Ukraine and the IMF
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The International Monetary Fund (IMF) has approved a one-year stand-by credit for Ukraine, equivalent to SDR 398.92 million (about US$542 million), to support the government’s 1997-98 economic program. Of the total, SDR 36.27 million (about US$49 million) is available immediately.
Ukraine made considerable progress in stabilizing the economy under its 1996 economic reform program, supported by a stand-by credit from the IMF. Inflation was reduced rapidly, and for the first time since independence, a measure of stability was achieved, even though real GDP continued to decline. Progress was also made on the structural front in privatization, price liberalization, and trade liberalization. In addition, in mid 1997, VAT and enterprise profit tax reforms were introduced.
The authorities had intended to follow this stabilization effort with a comprehensive three-year macroeconomic and structural adjustment program that could be supported by the IMF under the Extended Fund Facility (EFF). However, domestic consensus could not be reached on several key elements of the program, and internal discussions continue on the details of a program that could be implemented in 1998 and beyond. Nevertheless, during the first half of 1997, the authorities followed the spirit of the proposed EFF program, implementing monetary and fiscal policies in line with specified internal targets.
The 1997-98 Program
The key objectives of the 1997-98 program, supported by the current stand-by credit, are to lay the basis for the resumption of economic growth through structural reforms, consolidate the gains already achieved, further reduce inflation, and strengthen the external reserve position of the National Bank of Ukraine. The program aims to reduce inflation from 40 percent during 1996 to 15 percent during 1997 and to 12 percent during 1998. The fall in output is projected to level off in the second half of 1997, partly because of an expected recovery of agriculture, and to record modest growth in 1998. The program also aims to increase gross international reserves from the equivalent of 5.2 weeks of imports of goods in 1996 to 6 weeks of imports in 1997, and to 7.4 weeks of imports in 1998.
To achieve these objectives, the consolidated budget deficit will be limited to 4.6 percent of GDP in 1997 and 4.5 percent of GDP in 1998. After adjusting for the arrears accumulation in1996 and net payments of arrears in 1997 and 1998, the underlying budget deficit will be reduced from over 6 percent in 1996 to 4.3 percent in 1997 and 2 percent in 1998. A major objective of fiscal policy will be to reduce existing arrears on wages, pensions, and social benefits, while avoiding new arrears. For this, speedy implementation of measures to expand treasury operations and to better monitor expenditure commitments is vitally important. On the monetary front, a key element will be the maintenance of a stable exchange rate within a narrow band.
As under the previous stand-by credit, monthly monitoring should provide early warning signals if actions are necessary to keep the program on track, while quarterly reviews will provide for a continuous dialogue between authorities and the IMF.
Stabilization alone will not lead to a resumption of growth, and it is crucial that there be a fundamental reorientation of the economy to foster private sector activity and domestic and foreign investment. The main thrust of structural policies during the program is further deregulation, privatization, and demonopolization. These elements, along with improvements in the payments system, should also help to ensure better governance.
Deregulation efforts are expected to simplify business registration and to drastically reduce the number of activities subject to business licensing and registration. With small-scale privatization virtually complete, Ukraine will concentrate on privatizing medium- and large-scale enterprises. Several large monopolies and difficult privatization cases previously excluded will be privatized by end-1997. The program aims to develop further capital market institutions to support post-privatization trading in shares and to reform bankruptcy procedures to provide a workable framework for financial restructuring and liquidation.
Other structural reforms will include establishing more efficient labor markets through increased wage flexibility, implementing faster land reform and privatization within the agro-industrial complex, and widening and deepening energy sector restructuring. As part of its outward-oriented growth strategy, Ukraine intends to continue to maintain a liberal and transparent trade regime.
Addressing Social Costs
In recent years, there have been important improvements in the targeting of social protection programs in Ukraine, especially regarding subsidies for communal services. However, much remains to be done. The objectives for the medium term are to further strengthen means testing of social programs, to streamline the diverse set of allowances to provide a higher level of benefits to the most needy recipients, and to rationalize the pension and unemployment insurance systems.
The Challenge Ahead
While Ukraine has made great strides, formidable challenges remain as domestic consensus on the nature of reform is sought, particularly as parliamentary elections approach. Vigilance will be necessary to maintain current budget ceilings, to control expenditure commitments, and to track revenue developments that may warrant offsetting measures. It will be important to resist pressures from the enterprise sector to attempt to stimulate production by loosening monetary policy, as this could lead to higher inflation and undermine the program.
Ukraine joined the IMF on September 3, 1992; its quota1 is SDR 997.3 million (about US$1,356 million). Its outstanding use of IMF credit currently totals SDR 1,635.5 million (about US$2,224 million).
1A 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