The International Monetary Fund has warned that Ukraine’s ability to absorb further economic shocks is rapidly diminishing as the war with Russia enters its fourth year and reform momentum in Parliament slows. In its latest staff report released on June 20, the IMF said the country’s macroeconomic stability had been preserved through “skillful policymaking and substantial external support”, but risks remain “exceptionally high”.

“The current four-year programme has limited time to absorb further shocks – including from a more prolonged and intense war – while still being able to implement the policies needed to achieve medium-term external viability,” the IMF said.

The IMF's baseline scenario assumes the war in Ukraine will end by the end of 2025 and if peace is reached Ukraine's economic growth will rise to 4.5% in 2026. However, Ukraine needs guarantees and resources for economic growth.

Under this base case assumption, the Fund intends to cut Ukraine’s debt to GDP from 100% to 65% by 2033. “But in the downside scenario of the war extending to 2026, at least, the target ratio stays above 100% with the Fund suggesting that there would then need to be a second debt treatment in 2026-27. That now seems more like the base case,” said Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London in a note.

The Fund has maintained its 2025 growth forecast for Ukraine at 2-3%, citing improved electricity availability but noting headwinds from lower gas production and weaker agricultural exports. Inflation is expected to decline to 9% by the end of the year. Yet the IMF warned that fiscal and debt sustainability depends on “continued decisive efforts to implement the National Revenue Strategy”, including tax and customs reforms, and enhanced revenue collection.

"A peaceful settlement without reliable security guarantees and/or sufficient financial resources for reconstruction and defence could lead to adverse economic and social consequences," the IMF warns.

More uncertainty will hinder the return of refugees, the pace of reconstruction, and the resumption of badly needed foreign direct investment, the IMF warned.

The negative scenario still assumes an end to the war in the second quarter of 2026, which has become more likely as ceasefire talks are currently dead in the water and Russia is, if anything, ramping up its summer offensive with renewed missile and drone barrages.

The updated IMF forecast indicates that the primary negative impact would occur in the third quarter of 2025, leading to a 1% decline in real GDP in 2025 and zero growth in 2026. Ukraine's financing needs are expected to increase by $12.4bn as a result.

“If we are also in the downside scenario the Fund will need to come up with additional financing assurances to fill likely financing gaps caused by the extended war but also by doubts around US support. There is also a looming risk to the $50bn Extraordinary Revenue Acceleration (ERA) facility that underpins the EFF and is funded from the interest flow on immobilised CBR assets,” says Ash. Currently the ERA is paying out around $1bn a month to Ukraine.

A key date is coming up at the end of July, when EU sanctions on freezing the $300bn of Central Bank of Russia (CBR) assets needs to be renewed, and currently it says it will block the renewal – unanimity is needed within the EU for this decision.

“Russia could get the underlying assets back, which would leave either a huge financing gap for Ukraine or G7 countries on the hook to fill the void, as there would be no assets from which to secure an interest stream,” says Ash.

EU foreign policy chief and former Estonian Prime Minister Kaja Kallas has said that she has a Plan B to work around the Hungarian veto, which may involve trying to strip Budapest of its voting rights. However, if this fails and the $300bn of CBR frozen assets is returned to Russia then that leaves the EU obliged to make the payments on the G7 $50bn loan to Ukraine, approved on June 13 at a G7 summit in Italy, that makes up the ERA mechanism.

$500mn tranche

The IMF Executive Board approved an additional tranche to Ukraine under the Extended Fund Facility (EFF) on July 1. As a result, Ukraine has already received the ninth tranche of approximately $500mn under the programme. In total, payments under the programme amount to $10.6bn out of the planned $15.5bn for 2023-2027. 

"The IMF noted the progress of the Ukrainian side in fulfilling the conditions of the EFF programme as of the end of March 2025. The Ukrainian economy remains resilient, and the programme implementation indicators stay high, despite the full-scale war," the Ministry of Finance stated. 

The new tranche will be used to cover priority budget needs. It is worth noting that, at the request of the Ukrainian authorities, the ninth and tenth reviews of the EFF program, originally scheduled for the end of August and early December this year, have been combined into one ninth review, set to take place in the fourth quarter of 2025. 

The IMF clarified that Kyiv explained this by the desire to align the IMF's financing with Ukraine's expected balance of payments needs and to allow more time to advance reforms. As a result, the combined 10th tranche from the IMF program will now total $1.6bn.

IMF programme on track

“As I have long argued, the way the IMF accounts for Ukraine’s financing needs is very blinkered. They just look at budget and BOP financing needs, not the total cheque in terms of Western financial support needed to keep Ukraine in the war,” says Ash. “I would concur with the IMF in that the budget and BOP financing needs amount to around $40bn a year. Indeed, the Fund uses the figure of $153bn for the duration of the four-year programme, so $38.25bn per year. It rises to $165bn under an extended war scenario. But this is only a partial view of what Ukraine needs to keep it in the war – in terms of Western military, budget and balance of payments support.”

The Kiel Institute’s Ukraine support tracker estimates that from January 2022 to the end of April 2025 the total support from Europe, the US, Japan, Canada et al has come in at €287.5bn ($339.25bn), plus around another $20bn in multilateral financing to a total of around $360bn.

“Give or take, that is around $100bn a year for the West to keep Ukraine in the war, and not the $40bn mentioned by the IMF. Actually as I have argued, to ensure a Ukrainian victory we actually need to increase funding of Ukraine to $150bn a year, or just over $12bn per month,” says Ash.

In the meantime, Ukraine met all end-March quantitative performance criteria under the Extended Fund Facility, including targets for fiscal performance, tax revenues and international reserves. However, the Fund noted slippages in structural and governance reforms, particularly where legislative action was required. “Fiscal structural and governance reforms have been subject to delay, especially where requiring legislative action,” IMF staff stated.

A supplementary budget has been introduced for 2025 to accommodate higher defence spending, raising the overall fiscal deficit projection to 22.1% of GDP. “Any further shocks will require fully counterbalancing measures,” the Fund said, adding that even under the revised plan, deposit buffers have been eroded. External debt has been rising steadily and is expected to top 100% of GDP this year.

On the monetary side, the IMF endorsed the National Bank of Ukraine’s tight policy stance. Annual inflation in Ukraine accelerated to 15.9% in May, marking its highest level this year as food prices surged, data from the State Statistics Service showed on June 9. Interest rates on bank loans in Ukraine could return to 2024 levels of 17-18% per annum in the second half of this year, provided that macroeconomic conditions remain favourable, say experts.

“Given still elevated inflation, the tight monetary policy stance is appropriate, and the NBU should stand ready to tighten further should inflation expectations deteriorate,” the report said.

The IMF also highlighted continued risks to financial sector stability, urging authorities to complete the updated bank resilience assessments and address governance weaknesses in the securities regulator. Ukrainian banks have posted a cumulative profit of nearly UAH255bn ($6.1bn) since the beginning of Russia’s full-scale invasion in 2022, according to the NBU, and remain profitable for now, but more work on the sector is needed.

“Operational and governance weaknesses in the security markets regulator need to be tackled urgently,” the Fund said.

In the longer term, the IMF called for structural reforms to support reconstruction and EU accession. “Sustained progress in anticorruption and governance reforms remains crucial,” it said, citing the need for criminal code amendments and further institutional strengthening.

The IMF concluded that, despite robust international support, Ukraine’s programme is “running out of space” to handle additional economic stress.