## Supplement to IMF Staff Report and MEFP (cr1783)

## Source details

**Canonical URL:** [Supplement to IMF Staff Report and MEFP (cr1783)](https://www.imf.org/-/media/files/publications/cr/2017/cr1783.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr1783.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr1783.pdf.json)

---

### Suspension of trade with NGCA and near-term shocks
- On March 15, 2017, authorities decided to suspend trade with the non-government controlled area (NGCA).
- Blockade and related events:
  - Rail lines blocked late January–early February; coal supplies from NGCA halted, affecting metal factories (particularly steel) and power plants.
  - Separatists moved to take control over Ukrainian assets in NGCA including 40 medium- to large-sized companies.
  - Authorities banned transport of all goods (excluding humanitarian aid) between NGCA and the rest of Ukraine until property rights are restored.
- Financial-sector incidents in Feb–Mar 2017:
  - Physical attacks against some Russian state-owned banks’ branches/ATMs after Russian recognition of certain identity cards.
  - Sizable deposit outflows and liquidity pressures on those banks.
  - Restrictions imposed on subsidiaries of Russian state-owned banks prohibiting financial transactions with parent banks (Decision No. 144-(52/51)); banks account for about 8 percent of banking system assets; banks described as solvent and in compliance with prudential regulations; access to liquidity support, including emergency liquidity assistance from the NBU, assured.
- Legal and political developments:
  - March 29 UK High Court summary judgement in favor of Russia on the US$3 billion Eurobond; stay on execution until next hearing (expected late May); Ukraine granted right to appeal without condition.
  - Authorities intend to appeal and request an extension of the stay.

### Near-term economic impact and revised 2017 projections
- Expected effects of the blockade and related events:
  - Loss of recorded economic activity in the NGCA.
  - Impact on industrial production in government-controlled areas.
  - Lower growth and wider current account deficit due to lower exports and higher import requirements (mainly coal and cokes).
  - Partly offset by recent improvement in terms of trade.
- Revised projection for Real GDP in 2017: 2.0 percent (from 2.9 percent previously).
- External current account projected to widen to 3¾ percent of GDP in 2017 (from 3 percent previously).
- NBU reserves: projected to reach US$21.8 billion by year-end 2017 (about US$0.5 billion less than anticipated earlier); pace of reserve rebuilding somewhat slower; NBU committed to catch up by maintaining appropriately tight monetary policies.
- Fiscal revenue impact:
  - Loss in tax revenues from companies’ operations in NGCA and reduced profitability estimated at about ¼ percent of GDP; expected to be offset by some revenue over-performance elsewhere while authorities maintain tight spending control.
- Staff recommends completion of the third review and the financing assurances review under the extended arrangement given authorities’ corrective actions.
- Staff supports waiver requests:
  - Waiver of nonobservance of end-March 2017 performance criterion on NBU’s net international reserves (expected miss of US$520 million).
  - Waiver of applicability of other end-March 2017 performance criteria for which data are not yet available.

### Macro framework — selected projections and key statistics (selected entries preserved exactly)
- Real GDP:
  - 2016 Actual: 2.3
  - 2017 SR: 2.9
  - 2017 Proj. (3rd Review): 2.0
  - 2018 Proj.: 3.1
  - 2019 Proj.: 3.2
  - 2020 Proj.: 3.5
  - 2021 Proj.: 4.0
  - 2022 Proj.: 4.0
- Inflation (eop):
  - 2016 Actual: 12.4
  - 2017 Proj. (3rd Review): 10.0
  - 2018 Proj.: 7.0
  - 2019 Proj.: 7.0
  - 2020 Proj.: 6.0
  - 2021 Proj.: 5.0
  - 2022 Proj.: 5.0
- General government balance (percent of GDP):
  - 2016 Actual: -2.2
  - 2017 Proj. (3rd Review): -3.0
  - 2018 Proj.: -2.6
  - 2019 Proj.: -2.5
  - 2020 Proj.: -2.3
  - 2021 Proj.: -2.1
  - 2022 Proj.: -2.0
- Public Debt (percent of GDP):
  - 2016 Actual: 81.2
  - 2017 Proj. (3rd Review): 89.8
  - 2018 Proj.: 86.2
  - 2019 Proj.: 85.3
  - 2020 Proj.: 78.1
  - 2021 Proj.: 71.6
  - 2022 Proj.: 65.6
- External current account (percent of GDP):
  - 2016 Actual: -3.6
  - 2017 Proj. (3rd Review): -3.7
  - 2018 Proj.: -2.6
- GIR (eop, billions of U.S. dollars):
  - 2016 Actual: 15.5
  - 2017 Proj. (3rd Review): 21.8
  - 2018 Proj.: 30.2
- Months of next year's imports:
  - 2016 Actual: 3.4
  - 2017 Proj. (3rd Review): 4.6
  - 2018 Proj.: 5.9
- Percent of IMF composite measures:
  - 2016 Actual: 61.9
  - 2017 Proj. (3rd Review): 82.0
  - 2018 Proj.: 105.3

### Medium-term outlook and DSA conclusions
- Medium-term outlook broadly unchanged despite shock:
  - Growth expected to pick up to 3.2 percent in 2018 (from a lower base and somewhat lower potential output).
  - Balance of payments and reserves broadly expected to gradually revert to previously projected paths; imports likely to remain somewhat higher over medium term.
- Debt sustainability (Annex III):
  - Under program and successful debt operation, public debt assessed as sustainable with high probability.
  - Debt projected to fall below 70 percent of GDP by 2021 assuming fiscal consolidation, no reemergence of energy quasi-fiscal losses, successful debt operation, growth recovery, and privatization.
  - Baseline public debt projections and stress tests show vulnerability to growth, real exchange rate, and contingent liability shocks; stress scenarios can push debt much higher (examples: combined macro-fiscal shock pushes debt to almost 150 percent of GDP in 2019 in source stress).
  - External debt: gross external debt was 129.4 percent of GDP in 2016; projected to decline to about 95.8 percent of GDP by end-2021 in source tables.

### Financial sector measures, PrivatBank nationalization, and supervision
- PrivatBank nationalization:
  - Nationalized after failure to meet capital requirements; systemic role.
  - Capital shortfall amounted to nearly 7 percent of GDP; related-party deposits and liabilities bailed in equivalent to about 1¼ percent of GDP (12 percent of the bank’s total deposits and liabilities).
  - Measures: new management and supervisory board; reputable audit firm and forensic audit engaged; specialized unit to manage and restructure related-party loans of UAH 155 billion; international asset manager to be hired.
  - PrivatBank expected to be privatized over the medium term.
- Bank recapitalization and supervision:
  - Group I/II/III banks recapitalization timetables and minimum CAR requirements specified; by mid-January 2017 many had to meet minimum CAR targets; further deadlines through 2017.
  - RPMO oversight and credit registry establishment: legislation to authorize NBU to establish a credit registry by end-March 2017; collection from banks by end-September 2017; sharing with industry by end-December 2018.
  - NBU institutional strengthening: new Council established November 2016; Audit Committee constituted; ELA framework revamped.
- Reporting and monitoring:
  - Extensive reporting requirements to IMF (daily, weekly, monthly, quarterly) for NBU, Deposit Guarantee Fund (DGF), Ministry of Finance, SFS, Naftogaz, SOEs, NAPC, NABU, FIU; detailed bank-by-bank data for largest 35 banks on liquidity, assets, liabilities, related-party exposures, loan classifications, provisioning, and supervisory actions.

### Fiscal policy execution, revenues, and structural fiscal reforms
- Fiscal outturns and targets:
  - 2016 combined deficit limited to 2.3 percent of GDP (over-performance compared to prior target of 3.7 percent).
  - Parliament approved 2017 budget consistent with deficit target of 3.1 percent of GDP.
  - Authorities committed to maintain tight spending control and meet budget deficit targets despite revenue risks.
- General government finances (selected table highlights exact figures preserved):
  - Revenue (billions of UAH): 2015: 832.9; 2016: 914.1; 2017 (MEFP projection series): 1,064.6; 2018 Proj.: 1,194.5.
  - Expenditure (billions of UAH): 2015: 855.9; 2016: 967.1; 2017: 1,146.5; 2018 Proj.: 1,370.8.
  - General government overall balance (billions of UAH): 2016: -53.0; 2017: -81.8; 2018: -76.9 (selected years from tables).
  - Public and publicly-guaranteed debt (percent of GDP): 2016 Actual: 81.2; 2017 SR: 91.4; 2017 Proj. (3rd Review): 89.8.
- Structural fiscal reforms and priorities:
  - Pension reform: parliamentary approval targeted by end-April 2017 (delayed); reform to provide savings of at least 3 percent of GDP over the long term; target effective implementation by January 1, 2018.
  - Public administration: delink civil service wage grid from minimum wage; reduce public-sector employment targets (reduce budgetary sector employment by at least 4 percent by end-2017 and further 10 percent by end-2019; civil service -5 percent by end-2017 and -10 percent by end-2019).
  - Revenue administration: merge tax and customs into single legal entity by end-March 2017 (reset), tighten simplified tax regime, strengthen SFS oversight, enhance electronic filing and risk-based audits.
  - Energy sector: maintain gas and heating tariffs at import-parity via automatic semi-annual adjustment mechanism (CMU Resolution 758); monetize household utility subsidies at utility-company level by end-August 2017; limit HUS outlays to UAH 47 billion in 2017.
  - Privatization and SOE reform: triage and transfer pipeline to SPFU; privatize selected large SOEs (e.g., PJSC Odessa Portside Plant by first half of 2017; initiate privatization of PJSC Centrenergo, Turboatom, regional obloenergos by end-September 2017).

### Structural reforms, anticorruption, and business environment
- Anti-corruption measures:
  - Publication and verification of high-level officials’ asset declarations; NAPC and NABU empowered with additional responsibilities; operationalize anticorruption court (legislation to be submitted mid-April 2017; adoption expected by mid-June 2017; court to begin operations by end-March 2018).
  - FIU to publish quarterly reports on cases sent to NABU; NBU to continue AML/CFT inspections.
- Business climate reforms:
  - Deregulation plans, licensing streamlining, and launching electronic privatization auctions (Prozorro) for small assets; establish Single State Register operational by end-June 2017.
  - Land reform: draft legislation to open agricultural land market; parliamentary approval expected by end-May 2017; moratorium on land sale to expire by end-2017.
- SOE governance:
  - Adopt SOE corporate governance decisions; appoint independent supervisory boards in largest 15 SOEs by end-June 2017; triage of SOEs and transfers to SPFU by end-August 2017.

### Program financing, IMF purchases, and conditionality
- Request and timing:
  - Authorities requested completion of the third review and financing assurances review; disbursement request SDR 734.05 million upon review completion.
  - With postponement of Executive Board consideration, end-March 2017 performance criteria are controlling.
- Schedule of purchases under Extended Arrangement (selected exact amounts from source):
  - March 11, 2015: 3,546.00 SDRs; 4,872.00 US$; 258.45 percent of quota.
  - November 15, 2016: 734.05 SDRs; 987.34 US$; 36.49 percent of quota.
  - May 15, 2017: 1,418.48 SDRs; 1,906.91 US$; 70.51 percent of quota.
  - Total amount of purchase: 12,348 Millions of SDRs; 16,794 Millions of US$; 614 percent of quota.
- Exceptional access and financing assurances:
  - Staff considers substantive criteria for exceptional access satisfied given program design and financing assurances; continued efforts to reach negotiated agreement on Russian-held bond emphasized.
  - Prospective purchases and IMF credit stock detailed in staff tables (e.g., Stock of existing and prospective Fund credit in millions of SDRs: 7,701; 8,417; 11,846; 13,206; etc., as in source tables).

### Risks, monitoring, and conditionality emphasis
- Major risks identified:
  - Escalation of conflict in eastern Ukraine, domestic political instability and reform delays, external shocks (terms of trade, global slowdown), and vulnerabilities in financial sector and public debt dynamics.
- Program monitoring:
  - Extensive performance criteria, indicative targets, and structural benchmarks with specific deadlines and adjustors (cash deficit, NIR/NDA targets, VAT refund arrears ceiling UAH 0, ceilings on publicly guaranteed debt, non-accumulation of external debt payment arrears).
  - Detailed Technical Memorandum of Understanding (TMU) defines NIR, NDA, monetary base, inflation indicative ranges, cash deficit definitions, automatic adjustors, and reporting requirements.
- Staff recommendation:
  - Staff recommends completion of the third review and the financing assurances review, supports waiver requests, and endorses rephasing of remaining access under the program to better align financing with policy implementation.

*International Monetary Fund — Supplement (March 30, 2017); excerpts and tables from cr1783 as provided in the source content.*

### 1.      This supplement provides information that has become available since the

### 1.      This supplement provides information that has become available since the staff report was circulated to the Executive Board on March 7, 2017.

### Suspension of trade with the non-government controlled area (NGCA) and related events
- On March 15, 2017, the authorities decided to suspend trade with the NGCA.
- Late January–early February: war veteran and opposition groups blocked rail lines connecting the NGCA with the rest of Ukraine, arguing that trade financially sustains the separatists and prolongs the conflict.
- The blockade halted transport of coal supplies from mines located in the NGCA, which are critical for metal factories (particularly steel) and power plants in Ukraine.
- Separatists moved to take control over all Ukrainian assets located in the NGCA including 40 medium- to large-sized companies.
- The authorities banned the transport of all goods, excluding humanitarian aid, between the NGCA and the rest of Ukraine, until property rights are restored.

### Financial system impacts and authorities’ measures
- In February and March, following recognition by Russia of identity cards issued by some districts in Donetsk and Luhansk regions:
  - Physical attacks were launched by nationalist groups against a number of Russian state-owned banks operating in Ukraine, causing damage to several branches and ATMs.
  - These events triggered sizable deposit outflows and raised liquidity pressures on these banks.
- Authorities imposed restrictions on subsidiaries of Russian state-owned banks in the interest of national security, prohibiting financial transactions between these banks and their parent banks.
- The authorities notified the Executive Board of the measures under Decision No. 144-(52/51).
- Banks in question account for about 8 percent of banking system assets, are solvent and in compliance with prudential regulations, and authorities assured access to liquidity support, including emergency liquidity assistance from the NBU, if needed.
- Banks’ offices and branches that had been blocked have reopened, and authorities emphasized adherence to the rule of law.

### Near-term economic impact and revised projections for 2017
- These adverse events will have a sizable, although manageable impact on economic activity in the near term.
- The blockade, initially expected to be resolved relatively quickly, is now expected to last longer and alter 2017’s economic outlook.
- Expected effects:
  - Loss of recorded economic activity in the NGCA.
  - Impact on industrial production in the rest of Ukraine.
  - Lower growth and a wider current account deficit due to lower exports and higher import requirements (mainly coal and cokes).
  - Partly offset by a recent improvement in Ukraine’s terms of trade.
- Revised projection for Real GDP in 2017: 2.0 percent (from 2.9 percent previously).
- External current account projected to widen to 3¾ percent of GDP this year (from 3 percent previously).
- Pace of NBU reserve rebuilding will be somewhat slower than projected earlier this year; NBU committed to catch up with the program’s reserve targets in the coming years by maintaining appropriately tight monetary policies.
- Loss in tax revenues from companies’ operations in the NGCA and reduced profitability of affected companies in the rest of Ukraine estimated at about ¼ percent of GDP; expected to be offset by some expected revenue over-performance in other areas while authorities maintain tight spending control.

### Medium-term outlook
- Medium-term outlook projected to remain broadly unchanged.
- Growth is expected to pick up to 3.2 percent in 2018, albeit from a lower base and somewhat lower potential output, as affected companies gradually adjust and increase production and investment outside the NGCA.
- Balance of payments and reserves broadly expected to gradually revert back to previously projected paths, although imports are likely to remain somewhat higher over the medium term.

### Legal development on the US$3 billion Eurobond
- March 29: the UK High Court of Justice granted a summary judgement in favor of Russia regarding the US$3 billion Eurobond.
  - The court granted a stay on execution of the judgement until the next hearing, expected in late May.
  - The court granted Ukraine’s request for right to appeal without any condition.
- Ukrainian authorities indicated their intention to appeal and to request an extension of the stay through the appeal period.
- Staff assessment: the court’s decision does not alter staff’s assessment that the requirements under the policy on lending into arrears to official bilateral creditors have been met.
- Staff reiterated the importance of continued efforts to achieve a negotiated agreement in line with program parameters.

### Staff recommendations, waivers, and program implications
- Authorities reiterated intention to take all necessary measures to safeguard economic and external stability, including:
  - Allowing the exchange rate to adjust.
  - Maintaining a tight monetary policy stance to limit balance of payments impact and reduce inflation in line with the NBU’s inflation objective.
- Actions expected to help limit worsening in the current account deficit.
- Staff recommends completion of the third review and the financing assurances review under the extended arrangement, given the authorities’ actions as outlined in the attached Supplementary Letter of Intent and their commitments in the March 2, 2017 letter.
- With postponement of Executive Board consideration, the end-March 2017 performance criteria have become controlling.
- Staff supports:
  - Authorities’ request for a waiver of nonobservance of the end-March 2017 performance criterion on the NBU’s net international reserves, which has not been observed due to impact of recent events and the nationalization of the country’s largest bank on financial markets, given authorities’ corrective actions (allowing exchange rate to adjust, maintaining tight monetary policies, steps to safeguard banking stability).
  - Authorities’ request for a waiver of applicability of all other end-March 2017 performance criteria for which data are not yet available and for which there is no indication they may have been missed.

