Ukraine and the IMF
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The International Monetary Fund (IMF) today approved a nine-month stand-by credit for Ukraine equivalent to SDR 598.2 million (about $867 million) to support the Government's 1996 economic reform program.
In October 1994, Ukraine embarked, with IMF support, on a reform program that brought about the unification of the exchange rate, the liberalization of many features of the exchange system, the abolition of price controls, and the increase in interest rates to positive levels in real terms. In the opening months of 1995, Ukraine realized the first benefits of its new policies in the form of lower-than-expected inflation, nominal exchange rate stability, capital inflows, strong export performance, and expanded private sector activity.
However, delays and slippages in policy implementation occurred during the second half of 1995. Credit was allowed to overrun program targets, budgetary subsidies to the enterprise sector were renewed, and there were delays in privatization and export liberalization. The negative impact of these slippages was quick to emerge: the karbovanets weakened on the exchange market, inflation surged, confidence eroded, and foreign financing in support of the program virtually ceased.
Against this background, the authorities adopted several corrective measures in late 1995 and early 1996, to try to bring the program back on track. These measures helped to stabilize the financial situation, in particular, to halt the depreciation of the karbovanets, and to reduce inflationary pressures.
In recognition of the fragile state of the economy, the policies formulated for 1996 aim at resuming the stabilization and liberalization of the economy. The key policy objectives are to reduce inflation to about 1-2 percent per month by the end of the year, to limit the decline of output, and to realize the country's economic potential.
To these ends, the program seeks to reduce the consolidated budget deficit to 3.5 percent of GDP in 1996 from 5 percent of GDP in 1995. Following reform of the tax system in 1995, most ad hoc tax exemptions will be removed, and new taxes will be levied to support the restructuring of the energy sector. On the expenditure side, the increase in budgetary wages will be regulated so that they do not exceed 80 percent of inflation; subsidies will be reduced; and several other programs will be adjusted or postponed in accordance with financial targets. Although Ukraine's Parliament adopted a budget deficit of 4 percent of GDP, the authorities are confident that they can contain public expenditure sufficiently to achieve the program's deficit target. Control over expenditure commitments will be facilitated by a new treasury management system that will help project cash flows and manage liquid resources through centralizing paying agents' funds. Monetary policy will be consistent with the objectives of lowering inflation and replenishing net international reserves. Ukraine's program in 1996 is expected to be supported by external financing official flows of about $2 billion from multilateral and bilateral creditors.
The Government intends to introduce further structural reforms in 1996 to create the conditions for a sustainable recovery in output. A number of measures have been taken to accelerate the auctions of state enterprises with the aim by the end of 1996 of privatizing at least 70 percent of the shares in a total of 5,000 medium and large enterprises. These include the streamlining of preparation procedures for privatization, the circulation of new privatization certificates to boost demand at auctions, and no official intervention in price setting at these auctions.
Price liberalization will also be deepened by halving the number of goods for which advanced declarations of price increases must be submitted to the Government. Competition policies for government procurement orders will be strengthened, and a land reform is expected to take place, including the introduction of a title registration system.
Addressing Social Costs
During 1996, the authorities intend to further improve targeting of their social protection policies. To these ends, improvements to the household budget survey will be made to better identify the segments of the population with the greatest need of protection. Already, steps are being taken to improve the efficiency of the recently introduced income-based housing subsidy scheme, limited to households where housing and energy costs exceed 15 percent of total income. Efforts will also be made to strengthen the pension system to make it sustainable, affordable, and more effective in providing benefits to the large number of pensioners.
The Challenge Ahead
Although the 1996 program will help to set the stage for future recovery of economic activity, many tasks remain to transform the Ukrainian economy into a market-oriented one and to achieve sustained growth. Chief among these tasks is the widening and deepening of structural reforms.
Ukraine joined the IMF on September 3, 1992. Its quota1 is SDR 997.3 million (about $1,446 million), and its outstanding use of IMF credit currently totals SDR 1,037 million (about $1,503 million).
Sources: Ukrainian authorities; and IMF staff estimates.
1. 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 allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT