Press Release No. 07/291

Ukrainian

Press Release No. 07/291

The following statement was issued today in Kyiv at the conclusion of an International Monetary Fund (IMF) staff mission to Ukraine:

"A mission of the International Monetary Fund (IMF) headed by Mr. Robert Ford visited Kyiv during December 11-14 to discuss recent economic developments and macroeconomic policies. The mission met with senior officials and representatives of the private sector.

"The economy continued to perform very well in 2007 and the growth outlook for 2008 remains strong. Real GDP is set to grow by about 7 percent this year, driven by a boom in consumption and investment, and a rebound in exports reflecting high world economic growth and metals prices. The general government deficit and debt are low. Exchange reserves have increased and, notwithstanding the recent global financial market turbulence and continued political uncertainty within the country, Foreign Direct Investment (FDI) and other capital inflows remain strong.

"The Ukrainian economy has enormous long-term growth potential, as industrial efficiency continues to improve, financial markets deepen, and its structure of production evolves.

"However, there are near-term challenges. First, inflation is on the rise. While much of the increase in 2007 reflects food prices, strong domestic demand growth has intensified underlying inflationary pressure. Moreover, the current account position is eroding, and further deterioration in the years ahead—gas import prices may rise further and world steel prices may fall toward their long-term real average—could raise external financing risks. Finally, rapid credit growth points to rising risks in the financial sector.

Stability-oriented fiscal and monetary policies, a stronger monetary and financial sector policy framework, and progress on structural reform are needed to help Ukraine achieve high growth with low inflation and improve the living standards of all its citizens.

Tighter and more balanced macroeconomic policies, with at least budget balance in 2008, are needed to reduce domestic demand growth to sustainable rates. Growth in the minimum wage and nominal government transfers needs to slow, consistent with reducing inflation to single digits in 2008. Finally, less accommodative monetary conditions would reduce liquidity in the banking system toward optimum levels.

"A stronger monetary and financial sector policy framework would mitigate vulnerabilities. In this context, preparations for exchange rate flexibility, and eventual inflation targeting, should be accelerated. Financial supervision needs to keep pace with the ongoing credit boom, while financial sector transparency and disclosure requirements need to be strengthened.

"Turning to longer term growth prospects, the structural reform agenda—including the need to improve the business environment—is crucial. To this end, key macro-structural reforms for the near-term include handling the lost savings issue in a non-inflationary manner, reforming the administration of the VAT, strengthening the tax code, reforming the energy sector, and liberalizing the capital account in a carefully sequenced manner, coordinated with financial sector reforms."