Ukraine has been allocated € 500 million from the European Union, president Poroshenko writes in a message on his Facebook page. It is the first tranche the country receives from the so-called ‘Macro-Financial Assistance‘ program of the EU, which was created to provide financial support to EU partner countries that have balance of payment problems.
President Poroshenko expressed his special thanks to Jean-Claude Juncker and Valdis Dombrovskis of the European Commission, referring to an agreement reached in Helsinki at the beginning of November. The Ukrainian president also emphasized that financial support from the EU is important to ‘send a signal to the Russian aggressor’.
The economy of Ukraine is not only struggling to recover from the crisis, it is also troubled with a high debt burden. The IMF and international partners of Ukraine therefore provide financial support to the country by providing emergency loans and grant. It is not yet clear whether this new tranche of €500 million from the EU is a donation or a loan, because according to the EU program both options are possible.
In a European Commission document published on June 29, 2018, we read that European countries were aware of the weak financial position of the Ukrainian government for some time. In the next part we read that the country still has too few reserves and that the government will have to pay off more than $12 billion in debt in 2018 and 2019 alone. The document states that the country could therefore get into financial problems. So the support package of € 500 million comes at a appropriate time for Poroshenko.
While Ukraine has managed to replenish its gross international reserves over the last 3 years, the process has been slower than initially planned by the IMF. With USD 18.8 billion at end-2017, reserves remain below their pre-crisis level and the level foreseen in the IMF programme (USD 22.3 billion by end-2017). Reserves could come under renewed pressure in 2018-2019, when the country is expected to make more than USD 12 billion in payments (interest and principal) on sovereign and quasi-sovereign external debt. This peak in debt repayments comes at the time of the presidential and parliamentary elections in 2019. In this context, the further replenishment of Ukraine’s international reserves seems necessary, and the EU’s additional MFA could usefully support this effort, both directly (through its disbursements) and indirectly (as a catalyst for private capital inflows and instilling confidence in the local currency).
Continued support from the IMF and Ukraine’s international partners, including the EU, therefore remains essential. Since the onset of the crisis, the USD 17.5 billion Extended Fund Facility programme for Ukraine approved by the IMF in March 2015 has been complemented by substantial support from Ukraine’s bilateral partners, including the EU. Other international financial institutions such as the World Bank, the EBRD and the EIB have also significantly scaled up their activity to support the country’s economic transition. However, as Ukraine’s economy remains fragile and exposed to a number of vulnerabilities, the IMF estimates that the country will face additional external financing needs in 2018 and early 2019. In this context, the Commission received a request from the Ukrainian authorities for additional EU MFA in November 2017.