By Olena Harmash

KYIV (Reuters) -An International Monetary Fund team began talks with Ukrainian officials on Tuesday as Kyiv looks for ways to increase revenue streams for its war-ravaged economy and plug the 2024 budget deficit, officials said.

The meetings in Kyiv, the IMF said in a statement, will “focus on the authorities’ fiscal policy plans for the remainder of 2024 and the medium term.”

The IMF has already released $3.078 billion to Ukraine this year under its $15.6 billion Extended Fund Facility program.

Ukraine’s finance ministry said the discussions would focus on preparations for the fifth review of the four-year lending program that could unlock the next $1.1 billion tranche.

More than 28 months since Russia’s invasion, the government faces a budget gap of between 400 billion hryvnias ($9.8 billion) and 500 billion hryvnias for this year, said Roksolana Pidlasa, head of the parliament’s budget committee.

Officials and analysts say the government plans to cover its budget deficit this year by raising taxes and increasing domestic borrowing.

“The IMF mission starts this week,” Yaroslav Zheleznyak, a lawmaker from the Holos party, said on the Telegram messaging app. “I think after that there will be news from the government on budget changes and tax increases.”

Ukraine’s 2024 budget allocates more than $40 billion – about half of its total expenses – to the defence sector, while the government relies heavily on international financial aid to cover social and humanitarian spending. 

The IMF is one of Ukraine’s major multilateral creditors, and its funds are a key part of about $37 billion Ukraine expects to receive in foreign aid this year.

The finance ministry said officials and the IMF agreed that policies in the financial area should focus on strengthening Ukraine’s internal capacity.

“In the first half of 2024, tax and customs revenues increased by 55% compared to the same period in 2023,” Finance Minister Serhiy Marchenko said.

“We have positive dynamics, but at this stage external financing continues to be critically crucial.”

The government has received about $16 billion from its Western partners so far this year, according to the finance ministry. Foreign aid totalled $73.6 billion between the February 2022 invasion and the end of 2023.

The invasion battered Ukraine’s economy, with millions fleeing the fighting, cities and infrastructure bombed, and supply chains and exports disrupted. The nation’s economic output tumbled by about 29% in 2022, but started recovering in 2023, with the economy growing 5.3% as businesses adapted to wartime conditions.

Ukraine’s government was forced this year to cut its economic growth forecasts to around 3% due to a growing energy deficit after repeated Russian missile and drone strikes on Ukrainian power facilities.

The government is also working against the clock to restructure its foreign debt, with payment moratoriums due to expire by Aug. 1.

(Reporting by Olena HarmashEditing by Tom Balmforth, Tomasz Janowski and Paul Simao)

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