IMF Executive Board Concludes 2013 Article IV Consultation, First Post-Program Monitoring, and Ex Post Evaluation of Exceptional Access with Ukraine

Press Release No. 13/531
December 19, 2013

On December 16, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the 2013 Article IV consultation and the first Post Program Monitoring Review, as well as the Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement with Ukraine.1

The Ukrainian economy has been in recession since mid-2012, and the outlook remains challenging. In January–September 2013 GDP contracted by 1¼ percent y-o-y, reflecting lower demand for Ukrainian exports and falling investments. Consumer prices stayed flat, held down by decreasing food prices and tight monetary policy. Weak external demand and impaired competitiveness kept the trailing 12-month current account deficit elevated at about 8 percent of GDP by end-September despite a significant reduction in natural gas imports. The high current account deficit amid less favorable international market environment pressured international reserves, which fell below the equivalent of 2½ months of imports by end-October 2013. Under currently planned policies, modest growth should return in 2014, driven by improvements in external demand, strong grain exports, and continuing consumption expansion. However, this outlook is subject to significant risks, emanating from the inconsistent policy mix and heightened political and economic uncertainty in recent weeks.

The fiscal stance loosened in 2012–13, contributing to the buildup of vulnerabilities. Large pension and wage increases, generous energy subsidies, and soccer cup spending led to a widening of the combined deficit of the general government and the state-owned company Naftogaz to 5½ percent of GDP in 2012. In 2013, the combined government-Naftogaz deficit is projected to expand to 7¾ percent of GDP.

An inefficient and opaque energy sector continues to weigh heavily on public finances and the economy. Overall energy subsidies in Ukraine reached about 7½ percent of GDP in 2012. The very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage one of the highest energy consumption levels in Europe. As a result, Naftogaz’s losses in 2013:H1 more than doubled and the company is late on payments for imported gas.

Tight monetary policy in 2012–13 focused on defending exchange rate stability while accommodating the expanding fiscal deficit. In part reflecting deficit monetization, base money increased by nearly 15 percent in the year to September 2013. To ensure steady supply of foreign exchange to the market, the authorities tightened foreign exchange regulations and controls, which increased transactions costs in the economy.

The banking system appears stable at present, but vulnerabilities persist. A high average capital adequacy ratio of 18 percent provides some cushion against risks stemming from an elevated non-performing loan ratio of 14 percent. High interest rates offered by banks induced a more than 30 percent increase in hryvnia deposits in the year to November, while credit to the economy expanded only modestly, constraining economic activity.

Ukraine remains current on all its payments to the Fund, and the authorities have reaffirmed their commitment to repay all outstanding Fund credit. On the obligation basis, outstanding Fund credit to Ukraine would decline below 200 percent of quota by February 2014 and below 100 percent of quota by September 2014.

In accordance with IMF procedures for arrangements entailing exceptional access, the Executive Board discussed an ex-post evaluation (EPE) of Ukraine’s experience under the Stand-By Arrangement (SBA) approved in July 2010. The EPE finds that the SBA-supported program was appropriately designed to address Ukraine’s most important vulnerabilities, and delivered some notable achievements, including the passage of pension reform in 2011. However, the program quickly went off-track as the authorities stopped implementing the agreed policies, reflecting insufficient ownership. The same issues that had derailed previous programs in Ukraine hindered the completion of the 2010 SBA, particularly the reluctance to sufficiently adjust energy prices and increase exchange rate flexibility.

The EPE draws several lessons for future IMF engagement with Ukraine and other countries from the experience of the 2010 program. First, exceptional access and long-duration arrangements may be too ambitious in countries with low program policy ownership; arrangements with lower access focused on critical areas may have better prospects of success. Second, a mechanism to terminate off-track arrangements could be useful in designing future IMF programs, especially when program ownership is an issue. Finally, prior actions continue to be a powerful tool for implementing program policies, as they were responsible for the majority of the achievements under the 2010 SBA.

Executive Board Assessment2

Executive Directors noted that, despite the Ukrainian authorities’ efforts to maintain macroeconomic stability amid worsening economic conditions, the current macroeconomic policy mix has generated large external and fiscal imbalances and has contributed to deepening the recession. Directors recommended the authorities implement a package of comprehensive policy adjustments in several areas, including curtailing the fiscal and external current account deficits, phasing out energy subsidies, strengthening the banking sector, and improving the external competitiveness of the economy.

Directors concurred that the overvalued exchange rate has contributed to a widening external current deficit, loss of competitiveness, and steady depletion of international reserves. At the same time, a tight monetary policy, focused on defending exchange rate stability and based on the extensive use of administrative controls, has stifled growth. Against this background, Directors advised the authorities to allow greater exchange rate flexibility and to accelerate the transition to an inflation targeting framework.