### Macroeconomic framework (selected figures from table)
- Real GDP:
  - 2016 Actual: 2.3
  - 2017 SR (staff report): 2.9
  - 2017 Proj. (3rd Review): 2.0
  - 2018 Proj.: 3.1
  - 2019 Proj.: 3.2
  - 2020 Proj.: 3.5
  - 2021 Proj.: 4.0
  - 2022 Proj.: 4.0
- Inflation (eop):
  - 2016 Actual: 12.4
  - 2017 SR: 10.0
  - 2017 Proj. (3rd Review): 10.0
  - 2018 Proj.: 7.0
  - 2019 Proj.: 7.0
  - 2020 Proj.: 6.0
  - 2021 Proj.: 5.0
  - 2022 Proj.: 5.0
- General government balance (percent of GDP):
  - 2016 Actual: -2.2
  - 2017 SR: -3.1
  - 2017 Proj. (3rd Review): -3.0
  - 2018 Proj.: -2.6
  - 2019 Proj.: -2.5
  - 2020 Proj.: -2.3
  - 2021 Proj.: -2.1
  - 2022 Proj.: -2.0
- Public Debt (percent of GDP):
  - 2016 Actual: 81.2
  - 2017 SR: 91.4
  - 2017 Proj. (3rd Review): 89.8
  - 2018 Proj.: 86.2
  - 2019 Proj.: 85.3
  - 2020 Proj.: 78.1
  - 2021 Proj.: 71.6
  - 2022 Proj.: 65.6
- External current account (percent of GDP):
  - 2016 Actual: -3.6
  - 2017 SR: -3.0
  - 2017 Proj. (3rd Review): -3.7
  - 2018 Proj.: -2.6
  - 2019 Proj.: -3.0
  - 2020 Proj.: -2.4
  - 2021 Proj.: -2.3
  - 2022 Proj.: -2.9
- GIR (eop, billions of U.S. dollars):
  - 2016 Actual: 15.5
  - 2017 SR: 22.3
  - 2017 Proj. (3rd Review): 21.8
  - 2018 Proj.: 30.2
  - 2019 Proj.: 29.5
  - 2020 Proj.: 30.1
  - 2021 Proj.: 30.8
  - 2022 Proj.: 32.0
- Months of next year's imports:
  - 2016 Actual: 3.4
  - 2017 SR: 4.7
  - 2017 Proj. (3rd Review): 4.6
  - 2018 Proj.: 5.9
  - 2019 Proj.: 5.8
  - 2020 Proj.: 5.4
  - 2021 Proj.: 5.2
  - 2022 Proj.: 5.0
- Percent of IMF composite measures:
  - 2016 Actual: 61.9
  - 2017 SR: 83.9
  - 2017 Proj. (3rd Review): 82.0
  - 2018 Proj.: 105.3
  - 2019 Proj.: 102.4
  - 2020 Proj.: 101.3
  - 2021 Proj.: 101.8
  - 2022 Proj.: 102.4

*International Monetary Fund — Supplement (March 30, 2017)*

### 11.      It is proposed that the next Article IV consultation with Ukraine be held on the

### cr1783 - 11.      It is proposed that the next Article IV consultation with Ukraine be held on the

### Article IV consultation timing
- It is proposed that the next Article IV consultation with Ukraine be held on the 24-month cycle, subject to the Decision on Article IV Consultation Cycles (Decision No. 14747 (10/96), as amended).

### Selected economic and social indicators (Table 1: 2016–21)
- Nominal GDP (billions of Ukrainian hryvnias) 1/: 2,280 2,383 2,626 2,734 2,953 3,074 3,421 3,773 4,162
- Real GDP (percent change): 2.0 2.3 2.9 2.0 3.1 3.2 3.5 4.0 4.0
- Contributions to real GDP (percent points):
  - Domestic demand: 4.5 6.4 4.2 4.4 4.2 4.4 4.6 4.9 5.0
  - Private consumption: 2.3 1.3 2.5 2.2 2.2 2.0 2.2 2.4 2.4
  - Public consumption: -0.3 0.0 -0.2 0.0 -0.1 -0.1 0.0 0.0 0.0
  - Investment: 2.5 5.2 2.0 2.2 2.0 2.4 2.4 2.5 2.5
  - Net exports: -2.5 -4.1 -1.4 -2.4 -1.0 -1.2 -1.0 -0.9 -0.9
- GDP deflator (percent change): 13.0 17.1 12.0 12.5 9.0 9.0 7.5 6.0 6.0
- Output gap (percent of potential GDP): -3.4 -3.1 -1.7 -1.9 -0.9 -0.9 -0.6 -0.3 0.0
- Unemployment rate (ILO definition; percent): 8.8 8.8 9.0 9.0 8.7 8.7 8.4 8.2 8.0
- Consumer prices (period average): 13.9 13.9 11.5 11.5 9.5 9.5 6.5 5.5 5.0
- Consumer prices (end of period): 12.4 12.4 10.0 10.0 7.0 7.0 6.0 5.0 5.0
- Nominal monthly wages (average): 23.3 23.3 28.0 28.0 12.0 12.0 10.5 10.0 9.5
- Real monthly wages (average): 8.2 8.2 14.8 14.8 2.3 2.3 3.8 4.3 4.2
- Savings (percent of GDP): 14.5 17.9 16.5 18.0 19.5 21.8 24.2 25.2 25.3
  - Private: 13.6 17.1 16.6 17.8 19.1 21.2 23.2 23.9 23.6
  - Public: 0.9 0.8 -0.2 0.1 0.5 0.6 1.0 1.3 1.7
- Investment (percent of GDP): 18.3 21.5 19.5 21.7 22.2 24.7 26.6 27.5 28.1
  - Private: 15.1 18.5 16.6 18.9 19.1 21.8 23.5 24.3 24.7
  - Public: 3.2 3.1 2.9 2.8 3.1 2.9 3.0 3.2 3.4
- General government balance 2/ (percent of GDP): -2.3 -2.2 -3.1 -3.0 -2.6 -2.5 -2.3 -2.1 -2.0
- Public and publicly-guaranteed debt (percent of GDP): 84.9 81.2 91.4 89.8 86.2 85.3 78.1 66.5 56.6
- Broad money (end of period, percent change): 10.9 10.9 11.3 10.8 19.3 19.2 15.4 15.1 12.1
- Credit to nongovernment (end of period, percent change): -1.1 -1.1 7.4 7.8 8.5 8.4 9.7 9.4 10.5
- Current account balance (percent of GDP): -3.8 -3.6 -3.0 -3.7 -2.6 -3.0 -2.4 -2.3 -2.9
- Gross reserves (end of period, billions of U.S. dollars): 15.5 15.5 22.3 21.8 30.2 29.5 30.1 30.8 32.0
- Months of next year's imports of goods and services: 3.5 3.4 4.7 4.6 5.9 5.8 5.4 5.2 5.0
- Goods exports (annual volume change in percent): -3.4 -4.6 4.8 3.0 7.5 6.7 7.3 6.4 5.6
- Goods imports (annual volume change in percent): 6.3 7.0 2.0 3.4 4.8 4.2 7.3 9.1 7.5
- Memorandum items:
  - Per capita GDP / Population (2016): US$2,189 / 42.6 million
  - Literacy / Poverty rate (2015): 100 percent / 6.4 percent
- Note: 1/ Data based on SNA 2008, exclude Crimea and Sevastopol.

### General government finances (Tables 2a & 2b: 2015–21)
- Revenue (billions of Ukrainian Hryvnias): 832.9 914.1 914.1 1,064.6 1,065.5 1,194.5 1,325.8 1,458.8 1,595.1
- Tax revenue (billions of UAH): 702.0 788.0 788.0 941.0 941.9 1,068.5 1,185.6 1,304.2 1,424.6
  - VAT: 178.5 235.5 235.5 293.1 294.8 338.6 373.2 410.6 448.8
  - Excise: 70.8 101.8 101.8 124.8 125.7 141.2 156.4 171.5 186.4
  - Personal income tax: 100.0 138.8 138.8 165.4 164.8 191.0 213.7 235.0 256.1
  - Corporate profit tax 2/: 39.1 60.2 60.2 63.8 63.1 64.8 72.1 79.5 87.7
- Nontax revenue (billions of UAH): 130.9 126.1 126.1 123.6 123.6 126.0 140.2 154.6 170.6
- Expenditure (billions of UAH): 855.9 967.1 967.1 1,146.5 1,147.4 1,370.8 1,556.9 1,743.4 1,901.1
  - Current expenditure: 806.1 892.3 892.3 1,057.0 1,057.9 1,262.3 1,432.1 1,599.4 1,734.8
  - Capital: 46.7 73.0 73.0 77.4 77.4 89.7 103.9 120.9 140.8
  - Interest: 82.8 97.7 97.7 113.7 114.4 131.5 139.2 149.0 159.1
- General government overall balance (billions of UAH): -23.1 -53.0 -53.0 -81.8 -81.8 -76.9 -78.7 -79.2 -83.2
- Naftogaz operational balance (billions of UAH): -20.5 -1.0 -1.0 0.0 0.0 0.0 0.0 0.0 0.0
- General government and Naftogaz balance (billions of UAH): -43.6 -54.0 -54.0 -81.8 -81.8 -76.8 -78.7 -79.2 -83.3
- General government financing (billions of UAH): 23.1 53.0 53.0 81.8 81.8 76.9 78.7 79.2 83.2
  - External financing (billions of UAH): 101.3 35.4 35.4 76.2 78.7 48.5 -67.8 -73.8 5.7
  - Domestic (net) financing (billions of UAH): -78.3 17.6 17.6 5.6 3.1 28.4 146.5 153.0 77.5
  - Bank and DGF recapitalization (billions of UAH): 45.3 129.0 129.0 98.0 98.0 0.0 0.0 0.0 0.0
- Memorandum items (percent of GDP):
  - Revenue: 41.9 40.1 38.4 40.5 39.0 38.9 38.8 38.7 38.3
  - Expenditure: 43.0 42.4 40.6 43.7 42.0 44.6 45.5 46.2 45.7
  - General government overall balance: -1.2 -2.3 -2.2 -3.1 -3.0 -2.5 -2.3 -2.1 -2.0
  - Public and publicly-guaranteed debt: 79.3 84.9 81.2 91.4 89.8 85.3 78.1 66.5 56.6
- Notes:
  - 1/ National methodology, cash basis.
  - 2/ Assumes excess CIT payments are cleared over 2017-18.
  - 3/ Domestic bonds have been adjusted to reflect discrepancy between the above-the-line and the below-the-line deficits.
  - 4/ Government spending on Naftogaz financing and recapitalization, including through T-bills issuance.
  - 5/ Includes external and domestic net disbursements, domestic arrears accumulation, and deposit drawdowns.
  - 6/ For the calculation of these balances, it is asumed that the unidentified measures are on the expenditure side.
  - 7/ The balance in 2015 treats import duty surcharges, part of the NBU profit transfer, nonpayment of pensions for working pensioners and advancement of 2016 pensions as one-off operations.

### Balance of payments (Table 3: 2015–21; billions of U.S. dollars unless otherwise indicated)
- A. Current account balance: -0.3 -3.4 -3.4 -2.9 -3.5 -3.0 -2.6 -2.8 -3.8
  - Goods (net): -3.3 -6.8 -6.8 -5.0 -5.6 -5.8 -5.7 -6.5 -7.3
    - Exports: 35.4 33.6 33.6 36.8 36.8 39.2 42.5 46.0 49.3
    - Imports: -38.7 -40.4 -40.4 -41.9 -42.5 -45.0 -48.2 -52.5 -56.5
    - Of which: gas: -4.4 -2.3 -2.3 -2.4 -2.4 -2.7 -2.9 -3.2 -3.2
  - Services (net): 1.6 1.2 1.2 1.2 1.2 1.6 1.8 1.8 1.7
    - Receipts: 12.4 12.3 12.3 13.0 13.0 13.9 14.7 15.6 16.4
    - Payments: -10.8 -11.1 -11.1 -11.8 -11.8 -12.3 -13.0 -13.8 -14.7
  - Primary income (net): -1.2 -0.7 -0.7 -1.6 -1.6 -1.5 -1.4 -0.9 -1.0
  - Secondary income (net): 2.6 2.9 2.9 2.6 2.6 2.7 2.7 2.7 2.7
- C. Financial account balance: 4.9 -3.7 -3.7 -1.6 -1.6 -7.3 -3.5 -3.5 -5.6
  - Direct investment (net): -3.0 -3.4 -3.4 -1.7 -1.7 -2.5 -3.7 -4.4 -4.6
  - Portfolio investment (net): 2.4 -0.3 -0.3 -1.0 -1.0 -2.8 1.5 0.9 -0.5
  - Other investment (net): 5.5 -0.1 -0.1 1.1 1.0 -2.0 -1.3 0.0 -0.5
- E. Overall balance (A+B-C+D): -5.3 -0.2 -0.2 -1.3 -1.8 4.4 0.9 0.7 1.9
- F. Financing:
  - Gross official reserves (increase: -): -6.0 -2.3 -2.3 -6.8 -6.3 -7.7 -0.6 -0.8 -1.1
  - Net use of IMF resources: 5.2 1.0 1.0 4.6 4.6 1.8 -1.5 -1.1 -1.5
  - Official financing 8/: 3.2 1.8 1.8 3.5 3.5 1.5 1.2 1.1 0.7
    - World Bank/IFC: 1.2 0.2 0.2 0.8 0.8 0.5 0.6 0.6 0.3
    - EU: 0.9 0.1 0.1 1.3 1.3 0.0 0.0 0.0 0.0
    - EBRD/EIB/Others: 1.1 1.4 1.4 1.4 1.4 0.9 0.7 0.6 0.4
- Memorandum items:
  - Total external debt (percent of GDP): 130.0 129.4 123.8 128.5 127.4 126.3 114.3 104.6 95.8
  - Gross international reserves (billions of U.S. dollars): 13.3 15.5 15.5 22.3 21.8 29.5 30.1 30.8 32.0
  - Months of next year's imports of goods and services: 3.1 3.5 3.4 4.7 4.6 5.8 5.4 5.2 5.0
- Notes:
  - 1/ Based on BPM6.
  - 4/ Reflects currency swap transactions.
  - 5/ Mainly reflects residents' conversion of UAH cash to FX held outside the banking system and its usage to finance informal trade.
  - 6/ Only reflects principal amortization. Disbursements from the World Bank, IFC, EU, EIB, EBRD, and official bilaterals are recorded below the line.
  - 7/ Includes clearance of Naftogaz potential arrears to Gazprom in 2017.
  - 8/ Includes project financing to the public and private sector. The Eurobond issuance of US$2 billion with U.S. guarantees is included above the line in portfolio investment: liabilities, debt securities, and general government.

### Gross external financing requirements (Table 4: 2015–21; Billions of U.S. dollars)
- Total financing requirements: 42.1 25.3 25.3 34.1 34.6 34.7 38.9 43.1 44.5
- Components:
  - Current account deficit: 0.3 3.4 3.4 2.9 3.5 3.0 2.6 2.8 3.8
  - Portfolio investment: 4.3 1.0 1.0 0.0 0.0 0.2 5.0 5.1 4.2
  - Medium and long-term debt: 12.3 6.7 6.7 6.2 6.2 7.6 6.3 9.1 9.8
  - Short-term debt (including deposits): 15.5 6.0 6.0 13.5 13.5 13.7 13.8 13.8 13.8
  - Trade credit: 10.9 11.9 11.9 12.6 12.6 11.2 11.8 12.3 12.9
- Total financing sources: 37.8 25.5 25.5 33.7 33.7 39.1 39.8 43.8 46.4
  - Direct investment, net: 3.0 3.4 3.4 1.7 1.7 2.5 3.7 4.4 4.6
  - Portfolio investment: 1.9 1.2 1.2 1.0 1.0 3.0 3.5 4.3 4.8
  - Medium and long-term debt: 7.3 2.5 2.5 6.0 6.0 7.7 6.3 8.2 9.5
  - Short-term debt (including deposits): 14.2 5.9 5.9 13.8 13.8 14.1 14.0 14.0 14.0
  - Increase in gross reserves: 6.0 2.3 2.3 6.8 6.3 7.7 0.6 0.8 1.1
- Total financing needs: 9.6 2.6 2.6 2.7 2.7 3.3 -0.3 0.1 -0.7
- Official financing:
  - IMF: 5.2 1.0 1.0 4.6 4.6 1.8 -1.5 -1.1 -1.5
    - Prospective purchases: 6.5 1.0 1.0 5.5 5.5 3.8 0.0 0.0 0.0
  - Official creditors 3/: 3.2 1.8 1.8 2.6 2.6 1.5 1.2 1.1 0.7
    - World Bank: 1.2 0.2 0.2 0.2 0.2 0.5 0.6 0.6 0.3
    - EU: 0.9 0.1 0.1 1.3 1.3 0.0 0.0 0.0 0.0
    - EBRD/EIB/Others: 1.1 1.4 1.4 1.1 1.1 0.9 0.7 0.6 0.4
- Memorandum items:
  - Gross international reserves (billions of U.S. dollars): 13.3 15.5 15.5 22.3 21.8 29.5 30.1 30.8 32.0
  - Months of next year's imports of goods and services: 3.1 3.5 3.4 4.7 4.6 5.8 5.4 5.2 5.0
  - Percent of short-term debt (remaining maturity): 48.0 59.2 59.2 79.7 78.0 92.3 85.5 85.5 84.2
  - Percent of the IMF composite metric 4/: 51.4 62.2 61.9 83.9 82.0 102.4 101.3 101.8 102.4

