Ukraine evaluates a contingency plan in the face of the blockade of US aid

Volodimir Zelensky’s government insists on the importance of the West not cutting its financial and military aid to Ukraine (REUTERS/Alina Smutko) (ALINA SMUTKO/)

Ukraine is studying a plan – including increased sales of national bonds, tax hikes and spending cuts – to plug a hole in its budget in an attempt to get money from the International Monetary Fund if crucial American aid remains blocked.

Ukrainian officials intend to propose the plan to the IMF during a staff visit to kyiv next week, according to people familiar with the matter, who asked not to be identified discussing private deliberations. The measures are necessary to guarantee the IMF that Ukraine can meet its debt service in case the allies do not provide helpa condition of its $15.6 billion lending program.

IMF staff, led by the head of the Fund’s mission in Ukraine, Gavin Gray, will visit kyiv for three days starting February 12, ahead of official talks on Ukraine in neighboring Poland, the people said. The visit comes ahead of a review of the IMF’s lending program, which will begin later this month and would unlock a $900 million tranche of aid.

Ukraine has offered to discuss an “action plan” with the IMF in case foreign aid is cut off, the Central Bank said in a comment emailed to BloombergNews. It still expects aid to resume “in the coming months,” and the IMF shares this view, according to the statement.

“The measures envisaged in Plan B are currently being discussed and will potentially include the activation of the national loan market, fiscal optimization and consolidation”noted the Central Bank, adding that it hopes that the next IMF review will be successful.

The IMF declined to comment.

President Biden is pressing for the US Congress to approve the funds requested to help Ukraine confront the Russian invasion (Europa Press/Contact/Adam Schultz/White House)
President Biden is pressing for the US Congress to approve the funds requested to help Ukraine confront the Russian invasion (Europa Press/Contact/Adam Schultz/White House) (Europa Press/Contact/Adam Schul/)

Although Ukraine is meeting its obligations, the Finance Ministry and the Central Bank believe there is a risk that the IMF board will not approve the next loan disbursement without the fiscal plan if US funds remain blocked, a Ukrainian official said. kyiv is scheduled to receive $5.3 billion from the IMF program this year.

The main source of funds to replace those from the United States would be an increase in domestic public debt, according to the official. Ukrainian banks are flush with liquidity, and the government expects them to continue investing the cash, which they refrain from lending due to war risks, in high-yield government bonds.

This could bring in at least $5 billion in revenue this year, according to the official. The government could also raise taxes or reduce spending if necessary, according to the official.

More than $60 billion in funding for Ukraine requested by President Joe Biden, most of it for weapons, have been blocked in Congress. The US Senate showed its support for war aid to Ukraine and Israel in a test vote on Thursday. However, some House Republicans staunchly oppose aid to Ukraine and others want to revive efforts to link it to the adoption of measures to stop an unprecedented wave of migration across the US border.

The Washington-based IMF last year approved the four-year loan for Ukraine, the first time it has lent to a country at war. The program was coordinated with the European Union, the United States and other Group of Seven countries, which pledged financial aid to cover kyiv’s budget deficit.

The IMF Executive Board approved the disbursement of $900 million to Ukraine in December, and urged other countries and lenders to fulfill their promises, which last year amounted to $122 billion. An EU package worth 50 billion euros ($55.6 billion) was finally approved last week.

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