The executive board of the International Monetary Fund (IMF) has approved a $5bn, 18-month Standby Arrangement (SBA) to Ukraine.

"The new programme aims to help Ukraine to cope with COVID-19 pandemic challenges by providing balance of payments and budget support, while safeguarding achievements to date and advancing a small set of key structural reforms, to ensure that Ukraine is well poised to return to growth when the crisis ends," the IMF said in a statement on June 9.

Ukraine’s track record in stabilising the economy over the last five years "has been strong", the multinational lender added. However, more reform efforts are needed to ensure robust and inclusive growth. The outbreak of the coronavirus (COVID-19) pandemic has significantly worsened the outlook and has refocused government policies on containment and stabilisation.

"Uncertainty is large, and the economy is projected to contract sharply in 2020, as strict containment measures – in Ukraine and globally – led to sizable falls in domestic and external demand. The 2020 budget is expected to be hit hard, with a sharp decline in revenues and large emergency spending needs to address the crisis. This has created large balance-of-payments and fiscal financing needs. The new arrangement succeeds the 14-month SBA that was approved in December 2018, which was focused on maintaining stability during the election year," the IMF added.

Policies under the new arrangement will focus on four priorities: mitigating the economic impact of the crisis, including by supporting households and businesses; ensuring continued central bank independence and a flexible exchange rate; safeguarding financial stability while recovering the costs from bank resolutions; and moving forward with key governance and anti-corruption measures to preserve and deepen recent gains.

Kristalina Georgieva, managing director and chair, said in a statement that the humanitarian and economic crisis stemming from the COVID-19 pandemic had refocused policy priorities away from deep structural reforms.

"The new SBA will provide an anchor for the authorities’ efforts to address the impact of the crisis, while ensuring macroeconomic stability and safeguarding achievements to date. Together with support from the World Bank and the European Union, it will help address large financing needs. [It] will focus on safeguarding medium-term fiscal sustainability, preserving central bank independence and the flexible exchange rate, and enhancing financial stability while recovering the costs from bank resolutions," she said.

"Concerted reform efforts aimed at tackling corruption and strengthening governance will be critical to ensure macroeconomic stability and achieve sustainable and inclusive growth."

At the same time, the IMF's head believes that the risks to the new programme "are very large". "The uncertainty about the severity and length of the global downturn is exceptionally high. On the domestic side, uncertainty about the direction of economic policies remains substantial."

Georgieva added that Ukraine's public debt remains high and government financing needs are large. While fiscal policies under the programme will initially be directed at addressing the impact of the crisis, fiscal policy will need to be tightened as the recovery sets in, to set public debt back on a downward path.

The National Bank of Ukraine (NBU) has "skilfully" managed monetary policy during a very challenging period. Central bank independence should be preserved, and monetary and exchange rate policies should continue to provide a stable anchor in the context of the inflation-targeting regime, while allowing orderly exchange rate adjustment and preventing liquidity stress," she added.

Financial policies should strike a balance between preserving financial stability and assisting the recovery. "Full and timely implementation of policies under the Fund-supported programme will be critical to mitigate economic risks and lay the ground for stabilisation and recovery," the IMF's head believes.