### Monetary accounts (Table 5: 2015–21; Billions of Ukrainian hryvnias unless noted)
- Monetary survey:
  - Net foreign assets (UAH): -356 464 667 353 110 100 256 305 348 412
    - (In billions of U.S. dollars): -1.4 2.4 2.4 2.4 2.6 1.8 3.8 3.3 8.4 9.9 11.2 13.3
  - Net domestic assets: 1,029 1,038 1,038 1,029 1,053 1,117 1,116 1,123 1,201 1,376 1,587 1,758
  - Domestic credit: 1,503 1,673 1,673 987 1,023 1,081 1,808 1,810 1,914 2,157 2,411 2,621
  - Credit to the economy: 1,013 1,003 1,003 987 1,023 1,081 1,077 1,081 1,172 1,286 1,407 1,554
  - Broad money: 994 1,103 1,103 1,095 1,126 1,170 1,227 1,222 1,458 1,682 1,935 2,169
  - Currency in circulation: 283 314 314 311 323 325 352 350 387 429 475 528
  - Total deposits: 711 788 788 784 803 845 875 872 1,070 1,252 1,460 1,641
    - Domestic currency deposits: 392 426 426 421 441 464 469 468 573 696 810 912
    - Foreign currency deposits: 320 362 362 363 362 381 406 404 497 556 650 729
- Accounts of the NBU:
  - Net foreign assets (UAH): 341 161 161 261 411 291 901 823 604 284 875 68
    - (In billions of U.S. dollars): 1.4 4.3 4.3 4.6 5.0 4.5 6.5 6.5 6.1 11.8 13.9 15.8 18.3
  - Reserve assets (UAH): 319 423 423 468 549 579 648 657 899 925 953 990
    - (In billions of U.S. dollars): 13.3 15.7 15.5 16.9 19.5 20.0 22.3 21.9 29.5 30.1 30.8 32.0
  - Base money: 336 382 382 386 405 412 433 431 486 545 608 677
- Deposit money banks:
  - Net foreign assets (UAH): -69 -52 -52 -60 -68 -76 -79 -82 -104 -123 -140 -156
    - (In billions of U.S. dollars): -2.9 -1.9 -1.9 -2.2 -2.4 -2.6 -2.7 -2.7 -3.4 -4.0 -4.5 -5.0
  - Domestic credit: 1,217 1,417 1,417 1,434 1,475 1,539 1,606 1,605 1,864 2,105 2,361 2,583
  - Banks' liabilities: 711 788 788 783 802 845 875 872 1,070 1,252 1,459 1,641
- Key monetary rates and ratios (memorandum items):
  - Base money (percent change): 0.8 13.6 13.6 1.3 6.1 8.1 13.6 13.0 12.7 12.0 11.7 11.3
  - Broad money (percent change): 3.9 10.9 10.9 -0.7 2.1 6.1 11.3 10.8 19.3 19.2 15.4 15.1
  - Credit to the economy (percent change): -1.0 -1.1 -1.1 -1.6 2.1 7.8 7.4 7.8 8.4 8.4 9.7 9.4
  - Credit-to-GDP ratio (percent): 51.2 44.0 42.1 40.6 40.6 41.3 41.0 39.5 38.1 37.6 37.3 37.3
  - Velocity of broad money, ratio: 1.99 1.82 1.83 2.22 2.24 2.24 2.14 2.24 2.11 2.03 1.95 1.92

### Indicators of Fund credit (Table 6: 2015–25)
- Stock of existing and prospective Fund credit (In millions of SDRs): 7,701 8,417 11,846 13,206 12,053 11,264 10,178 8,476 6,418 4,360 2,597
  - In percent of quota: 561 418 589 656 599 560 506 421 319 217 129
  - In percent of GDP: 11.8 12.5 16.6 17.3 14.4 12.3 10.2 7.7 5.0 3.2 1.8
  - In percent of exports of goods and services: 22.5 25.5 31.9 33.4 28.3 24.6 20.8 16.3 11.6 7.4 4.1
  - In percent of gross reserves: 81.0 75.3 72.9 60.1 53.9 49.1 42.8 34.5 27.8 21.4 14.6
- Stock of existing Fund credit (In millions of SDRs): 7,701 8,417 7,788 6,302 5,149 4,361 3,453 2,546 1,639 731 119
  - In percent of quota: 561 418 387 313 256 217 172 127 81 36 6
  - In percent of GDP: 11.8 12.5 10.9 8.3 6.2 4.8 3.5 2.3 1.3 0.5 0.1
  - In percent of exports of goods and services: 22.5 25.5 21.0 15.9 12.1 9.5 7.1 4.9 3.0 1.2 0.2
  - In percent of gross reserves: 81.0 75.3 47.9 28.7 23.0 19.0 14.5 10.4 7.1 3.6 0.7
- Stock of prospective Fund credit (In millions of SDRs): 0 0 4,058 6,904 6,904 6,904 6,724 5,930 4,779 3,628 2,478
  - In percent of quota: 0 0 202 343 343 343 334 295 238 180 123
  - In percent of GDP: 0.0 0.0 5.7 9.1 8.3 7.6 6.7 5.4 3.7 2.7 1.7
  - In percent of exports of goods and services: 0.0 0.0 10.9 17.4 16.2 15.0 13.8 11.4 8.6 6.1 3.9
  - In percent of gross reserves: 0.0 0.0 25.0 31.4 30.9 30.1 28.3 24.1 20.7 17.8 13.9
- Obligations to the Fund from existing and prospective drawings (In millions of SDRs): 125 0 881 1,822 1,515 1,161 1,423 1,984 2,261 2,175 1,810
  - In percent of quota: 9 0 44 91 75 58 71 99 112 108 90
  - In percent of GDP: 0.2 0.0 1.2 2.4 1.8 1.3 1.4 1.8 1.8 1.6 1.3
- Notes:
  - 1/ End of period.
  - 2/ Repayment schedule based on repurchase obligations and charges.
  - 3/ For 2015 Ukraine's old quota of SDR 1,372 million applies. Ukraine's new quota of SDR 2,011.8 million became effective in February 2016.

### Supplementary Letter of Intent
- A Supplementary Letter of Intent dated Kyiv, March 29, 2017, is present in the source document (addressed to Ms. Christine Lagarde, Managing Director, IMF).

*Sources: Ukrainian authorities; World Bank, World Development Indicators; National Bank of Ukraine; Ministry of Finance; and IMF staff estimates and projections.*

### 1.      This letter supplements our Letter of Intent of March 2, 2017, and provides information

### cr1783 - 1.      This letter supplements our Letter of Intent of March 2, 2017, and provides information

### Recent developments and security measures
- Escalation in the eastern part of Ukraine and increased actions against national and economic security, including the seizure of assets of Ukrainian companies operating in the non-government controlled areas and disruption of supply chains.
- National Security and Defense Council decision to temporarily halt trade with the non-government controlled areas and all transport of goods, excluding humanitarian assistance, to and from the non-government controlled areas, until property rights are restored.
- Strong negative public reaction to Russian state-owned banks operating in Ukraine led to restrictions on transactions of these banks with their parent banks; these measures were notified to the IMF’s Executive Board under Decision No. 144-(52/51).
- Authorities state they will ease these restrictions as soon as security conditions permit.

### Economic impact and macro outlook
- Immediate negative repercussions for energy and steel production, and hence for exports and economic growth.
- Expectation that companies will gradually adjust operations by finding new suppliers and expanding capacity in government-controlled areas.
- Growth in 2017 is expected to be almost 1 percentage point lower than previously projected.
- Current account deficit is expected to widen to 3¾ percent of GDP in 2017.
- National Bank of Ukraine’s (NBU) reserves are projected to reach US$21.8 billion by year-end, about US$0.5 billion less than anticipated earlier.
- Authorities will allow the exchange rate to adjust and maintain appropriately tight monetary policies to meet the inflation objective and limit adverse balance of payments impact.
- Authorities remain committed to meeting the budget deficit targets previously agreed despite increased uncertainty and some loss in revenues, emphasizing the importance for reducing the public debt burden.

### Financial sector stability and support measures
- The abovementioned banks are described as solvent and continuing to adhere to prudential regulations.
- Arrangements made to ensure quick access to necessary liquidity support if needed, including emergency liquidity assistance from the NBU.
- Authorities commit to treat banks evenhandedly, to ensure the safety and security of these banks’ offices and branches, and to allow continued and uninterrupted operations.
- Nationalization of the country’s largest, but insolvent, private bank occurred and has impacted financial markets.

### Program performance criteria, requests, and adjustments
- Proposal to set performance criteria for accumulation of the NBU’s net international reserves and net domestic assets for end-June, end-September, and end-December 2017 as specified in the attached Table 1; all other performance criteria and indicative targets for those dates remain as proposed in the March 2, 2017 letter and as reflected in Table 1.
- Request for a waiver of non-observance of the end-March 2017 performance criterion on the accumulation of the NBU’s net international reserves; based on available data it is expected to be missed by US$520 million, attributed to recent developments and the impact on financial markets from the nationalization of the largest bank.
- Request for a waiver of applicability of all other end-March 2017 performance criteria as presented in Table 1, since final data are not yet available and there is no indication these have not been observed.
- Request to reset the structural benchmark on adoption of legislation to merge customs and tax administration into a single legal entity to end-April 2017 (instead of end-March 2017).
- With these changes, request completion of the third review and the financing assurances review, and disbursement of SDR 734.05 million.

### Key quantitative table highlights (Table 1, end-of-period targets and memoranda)
- Ceiling on the cash deficit of the general government (- implies a surplus): Proposed end-June 15,000; end-September 29,000; end-December 45,000; (column shows 80,970 in adjacent context).
- Ceiling on the cash deficit of the general government and Naftogaz (- implies a surplus): Proposed flows include -1,100; 16,200; 52,000; (80,970 in adjacent context).
- Floor on cumulative change in net international reserves (in millions of U.S. dollars): 2,288; 3,451; 2,894; 4,578.
- Ceiling on cumulative change in net domestic assets of the NBU: 22,584; 14,301; 30,791; 23,169.
- Ceiling on publicly guaranteed debt: 15,000; 15,000; 15,000; 15,000.
- Continuous performance criterion: Non-accumulation of new external debt payments arrears by the general government: 0 0 0 0.
- Indicative targets: Ceiling on cumulative change in base money: 58,655 (other quarters n.a.).
- Inflation (mid-point, percent): 12.0; 12.0; 10.0; 8.0 (mid-point within a +/- 3 percent range through 2017Q3; mid-point within a +/- 2 percent rage in 2017Q4).
- Ceiling on stock of VAT refund arrears: 0 0 0 0.
- Ceiling on current primary expenditure of the state budget: n.a. n.a. n.a. 620,000.
- General government employment (excluding salaried military personnel): n.a. n.a. 3,290,011 n.a.
- Memorandum items:
  - Naftogaz deficit (- implies a surplus): -16,100; -12,800; 7,000; 0.
  - External project financing: 4,000; 8,000; 12,000; 16,000.
  - NBU loans to DGF and operations with government bonds issued for DGF financing or banks recapitalization: 4,552; 8,027; 24,979; 23,599. (table formatting preserved as in source)
  - Government bonds issued for banks recapitalization and DGF financing: 7/6,000; 184,000; 207,000; 227,000.
  - Programmed disbursements of international assistance except IMF (millions of U.S. dollars): 2,529; 2,479; 2,534; 4,368.
  - Net financing from debt operations (millions of U.S. dollars): 2,199; 2,545; 4,877; 5,846.
  - Projected payments of interest on government bonds held by NBU: 10,585; 22,880; 33,290; 44,822.
  - Net issuance of central government domestic FX debt: -9/1,000; 852; 701.
  - Program accounting exchange rate, hryvnia per U.S. dollar: 15.7686; 15.7686; 15.7686; 15.7686.

### Executive summary and policy priorities (staff report highlights)
- After the 2014–15 crisis, the economy is growing again and tight fiscal and monetary policies have greatly reduced internal and external imbalances.
- Reserves—while still relatively low—have doubled to US$15 billion.
- The pace of recovery has been modest; faster growth is needed to catch up with regional peers and lift per capita income.
- Policy priorities to accelerate growth while maintaining macro stability:
  - (i) Attract investment and raise potential by improving business environment, reforming the large state-owned enterprise (SOE) sector, developing a market for agricultural land, and tackling corruption.
  - (ii) Ensure fiscal sustainability through fiscal consolidation, supported by pension reform, more efficient public spending, and a more equitable and growth-friendly tax system.
  - (iii) Further reduce inflation and rebuild reserves.
  - (iv) Repair viable banks and revive sound bank lending.
- Program performance: All fiscal and monetary performance criteria for end-December 2016 were met.
- Important policy measures since last review include adoption of a 2017 budget consistent with program targets; adoption of an automatic adjustment mechanism to maintain gas and heating tariffs at market levels; tightening of norms for utility subsidies; nationalization of the largest insolvent private bank; and publication of high-level officials’ asset declarations.
- Several structural benchmarks were missed and reset, including on land, SOE, and pension reforms.
- Staff supports completion of the third review and the financing assurances review; the purchase available upon completion of this review would be equivalent to SDR 734.05 million, bringing total purchases under the Extended Fund Facility to SDR 6,178.26 million.

*Source: Letter supplementing the Letter of Intent of March 2, 2017, and IMF staff report excerpts as presented in the provided content.*

### 6.      Inflation has been successfully brought down. With strengthened independence and a

### 6.      Inflation has been successfully brought down. With strengthened independence and a

### Macroeconomic stabilization and monetary policy
- Inflation has fallen from its peak of 61 percent in April 2015 to 12½ percent by end-2016, very close to the NBU’s target.
- The National Bank of Ukraine (NBU) has strengthened independence and with a strong commitment to medium-term price stability has steered monetary policy adeptly to ensure that the pass-through of large shocks to prices was short-lived.
- Inflation is projected to decline further, to close to 10 percent by end-2017, and to gradually reach the NBU’s medium-term target of 5 percent in the coming years.
- Reserve adequacy—as measured by the IMF composite index—is expected to be achieved by end-2018.

### Banking sector cleanup and financial vulnerabilities
- Following two rounds of asset quality reviews, decisive efforts are underway to strengthen banks’ capitalization and reduce excessive credit concentration.
- Nearly 90 insolvent banks, including the largest private bank accounting for more than 50 percent of the banking system’s assets in early 2014, have been resolved.
- Confidence is gradually being restored and deposits are on the rise.
- Remaining vulnerabilities:
  - public and external debt at around 85 and 130 percent of GDP, respectively;
  - gross international reserves, while having increased, are still low by standard metrics;
  - the financial system remains heavily dollarized and strained by record-high non-performing loans;
  - the public sector is large and inefficient, while pressures to increase public spending remain strong.

### Growth performance, structural constraints, and competitiveness
- Growth is estimated to have reached 2 percent in 2016.
- Dollar GDP is now half of its pre-2014 level and GDP per capita in PPP terms is just 20 percent of the EU average, the second lowest level of all Central and Eastern European countries.
- On balance, the economy has not grown at all over the last decade and has only grown by a meager annual average of 0.8 percent over the last two decades.
- Structural impediments:
  - important parts of the economy are dominated by oligarchs and inefficient SOEs, deterring competition and contributing to corruption;
  - no large SOE has been privatized in recent years;
  - excessive regulation, arbitrary tax administration, and a weak judicial system undermine the business environment;
  - a moratorium on agricultural land sales hampers agricultural sector development.
- Labor and trade challenges:
  - labor productivity is low, amounting to less than 10 percent of average productivity in EU countries;
  - labor participation has declined, including due to migration of younger and skilled workers;
  - trade disruptions and commodity price volatility affected exports and growth, prompting re-orientation to Europe and Asia;
  - the Deep and Comprehensive Free Trade Area (DCFTA) could provide new trade opportunities.

### Outlook, projections, and key macroeconomic figures
- Near-term outlook:
  - Growth could accelerate to close to 3 percent in 2017, supported by stronger consumer and investor confidence and rising real incomes (including due to the higher minimum wage).
  - Inflation is projected to be close to 10 percent by end-2017.
- Medium-term scenario:
  - Growth could accelerate to around 3½–4 percent over the medium term, assuming structural reforms are implemented and no intensification of the conflict.
  - Growth drivers: capital investment to reorient trade and increase production; recovery in total factor productivity; increased labor market participation (with pension reform helping offset adverse demographic trends).
- Debt and reserves:
  - Public debt is projected to drop below 70 percent of GDP by 2021, assuming successful completion of the debt operation, sustained fiscal consolidation, and gradual growth pickup.
  - The Debt Sustainability Analysis (DSA) includes the full costs of bank recapitalization of 11½ percent of GDP, assuming successful bail-in of 1¼ percent of GDP of related-party liabilities and, conservatively, no gains from asset recovery.
- Macroeconomic framework (selected table entries reproduced exactly):
  - Real GDP: 2016 2.0 2017 2.9 2018 3.1 2019 3.5 2020 4.0 2021 4.0
  - Inflation (eop): 2016 12.4 2017 10.0 2018 7.0 2019 6.0 2020 5.0 2021 5.0
  - General government balance 1/: 2016 -2.3 2017 -3.1 2018 -2.6 2019 -2.4 2020 -2.2 2021 -2.1
  - Public debt 1/: 2016 84.9 2017 91.4 2018 86.2 2019 78.6 2020 72.2 2021 66.4
  - Credit to the nongovernment-: 2016 -1.1 2017 7.4 2018 8.5 2019 11.4 2020 10.2 2021 10.5
  - External current account 1/: 2016 -3.8 2017 -3.0 2018 -2.6 2019 -2.7 2020 -2.6 2021 -2.9
  - Foreign direct investment 1/: 2016 3.8 2017 1.7 2018 2.5 2019 3.2 2020 3.6 2021 3.4
  - GIR (eop, billions of U.S. dollars): 2016 15.5 2017 22.3 2018 30.2 2019 30.3 2020 30.7 2021 31.8
  - Months of next year's imports: 2016 3.5 2017 4.7 2018 5.9 2019 5.5 2020 5.2 2021 5.0
  - Percent of IMF composite measures: 2016 62.2 2017 83.9 2018 105.3 2019 102.7 2020 102.0 2021 102.9
  - Sources: Ukrainian authorities; and IMF staff estimates.

