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Press Release No. 04/62
March 29, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves 12-Month Stand-By Arrangement for Ukraine

The International Monetary Fund (IMF) today approved a Stand-By Arrangement in an amount equivalent to SDR 411.6 million (about US$605 million) for a period of 12 months ending on March 28, 2005. The Ukrainian authorities intend to treat the Arrangement as precautionary.

Following the Executive Board's discussion on Ukraine, Anne Krueger, Acting Managing Director and Chair, said:

"Ukraine has achieved a broad-based and sustained economic recovery, and has subdued inflation following the 1998-99 financial crisis. Renewed confidence in macroeconomic stability has contributed to the remonetization of the economy, a strong balance of payments, the rebuilding of international reserves, and a significant improvement in the economic outlook. The latest indicators suggest that economic activity remains strong this year.

"Ukraine is well placed to consolidate these gains. Full implementation of the government's prudent financial policies and further progress on growth-oriented structural reforms will support growth and contain inflationary pressures, while bolstering debt sustainability and market confidence.




"Parliamentary approval of the government's economic reform strategy and wide-ranging tax and pension reforms, progress in eliminating VAT refund arrears, and the strengthening of banking sector capitalization are particularly welcome steps. Looking forward, the government's plan to improve governance and enhance the business climate will be key to ensure that Ukraine sustains its medium-term growth potential.

"The 2004 budget will contribute to preserving macroeconomic stability, and the recent reductions in tax exemptions and sectoral VAT preferences, and in corporate and personal income tax rates are welcome. However, government spending should remain in line with the budget, in view of the uncertainty associated with the full impact of the reductions in tax rates.

"The National Bank of Ukraine's stewardship of monetary policy has contributed to subdued inflationary pressures. Rapid credit expansion poses a risk to financial sector stability and needs to be monitored closely. In this regard, the recent strengthening of the supervisory and prudential regulatory framework is welcome, though further steps deserve consideration.

"It is essential to strengthen the role of the private sector and business climate to foster economic growth and increase foreign direct investment. Continued improvements in governance, reform of the energy sector, and the adoption of a transparent privatization process will contribute to these objectives.

"Despite the positive macroeconomic performance and outlook, vulnerabilities remain, especially in the fiscal, financial, and external areas. Full implementation of the program is critical to sustain non-inflationary economic growth and improve living standards," Ms. Krueger said.

ANNEX

Background

Ukraine's macroeconomic performance has improved substantially since the 1998-99 financial crises. Real GDP grew by an estimated 9.3 percent in 2003, despite the poor grain harvest, completing the fourth year of Ukraine's strong economic recovery. The expansion was driven by an 18 percent increase in manufacturing, double-digit growth of transport services and domestic trade, as well as a sharp rebound in construction. The sustained economic recovery has been supported by the establishment of macroeconomic stability, in particular the maintenance of a prudent fiscal stance. Ukraine has regained access to international capital markets and there is no immediate balance of payment need.

The Main Program Objectives

Support sustained economic growth. The 2004 budget is based on a conservative projection of about 5 percent real GDP. To sustain economic growth over the medium term, the authorities aim to improve the investment climate by strengthening governance, reforming the tax system, strengthening the financial sector, and joining the WTO.

Keep inflation under control. The objective for 2004 is to reduce consumer price inflation to the mid-single digits. This is likely to require a tighter monetary policy and the maintenance of prudent fiscal policy, although the high volatility of food prices implies significant uncertainty about the CPI outlook.

Reduce vulnerabilities. Executing the 2004 budget and maintaining a low deficit thereafter will support the continued reduction in public debt ratios, providing a safety net for potential fiscal costs of future structural reforms or economic shocks. Addressing the financial problems of the energy sector will help reduce quasi-fiscal deficits and contingent liabilities. To reduce credit risk in the banking sector, the National Bank of Ukraine is strengthening prudential regulations and banking supervision with a view to discourage imprudent lending practices.

Ukraine joined the IMF on September 3, 1992; its quota is SDR 1.372 billion (about US$2.018 billion). Its outstanding use of IMF credit currently totals SDR 1.201 billion (about US$1.766 billion).

Ukraine: Selected Economic Indicators, 1999-2004

1999

2000

2001

2002

 2003

2004 

Est.

