Devaluation for credit? The IMF is putting pressure on Kyiv before a new round of loans

The International Monetary Fund (IMF) is putting pressure on the National Bank of Ukraine (NBU) to devalue the hryvnia, Bloomberg reported, emphasizing that the pressure may cause tension in Ukraine ahead of key talks on a new loan package.

According to Bloomberg, citing people close to the ongoing talks, the IMF argues that a controlled devaluation could help improve Ukraine's tense financial situation; budget revenues denominated in hryvnia would increase.

However, NBU officials oppose such a move, believing that it would increase the risk of inflation and negatively affect public sentiment. Since 2022, Ukraine has been repelling a full-scale Russian invasion, and its economy is dependent on Western aid.

Divergences over economic policy pose a potential risk as the government in Kiev seeks to obtain a new loan package from the IMF. Ukraine received most of the $15.6 billion from the IMF program negotiated in 2023, and the parties are currently negotiating a new package, the total value of which may reach $8 billion.

The talks took place in Washington this week, and a lower-level dialogue is expected next month, Bloomberg reported. The head of the IMF, Kristalina Georgieva, is planning a visit to Kiev that would help with the issue of additional funds.

However, the currency issue is causing additional tensions. Devaluation may result in an increase in nominal fiscal revenues because export contracts are denominated in foreign currency.

NBU representatives are reluctant to give in to IMF pressure, citing potential damage to the economy. The projected benefits are limited because Ukraine's budget relies heavily on direct international aid and devaluation could also trigger inflation.

Moreover, there would be political consequences. Ukrainian policymakers have long been cautious about devaluations, and the public is sensitive to price fluctuations caused by financial crises that occurred before Russian aggression. With no end to the war in sight and fatigue growing, political leaders would be reluctant to agree to such a step, Bloomberg reported.

The NBU declined to comment to Bloomberg due to the period of silence before the decision on interest rates, which will be made next week; the IMF also refused to comment.

Ukraine's central bank suspended the floating exchange rate shortly after Russia's full-scale attack in February 2022 to prevent a sharp decline in the value of the hryvnia. Two years ago, after the IMF finalized the aid package, the NBU allowed the exchange rate to fluctuate within a narrow range. Since then, the hryvnia has lost about 13 percent. value against the US dollar.

However, this is currently not enough for the IMF, which has made the unprecedented decision to grant a loan to a country at war. The 2023 agreement was reached after the G7+ offered debt repayment assistance in the event that Ukraine was unable to do so.

For Ukraine, cooperation with the IMF remains an anchor of economic policy as the war with Russia continues for a fourth year and the country faces the difficult task of raising money to cover its budget gap next year, Reuters reported.

The government has prepared a draft budget for 2026, which assumes a deficit of over 18%. GDP. Finance Minister Serhiy Marchenko estimated the gap in next year's budget at approximately $18 billion. (PAP)

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