### Risks and conditionalities
- Major risks:
  - Possible escalation of the conflict in the eastern part of Ukraine (including flare ups of military action and a trade blockade).
  - Domestic risks from reform delays due to the narrow majority of the governing coalition and possible policy reversals facing vested interests.
  - External risks include further weakening of the terms of trade, a weaker global recovery, or slowdown in major emerging markets affecting Ukraine through trade and commodity price channels.
- If reforms are not sustained or external risks materialize, growth prospects could be much weaker than projected, with implications for fiscal and external sustainability.

### Macroeconomic impact of doubling the minimum wage (Box 1 findings)
- The government doubled the minimum wage to UAH 3,200 (about US$125) per month, effective January 1, 2017.
- The shadow economy is estimated at around 40 percent of the overall economy.
- Official statistics show that about 44 percent of private sector employees receive less than UAH 3,200.
- The new minimum wage is 50 percent higher than its pre-crisis average in real terms and is close to 50 percent as a share of the average wage (regional average: 40 percent).
- Short- and medium-term impacts:
  - The economy-wide actual wage bill is expected to increase by roughly 10 percent.
  - This will increase consumption and temporarily boost growth by an estimated modest 0.2 percentage points.
  - The measure will increase inflation by about 2 percentage points in 2017.
  - The increase may affect smaller businesses in less populated regions, possibly driving some into the shadow economy or to adjust employment and hours.
- Longer-term impacts depend on whether the central bank allows exchange rate adjustment, whether the increase is perceived as a one-off, and how the increase feeds through to public sector wages and pensions.

### Policy priorities and reform agenda
- An ambitious policy agenda is necessary to accelerate growth, improve living standards, strengthen resilience, and maintain macroeconomic stability. Key focus areas:
  - Building a vibrant private sector and raising potential output by accelerating SOE reform, improving the business environment, developing a market for agricultural land, and tackling corruption.
  - Ensuring fiscal sustainability through further consolidation, supported by pension reform, improving spending efficiency, and making the tax system more efficient and growth friendly.
  - Further energy reforms to improve governance and efficiency while avoiding re-emergence of quasi-fiscal deficits.
  - Further reducing inflation and rebuilding reserves.
  - Repairing viable banks and reviving sound bank lending.

*Source: Ukrainian authorities; and IMF staff estimates.*

### 20.      The pace of structural reforms will need to be dramatically increased to improve the

### 20.      The pace of structural reforms will need to be dramatically increased to improve the business environment, attract investment, and raise the economy’s potential

### Structural reforms: privatization, land, and business environment
- To build momentum in what to date has been a largely unsuccessful privatization process:
  - A first set of larger companies will need to be privatized in a transparent process and a pipeline of companies for sale will need to be prepared, with their shares transferred from the line ministries to the State Property Fund.
  - A much faster divestiture of smaller companies and assets of defunct companies should be facilitated by launching an electronic platform.
  - Only a small number of SOEs considered strategic should remain under state ownership, with further improvements in their governance, including the appointment of independent supervisory boards.
- Land reform:
  - As Ukraine has a comparative advantage in agriculture and related industries, land reform will need to get underway.
  - The key step toward this would be adopting legislation to allow the sale of agricultural land and lifting the moratorium on land sales.
- Broader business environment improvements needed:
  - Eliminate unnecessary licenses.
  - Improve revenue administration.
  - Advance judicial reform and ensure adherence to the rule of law.
  - Strengthen competition.
  - Reduce rigidities in the labor code to foster employment.

### Tackling corruption and increasing transparency
- Corruption remains the most frequently mentioned obstacle to doing business in Ukraine.
- Progress to date:
  - New institutions set up, including the National Anti-Corruption Bureau of Ukraine (NABU).
  - Adoption of legislation to reform the judiciary and declaration of assets by high-level officials were major steps forward.
- Shortcomings:
  - Tangible results in prosecuting and convicting corrupt high-level officials and recovering proceeds from corruption have yet to be achieved.
- Recommended steps:
  - (i) The National Agency for the Prevention of Corruption (NAPC) should start checking the asset declarations of senior officials and be more forthcoming in working together with NABU.
  - (ii) NABU’s investigative powers should be strengthened further.
  - (iii) An independent anticorruption court should be set up.
  - Increased scrutiny of high-level officials’ sources of wealth and further strengthening the anti-money laundering framework will help detect and deter corruption.
  - Public administration reform is necessary to create room to decompress the wage structure, ensure a better link between a person’s wage and the job performed, and reduce incentives for corruption.
- Staff analysis note:
  - A lower level of corruption, at the EU average, could contribute to a higher rate of per capita GDP growth, by possibly as much as 2 percentage points a year (see Selected Issues Paper from March 2017).

### Making government finances sustainable and more efficient
- Fiscal targets and debt:
  - With public debt still above safe levels, continued fiscal discipline is necessary.
  - A primary fiscal surplus of at least 1¾ percent of GDP needs to be sustained in the coming years to steadily reduce debt.
  - Staff projections suggest that debt would fall below 70 percent of GDP by 2021 (Figure 5).
- Fiscal pressures and minimum wage:
  - The decision to double the minimum wage has increased risks to medium-term fiscal sustainability.
  - Authorities’ efforts attempted to limit the immediate impact on the wage bill to 1½ percent of GDP by compressing the wage structure, but strong pressures could emerge to raise civil service wages and pensions.
  - Under a scenario that assumes implementation of the civil service law adopted last year and a gradual increase in pension replacement rates to pre-crisis levels, fiscal measures in the order of 3–5 percent of GDP would be needed to ensure the program’s medium-term primary balance target of 1¾ percent of GDP is achieved.
- Structural fiscal reforms critical to achieve fiscal targets:
  - (i) Downsize public sector employment—which at 25 percent of total employment is large compared to elsewhere in the region—including notably in the healthcare and education sectors, while improving the efficiency of spending.
  - (ii) Streamline social assistance programs and improve their targeting to protect the vulnerable.
  - (iii) Ensure the viability of the pension system.

### Pension system challenges and reforms
- Current situation:
  - Ukraine has one of the highest levels of pension spending in Europe, while having one of the lowest levels of average pension benefits, providing an old-age income of slightly more than US$2 per day.
  - Very large number of beneficiaries—with a beneficiary to contributor ratio of 1:1—reflecting one of the lowest statutory retirement ages in Europe combined with still generous early retirement options.
  - Pension fund revenues are low, as the social contribution rate was cut to one of the lowest in Europe in late 2015, and there is considerable avoidance in paying contributions.
  - This has resulted in the second largest pension fund deficit in Europe, estimated to have reached 6 percent of GDP in 2016.
- Outlook and demographic pressures:
  - Challenges are expected to worsen as the population continues to age and young people leave to find job opportunities abroad.
- Recommended comprehensive reforms:
  - Further reduce the scope for early retirement.
  - Increase years-of-service requirements.
  - Create incentives for people to pay contributions and retire at a later retirement age.
  - Act now because the impact of these decisions on the pension system’s finances will be gradual.

### Tax policy and revenue administration
- Tax cuts:
  - Further major tax cuts should be avoided.
  - After the tax reforms adopted in late 2015, tax rates are no longer high by international standards.
  - Bringing the agricultural sector fully under the general regime for value added taxation was a major step forward.
  - Proposals for tax amnesties, tax holidays, and tax-free industrial zones would distort the tax system and should be resisted.
- Focus instead:
  - Tighten the overly generous simplified tax regime:
    - The effective taxation rate under the simplified tax regime for small taxpayers needs to be increased significantly and eligibility tightened.
  - Overhaul revenue administration without delay to transform the State Fiscal Service (SFS) into a modern administration:
    - Strengthen institutional framework, powers to collect and enforce taxes, and governance.
  - Given the still very large size of the informal economy, there would be significant potential for revenue gains to fund government priorities.

### Improving energy efficiency and independence
- Tariffs and quasi-fiscal deficits:
  - Keeping energy prices at import-parity levels is critical to prevent the reemergence of quasi-fiscal deficits.
  - Following two rounds of tariff adjustment, gas and heating tariffs reached full import parity levels after the 2015–16 heating season, supporting a dramatic decline in gas consumption and all but eliminating the quasi-fiscal deficit of Naftogaz in 2016.
  - While a law providing for an independent regulator was adopted, there has been limited progress in unbundling the gas sector.
  - Pending full liberalization of the gas market, it will be important to ensure that tariffs remain at full cost recovery.
- Protection and targeting of subsidies:
  - The poorest households should continue to be protected from higher energy tariffs, but the targeting of subsidies needs to be improved.
  - Utility subsidies are provided now to half of all households; these subsidies need to be better targeted to keep them fiscally affordable, protect households in need, and focus on incentivizing energy efficiency.
- Structural reforms to attract investment and increase efficiency:
  - Further improvements in governance and regulation to attract investment in domestic oil and gas production.
  - Unbundling of Naftogaz and monetization of utility subsidies so that private gas traders can compete with Naftogaz in the supply of gas.
- Energy efficiency specifics (Box 2 highlights):
  - Gas represents about 75 percent of resources used for individual heating.
  - Energy-related social assistance programs can be improved: around half of households are receiving subsidies that accrue as a non-cash credit on households’ utility accounts; monetization of these credits at the household level could help incentivize households to further reduce consumption.
  - Government and the EU are leading an initiative to assist households to invest in meters, regulators, insulation and other modernization measures.
  - Technological efficiency of district heating companies can be improved; the energy regulator introduced incentives to reduce thermal energy losses, allowing costs of actual energy losses to be reflected in heating tariffs if companies increase infrastructure investments and reduce losses over time.
  - Research by the Fund’s Fiscal Affairs Department suggests that an environmentally efficient tariff would be some 20 percent higher to internalize local pollution and global warming externalities.

### Rebuilding reserve buffers and anchoring inflation
- Reserves and FX measures:
  - Gross international reserves have increased to US$15 billion (about 60 percent of the ARA metric), but they are still relatively low compared to what is needed to provide an adequate buffer and handle the large external debt service payments falling due after 2018.
  - As reserves and financial stability strengthen, consideration should be given to easing remaining administrative measures on foreign exchange, prioritizing measures that help improve business conditions, attract investment, and deepen the foreign exchange market.
- Central bank policy:
  - Continued strong support for central bank independence remains important for the NBU to rebuild reserves and secure low and stable inflation.
  - The NBU is targeting a gradual disinflation path, with a commitment to continue to adhere to a flexible exchange rate regime that will support the required economic adjustment.
  - The NBU should continue to refine its inflation-targeting framework by strengthening credibility and enhancing the transmission mechanism, further improving operations, analytics, and communication, and taking further steps to support financial sector development.

### Safeguarding a stable financial system that can support growth
- Banking sector stabilization and governance:
  - Progress made in restoring banks’ financial health and improving governance, but challenges remain to fully secure financial stability.
  - Ensure banks are adequately capitalized, reduce related-party exposures below prudential limits, and have transparent ownership structures.
  - Recapitalization plans and plans for unwinding related-party exposures adopted for the largest banks, accounting for some 95 percent of current banking system assets.
  - These largest banks have now reached a risk-weighted capital of at least zero, including PrivatBank following its nationalization.
  - Banks that fail to meet plan requirements should be resolved promptly, maximizing asset recovery and timely resolution to limit state costs.
  - Over the last two years, the NBU closed 88 banks—accounting for more than half of the banking system’s assets in early 2014.
  - Banking supervision and governance need further strengthening; state-owned banks must operate on a commercial basis and improve governance to prepare for eventual privatization.
- Non-performing loans (NPLs):
  - Stronger efforts are needed to address the high level of NPLs to facilitate sound new lending.
  - High NPLs reflect inability to foreclose on assets and lack of incentives to restructure NPLs.
  - Recommended measures:
    - Strengthen the legal framework for corporate insolvency.
    - Implement newly adopted arrangements for out-of-court restructuring of corporate debt.
    - Address tax disincentives to restructuring.
    - Improve the debt collection enforcement regime.
    - Maximize recovery of assets of failed banks by the Deposit Guarantee Fund (DGF) and facilitate their sale efficiently and transparently.

### Authorities’ views and program discussions
- Authorities’ agreement and priorities:
  - Agreed on need to continue ambitious policies under the program to accelerate growth and reduce remaining vulnerabilities.
  - Agreed external assessment that the exchange rate was broadly in line with fundamentals and that competitiveness had been restored.
  - Acknowledged faster progress needed to advance transition to a modern market economy, including improving the business environment and tackling corruption.
  - Intent to focus efforts on revamping sale or restructuring of SOEs and strengthening the judiciary in line with reform legislation adopted in June 2016.
  - Committed to maintaining sound fiscal and monetary policies and advancing structural fiscal reforms to improve efficiency of government spending.
  - Started reform of large education and health sectors and developed a proposal for pension reform aimed at substantially reducing the pension system’s deficit.
- Challenges noted by authorities:
  - Continuing conflict in the eastern part of the country.
  - Challenges in passing some reform legislation through parliament given the small majority of the coalition.
  - Notwithstanding challenges, considerable progress made in reducing imbalances and restoring growth.
- Program discussions and prior actions:
  - Program discussions focused on accelerating reform momentum in key policy areas.
  - All continuous and end-December 2016 performance criteria were met.
  - Five prior actions implemented for completion of the review:
    - Adopting a 2017 government budget consistent with program targets, including supporting legislation.
    - Securing progress in bringing gas and heating tariffs to import-parity levels by adopting an automatic tariff adjustment mechanism.
    - Reducing consumption norms for utility subsidies.
    - Resolving banks that failed to meet capital requirements in line with agreed timetables, including the nationalization of the largest private bank.
    - Ensuring that all high-level officials submitted an electronic asset declaration and making these available to the public.
  - Due to political and technical challenges and limited implementation capacity, 8 out of 11 structural benchmarks for this review had to be reset.

### Fiscal policy execution (brief)
- Budget execution:
  - Budget execution continued to be strong, over-performing relative to program targets.
  - The 2016 budget deficit has been limited to 2.3 percent of GDP, compared to a target of

*Source: IMF staff report excerpt (chapter on structural reforms, fiscal policy, pensions, energy, and financial sector).*

### 3.7 percent of GDP. The over-performance was the result of stronger tax and non-tax revenues.

### cr1783 - 3.7 percent of GDP. The over-performance was the result of stronger tax and non-tax revenues.

### Fiscal performance and 2017 budget
- Outturn: 3.7 percent of GDP. The over-performance was the result of stronger tax and non-tax revenues.
- Parliament approved a 2017 government budget consistent with the deficit target of 3.1 percent of GDP (MEFP ¶18).
- Tax policy: Tax rates were kept mostly unchanged, with the exception of some increases in excise rates. The agricultural sector is now fully under the general regime for VAT.
- Wages and fiscal pressures:
  - Wages in the broader public administration—including teachers and healthcare workers—were raised in line with the higher minimum wage.
  - Wage grids for the civil service and the judiciary were decoupled from the minimum wage.
  - Authorities recognized likely increased pressures to raise civil service wages and pensions, increasing the need to accelerate structural fiscal reforms (civil service, pension, healthcare, education) to eliminate waste and improve outcomes (MEFP ¶21).

### Pension reform
- Authorities have started developing a comprehensive pension reform package but require more time for legislation and parliamentary approval (MEFP ¶21a).
- Target: obtain parliamentary approval by end-April 2017 (a new date for this missed structural benchmark).
- Objectives:
  - Put pension fund finances on a sustainable footing.
  - Create room for better pensions by increasing the effective retirement age.
  - Establish a single database of beneficiaries of social benefits, including pensions (a new structural benchmark for end-December 2017, MEFP ¶21d) to help detect benefit fraud.

### Revenue administration and tax modernization
- Progress:
  - SFS substantially reduced staff and streamlined regional offices; begun reorganization along functional lines.
  - Anticorruption efforts: vetting/reappointing staff; new internal department to investigate corruption-related offenses by SFS staff.
  - Ministry of finance established key performance indicators for the SFS.
  - Taxpayer services improved: Large Taxpayer Office concentration, new electronic services (streamlining VAT payments and refunds), and a “single window” at customs.
- Remaining priorities (MEFP ¶20):
  - Merge tax and customs administrations within the SFS and transform the SFS into a single legal entity by end-March 2017 (new deadline for missed structural benchmark).
  - Complete reorganization along functional lines.
  - Establish stronger oversight by the ministry of finance of SFS operations, including IT systems.
  - Dissolve the tax police within the SFS and establish a new civil financial police (new structural benchmark for end-April 2017).
  - Strengthen taxpayer compliance by granting SFS additional legal powers (e.g., ability to use indirect tax liability assessment methods).
  - Introduce risk-based audit procedures.

### Energy sector policies
- Tariffs and subsidy reform:
  - An automatic tariff adjustment mechanism adjusts gas tariffs semi-annually to ensure they remain at import parity (MEFP ¶24).
  - Utility subsidies will be monetized (at the level of utility companies) before the next heating season (new structural benchmark for end-August 2017).
- Targeting household subsidies:
  - Consumption norms revised downward.
  - Additional changes before next heating season include further adjustments to subsidy parameters, adjustment to the social norm for off-peak heating months, and introduction of a capacity-based distribution tariff to shift some charges to the summer (new structural benchmark for end-July 2017).