Prog. 1/

Output and employment

Real GDP (annual change in percent) 2/

-0.2

5.9

9.2

5.2

9.3

6.0

Nominal GDP (in billions of hryvnia)

130.4

170.1

204.2

220.9

257.0

292.0

Nominal GDP (in billions of U.S. dollars)

31.6

31.3

38.0

41.5

48.2

54.8

Unemployment rate (ILO definition)

11.9

11.7

11.1

10.1

8.7

...

Prices and wages (percent change)

Consumer prices, period average

22.7

28.2

12.0

0.8

5.2

7.1

Consumer prices, end of period

19.2

25.8

6.1

-0.6

8.2

6.0

Producer prices, end of period

15.7

20.6

0.9

5.7

11.1

5.5

Average monthly wages, annual average

16.1

30.2

34.9

20.7

23.0

...

Consolidated budget (in percent of GDP)

Revenue 3/

31.9

33.4

33.5

36.8

37.7

37.3

Expenditure (cash basis)

34.2

34.7

35.1

36.3

38.5

39.0

Cash balance 3/

-2.4

-1.3

-1.6

0.5

-0.7

-1.8

Primary balance (cash basis)

0.0

1.8

0.4

1.9

0.3

-0.4

Commitments balance 4/

-1.4

2.1

-1.5

0.2

0.1

-0.8

Privatization proceeds

0.6

1.3

1.3

0.5

1.1

0.8

Net domestic financing

1.5

0.3

-0.1

-0.3

-1.2

0.5

Net external financing 3/

0.2

-0.3

0.4

-0.7

0.8

0.4

Public debt and arrears (in percent of GDP) 5/

61.3

47.7

39.4

36.9

32.1

27.7

o.w. external debt

39.5

33.1

26.6

24.6

22.5

19.5

Money and credit (end of period, percent change)

Base money

39.2

40.1

37.4

33.6

30.1

16.3

Broad money

40.4

45.5

41.9

41.8

46.5

24.1

Credit to nongovernment

43.5

61.3

40.5

47.3

63.4

25.1

Velocity 6/

5.9

5.3

4.5

3.4

2.7

2.5

Average hryvnia lending rate (in percent, period average)

55.0

41.5

32.3

25.5

18.3

...

Average hryvnia deposit rate (in percent, period average)

20.7

13.7

11.0

7.9

7.0

...

Balance of payments

Current account balance (in percent of GDP)

5.2

4.7

3.7

7.7

6.1

3.7

Gross reserves (end of period, in billions of U.S. dollars)

1.1

1.5

3.1

4.4

6.9

7.8

In months of next year's imports of goods and services

0.7

0.9

1.7

1.9

2.8

3.0

Debt service (in percent of exports of goods and services) 5/

15.8

10.4

6.7

5.4

6.3

6.4

Exports (annual change in percent)

-3.7

19.2

8.7

9.2

27.1

6.3

Imports (annual change in percent)

-20.5

15.4

13.0

6.3

33.7

8.4

Exchange rate

Hryvnia per U.S. dollar, end of period

5.22

5.43

5.30

5.33

5.33

...

Hryvnia per U.S. dollar, period average

4.13

5.44

5.37

5.33

5.33

...

Real effective exchange rate, (percent change) 7/

-15.9

-4.5

7.0

-4.2

-6.8

...

Sources: Ukrainian authorities; and IMF staff estimates and projections.

1/ Assumes an exchange rate of 5.33 Hrv/US$.

2/ Official real GDP growth estimates were revised upwards since the issuance of the staff report from 4.8 percent for 2002

and 8.5 percent for 2003. All other data in this table reflect the status at the issuance of the staff report.

3/ From 2003 onwards, based on an accounting treatment that excludes offset-based amortization to Russia, which decreases

revenues and increases net external financing (and the budget deficit) by 0.2 percent of GDP relative to previous years.

4/ Cash balance adjusted for the net accumulation of expenditure and VAT refund arrears, as well as for non-cash property income.

5/ Government and government-guaranteed debt and arrears, plus NBU debt. Excludes debt by state-owned enterprises.

6/ Annual GDP divided by end-period broad money (M3).

7/ Period averages; (+) represents real appreciation; based on CPI and average trade weights for 1996-2002.





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