Press Release: IMF Approves Stand-by Credit and Second STF Drawing for Ukraine
April 7, 1995The International Monetary Fund (IMF) today approved credits for Ukraine totaling SDR 1,246.62 million (about $1.96 billion) to support the Government's 1995 economic reform program. Of the total, the equivalent of SDR 997.3 million (about $1.57 billion) is being made available under a one-year stand-by credit, and SDR 249.3 million (about $392 million) is being disbursed as Ukraine's second drawing under the systemic transformation facility (STF). 1 The first drawing under the STF, SDR 249.3 million, was approved on October 26, 1994 (see Press Release No. 94/76).
The Government that took office in Ukraine in the summer of 1994 has acted with increasing resolve under the first STF program to come to grips with the deep economic crisis it inherited. Measures taken in the final quarter of the year--to contain a prospective explosion of the budget deficit, to limit the growth of credit to enterprises, and to begin liberalizing prices and the exchange and trade system--served to forestall a slide into hyperinflation and to prepare the ground for more radical action in 1995.
The record of policy implementation under the first STF program has been generally good, with most of the policy commitments eventually achieved and a tightening of financial policies that surpassed expectations. However, the persisting difficulties in the areas of inflation, the balance of payments, and economic activity highlight the magnitude of the economy's imbalances and of the structural impediments to a recovery in output.
The Program for 1995
The Government's program for 1995 seeks to build on the earlier measures with a view to achieving a swift and enduring reduction in inflation, liberating the economy's export potential, putting in place meaningful structural reforms, and normalizing financial relations with creditors.
Bringing inflation down from its current high level is seen as a precondition to re-establishing confidence, reversing capital flight, and allowing the system of prices to guide effectively the allocation of resources. The specific aim is to reduce monthly inflation to low single digits by the middle of the year, and about 1 percent by end-1995. The program also aims at limiting the decline in real GDP to 10 percent and at containing the deficit in the current account of the balance of payments to about $1.3 billion in 1995.
A tight fiscal policy is the key to achieving this objective. The state budget deficit is targeted to decline to 3.3 percent of GDP in 1995 from 8.6 percent in 1994, entirely on the basis of a reduction in expenditure, partly reflecting the withdrawal of government from operations that can be more efficiently discharged by the nongovernment sector. This includes the Government's substantial withdrawal from agricultural financing, the replacement of budget subsidies to the coal industry by a system of intra-industry transfers, and the curtailment of budget lending. Other measures of expenditure restraint include a strict wage policy in the budgetary sphere, cash limits in certain other areas, and further increases in public utility charges, housing rents, and energy prices to households in order to contain subsidies.
The monetary projections incorporated in the program support the policy goal of keeping the rate of monetary expansion substantially below the projected rate of increase in nominal activity in the first half of the year. The program envisages a policy of wage restraint to support the adjustment process and to limit the prospective increase in unemployment.
The program envisages implementation of structural reforms consisting of the removal of administrative controls and the provision of incentives for enterprises to innovate, enter new markets, and reduce costs. To these ends, the Government will substantially reduce price controls by the end of the year and will adjust prices for subsidized goods, continually reducing the level of subsidization. The program also includes the privatization through vouchers of about 8,000 medium and large-scale enterprises, as well as the majority of small-scale enterprises, by the end of the year. Sales to foreign investors, both through individually negotiated deals and through tenders of blocks of shares in the auction process, are also contemplated under the privatization program.
The program also envisages further reform of the trade system, with a view to removing all impediments to the promotion of exports. The government has already eliminated most export quotas, streamlined a preregistration scheme which limited exports, and will remove the export quota on grain in the course of the year.
Addressing Social Costs
The authorities attach paramount importance to protecting the most vulnerable social groups from the impact of the adjustment and liberalization process. The budget provides for an increase in spending on social protection by close to 2 1/2 percent of GDP. Existing benefits will be indexed to wage increases with, where necessary, a flattening of the pension-benefit structure to allow minimum incomes to keep pace with inflation. With assistance from the World Bank, a review of all social benefits will begin in 1995, including the design of measures to strengthen the pension and unemployment compensation systems.
The Challenge Ahead
The program that the Ukrainian authorities have launched represents a clear break with the past, both in its commitment to rigorous financial discipline and in the implementation of substantial structural reforms. However, the task of restructuring the Ukrainian economy and restoring the country's external viability goes beyond 1995 and will require continued adjustment measures, as well as external assistance over the medium term. The program has received pledges of support from the international community in the form of grants, credits, and debt rescheduling for a total of US$1.5 billion. This support will help Ukraine achieve its ambitious reform program and, at the same time, pave the way towards the normalization of relations with its creditors.
Ukraine joined the IMF on September 3, 1992. Its quota2 is SDR 997.3 million (about $1.57 billion), and its outstanding use of IMF credit currently totals SDR 249 million (about $391 million).
Sources: Ukrainian authorities; and IMF staff estimates.
1. The STF is a temporary IMF financing facility that provides assistance to member countries facing balance of payments difficulties arising from severe disruptions in their traditional trade and payments arrangements owing to a shift from reliance on trading at nonmarket prices to multilateral market-based trade.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.