### Monetary and exchange rate policy
- NBU policy stance:
  - Continue gradually reducing interest rates, purchasing foreign exchange, and following a conditions-based easing of administrative measures (MEFP ¶3–6).
  - Monetary policy guidelines for 2017 and medium term target inflation of 8 percent by end-2017 (±2 percent) and 5 percent over the medium term, within a flexible exchange rate regime.
  - Key policy rate kept positive in real terms: 14 percent since October 2016.
  - Further easing to be gradual and conditional on inflation expectations and reserve accumulation.
  - NBU continued to purchase foreign exchange—meeting the September and December 2016 net international reserve targets—with occasional sales to avoid excessive volatility.
- Road map: New condition-based road map for further relaxation of administrative measures on foreign exchange, prioritizing measures supporting investment and deepening the FX market.

### Financial sector policies and PrivatBank
- PrivatBank nationalization:
  - Nationalized after failure to meet capital requirements (MEFP ¶8).
  - Systemic role: accounted for more than one-fifth of banking system assets.
  - Capital shortfall amounted to nearly 7 percent of GDP, mainly from related-party loans requiring provisioning.
  - State became sole owner; related-party deposits and other liabilities bailed in equivalent to about 1¼ percent of GDP (12 percent of the bank’s total deposits and liabilities).
  - All other household deposits fully guaranteed.
- Post-nationalization actions:
  - New management and supervisory boards appointed; supervisory board majority independent.
  - Reputable audit firm hired for due diligence; forensic audit to investigate possible wrongdoing ahead of nationalization.
  - Loans to parties related to former owners assigned to a special unit in the bank.
  - An international asset management firm will be hired to enhance value or collect on these loans.
  - Another audit firm will be hired to evaluate progress in enhancing this loan portfolio (a new structural benchmark for end-April 2017).
  - PrivatBank should be privatized over the medium term.
- Broader bank recapitalization and oversight:
  - Next group of 19 largest banks required to bring capital to at least zero by mid-January 2017 and submit credible recapitalization/unwinding plans; three were closed and transferred to the DGF.
  - Remaining banks in this group need a capital adequacy ratio of 5 percent by end-April 2017.
  - Remaining 59 banks (about 5 percent of banking system assets) to be evaluated during 2017.
  - Legislation to improve governance of state-owned banks expected by end-March 2017 (smaller and independent supervisory boards; transfer accountability from cabinet to boards).
  - Other forthcoming legislation: establish a credit registry at the NBU; enhance DGF’s ability to dispose of failed-bank assets; strengthen corporate debt restructuring and insolvency framework (missed structural benchmark, reset for end-September 2017).
  - NBU completed an assessment of its regulatory framework in coming months.
- NBU institutional strengthening:
  - New Council established in November 2016; Audit Committee constituted (MEFP ¶7).
  - Emergency liquidity assistance framework revamped in line with Fund staff recommendations.

### Structural reforms and anti-corruption
- Asset declarations:
  - Publication of senior officials’ asset declarations was a major step; large amounts disclosed by some officials surprised the public.
  - Need for adequate follow-up, starting with non-filers, to address corruption which deters investment (MEFP ¶26).
- Strengthening NABU and judiciary:
  - Authorities will strengthen powers and independence of NABU, including granting wiretap rights (missed structural benchmark, reset for end-May 2017) and safeguarding exclusive jurisdiction for high-level corruption cases.
  - Set up an anticorruption court as foreseen in the June 2016 Law on the Judiciary (implementing legislation is a new structural benchmark for mid-June 2017) to become operational in early 2018.
  - Further strengthen anti-money laundering framework.
- State-owned enterprises and business environment:
  - Little progress in SOE reform; benchmarks reset (MEFP ¶27–28).
  - Delays in triage of all SOEs (missed structural benchmark, reset for end-August 2017).
  - Authorities aim to accelerate by:
    - Identifying a pipeline of large enterprises for privatization with parallel processes.
    - Accelerating liquidation of non-viable companies and streamlined privatization of smaller companies through electronic auctions.
    - Appointing independent supervisory boards in all large SOEs under transparent procedures.
    - Improving legal framework, including amendments to privatization law to improve transparency and safeguards (missed structural benchmark, reset for end-August 2017).
  - Priorities: elimination of costly regulations; adoption of law on electricity market; adoption of law on agricultural land circulation (missed structural benchmark, modified and reset for end-May 2017) to allow removal of moratorium on land sales.
  - Establish efficient regime for expedited processing of claims and enforcement of debts through seizure of sums in bank accounts (missed structural benchmark, reset for end-September 2017).

### Program financing, debt operations, and exceptional access
- Financing assurances:
  - Firm financing assurances in place for the next 12 months, with good prospects for the rest of the program.
  - Includes the second and third tranches of the EU’s Macro Financial Assistance (each €600 million) expected by Q1-2017 and Q4-2017, respectively.
  - Assumption: Russian-held bond will be restructured consistent with program parameters.
  - Conclusion: external financing commitments remain adequate to close the financing gap through the end of the program, given strong program implementation.
- Debt restructuring:
  - Authorities’ efforts consistent with policy on lending into arrears to official bilateral creditors.
  - Offered substantive dialogue with Russian authorities on restructuring the US$3 billion bond.
  - Staff assesses efforts consistent with policy on non-toleration of arrears to official bilateral creditors; conditions met to proceed with the review.
- Exceptional access criteria:
  - Program continues to satisfy the substantive criteria for exceptional access (Box 3).
  - Public debt projected at 72.2 percent of GDP in 2020, slightly above original program target of 71 percent, but on a firm downward path.
  - Official reserves remain very low, covering only 59 percent of short-term debt and below the 100 percent adequate benchmark of the Fund reserve metric.
  - A package of capital control measures remains in place to support financial stability.

### Key program financing figures (Program Financing table; in billions of U.S. dollars)
- Financing Gap 1/: 2015: 5.6; 2016: 6.3; 2017: 12.4; 2018: 5.7; Total: 40.0
- Reserve accumulation: 2015: 6.0; 2016: 2.3; 2017: 6.8; 2018: 7.9; Total: 23.1
- Underlying BOP gap 1/9.6: 2015: 4.0; 2016: 4.0; 2017: 5.7; 2018: -2.2; Total: 16.9
- Identified Financing 2/: 2015: 5.6; 2016: 6.3; 2017: 12.4; 2018: 5.7; Total: 40.0
- Bilateral and multilateral: 2015: 9.8; 2016: 2.7; 2017: 8.0; 2018: 3.7; Total: 24.3
- IMF: 2015: 6.5; 2016: 1.0; 2017: 5.5; 2018: 3.8; Total: 16.8
- Other multilateral/bilateral: 2015: 3.3; 2016: 1.7; 2017: 2.6; 2018: -0.1; Total: 7.5
- Multilateral: 2015: 1.0; 2016: 0.3; 2017: 1.0; 2018: -0.1; Total: 2.1
- European Union: 2015: 0.9; 2016: 0.1; 2017: 1.3; 2018: 0.0; Total: 2.3
- United States: 2015: 1.0; 2016: 1.0; 2017: 0.0; 2018: 0.0; Total: 2.0
- Other bilateral: 2015: 0.4; 2016: 0.3; 2017: 0.4; 2018: 0.0; Total: 1.1
- Debt operation: 2015: 5.7; 2016: 3.5; 2017: 4.4; 2018: 2.0; Total: 15.7
- Memorandum items — Project loans 3/: 2015: 0.7; 2016: 0.9; 2017: 0.9; 2018: 1.4; Total: 3.9
- Project financing to public and private sector: Multilateral: 2015: 0.7; 2016: 0.8; 2017: 0.5; 2018: 0.9; Total: 3.0
- WB: 2015: 0.1; 2016: 0.1; 2017: 0.2; 2018: 0.5; Total: 0.9
- EBRD: 2015: 0.5; 2016: 0.7; 2017: 0.3; 2018: 0.2; Total: 1.6
- EIB: 2015: 0.1; 2016: 0.0; 2017: 0.1; 2018: 0.3; Total: 0.5
- Bilateral (memorandum): 2015: 0.0; 2016: 0.0; 2017: 0.4; 2018: 0.5; Total: 0.9
- Capital market access: 2015: 0.0; 2016: 0.0; 2017: 1.0; 2018: 2.0; Total: 3.0
- Gross international reserves: 13.3; 15.5; 22.3; 30.2
- Percent of composite metric: 51.3; 62.2; 83.9; 105.3

*Source: IMF staff estimates.*

### Box 3. Exceptional Access Criteria (concluded)

### Box 3. Exceptional Access Criteria (concluded)

### Debt sustainability and financing assumptions
- Financing from sources other than the Fund may include, inter alia, financing obtained through any intended debt restructuring; this applies only to public (domestic and external) debt, but analysis will incorporate relevant contingent liabilities, including those potentially arising from private external indebtedness.
- Assuming the successful completion of the debt operation:
  - Public debt is projected on a clearly downward path, reaching 72.2 percent of GDP by 2020.
  - Gross financing needs remain on average significantly below DSA higher risk benchmarks during and after the program period.
  - Sensitivity tests show that debt remains on a non-explosive path after a number of reasonable macroeconomic shocks.
  - The shift in the composition of debt towards official debt with longer maturity and lower cost lessens risks.
- Conclusion: staff considers the debt to be sustainable in the medium term with high probability.

### Criterion 3 — Prospects for regaining market access
- The policy and financing mix under the program addresses domestic and external imbalances needed to stabilize the economy and revive growth in the medium term.
- With successful implementation of the program and completion of the debt operation:
  - Confidence should improve, helping to bring Ukraine CDS and bond spreads down and ultimately lead to regaining market access.
  - Staff anticipates Ukraine has good prospects for regaining access to private capital markets on a scale that would enable it to meet its obligations falling due to the Fund, provided continued support from the international community.

### Criterion 4 — Prospect of program success and implementation capacity
- The program provides a reasonably strong prospect of success, considering adjustment plans and institutional and political capacity to deliver:
  - The program has remained broadly on track, with fiscal and monetary policies meeting targets and objectives.
  - Key prior actions implemented include adoption of the 2017 budget, further cleaning up of the banking system, and measures to prevent reemergence of losses in the energy sector.
  - Prior actions demonstrate authorities’ ability to tackle major reforms affecting vested interests if given enough time.
  - Re-phasing of next steps in key reform areas aligns the program better with observed implementation capacity.
- Major risks:
  - Fragile parliamentary majority and pressures for populist policies.
  - Resistance to deeper reforms from vested interests.
  - Conflict in the eastern part of Ukraine (mitigated by the peace process).
- Support factors:
  - Authorities’ strong commitment to the program.
  - Significant technical support from the Fund and other multilateral and bilateral creditors.

### C. Capacity to Repay the Fund and Risks to the Program
- Under the program scenario, Ukraine’s capacity to repay the Fund remains adequate, assuming:
  - Implementation of envisaged policies and reforms.
  - Revival of growth, external and fiscal adjustment, and buildup of reserves.
- As a result of the debt operation:
  - Gross financing needs are contained during the program period when the first large repayments come due to the Fund in 2018.
  - In 2018, debt service as a ratio of exports of goods and services would peak at 4½ percent.
  - By the end of the arrangement in early 2019, outstanding credit to the Fund is projected at about 17.3 percent of GDP, or 59 percent of gross reserves.
- Uncertainties and downside risks:
  - Main risk: domestic political situation.
  - Other risks: geopolitical developments.
  - Ukraine’s ability to repay would be adversely affected if the program were interrupted due to weak performance or an intensification of the conflict that would weigh on market and investment sentiment.

### D. Exchange System
- Ukraine continues to maintain several exchange restrictions and Multiple Currency Practices (MCPs); a roadmap has been put in place to gradually phase them out.
- Exchange restrictions identified:
  - Absolute limits on the availability of foreign exchange for certain non-trade current international transactions.
  - Partial ban on the transfer abroad of dividends received by nonresident investors from foreign investments in Ukraine.
- MCPs identified:
  - Use of multiple price foreign exchange auctions conducted by the NBU without a mechanism to prevent a spread deviation of more than 2 percent between the auction and market exchange rates.
  - Use of the official exchange rate for exchange transactions with the government without a mechanism to prevent a spread deviation of more than 2 percent between the official exchange rate and market exchange rates.
  - Requirement to transfer any gains from the purchase of foreign exchange to the state budget if it is unused and resold.
- These measures were approved under Article VIII, Section 2(a) and 3 in September 2016 for a period of one year (see second review staff report (IMF Country Report No. 16/319)).

### E. Program Monitoring
- The attached Letter of Intent and MEFP:
  - Describe the authorities’ progress in implementing their economic program and set out their commitments.
  - Request a rephasing of pending structural benchmarks, taking into account reform priorities and observed implementation capacity, and propose new structural benchmarks.
  - Propose performance criteria for end-June, end-September, and end-December 2017, and a new indicative target on employment reduction in MEFP Table 1 to support efforts to right-size the public sector.
- Authorities are requesting a rephasing of access under the program:
  - Request a reduction in the number of reviews to 10 and a rephasing of remaining access to align purchases with reform progress and balance of payments needs.

### Staff appraisal — progress, remaining challenges, and policy priorities
- Recent macroeconomic outcomes and reforms:
  - Ukrainian economy showing signs of recovery after a difficult period.
  - Decisive policy actions led to a dramatic reduction in external and internal imbalances.
  - Inflation brought under control; central bank international reserves increased substantially; growth has returned.
  - Authorities raised gas and heating tariffs to import parity, reined in large budgetary deficits, pursued banking system cleanup, and maintained a flexible exchange rate regime.
- Governance and structural reform priorities:
  - Despite some reform progress, delay in other long-standing reforms in key program areas is regrettable; authorities need to strengthen efforts to build political support.
  - Recent key measures include adoption of a 2017 budget consistent with program targets, adopting an automatic gas tariff adjustment mechanism, resolution and nationalization of the largest insolvent bank, and publication of high-level officials’ asset declarations.
  - Critical need for long-overdue pension and land reform, acceleration of privatization, and decisive action to tackle corruption; concrete anticorruption results remain limited despite new institutions.
- Banking sector and NBU:
  - Nationalization of the largest bank was an important demonstration of authorities’ ability to tackle vested interests to safeguard financial stability.
  - Nationalization should be followed by firm efforts, in line with existing legislation and international best practice, to ensure repayment of loans and minimize cost to the state and taxpayers.
  - Ensuring all banks meet capital and regulatory requirements is essential to maintain public confidence and support growth.
  - NBU has made impressive progress in containing inflation and rebuilding reserve buffers; preserving the NBU’s strong institutional framework and operational independence is important.
  - Recommendation: gradual easing of monetary policy as inflation expectations become better anchored and reserve accumulation remains on track; further relaxation of administrative measures should proceed with progress in financial stability and reserves.
- Fiscal policy and structural fiscal reforms:
  - Remarkable fiscal adjustment to date, but medium-term fiscal sustainability requires ambitious structural fiscal reforms.
  - Passage of the 2017 budget and automatic gas and heating tariff adjustment mechanism expected to support 2017 fiscal targets.
  - Urgency of comprehensive pension reform is highlighted; repeated delays strengthen vested interests and increase political cost.
  - Need for systematic preparation and strong public communication to build support for pension reform.
  - Decisive and sustained efforts needed to improve tax administration and customs, and advance public administration reform, including health and education sector reforms.
- Growth and structural reform agenda:
  - To achieve growth rates of 4 percent per year, Ukraine needs to increase labor participation and attract significant investment, including foreign investment, requiring substantial improvements in the business environment.
  - SOE and land reform need to get underway, and stronger efforts are needed to root out corruption; without this, achieving the program’s goals will be difficult.

*IMF staff.*

### 66.      In view of the authorities’ recent performance under the program and their

### cr1783 - 66.      In view of the authorities’ recent performance under the program and their

### Program recommendation
- Staff recommends completion of the third review and the financing assurances review under the extended arrangement.
- Staff supports completion of the financing assurances review on the basis that adequate safeguards remain in place for the further use of the Fund’s resources in Ukraine’s circumstances and that Ukraine’s adjustment efforts have not been undermined by the developments in debtor-creditor relations.
- Staff supports the authorities’ request for the rephasing of remaining access under the program, including to better align financing with policy implementation.

