IMF Completes Second Review Under Stand-By Arrangement with Ukraine and Approves US$3.3 Billion Disbursement

Press Release No. 09/271
July 28, 2009

The Executive Board of the International Monetary Fund (IMF) completed today the second review of Ukraine’s economic performance under the two-year Stand-By Arrangement (SBA), and approved the immediate release of the third tranche under the arrangement equivalent to SDR 2.12 billion (about US$3.3 billion). This will bring total disbursements under the SBA to SDR 7 billion (about US$10.9 billion).

With the completion of this review, the Executive Board also approved the modification of a performance criterion on the fiscal deficit in response to a broadening of the fiscal deficit target to include the deficit of Naftogaz.

The SBA with Ukraine was approved on November 5, 2008 in an amount equivalent to SDR 11 billion (about US$16.4 billion; see Press Release No. 08/271).

Following the Executive Board discussion, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, said:

“Financial stress has eased in recent months and Ukraine’s current account is adjusting rapidly. At the same time, the fall in output is more pronounced than expected, which has necessitated further significant policy adjustments. The revised economic program continues to seek to mitigate the effects of the global crisis, restore confidence in the banking system, and preserve fiscal sustainability, while protecting the most vulnerable segments of the population.

“To cushion the impact of the sharper economic contraction and to reflect the imbalances of the state gas company Naftogaz, the revised economic program targets a broadened fiscal deficit. Corrective fiscal measures and structural reforms are a priority to ensure fiscal sustainability and to avoid crowding out of private sector borrowing. The authorities have reduced nonpriority expenditures as well as taken a number of steps to restore viability in the natural gas sector. A key step is a schedule of natural gas price increases to bring domestic prices in line with international prices. Vulnerable households will be protected by a better targeting of the social safety net programs. The authorities are also moving ahead with a strategy to strengthen the financial situation and transparency of Naftogaz. Plans for pension and tax reforms in the context of the 2010 budget will also help entrench fiscal sustainability and reduce fiscal financing needs.

“The monetary policy stance is adequate. The National Bank of Ukraine (NBU) will closely monitor developments in monetary aggregates and stands ready to tighten its policies if inflation or exchange rate pressures were to reemerge. The NBU has also taken measures to increase currency flexibility in both directions, including by amending regulation to allow foreign exchange forward transactions. Further progress in this area will help Ukraine to adjust better to external shocks, discourage dollarization and excessive risk taking by unhedged borrowers, and allow monetary policy to focus on inflation objectives.

“Restoring confidence in the banking system, which is essential to facilitate the economic recovery, remains a key priority. Recent important steps include the recapitalization of the systemic banks, the decisions taken with regard to two other banks, and the adoption of legal amendments to enable the resolution of nonsystemic banks.

“The authorities plan to phase out remaining import restrictions in line with their commitments under the program.

“Going forward, close adherence to the program will be key to create the conditions that facilitate an expeditious economic recovery,” Mr. Lipsky stated.



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