Ukraine's accession to the EU.