### Real economy — key projections and contributions (selected indicators from Table 1)
- Nominal GDP (billions of Ukrainian hryvnias): 1,465; 1,587; 1,979; 2,281; 2,280; 2,596; 2,626; 2,953; 3,289; 3,624; 3,996
- Real GDP (percent change): 0.0; -6.6; -9.9; 1.5; 2.0; 2.5; 2.9; 3.1; 3.5; 4.0; 4.0
- GDP deflator: 4.3; 15.9; 38.4; 13.5; 13.0; 11.0; 12.0; 9.0; 7.5; 6.0; 6.0
- Consumer prices (period average): -0.3; 12.1; 48.7; 15.1; 13.9; 11.0; 11.5; 9.5; 6.5; 5.5; 5.0
- Unemployment rate (ILO definition; percent): 7.2; 9.3; 9.1; 9.0; 8.8; 8.7; 9.0; 8.7; 8.4; 8.2; 8.0
- Output gap (percent of potential GDP): -0.3; -2.7; -6.7; -3.9; -3.4; -2.1; -1.7; -0.9; -0.5; -0.2; 0.0
- Savings (percent of GDP), total: 9.3; 9.2; 15.0; 14.6; 14.5; 14.9; 16.5; 19.5; 21.3; 22.6; 23.2
- Investment (percent of GDP), total: 18.5; 13.4; 15.3; 16.1; 18.3; 17.0; 19.5; 22.2; 24.1; 25.2; 26.1
- Public and publicly-guaranteed debt (percent of GDP): 40.5; 70.3; 79.7; 90.3; 84.9; 91.7; 91.4; 86.2; 78.6; 72.2; 66.4
- Gross reserves (end of period, billions of U.S. dollars): 20.4; 7.5; 13.3; 16.8; 15.5; 23.7; 22.3; 30.2; 30.3; 30.7; 31.8
- Months of next year's imports of goods and services: 3.5; 1.8; 3.1; 4.1; 3.5; 5.4; 4.7; 5.9; 5.5; 5.2; 5.0

### Public finance — levels, balances, and financing (selected from Tables 2a and 2b)
- Revenue (billions of Ukrainian Hryvnias): 832.9; 869.6; 914.1; 986.2; 1,064.6; 1,198.9; 1,333.1; 1,466.7; 1,602.0
- Revenue (percent of GDP): 42.1; 38.1; 40.1; 38.0; 40.5; 40.6; 40.5; 40.5; 40.1
- Tax revenue (billions): 702.0; 766.5; 788.0; 872.0; 941.0; 1,072.9; 1,192.8; 1,312.1; 1,431.5
- Nontax revenue (billions): 130.9; 103.0; 126.1; 114.2; 123.6; 126.0; 140.3; 154.6; 170.5
- Expenditure (billions): 855.9; 954.4; 967.1; 1,100.8; 1,146.5; 1,354.6; 1,537.6; 1,719.7; 1,874.2
- Current expenditure (billions): 806.1; 874.4; 892.3; 999.2; 1,057.0; 1,246.4; 1,413.1; 1,576.1; 1,708.5
- Interest (billions): 82.8; 105.2; 97.7; 115.4; 113.7; 129.8; 137.0; 146.3; 156.2
- General government overall balance (billions): -23.1; -84.9; -53.0; -81.2; -81.8; -76.8; -78.9; -79.7; -83.9
- General government overall balance (percent of GDP): -1.2; -3.7; -2.3; -3.1; -3.1; -2.6; -2.4; -2.2; -2.1
- Overall balance including Naftogaz (billions): -43.6; -90.0; -54.0; -81.3; -81.8; -76.8; -78.9; -79.7; -83.9
- Public and publicly-guaranteed debt (billions): 1,578; 2,059; 1,936; 2,380; 2,400; 2,545; 2,586; 2,617; 2,652

- General government financing (billions): 23.1; 84.9; 53.0; 81.2; 81.8; 76.8; 78.9; 79.7; 83.9
  - External financing (billions): 101.3; 74.2; 35.4; 50.3; 76.2; 46.6; -64.6; -70.3; 5.5
  - Disbursements (billions): 133.5; 83.9; 47.6; 76.3; 104.6; 99.9; 94.2; 92.1; 110.1
  - Amortizations (billions): -32.2; -9.7; -12.3; -26.0; -28.3; -53.4; -158.8; -162.4; -104.7
  - Domestic (net) financing (billions): -78.3; 10.7; 17.6; 31.0; 5.6; 30.2; 143.6; 150.0; 78.4
  - Bank and DGF recapitalization (billions): 45.3; 166.0; 129.0; 42.0; 98.0; 0.0; 0.0; 0.0; 0.0

### Balance of payments and external outlook (selected from Tables 3 and 4)
- Current account balance (billions of U.S. dollars, Table 3): -0.3; -1.3; -3.4; -2.0; -2.9; -2.7; -3.1; -3.2; -3.9
- Goods (net, billions): -3.3; -3.7; -6.8; -3.9; -5.0; -5.5; -6.1; -6.8; -7.3
- Exports (billions): 35.4; 32.6; 33.6; 34.6; 36.8; 39.2; 42.4; 45.8; 49.0
- Imports (billions): -38.7; -36.4; -40.4; -38.5; -41.9; -44.7; -48.5; -52.7; -56.4
- Services (net, billions): 1.6; 2.1; 1.2; 2.2; 1.2; 1.6; 1.8; 1.8; 1.7
- Gross international reserves (billions of U.S. dollars, Table 3 memorandum): 13.3; 16.8; 15.5; 23.7; 22.3; 30.2; 30.3; 30.7; 31.8
- Months of next year's imports of goods and services (memorandum): 3.1; 4.1; 3.5; 5.4; 4.7; 5.9; 5.5; 5.2; 5.0

- Total gross external financing requirements (billions of U.S. dollars, Table 4): 42.1; 46.2; 25.3; 41.7; 34.1; 34.5; 39.3; 43.5; 44.6
  - Current account deficit (billions): 0.3; 1.3; 3.4; 2.0; 2.9; 2.7; 3.1; 3.2; 3.9
  - Medium and long-term debt (billions): 12.3; 12.7; 6.7; 6.2; 6.2; 7.6; 6.3; 9.1; 9.8
  - Short-term debt (including deposits) (billions): 15.5; 13.2; 6.0; 14.0; 13.5; 13.7; 13.8; 13.8; 13.8

- Total financing sources (billions): 37.8; 44.6; 25.5; 41.6; 33.7; 39.1; 39.8; 43.8; 46.4
  - Direct investment, net (billions): 3.0; 2.1; 3.4; 2.3; 1.7; 2.5; 3.7; 4.4; 4.6
  - Portfolio investment (billions): 1.9; 1.0; 1.2; 1.3; 1.0; 3.0; 3.5; 4.3; 4.8
  - Medium and long-term debt inflows (billions): 7.3; 8.9; 2.5; 5.9; 6.0; 7.7; 6.3; 8.2; 9.5
  - Short-term debt (including deposits) (billions): 14.2; 13.4; 5.9; 14.5; 13.8; 14.1; 14.0; 14.0; 14.0
  - Increase in gross reserves (billions): 6.0; 3.3; 2.3; 6.9; 6.8; 7.9; 0.1; 0.4; 1.0

- Total financing needs (net) (billions): 9.6; 5.1; 2.6; 7.0; 7.2; 3.3; -0.3; 0.1; -0.7
  - Official financing (billions): 8.3; 5.6; 2.8; 7.0; 7.2; 3.3; -0.3; 0.1; -0.7
    - IMF (billions): 5.2; 2.3; 1.0; 4.5; 4.6; 1.8; -1.5; -1.1; -1.5
      - Prospective purchases (billions): 6.5; 2.3; 1.0; 5.4; 5.5; 3.8; 0.0; 0.0; 0.0

### Monetary and financial sector (selected from Tables 5 and 6)
- Broad money (billions of Ukrainian hryvnias): 994; 1,169; 1,103; 1,087; 1,130; 1,175; 1,386; 1,227; 1,463; 1,690; 1,943; 2,180
- Base money (end of period, percent change, memorandum): 0.8; 13.8; 13.6; -0.4; 6.4; 8.6; 12.8; 13.6; 13.0; 12.1; 11.7; 11.4
- Credit to the economy (percent change): -1.0; 10.2; -1.1; -2.9; 2.1; 8.0; 12.3; 7.4; 8.5; 11.4; 10.2; 10.5
- Credit-to-GDP ratio (percent): 51.2; 48.9; 44.0; 41.7; 42.3; 43.0; 48.3; 41.0; 39.5; 39.6; 39.6; 39.7

Banking sector soundness (Table 6)
- Number of banks: 148; 139; 131; 120; 116; 110; 103; 100
- Regulatory capital to risk-weighted assets: 8.4; 9.0; 7.1; 12.3; 12.0; 13.0; 13.8; 13.9
- NPLs to total loans (NBU definition): 24.7; 24.3; 25.6; 28.0; 29.7; 30.4; 31.0; 30.5
- Loans in foreign currency to total loans: 55.3; 51.9; 52.1; 54.1; 55.7; 54.2; 52.5; 49.3
- Return on assets (after tax; end-of-period): -22.3; -11.7; -6.7; -5.4; -2.4; -2.1; -1.2; -1.2

### IMF financing, exposures, and schedule (Tables 7 and 8)
- Stock of existing and prospective Fund credit (millions of SDRs): 7,701; 8,417; 11,846; 13,206; 12,053; 11,264; 10,178; 8,476; 6,418; 4,360; 2,597
- In percent of quota: 561; 418; 589; 656; 599; 560; 506; 421; 319; 217; 129
- In percent of GDP: 11.9; 13.1; 16.7; 17.3; 14.3; 12.2; 10.1; 7.7; 5.0; 3.2; 1.8
- Stock of existing Fund credit (millions of SDRs): 7,701; 8,417; 7,788; 6,302; 5,149; 4,361; 3,453; 2,546; 1,639; 731; 119
- Stock of prospective Fund credit (millions of SDRs): 0; 0; 4,058; 6,904; 6,904; 6,904; 6,724; 5,930; 4,779; 3,628; 2,478
- Obligations to the Fund from existing and prospective drawings (millions of SDRs): 125; 0; 881; 1,822; 1,515; 1,161; 1,423; 1,984; 2,261; 2,175; 1,810

Schedule of purchases under the Extended Arrangement (Table 8)
- Total amount of purchase: 12,348 millions of SDRs; 16,794 millions of US$; 614 percent of quota
- Availability dates, amounts (millions of SDRs and US$) and percent of quota:
  - March 11, 2015: 3,546.00 SDRs; 4,872.00 US$; 258.45 percent of quota — Board approval of extended arrangement
  - June 15, 2015: 1,182.10 SDRs; 1,650.00 US$; 86.16 percent of quota — First review and end-March 2015 performance criteria
  - September 15, 2015: 716.11 SDRs; 999.80 US$; 35.60 percent of quota — Second review and end-December 2015 performance criteria
  - November 15, 2016: 734.05 SDRs; 987.34 US$; 36.49 percent of quota — Third review and end-December 2016 performance criteria
  - May 15, 2017: 1,418.48 SDRs; 1,906.91 US$; 70.51 percent of quota — Fourth review and end-March 2017 performance criteria
  - August 15, 2017: 952.49 SDRs; 1,279.62 US$; 47.35 percent of quota — Fifth review and end-June 2017 performance criteria
  - November 15, 2017: 952.49 SDRs; 1,278.81 US$; 47.35 percent of quota — Sixth review and end-September 2017 performance criteria
  - February 15, 2018: 711.57 SDRs; 954.67 US$; 35.37 percent of quota — Seventh review and end-December 2017 performance criteria
  - May 15, 2018: 711.57 SDRs; 954.58 US$; 35.37 percent of quota — Eighth review and end-March 2018 performance criteria
  - August 15, 2018: 711.57 SDRs; 954.78 US$; 35.37 percent of quota — Ninth review and end-June 2018 performance criteria
  - November 15, 2018: 711.57 SDRs; 955.15 US$; 35.37 percent of quota — Tenth review and end-September 2018 performance criteria

### Structural and policy reforms supported under the program (Tables 9 and 10 — spending and revenue administration reforms)
- Budget process (objectives and pending steps)
  - Objective: Efficient and transparent budget process, credible and predictable annual budgets.
  - Recent reforms: Amended the budget code (December 2015); Published state budget projections for 2018–19 (September 2016); Included statement on quasi-fiscal operations (September 2016); Accounting Chamber received additional powers (April 2015).
  - Pending steps with deadlines: Create a reliable medium-term macro-fiscal framework for budget planning (December 2017); Develop state strategic plan system (December 2017); Complete spending reviews for selected ministries (June 2017); Amend the budget code to eliminate the distinction between protected and unprotected items (December 2017); Consolidate statements for transactions on implementation of budgets of the state and social insurance funds (from 2018); Update public sector accounting reform strategy (December 2017); Strengthen minister of finance role in legislative process (2017); Strengthen Accounting Chamber capacity (2016–18).

- Public administration
  - Objective: A small, efficient public administration.
  - Recent reforms: New law on civil service (December 2015); Civil service reform strategy for 2016–20 (June 2016).
  - Pending steps: Comprehensive review of remuneration system (June 2017); Implement civil service reform strategy (2016–20); Build central civil service information system and report number of civil servants (June 2017); Downsize public sector and raise salaries from efficiency gains (2017–20).

- Public pensions
  - Objective: Affordable, fair and equitable pension system.
  - Recent reforms: Tightened some early retirement opportunities (March 2015 and June 2016); Adopt a comprehensive pension reform (April 2017).

- Social assistance
  - Objective: Well-targeted, coherent and sustainable social assistance.
  - Recent reforms: Streamlined energy support programs and updated consumption norms (May 2016 and January 2017); Improved targeting for single mothers (January 2016).
  - Pending steps: Revise household utility subsidy parameters and adjust social norm for off-peak heating months (April 2017); Expand Guaranteed Minimum Income program (2017–18); Establish single centralized database of social assistance recipients (September 2017).

- Healthcare
  - Objective: Efficient, effective and well-targeted healthcare system.
  - Recent reforms: Outsourced procurement of pharmaceuticals (beginning of 2016); Lowered statutory limit on hospital beds per 10 thousand residents to 60 from 80 (December 2015); Cabinet approved healthcare financing concept (November 2016).
  - Pending steps: Implement new healthcare financing model (2017–20).

- Education
  - Objective: Fiscally sustainable, efficient and equitable education system.
  - Recent reforms: Started school network optimization (2015); Improved targeting of school lunch programs (December 2015).
  - Pending steps: Continue reducing school network and increase teaching hours to 20 hours per week in secondary schools; cut administrative and teaching staff (2018–18).

- Public investment
  - Objective: Scaled-up public investment program with strengthened institutional framework.
  - Recent reforms: Level of public investment increased to above 3 percent of GDP in 2016.
  - Pending steps: Strengthen planning, prioritization, project implementation system, and coordination between central and subnational governments (2016–18).

- Procurement of goods and services
  - Objective: Efficient and corruption-free public procurement system.
  - Recent reforms: Amendments to procurement law (September 2016); Adopted e-procurement legislation requiring use of electronic procurement system from August 1, 2016 (December 2015).
  - Pending steps: Bring procurement legislation and procedures in line with European Commission directives (2016–18).

Revenue administration reforms (Table 10) — objectives, progress, and next steps (selected highlights)
- Organization and governance
  - Problems: Overstaffed organization; inefficient structure; nontransparent performance evaluation.
  - Progress: About 20 percent of staff cut as of mid-July 2016; number of legal entities at SFS tax branches almost halved; Executive Management Committee and Reform Management Offices established; Large Taxpayers’ Office (LTO) established; KPIs for SFS established.
  - Next steps: Complete targeted 30 percent downsizing of SFS; Merge tax and customs into single legal entity and move to fully function-based structure; Dissolve tax police and establish new civil service for economic crimes; Establish oversight and accountability framework including KPIs; Develop SFS midterm reform strategy; Complete external audit of SFS IT; Find solution for emergency funding of SFS IT risks.

- Integrity and transparency
  - Problems: Public perception of corruption at SFS extremely high.
  - Progress: New internal security department (ISD) established and vetted; vetting and reappointment of SFS staff started; ISD investigated 540 cases in 2015 resulting in 24 convictions, and 506 cases in 2016 resulting in 26 convictions; ISD adopted anticorruption program and code of conduct (2016).
  - Next steps: Continue vetting with priority for LTO; communicate vetting outcomes; appoint staff associated with compensation reform financing; develop sustainable compensation plan with MOF.

- Filing, compliance and audit, tax collection
  - Progress: Unit responsible for filing compliance designated; proactive filing compliance program and electronic filing services developed; one-stop shop at customs introduced August 1, 2016; audit program rebalanced toward risk-based planned audits; VAT refund register implemented; customs mobile groups created; progress on customs risk management.
  - Next steps: Increase electronic filing; introduce one-level internal dispute resolution system; harmonize SSCs and PIT bases and enable single filing and payment; develop modern compliance management for PIT and SSC and implement compliance improvement program; establish post-clearance audit program for customs; authorize SFS to use indirect audit methods and gain access to bank account information with safeguards; establish criteria for High Net Worth Individuals audits; amend legislation to remove restrictions on audit frequency; create unified customs value reference database at SFS; adopt legislation to strengthen administrative enforcement of debt collection to reduce tax arrears (noting tax arrears exceeded 2½ percent of GDP as of July 1, 2016).

*Source: IMF staff estimates and projections as presented in the provided chapter content.*

### Annex I. Implementation Status of the 2013 Article IV

### Annex I. Implementation Status of the 2013 Article IV Recommendations

### Monetary and Exchange Rate Policies
- Recommendation: Allow the exchange rate to adjust to its equilibrium level and increase its flexibility thereafter.
  - Current status: "The NBU abandoned its de facto exchange rate peg and switched to a flexible exchange rate regime in February 2014. Since then, the NBU has limited foreign exchange intervention (sales) to offset excessive volatility."
- Recommendation: Adopt changes in the National Bank of Ukraine (NBU) monetary policy framework and in the medium-term adopt inflation targeting (IT). Remove FX restrictions.
  - Current status: "After floating the exchange rate, the NBU adopted an interest rate based monetary policy framework with targets for the NBU’s net domestic assets and net international reserves, and instituted reforms to transition to IT. However, due to the crisis, FX restrictions needed to be tightened further. Since May 2015, the NBU has adopted a condition-based roadmap to phase out the FX restrictions. Further, the NBU formally adopted an inflation-targeting framework in December 2016."

