Financial aid for Ukraine critical

As the crisis worsens in Ukraine, humanitarian and security aid is flowing into the country, but financial support to keep the government running also is critical.

The International Monetary Fund (IMF) board on Wednesday approved a US$1.4 billion emergency package for Kyiv, which it said would provide "critical financial support" needed to "mitigate the economic impacts of the war."

"The economy is collapsing," said Adnan Mazarei of the Peterson Institute for International Economics, a think tank based in Washington.

With Kyiv unable to access tax revenue, "it is absolutely crucial for the international community to provide quick assistance not only for humanitarian purposes, but also to keep some of the basic government functions," he said.

And with a flood of refugees leaving the country in the face of Russia's invasion, often taking their savings with them, the banking sector also needs support, Mazarei said.

IMF Managing Director Kristalina Georgieva warned of a "deep recession this year" on top of the severe human suffering.

The invasion "has been responsible for a massive humanitarian and economic crisis... and immense destruction of infrastructure and productive capacity," she said in a statement.

The World Bank on Monday released nearly US$500 million of what is expected to be a US$3 billion package of aid, dubbed the "Financing of Recovery from Economic Emergency in Ukraine," or "FREE Ukraine."

And Washington is expected to release US$13.6 billion in aid this week, of which US$1.8 billion is earmarked to ensure "continuity of government," prevent cyberattacks and support the energy sector, according to the bill introduced in the US Congress.

These sums are significant compared to the size of Ukraine's economy, valued at US$155.5 billion at the end of 2020, according to World Bank data.

Growth

The IMF said Ukraine cancelled the existing US$2.2 billion standby program that was due to run through June, and will shift focus to an "economic program aimed at rehabilitation and growth, when conditions permit."

The new IMF funding, under its Rapid Financing Instrument, fast-tracks aid and imposes few conditions.

The aid should catalyse "the large-scale mobilization of additional concessional financing that will be required to help fill the financing gap and mitigate the economic impacts of the war," Georgieva said.

"Once the war is over and a proper damage assessment can be performed, additional large support is likely to be needed to support reconstruction efforts," she said.

But experts caution that the aid likely will not be enough to avoid a major economic crisis in the country which even before the Russian invasion was among the poorest countries in Europe.

"The flows of money can never really replace the losses in output," said Homi Kharas, an economist at the Brookings Institution in Washington, noting in particular the shutdown of trade.

"Money can help to reduce the impact of that a bit, but certainly will not be able to offset it."

Mazarei said the international community needs to prepare for the post-conflict period and the impact of the war on neighbouring countries as well.

"Even when this war stops, even if the Russians just turn around and leave, there is a huge issue of the reconstruction of Ukraine," he said. -AFP