Directors welcomed the reported positive developments in the banking sector. Banks’ exposure to foreign exchange risk has declined and bank capitalization and provisioning have risen, providing a cushion against risks stemming from high non-performing loans. Directors warned, however, that maintaining financial stability leaves no room for complacency and recommended the authorities enforce consolidated supervision and high reporting standards, proceed with independent audits of vulnerable banks, and develop contingency plans to support banks in case of need.

Directors stressed the importance of fiscal consolidation for the overall adjustment effort. High budget expenditure should be reduced by rationalizing public procurement, restraining the growth in public sector wages and employment, and limiting pension indexation to inflation. In addition, authorities should refrain from unaffordable tax cuts. Directors agreed that these measures would reduce the fiscal deficit to a sustainable level over the medium term while creating space for essential public investment.

Directors underscored the need for a comprehensive energy sector reform. They stressed that upfront, meaningful, and broad-based tariff increases are essential for reducing large quasi-fiscal losses, attracting new investments, and improving governance. Energy tariff increases should be accompanied by measures to protect the most vulnerable households. Directors welcomed the authorities’ plans to continue with energy-saving reforms, increase domestic gas production, and diversify energy imports, but stressed that these measures cannot substitute for the indispensable tariff adjustments.

Directors noted the uneven progress in improving the business climate. They welcomed the streamlined procedures for starting a business, registering property, and dealing with construction permits. Directors stressed that much more needs to be done to enhance institutional capacity, strengthen the judicial system, improve law enforcement and tax administration, and eradicate corruption.

In discussing the ex post evaluation report on the 2010 SBA, Directors noted some important achievements, including the 2011 pension reform, but regretted the authorities’ insufficient ownership, which undermined the program. Directors agreed that, in view of Ukraine’s track record, arrangements with lower access and strong prior actions would be most appropriate. While most Directors concurred that arrangements of shorter duration would also be preferable, some others underscored that the structural nature of many of Ukraine’s economic problems calls for maintaining a sufficiently long time horizon.

Ukraine: Selected Economic Indicators, 2010–14
(As of December 2, 2013)
  2010 2011 2012 2013 2014

Real economy (percent change, unless otherwise indicated)





Nominal GDP (billions of Ukrainian hryvnias)

1,083 1,302 1,409 1,432 1,503

Real GDP

4.1 5.2 0.2 -0.3 1.0

GDP deflator

13.8 14.3 8.0 2.0 4.0

Unemployment rate (ILO definition; percent)

8.1 7.9 7.5 8.0 8.0

Consumer prices (period average)

9.4 8.0 0.6 -0.3 1.6

Core inflation (period average) 1/

8.6 7.7 3.3 0.2 1.4

Nominal monthly wages (average)

17.7 17.5 14.9 9.0 5.6

Real monthly wages (average)

7.6 8.8 14.2 9.3 3.9







Public finance (percent of GDP)






General government balance 2/

-5.8 -2.8 -4.5 -5.7 -4.6

Overall balance (including Naftogaz operational deficit)

-7.4 -4.3 -5.5 -7.7 -6.6

Structural general government balance

-3.7 -3.0 -4.5 -4.1 -4.1

Public debt (end of period) 3/

40.5 36.8 37.4 41.3 44.7







Money and credit (end of period, percent change)






Base money

15.8 6.3 6.4 14.7 12.9

Broad money

22.7 14.7 12.8 16.8 14.1

Credit to nongovernment

1.1 9.5 2.2 7.8 8.2

Interbank overnight rate (annual average, percent) 4/

2.0 5.8 10.8 3.3







Balance of payments (percent of GDP)






Current account balance

-2.2 -6.3 -8.1 -8.3 -8.2

Foreign direct investment

4.2 4.3 3.8 2.4 2.4

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

34.6 31.8 24.5 18.5 11.2

Months of next year's imports of goods and services

4.2 3.7 3.0 2.2 1.3

Percent of short-term debt (remaining maturity)

73.3 55.4 40.0 32.3 18.8

External debt (percent of GDP)

86.0 77.2 76.6 76.7 75.3

Goods exports (annual volume change in percent)

9.3 7.1 2.0 -7.4 3.9

Goods imports (annual volume change in percent)

15.0 22.6 2.2 -5.5 2.6

Goods terms of trade (percent change)

0.3 7.6 -3.2 2.2 0.2







Exchange rate






Hryvnia per U.S. dollar (end of period)

8.0 8.0 8.0

Sources: Ukrainian Authorities; and IMF staff estimates.

1/ Excludes unprocessed food, fuel, and administrative services.





2/ The general government includes the central and local governments and the social funds. In 2013, the general government deficit includes recognized arrears (1.3 percent of GDP).

3/ Government and government-guaranteed debt (includes debt to IMF). 

4/ For 2013, average of rates for the first ten months.





1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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