### Financial Sector Policies
- Recommendation: Strengthen the banking system resilience to shocks, including launching independent diagnostic audits of vulnerable systemic banks; allowing all banks to reduce their negative foreign exposure and removing impediments to non-performing loan resolution.
  - Current status:
    - "Significant progress has been made in cleaning up the banking system (with more than 80 banks closed)."
    - "Along with stronger powers to supervise related-party lending, bank diagnostics were an important tool in the resolution and recapitalization of many of the largest banks, including nationalization of PrivatBank."
    - "Repeal of Resolution 109 allowed for the reduction of banks’ large negative FX positions, while the NBU also strengthened other prudential requirements (importantly on credit risk provisioning)."
    - "Progress on removing impediments to NPL resolution require further tax and legal reforms."

### Fiscal Policies
- Recommendation: Pursue a sizeable current expenditure-based fiscal consolidation to curtail the budget deficit and make room for higher public investment. Limit the amount of government guarantees to below 1 percent of GDP per year.
  - Current status:
    - "The combined deficit of the general government and Naftogaz has been reduced from 10 percent of GDP in 2014 to 2.4 percent in 2016."
    - "Issuance of new guarantees is being limited to less than ¾ percent of GDP per year since 2015."

### Energy Sector Reforms and Social Assistance
- Recommendation: Comprehensive energy sector reform focused on eliminating Naftogaz’s operational losses.
  - Current status:
    - "Gas and heating tariffs reached full cost recovery levels in July 2016. Naftogaz’s deficit has now almost been eliminated."
- Recommendation: Increase targeted social assistance to the poorest 40 percent of households.
  - Current status:
    - "Energy-related social assistance programs have been significantly expanded with about half of households receive utility subsidies, suggesting the need for better targeting."

### Structural Reforms
- Recommendation: Improve the business climate to support higher growth.
  - Current status:
    - "Little progress has been made in SOE reform or improving the business environment as a piecemeal approach to these reforms has failed to generate momentum."

---

### Annex II. Competitiveness, Exchange Rate and Reserve Adequacy Assessment

### Overall assessment
- "Staff’s overall assessment is that Ukraine’s external position in 2016 was broadly in line with fundamentals, especially when taking into account the need for Ukraine to improve its deeply negative net international investment position (NIIP) and its low level of reserves."
- Key risks: "Possible capital flight as capital controls are prematurely removed, further negative terms of trade shocks, together with a further escalation of the conflict pose significant risks."
- "Reserves are low, with reserve adequacy expected to be reached by end-2018 only."

### Real Exchange Rate and Competitiveness
- Finding 1:
  - "Ukraine’s competitiveness has been boosted following the move to a flexible exchange rate in early 2014, but wage pressures pose risks that this is gradually reversed."
  - "The nominal exchange rate vis-a-vis the U.S. dollar depreciated by 50 percent by the end of 2014 as compared to 2013 and another 80 percent in the following year."
  - "With inflation averaging about 25 percent during 2014–16, real wages also declined by a cumulative 17 percent during this period."
  - Note on minimum wage: "the recent doubling of the minimum wage threatens to reverse some of the competitiveness gains."
    - Mitigating conditions listed in the source: i) "collective agreements in the private sector do not lead to automatically higher wages for non-minimum wage workers," ii) "the higher domestic demand leads to higher inflation and hence some nominal depreciation," and iii) "in the main export sectors such as commodities and agriculture products, Ukraine is considered to be a price taker." Under these assumptions "staff expects that the higher minimum wage will not lead to significant real appreciation going forward."
- Finding 2:
  - "The crisis also marked a structural break in trade relations."
  - "Export shares of CIS countries have dropped by about 20 percentage points in favor of larger shares of Europe and Emerging Asia."
  - "The Free Trade Agreement (FTA) agreement with the European Union that came into power in January 2016 is expected to facilitate the re-direction of trade towards European markets."
- Finding 3:
  - "The current account has corrected sharply following the early 2014 crisis, to a deficit of about 3.8 percent in 2016."
  - Historical context: "Following an average deficit of 8 percent of GDP during 2011–13, the current count was broadly balanced in 2015."
  - Drivers: "compression in imports, which declined by 30 percent," "ban on dividend repatriation as part of the capital controls instituted in 2014" and later relaxation of repatriation in 2016.
- Finding 4 (valuation and model results):
  - "Under the baseline of continued program implementation, staff assesses the external position to be broadly in line with fundamentals."
  - EBA-lite CA model: "points to a slight undervaluation of the hryvnia of about 5 percent, within the range of an external position in line with fundamentals."
  - External sustainability model: "points to a similar undervaluation ranging from 8 percent when stabilizing the NIIP at the current level of about 60 percent of GDP or an undervaluation of under 3 percent when targeting an NIIP of 50 percent for the next 10 years."
  - EBA-Lite REER model: "points to a larger undervaluation of 24 percent" but "historical structural breaks undermine the robustness of the results."

### Foreign Asset and Liability Position
- "Ukraine’s weak international investment position has continued to deteriorate."
  - NIIP evolution: "As of end-2016, the NIIP stood at -59 percent of GDP and going forward it is expected to reach to about -50 percent of GDP."
  - "As the non-financial sector maintains significant currency assets abroad (93 percent of GDP by end-2016) this reduces their exposure to external shocks and helps maintain external debt service."

### Capital and Financial Account Flows and Reserves
- Finding 6:
  - "The capital outflow during 2014 declined in 2015 and 2016, which combined with significant external official financing contributed to more than a doubling of reserves."
  - "Reserves... reaching US$15.5 billion by end-2016."
  - "Relaxation [of capital controls] is based on a conditions-based approach and while higher capital outflows can be expected following a relaxation, they are likely to facilitate higher FDI inflows and market access."
- Finding 7 (reserve adequacy):
  - "Ukraine’s gross international reserves (GIRs) are still far from an adequate level."
  - Historical levels and metrics (selected figures from the source):
    - "Ukraine’s gross reserves declined sharply in 2014 to a level of US$7.5 billion, covering only two months of imports and 20 percent of short-term debt."
    - "reserves... increased in 2015–16, reaching US$15.5 billion by end-2016."
    - "In terms of the composite IMF metric, reserve coverage stood at 25 percent [in 2014],... increased to 62 percent of the composite metric by end-2016."
    - "At the current state, reserves cover less than four months of imports of goods and services and only 59 percent of short debt."
    - Outlook: "official external financing and some market access under the program should increase gross reserves to above 100 percent of the IMF metric by 2018."
  - Risks to rebuilding reserves: "weak program implementation, depreciation pressures, limited capital market access and premature relaxation of capital controls."

- Reserve Adequacy Metrics, selected series from source table:
  - Gross official reserves (billions of U.S. dollars) series: 34.6 31.8 24.5 20.4 7.5 13.3 15.5 22.3 30.2 30.3 30.7 31.8
  - Months of imports of goods and services series: 4.2 3.7 3.0 3.5 1.8 3.3 3.5 4.7 5.9 5.5 5.2 5.0
  - Percent of short-term debt at remaining maturity series: 74.8 57.4 40.0 35.2 20.5 48.7 59.2 79.7 94.6 86.3 85.2 83.7
  - Percent of IMF composite measure series: 95.9 79.2 56.8 45.0 25.1 51.2 62.2 83.9 105.3 102.7 102.0 102.9

---

### Annex III. Debt Sustainability Analysis

### Overall assessment and main conclusion
- "Under the policy and financing package supporting the authorities’ program, including the recent completion of the debt operation as per terms consistent with program targets, and conditional to no material intensification of the conflict in the East, Ukraine’s public debt is assessed as sustainable with high probability."
- Debt trajectory: "Debt has embarked on a path to fall below 70 percent of GDP by 2021—assuming the fiscal consolidation achieved to date is sustained, including no reemergence of quasi-fiscal losses in the energy sector, successful completion of the debt operation with bilateral creditors, growth recovery, privatization, and real exchange rate appreciation."
- Risks: "considerable risks, particularly from growth and real exchange rate shocks, or failure to sustain the programmed fiscal adjustment."
- Gross financing needs: "The average gross financing needs during the program and post-program period are forecast to remain well below 15 percent of GDP."
- External DSA: "continues pointing to significant solvency concerns as external debt stood at 129 percent of GDP in 2016, with the historical scenario showing unsustainable dynamics."
- Offsetting factors: "The presence of significant non-financial foreign assets provides a buffer for maintaining external debt service while a sustained reduction in current account deficits would put external debt on a downward path, mitigating risks to public debt sustainability."

### Structure of the annex
- Section overview: "This annex considers the analysis of sustainability of Ukraine’s public and external debt. Section A provides a brief summary of the revisions to the macroeconomic framework... Section B considers public debt sustainability... Section C considers external debt sustainability."

### Key assumptions in the DSA (selected)
- Real GDP growth: "Growth is projected to reach 2.9 percent in 2017, slightly higher compared to the second review and thereafter reaching 4 percent by 2020."
- Exchange rate: "The average exchange rate stood at 25.5 in 2016... It is expected that relatively contained current account deficits and the resumption of capital inflows would support a small real exchange rate appreciation over the medium term."
- Inflation: "Inflation (measured by the GDP deflator) declined to 13 percent in 2016."

*Source: IMF staff report annexes (Annex I–III) as provided in the content unit.*

### 0.5 percentage points lower than projected at the time of the second review in light of weaker

### cr1783 - 0.5 percentage points lower than projected at the time of the second review in light of weaker

### Macroeconomic outlook and inflation
- Inflation is expected to gradually decrease to 12 percent in 2017 and to about 6 percent over the medium term.

### Fiscal performance and Naftogaz
- Combined fiscal deficit for 2016 stood at 2.4 percent of GDP, 1.5 percentage points lower than the deficit envisaged at the time of the second review.
- In 2017, the combined deficit is expected to reach 3.1 percent of GDP as envisaged at the time of the second review.
- The cyclically-adjusted primary surplus of the general government is projected to remain from 2017, onwards at 1.8 percent of potential GDP, representing an adjustment of around 4 percentage points of GDP over 2013.
- Historical context and ambition:
  - Average cyclically adjusted primary deficit of 0.6 percent of GDP over 2006–16.
  - Path is above the 75th percentile of historical primary balance adjustments in countries with IMF-supported programs, though not unprecedented.

### Other identified debt-creating/reducing flows
- Banking system support:
  - Fiscal costs for 2016 and 2017 stand at about 5.7 and 3.7 percent of GDP, respectively.
  - Total costs higher by some ½ percent of GDP compared to the second review.
  - About 1.5 percent of GDP in financing shifted from 2016 to 2017.
- Naftogaz recapitalization:
  - No more fiscal support envisaged during the medium term for operational and investment purposes.
  - Program assumes Naftogaz would need an additional 2 percent of GDP of financing support to clear the stock of arrears with Gazprom in 2017.
  - Footnote: Actual repayment will depend on the decision of the Stockholm arbitrage tribunal. These arrears are disputed by Naftogaz at present.
- Issuance of guaranteed debt:
  - For 2016, about 0.7 percent of GDP was issued in the form of guarantees.
  - In 2017, program assumes issuance of new guarantees would remain at 0.6 percent of GDP.
  - From 2018 onwards, limited to 0.3 percent of GDP per year due to expected reduced demand from privatization/corporatization of SOEs.
- Privatization proceeds:
  - For 2017–22, program assumes an average of 0.5 percent of GDP per year, below the historical average of 0.9 percent during 2006–16.
  - Risks remain high given delays in implementing the privatization agenda.
  - Authorities remain committed to the privatization of PJSC Odessa Portside Plant by the first half of 2017.
  - Plans to initiate privatization of large SOEs by end-September 2017: PJSC Centrenergo, Turboatom (shares transferred to SPFU), and regional energy distribution companies, obloenergos.

### Debt operation, official financing, and market access
- Debt operation:
  - Restructured nearly all external liabilities within the debt operation perimeter with total nominal value of US$19.3 billion.
  - Included public and publicly guaranteed debt and SOE debt (non-guaranteed Eurobonds and loans).
  - Russian-held bond of US$3 billion: good-faith efforts continue; first hearing in UK court took place in January 2017; judgment pending; DSA assumes restructuring agreement with no nominal haircut and repayment schedule/coupon consistent with program.
- Official financing:
  - Multilateral and bilateral financing provided at concessional rates (tied to Euribor/Libor and fixed annual rates below 2 percent, respectively).
  - Loans amortizing in the range of 10–20 years with multilaterals granting a grace period of about five years.
  - IMF lending under the current program is calibrated to be on EFF terms.
- Market access:
  - Evidence points to an early return to market access in past successful preemptive debt operations with time to re-access at about three years from the start of the operation.
  - It is expected that in 2017 Ukraine would be able to re-access international capital markets (five-year bonds at a yield of 9 percent), supported by improved debt profile and assuming de-escalation of the conflict in the East.
  - Low gross financing needs during the post-program period, well below the high-risk benchmark in the debt sustainability framework.

### Public sector debt coverage and 2016 stock (table highlights)
- Coverage in DSA includes:
  - (i) central government direct debt;
  - (ii) domestic and external government-guaranteed debt extended to SOEs;
  - (iii) debt of local governments;
  - (iv) Ukraine’s liabilities to the IMF not included in central government direct debt.
  - Does not contain non-guaranteed SOEs’ domestic and external liabilities.
- Public and publicly guaranteed debt, 2016 (as reported):
  - UAH (Billion): 1,936
  - USD (Billion): 71.28
  - Percent of GDP: 84.9
  - Percent of Total: 100.0
- Selected components (2016):
  - Domestic debt: UAH 693; USD 25.53; 30.4 percent of GDP; 35.8 percent of total
  - Direct debt in UAH: UAH 569; USD 20.9; 24.9 percent of GDP; 29.4 percent of total
  - Direct debt in FX: UAH 106; USD 3.9; 4.6 percent of GDP; 5.5 percent of total
  - Guaranteed debt: UAH 190; USD 0.7; 0.8 percent of GDP; 1.0 percent of total
  - External debt: UAH 1,243; USD 45.75; 54.6 percent of GDP; 64.2 percent of total
  - External direct debt: UAH 983; USD 36.2; 43.1 percent of GDP; 50.8 percent of total
  - Multilateral: UAH 354; USD 13.0; 15.5 percent of GDP; 18.3 percent of total
    - of which: IMF budget support: UAH 186; USD 6.8; 8.2 percent of GDP; 9.6 percent of total
  - Bilateral: UAH 108; USD 4.0; 4.8 percent of GDP; 5.6 percent of total (Includes EU)
  - Sovereign Eurobonds: UAH 518; USD 19.0; 22.7 percent of GDP; 26.7 percent of total
  - External guaranteed debt: UAH 260; USD 9.5; 11.4 percent of GDP; 13.4 percent of total
    - of which: IMF loans to NBU: UAH 170; USD 6.3; 7.5 percent of GDP; 8.8 percent of total
    - of which: Commercial loans: UAH 57; USD 2.1; 2.5 percent of GDP; 3.0 percent of total

### Debt trajectory, risks, and stress tests (Public DSA findings)
- Baseline projections:
  - Debt stood at about 85 percent of GDP at end-2016, up about 5 percentage points from 2015 driven by financial sector support and depreciation.
  - Debt is expected to peak in 2017 due to catch up of IFI disbursements and further bank recapitalization costs.
  - Baseline indicates debt ratio would fall below 70 percent of GDP by 2021.
  - Projected gross financing needs: average 11 percent during 2017–18 and 10 percent after the program period.
- Risk assessment:
  - Heat map and fan charts indicate significant risks to debt sustainability, even after successful debt operation and full program implementation.
  - Fan charts: asymmetric distribution restricts positive shocks, showing upward skew if fiscal consolidation and FX stabilization fall short.
  - EMBIG spread improved from peak of 4,312 basis points in 2015:Q1 to an average of about 651 basis points by mid-February 2017.
  - Share of public debt held by nonresidents: 2/3 of total debt.
  - Short-term debt ratios are very low; share of foreign currency debt projected to decline.
- Stress-test scenarios and impacts:
  - Growth shock (lower growth by one historical standard deviation in 2018–19 to -4 percent and -3.6 percent) leads to primary balance deteriorations to deficits of 1.7 and 5.7 percent of GDP, respectively; debt-to-GDP ratio reaches 105 percent in 2019.
  - Real exchange rate shock (nominal exchange rate moving from 27 UAH/USD in 2016 to 48 in 2018) pushes debt ratio to 109 percent of GDP by 2018.
  - Combined macro-fiscal shock (shocks to real growth, interest rate, primary balance, exchange rate) sends debt to almost 150 percent of GDP in 2019.
  - Contingent liabilities shock (large banking sector deterioration; growth 10 percentage points below baseline in 2018–19) peaks debt at 100 percent of GDP in 2019.
  - Historical scenario (flat growth and primary deficit at -1.3 and 0.7 percent, respectively) leaves debt about 92 percent of GDP.
- Liquidity and gross financing needs under stress:
  - Under baseline, 2016 gross financing needs declined and were fully covered.
  - Under stress tests, only the combined shock raises gross financing needs to an average of more than 20 percent of GDP during the projection period.
- Mitigating factors:
  - Reduced gross financing needs following debt restructuring.
  - Increase in share of official debt and decline in foreign currency debt.
  - Very low share of short-term debt.
  - Financial sector risks diminished with nationalization of PrivatBank and program buffer for bank restructuring and resolution costs.

