IMF's massive $15.6b loan to Ukraine will be its first to a country at war

IMF approves massive loan to Ukraine as Pakistan struggles with tough conditionalities to secure staff-level agreement

The International Monetary Fund (IMF) approved a $15.6 billion loan to Ukraine earlier this week, the first time the global lender extended assistance to a country at war, as Pakistan still struggles to fulfil challenging conditions to secure financing from the Fund.

“The Ukrainian authorities and IMF staff have reached a staff-level agreement on a set of macroeconomic and financial policies that would be supported by a new 48-month Extended Fund Facility (EFF) Arrangement," the IMF said in a press release on Tuesday.

The announcement for the extension of $15.6 financing to the war-torn Western ally came the same day Pakistan barely averted default on fuel purchase payments to Kuwait — a difficult move for the government that might create problems in other areas because of the country's efforts to keep the overall expenses within the limits agreed with the IMF to resume its $6.5b bailout programme.

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Under a deal with the IMF, Pakistan is committed to either slash expenditures equal to a supplementary grant or levy additional taxes of the same amount—just one of several tricky conditions set by the global lender for the crisis-hit country.

But financing to the tune of $15 billion has been relatively easy for Ukraine, allied with the US and Western powers, despite its ongoing military conflict with neighbouring Russia and resulting uncertainty of its ability to pay back its loans.

The global lender has now even struck down its own rules to assist Ukraine—providing financing to a country at war.

“I guess in its entire history – almost 80 years – the IMF hasn't made loans to countries at war. Why do you think they change now?" asked NPR's Scott Simon in a recent interview with Scheherazade Rehman, professor of international finance at the George Washington University.

“You know, a rule of banking lending is simple. War poses a risk to the lender, including the IMF, and so they have not done that. This rule change was obviously, you know, politically motivated,” said Rehman.

“They basically said they can now lend - there's a new loan program - for countries facing exceptionally high uncertainty. Now, Ukraine was not mentioned at all in this rule change, but clearly, it is targeted for exactly this loan,” added the professor.

Also read: IMF says Pakistan needs to overcome trust deficit

She said that the global lender is known for attaching tough conditions, and that it was unlikely for Ukraine to be able to fulfil any such requirements given the military conflict and its economic situation.

“When they lend money, as you well know, the country's already in trouble, and they come with very harsh conditionalities. Everybody is fully cognizant that they're not going to be able to do that, not until this war is over," said Rehman.

The IMF's loan package for Ukraine aims to support the country's efforts to stabilise its economy and improve its fiscal position amid the ongoing war with Russia and its supported separatists in its eastern region. The conflict, which began in 2014, has led to the displacement of over 1.5 million people and has caused significant damage to the country's infrastructure and economy.

Professor Scheherazade Rehman said the financing is a humanitarian lifeline for Ukraine to keep a government in place, with “the eventual goal of, when things go back to a new normal, after the war, they will anchor their policies in sustainable financial policies and have a gradual economic recovery and promote long-term growth”.

But the IMF's decision to extend financial assistance to Ukraine in such dire conditions is in stark contrast to its attitude toward countries like Sri Lanka and Pakistan, who continue to struggle to secure financing from the global lender.

Sri Lanka has been seeking a loan from the IMF since 2016 but has faced challenges due to its high debt levels and concerns over the country's economic policies.

Pakistan, meanwhile, has had to undergo several rounds of negotiations with the IMF in recent months but is yet to secure a staff-level agreement on resuming desperately needed financial assistance from the global lender.

Speaking during the NPR interview, Professor Rehman pointed out the stark contrast in the global lender’s treatment of different countries.

“I believe the EU and the US are so committed to making sure that Ukraine succeeds that the funding will continue," she said.

"The loan has not been noncontroversial… criticism has come in several forms – one that we've heard many times before. There have been many countries at war, and during this time, they have never done this. And the size of the loan is huge. And so, you know, the usual criticism is that it's a Western country, unlike a country, say, in South Asia."