Budget will compensate for war prolongation in 2025-2026 by financing at expense of Russian assets – updated program with IMF

The Extended Fund Facility program of the International Monetary Fund for Ukraine, updated during the fifth review, is based on the baseline scenario assuming the end of the war at the end of 2025, which will require additional financing of $32 billion, and it will be covered by $33.1 billion of the G7 initiative Extraordinary Revenue Acceleration (ERA) for Ukraine using revenues on frozen Russian assets.

According to the updated program materials published on the fund's website, of these $33 billion, $19.1 billion will be needed next year, $9.2 billion in 2026, and $4.9 billion in 2027.

It is specified that the total official financing needs after $36.1 billion this year are estimated at $35.7 billion next year, $19.1 billion in 2026, and $5.4 billion in 2027, of which the EU will provide $13.7 billion, $7.9 billion, and $600 million under the Ukraine Facility, respectively, compared to $17.5 billion this year.

The IMF will additionally provide $2.7 billion under the program in 2025, $1.9 billion in 2026, and $1.1 billion in 2027, compared to $5.3 billion this year.

According to the presented model, this will increase Ukraine's international reserves from $42.6 billion at the end of this year to $44.9 billion next year and $49.1 billion in 2026.

The revised negative scenario assumes the war ends in mid-2026, and it will require the entire $50 billion of the ERA initiative to be spent on the state budget. In it, with the same IMF financing, the estimate of the required funds from other external partners is increased from $42.6 billion this year to $43.2 billion next year, $35.6 billion in 2026, and $10.6 billion in 2027.

It is assumed that after the fall of international reserves in the fourth quarter of this year from $38.9 billion to $33 billion, this will allow them to increase next year to $35 billion and in 2026 to $40.5 billion.

The negative scenario assumes a decrease in Ukraine's GDP next year by 2.5% after growth of 1% this year, its stabilization in 2027 and growth of 4% only in 2027, while in the baseline scenario, growth next year will be 2.5-3.5% compared to 3% this year, after which it will accelerate to 5.3% in 2026 and slow down to 4.5% in 2027.

"This review focuses on updating the program scenarios and adapting macroeconomic policies to reflect a longer war and major developments on external financing, while continuing to restore sustainability and medium-term external viability," the report says.

"Staff assesses the residual strategic risk of the war extending beyond the revised duration assumptions as high, albeit lower than the level of risk at the time of the fourth review," it said.

"Electrical outages persist following repeated attacks on electrical generation capacity since the spring. Mobilization is tightening labor markets, 10.3 million people remain displaced, either internally or as refugees, and food insecurity affects a fifth of the population. The maintenance of overall stability largely reflects the authorities’ strong commitment to economic stability and adherence to policies under their IMF-supported program, the continued adaptability of firms and households to wartime conditions, and the prompt provision of large-scale donor financing," it reads.

"The G7 intends that Ukraine bear no financing burden from the financing provided under the ERA initiative," it says.

According to IMF estimates, frozen Russian assets and income from them will be sufficient for this.

Ukraine notes in its materials that since the start of the program in March 2023, it has already received $57.9 billion in external support, of which $24.6 billion from the beginning of this year to September 17, and expects to receive an additional $16.8 billion by the end of the year.

It is specified that firm commitments to finance for the next 12 months of the EFF program, through September 2025, have been received in the amount of $36.4 billion (excluding IMF financing), including $11.7 billion under the ERA initiative.