IMF warns of possible adverse economic outcomes of peace settlement without credible security guarantees

An earlier end to the war unleashed by Russia against Ukraine could entail a potential upside scenario conditional on adequate security guarantees, international support as well as stronger reforms and growth, the International Monetary Fund (IMF) said in materials published on its website regarding the Seventh Review of the Extended Fund Facility (EFF) for Ukraine.

"A peace settlement without credible security guarantees and/or financial resources for reconstruction could lead to adverse economic and social outcomes, with lingering uncertainty holding back the return of refugees, the pace of reconstruction and resumption of foreign direct investment," the IMF said.

Reform fatigue and challenges to political consensus are vulnerabilities regardless of the evolution of the war, the experts said.

According to the materials, although risks remain extremely high, the program's baseline scenario sees the war ending in the final months of this year. The ongoing war, in particular recent large-scale attacks on gas infrastructure and the closure of a critical coking coal mine near Pokrovsk, pose headwinds that will slow growth in 2025.

According to the IMF materials, a key revision to the baseline scenario since the Sixth Review pertains to new information on the schedule of ERA disbursements. Recently concluded donor arrangements revealed a $50 billion disbursement schedule that is substantially more frontloaded than expected at the Sixth Review.

"2025 growth is now expected towards the lower end of the 2-3% range, mainly resulting from lower steel exports and higher coal imports due to the war-related closure of the Pokrovsk mine and from increased gas imports due to large-scale attacks on the gas infrastructure," the IMF said that this is 0.5 percentage points (pp) less relative to the Sixth Review.

Inflation is expected at 9% y/y by year-end (+1.5 pp relative to the Sixth Review), on the back of the recent acceleration and the likely persistence ensuing from the deterioration in household expectations.

The current account deficit excluding grants is forecast to widen relative to the Sixth Review (by 1.3 percent of GDP), to 15.9% of GDP and in absolute figure by $3.4 billion to $34.3 billion, reflecting higher gas imports as well as higher services imports due to increased uptake of services liberalization. The production suspension at the Pokrovsk coal mine further contributes to the trade balance deterioration while the outlook for agriculture exports remains positive, the IMF said.

International reserves are expected to end the year higher ($56.8 billion), reflecting frontloaded ERA disbursements, but the estimate of the public debt has also been increased by 5.7 pp to 110% of GDP.

The published updated program also included changes to the forecasts for 2026-2027. 2026 GDP growth has been revised down to 4.5 percent (-0.8pp) to incorporate the enduring impact of reduced coal production on net exports and delayed migrant returns in line with recent surveys. Revised migration estimates also drive an upward revision of 2027 GDP growth to 4.8 percent y/y.

By end-2026, inflation is now expected at 7 percent y/y, reflecting inertia from the 2025 acceleration.

The program's downside scenario maintains the assumption of a longer and more intense war winding down by 2026Q2. The revised scenario is calibrated to a comparable cumulative GDP loss over the projection period relative to the Sixth Review baseline, implying real GDP growth at -2 percent y/y in 2025 and -0.5 percent y/y in 2026. As in the baseline, the post-war period sees even lower refugee returns, compressing growth in 2027 to 3.8 percent y/y.

Under the downside scenario for this year, inflation is expected to be at 13%, the current account deficit at 16.9% of GDP, and foreign exchange reserves at $45.3 billion, decreasing next year to $28.5 billion.

The 2025 state budget deficit under this scenario is 23.6% of GDP versus 18.8% of GDP under the baseline scenario, and the state debt at the end of the year is 117.7% of GDP.