Press Release No. 09/259

Press Release No. 09/259
July 10, 2009

An International Monetary Fund (IMF) mission led by Ms. Ceyla Pazarbasioglu visited Kyiv during June 24-July 10 for discussions on the second review under the Stand-By Arrangement (SBA) with Ukraine. At the conclusion of the visit, Ms. Pazarbasioglu issued the following statement today:

“The IMF mission today reached staff-level agreement with the Ukrainian authorities on the conclusion of the second review under the SBA. The authorities’ Letter of Intent will now be submitted to IMF Management with a view to consideration by the IMF Executive Board by early August. The completion of the review by the Executive Board would release a tranche of SDR 2.125 billion (about US$3.3 billion), pending the completion of prior actions.

“Macroeconomic and financial policies in Ukraine have been broadly on track. The end-May quantitative performance criteria on base money, net international reserves, and the general government balance were met. The authorities have made good progress in the resolution of the systemic problem banks and in preparing associated legislative amendments. Parliamentary passage of the amendments designed to strengthen the bank resolution process is required for the completion of the second review.

“Financial stress has eased but, as in other countries of the region, the economic downturn is more pronounced than expected. As a result of the much sharper-than-expected loss of output in the first quarter, real GDP is now expected to contract by 14 percent in 2009 against 8 percent at the time of the first review. The larger contraction contributes to a rapid improvement of the current account, but further weakens government revenue. Developments in inflation have been better than expected.

“Against this background, the mission revised the general government deficit target in 2009 from 4 to 6 percent of GDP, in addition to a Naftogaz deficit of 2.6 percent of GDP. To achieve this, the authorities have committed to corrective fiscal measures in 2009. They have committed to quarterly increases in gas tariffs, complemented by an effective social safety net, as well as to measures to eliminate the structural imbalances of Naftogaz finances and improvements in the governance of the company.

“Going forward, it is critical that the authorities take all necessary measures—including during the run up to the presidential elections—to keep fiscal developments in line with program targets. It is also crucial to achieve progress on the tax and pension reforms announced for 2010. These reforms will promote medium-term fiscal sustainability and help the economy emerge from the crisis.

“The mission noted that monetary and financial sector policies are broadly appropriate. In particular, the implementation of the bank recapitalization and restructuring program is progressing as planned. The authorities have committed to resolving systemic problem banks swiftly and to strengthen the financial sustainability of two state banks. Measures need to be taken to bolster the independence of the National Bank of Ukraine’s (NBU). The independent review of the NBU’s provisions of refinancing credit and foreign currency to banks in the fourth quarter 2008 was concluded. The preliminary results suggest that the NBU followed approved procedures and authorization policies in conducting these operations.

“The successful implementation of the policy package will require a strong national consensus and commitment on all political levels. Ukraine’s economy is at a crossroads and determined implementation of policy measures will help the country return to sustainable growth. The IMF will continue to assist the authorities in adapting to the challenging global conditions.”