### External sector DSA
- Baseline external debt projections:
  - Gross external debt estimated at 129 percent of GDP in 2016 (down from 131 percent in 2015).
  - Expected to decline to about 95 percent of GDP by end-2021 (drop by about 50 percentage points of GDP by 2021 from earlier highs).
- External adjustment drivers:
  - Trade balance of goods and services moving from a deficit close to 9 percent of GDP in 2013 to about 4 percent by 2021.
  - Debt operation improves primary income balance in the current account.
  - Expected sustained recovery of non-debt creating capital inflows.
  - Non-financial sector foreign currency assets at 93 percent of GDP by end-2016 (reducing net exposure and helping external debt service).
  - Net international investment position (NIIP) projected to improve from -59 percent of GDP in 2016 to close to -50 percent in the medium term.
- External downside risks:
  - Slower-than-expected export growth, delays finding markets previously targeted to CIS partners, or sudden worsening external environment could reverse current account adjustment.
  - If current account deteriorates on average by about 1.5 percent of GDP per year compared to baseline, external debt ratio would increase by about 9 percent of GDP by 2021.
  - Growth shock (half historical standard deviation, about 3 percentage points lower growth on average per year) increases external debt ratio by about 20 percentage points of GDP by 2021.
  - Slower resumption of non-bank FDI or delays in privatization would materially worsen external debt dynamics.
  - Historical scenario (real GDP contracting 0.8 percent per year; GDP deflator in U.S. dollar terms flat at 2.9 percent) generates unsustainable dynamics.
- Policy implication:
  - Critical to accelerate reform process to enhance business climate and non-price competitiveness to attract the needed FDI to support growth and expand and diversify the export base.

*International Monetary Fund staff summary based on the provided chapter content.*

### Annex III. Figure 2. Ukraine: Public DSA—Realism of Baseline Assumptions

### Annex III. Figure 2. Ukraine: Public DSA—Realism of Baseline Assumptions

### Baseline indicators and projections (selected)
- Nominal gross public debt (percent of GDP): 2015: 34.0; 2016: 79.7; 2017: 84.9; 2018: 91.4; 2019: 86.2; 2020: 78.6; 2021: 72.2; 2022: 66.4; 2022 (final listed): 61.0.
- Of which: guarantees (percent of GDP): 2015: 7.2; 2016: 12.0; 2017: 12.2; 2018: 17.5; 2019: 18.1; 2020: 15.9; 2021: 13.9; 2022: 11.5; 2022 (final listed): 9.3.
- Sovereign spreads (EMBIG (bp)): 643 (listed).
- Public gross financing needs (percent of GDP): 2015: 7.4; 2016: 11.7; 2017: 12.8; 2018: 12.7; 2019: 9.9; 2020: 12.1; 2021: 11.1; 2022: 8.7; 2022 (final listed): 7.8; Y CDS (bp): 621 (listed).
- Real GDP growth (percent): 2015: 0.3; 2016: -9.9; 2017: 2.0; 2018: 2.9; 2019: 3.1; 2020: 3.5; 2021: 4.0; 2022: 4.0; 2022 (final listed): 4.0.
- Inflation (GDP deflator, percent): 2015: 15.0; 2016: 38.4; 2017: 13.0; 2018: 12.0; 2019: 9.0; 2020: 7.5; 2021: 6.0; 2022: 6.0; 2022 (final listed): 6.0.
- Nominal GDP growth (percent): 2015: 15.5; 2016: 24.7; 2017: 15.2; 2018: 15.2; 2019: 12.5; 2020: 11.4; 2021: 10.2; 2022: 10.3; 2022 (final listed): 10.2.
- Effective interest rate (percent), defined as interest payments divided by debt stock (excluding guarantees) at end of previous year: 2015: 7.6; 2016: 8.6; 2017: 7.3; 2018: 6.9; 2019: 6.7; 2020: 6.8; 2021: 7.1; 2022: 7.4; 2022 (final listed): 7.8.
- Ratings (Foreign / Local): Moody's: Caa3 / Caa3; S&P's: B- / B-; Fitch: B- / B- (as listed).

### Contribution to changes in public debt (selected cumulative and yearly flows)
- Change in gross public sector debt (percent of GDP): 2015: 5.9; 2016: 9.4; 2017: 5.2; 2018: 6.4; 2019: -5.2; 2020: -7.5; 2021: -6.4; 2022: -5.9; 2022 (final listed): -5.4; cumulative: -24.0.
- Identified debt-creating flows (percent of GDP): 2015: 4.2; 2016: 10.3; 2017: 4.4; 2018: -2.8; 2019: -7.0; 2020: -5.8; 2021: -4.6; 2022: -3.9; 2022 (final listed): -3.5; cumulative: -27.6.
- Primary deficit (percent of GDP): 2015: 1.4; 2016: -3.0; 2017: -2.0; 2018: -1.2; 2019: -1.8; 2020: -1.8; 2021: -1.8; 2022: -1.8; 2022 (final listed): -1.8; cumulative: -10.2.
- Primary (noninterest) revenue and grants (percent of GDP): 2015: 42.2; 2016: 42.1; 2017: 40.1; 2018: 40.5; 2019: 40.6; 2020: 40.5; 2021: 40.4; 2022: 40.0; 2022 (final listed): 39.5; cumulative: 241.5.
- Primary (noninterest) expenditure (percent of GDP): 2015: 43.5; 2016: 39.1; 2017: 38.1; 2018: 39.3; 2019: 38.7; 2020: 38.7; 2021: 38.6; 2022: 38.2; 2022 (final listed): 37.7; cumulative: 231.2.
- Automatic debt dynamics (percent of GDP): 2015: 2.2; 2016: 10.0; 2017: 0.7; 2018: -6.1; 2019: -4.7; 2020: -3.5; 2021: -2.2; 2022: -1.9; 2022 (final listed): -1.5; cumulative: -19.9.
  - Interest rate/growth differential (percent of GDP): 2015: -1.0; 2016: -9.1; 2017: -5.4; 2018: -6.1; 2019: -4.7; 2020: -3.5; 2021: -2.2; 2022: -1.9; 2022 (final listed): -1.5; cumulative: -19.9.
  - Of which: real interest rate (percent of GDP): 2015: -1.2; 2016: -14.7; 2017: -4.1; 2018: -4.0; 2019: -2.1; 2020: -0.8; 2021: 0.6; 2022: 0.7; 2022 (final listed): 0.9; cumulative: -4.6.
  - Of which: real GDP growth (percent of GDP): 2015: 0.25; 2016: 5.6; 2017: -1.4; 2018: -2.1; 2019: -2.6; 2020: -2.7; 2021: -2.8; 2022: -2.6; 2022 (final listed): -2.4; cumulative: -15.3.
- Exchange rate depreciation contribution (percent of GDP): 2015: 3.2; 2016: 19.1; 2017: 6.1; subsequent years shown as dots in table.
- Other identified debt-creating flows (percent of GDP): 2015: 0.6; 2016: 3.3; 2017: 5.6; 2018: 4.6; 2019: -0.5; 2020: -0.5; 2021: -0.6; 2022: -0.3; 2022 (final listed): -0.1; cumulative: 2.5.
- General government financing: Domestic (net) private (percent of GDP): 2015: -0.5; 2016: -0.5; 2017: 0.0; 2018: -0.7; 2019: -0.5; 2020: -0.5; 2021: -0.5; 2022: -0.3; 2022 (final listed): -0.3; cumulative: -2.9.
- Bank and Naftogaz recapitalization (percent of GDP): 2015: 1.1; 2016: 3.8; 2017: 5.7; 2018: 5.2; 2019: 0.0; 2020: 0.0; 2021: 0.0; 2022: 0.0; 2022 (final listed): 0.0; cumulative: 5.2.
- Other adjustments (percent of GDP): 2015: 0.0; 2016: 0.0; 2017: 0.0; 2018: 0.0; 2019: 0.1; 2020: 0.0; 2021: -0.1; 2022: 0.1; 2022 (final listed): 0.2; cumulative: 0.2.
- Residual, including asset changes (percent of GDP): 2015: 1.7; 2016: -1.0; 2017: 0.9; 2018: 9.2; 2019: 1.7; 2020: -1.7; 2021: -1.8; 2022: -1.9; 2022 (final listed): -1.9; cumulative: 3.6.

### Alternative scenarios and stress tests (selected)
- Baseline composition assumptions (2017–2022):
  - Real GDP growth: 2017: 2.9; 2018: 3.1; 2019: 3.5; 2020: 4.0; 2021: 4.0; 2022: 4.0.
  - Inflation: 2017: 12.0; 2018: 9.0; 2019: 7.5; 2020: 6.0; 2021: 6.0; 2022: 6.0.
  - Primary Balance (percent of GDP): 2017: 1.2; 2018: 1.8; 2019: 1.8; 2020: 1.8; 2021: 1.8; 2022: 1.8.
  - Effective interest rate: 2017: 6.9; 2018: 6.6; 2019: 6.8; 2020: 7.1; 2021: 7.4; 2022: 7.8.
- Historical scenario (2017–2022) key differences:
  - Real GDP growth: 2017: 2.9; 2018–2022: -1.3 each year.
  - Inflation follows baseline.
  - Primary Balance: 2017: 1.2; 2018–2022: -0.7 each year.
  - Effective interest rate declines to 3.6 by 2022 (series: 6.9; 6.6; 5.3; 4.5; 3.9; 3.6).
- Constant Primary Balance Scenario:
  - Primary Balance held at 1.2 percent of GDP each year 2017–2022.
  - Effective interest rate series provided (2017: 6.9; 2018: 6.6; 2019: 6.4; 2020: 6.8; 2021: 7.1; 2022: 7.3).
- Stress tests illustrated for shocks to: Primary Balance, Real GDP Growth, Real Interest Rate, Real Exchange Rate, Combined Shock, Contingent Liability Shock.
  - Example scenarios (selected figures shown):
    - Real GDP Growth Shock projected Real GDP growth: 2017: 2.9; 2018: -4.0; 2019: -3.6; 2020: 4.0; 2021: 4.0; 2022: 4.0.
    - Primary Balance under Real GDP Growth Shock: 2017: 1.2; 2018: -1.7; 2019: -5.7; 2020: 1.8; 2021: 1.8; 2022: 1.8.
    - Real Interest Rate Shock increases Effective interest rate to as high as 9.8 in 2022 (series: 6.9; 6.6; 7.1; 8.3; 9.1; 9.8).
    - Combined Shock Effective interest rate series: 6.9; 8.1; 5.9; 7.6; 8.6; 9.4 (2017–2022).
- Stress test outcomes plotted for Gross Nominal Public Debt and Public Gross Financing Needs under scenarios; charts indicate large increases under combined or contingent shocks (scales up to 400 percent of revenue in some charts).

### External debt sustainability (selected bounds and indicators)
- Baseline external debt (percent of GDP): 2013: 79.1; 2014: 95.4; 2015: 130.6; 2016: 129.4; 2017: 128.5; 2018: 126.3; 2019: 113.5; 2020: 103.8; 2021: 95.3.
- Change in external debt (percent of GDP): 2013: 2.5; 2014: 16.3; 2015: 35.1; 2016: -1.1; 2017: -0.9; 2018: -2.2; 2019: -12.8; 2020: -9.7; 2021: -8.5.
- Identified external debt-creating flows (percent of GDP): 2013: 4.6; 2014: 32.2; 2015: 40.8; 2016: -2.7; 2017: -2.2; 2018: -3.6; 2019: -4.6; 2020: -5.1; 2021: -4.3.
  - Current account deficit, excluding interest payments (percent of GDP): 2013: 3.2; 2014: -1.5; 2015: -5.8; 2016: -2.0; 2017: -3.7; 2018: -4.4; 2019: -4.1; 2020: -3.7; 2021: -3.0.
  - Net non-debt creating capital inflows (negative, percent of GDP): 2013: -2.9; 2014: 0.1; 2015: -3.5; 2016: -3.8; 2017: -1.7; 2018: -2.5; 2019: -3.2; 2020: -3.6; 2021: -3.4.
  - Automatic debt dynamics contribution (percent of GDP): 2013: 4.4; 2014: 33.6; 2015: 50.2; 2016: 3.1; 2017: 3.2; 2018: 3.3; 2019: 2.8; 2020: 2.2; 2021: 2.0.
    - Contribution from nominal interest rate: 2013: 6.0; 2014: 5.3; 2015: 6.1; 2016: 5.8; 2017: 6.7; 2018: 7.0; 2019: 6.8; 2020: 6.3; 2021: 5.8.
    - Contribution from real GDP growth: 2013: 0.0; 2014: 7.0; 2015: 13.8; 2016: -2.6; 2017: -3.5; 2018: -3.8; 2019: -4.0; 2020: -4.1; 2021: -3.8.
- External debt-to-exports ratio (percent): 2013: 173.9; 2014: 193.0; 2015: 247.3; 2016: 251.5; 2017: 245.4; 2018: 243.3; 2019: 224.6; 2020: 208.7; 2021: 196.7.
- Gross external financing need (billions of U.S. dollars): 2013: 85.5; 2014: 69.9; 2015: 48.1; 2016: 46.9; 2017: 41.5; 2018: 41.9; 2019: 46.8; 2020: 51.0; 2021: 52.2.
  - As percent of GDP: 2013: 47.6; 2014: 52.8; 2015: 53.1; 2016: 52.6; 2017: 43.6; 2018: 41.0; 2019: 41.4; 2020: 41.3; 2021: 38.7.
- Key macro assumptions (selected):
  - Real GDP growth (percent): 2013: 0.0; 2014: -6.6; 2015: -9.9; 2016: -0.8; 2017: 7.6; 2018: 2.0; 2019: 2.9; 2020: 3.1; 2021: 3.5; 2022: 4.0; 2022 (repeat): 4.0.
  - GDP deflator in U.S. dollars (change, percent): 2013: 2.2; 2014: -21.1; 2015: -24.1; 2016: 2.9; 2017: 19.0; 2018: -3.3; 2019: 3.7; 2020: 4.2; 2021: 6.7; 2022: 5.2; 2022 (repeat): 5.1.
  - Nominal external interest rate (percent): 2013: 8.0; 2014: 5.0; 2015: 4.3; 2016: 7.1; 2017: 1.4; 2018: 4.3; 2019: 5.5; 2020: 5.9; 2021: 6.0; 2022: 6.1; 2022 (repeat): 6.2.
  - Growth of exports of goods and services (U.S. dollar terms, percent): 2013: -9.2; 2014: -19.9; 2015: -27.0; 2016: 3.9; 2017: 25.9; 2018: -3.9; 2019: 8.5; 2020: 6.5; 2021: 7.6; 2022: 7.6; 2022 (repeat): 6.5.
  - Growth of imports of goods and services (U.S. dollar terms, percent): 2013: -6.7; 2014: -27.5; 2015: -29.9; 2016: 5.9; 2017: 31.0; 2018: 4.1; 2019: 4.2; 2020: 6.2; 2021: 7.8; 2022: 8.2; 2022 (repeat): 7.0.
  - Current account balance, excluding interest payments (percent of GDP): 2013: -3.2; 2014: 1.5; 2015: 5.8; 2016: 0.6; 2017: 3.1; 2018: 2.0; 2019: 3.7; 2020: 4.4; 2021: 4.1; 2022: 3.7; 2022 (repeat): 3.0.
- Scenario with key variables at their historical averages projects external debt rising to values shown (series includes 129.1; 136.4; 145.0; 146.8; 150.3; 153.9 as listed).

### Risk assessment and recommended policy responses (selected)
- Domestic risks (relative likelihood and impact):
  - Domestic political instability (Medium likelihood): Expected impact Medium. Policy response: build political consensus; prioritize measures delivering growth and investment; increase transparency; fight corruption; ensure strong policy ownership for timely implementation.
  - Pressures to increase wages and pensions (Medium likelihood): Expected impact Medium. Policy response: advance public administration and pension reforms to right size public sector and align retirement age to create fiscal space.
  - Increased trade tensions with Russia / 2016 transit ban impact (Medium likelihood): Expected impact Medium. Observed measures include cancellation of free trade agreement with Russia and transit restrictions. Policy response: adapt to new export routes and increase exports to Europe under DCFTA.
  - Protracted and volatile bank resolution process (Low likelihood): Expected impact Medium. Policy response: ensure banks progress in recapitalization and restructuring, unwind related-party exposures, recover loans, improve collateral, reduce NPLs, and strengthen crisis preparedness and resolution principles.
  - Intensification of conflict in Eastern Ukraine (Low likelihood): Expected impact High. Contingency: tighten fiscal and monetary policies, impose exchange restrictions, limit deposit withdrawals to stem outflows.
- External risks:
  - Tighter and more volatile global financial conditions (Medium/High likelihood): Expected impact Low near term given lack of market access and capital controls; Ukraine needs market return by end-2017 to close financing gap.
  - Slowdown in China and other major EMs or structurally weak euro area (Low/Medium likelihood): Expected impact Medium. Policy response: implement structural reforms (deregulation, state-owned enterprise reform) to unlock growth and diversify exports.
  - Negative terms of trade shock from lower commodity prices (Medium likelihood): Expected impact High. Policy response: export product diversification to reduce dependence on volatile commodity prices.

*Source: IMF staff.*

### 3.1 percent of GDP. To ensure that the deficit target is achieved, we have taken a number of

### cr1783 - 3.1 percent of GDP. To ensure that the deficit target is achieved, we have taken a number of

### Fiscal consolidation and social mitigation
- Policy actions to ensure the 3.1 percent of GDP deficit target:
  - Adopted legislation to limit fiscal risks from the increase in the minimum wage.
  - Put in place an automatic adjustment mechanism for gas and heating tariffs to ensure that tariffs remain at market levels.
  - Adjusted parameters of utility-related social assistance programs to ensure better targeting and efficiency.
- Request to reset—and in some cases modify—the remaining eight structural benchmarks as outlined in the attached MEFP; proposed new benchmarks to maintain reform momentum.
- Specific benchmark timing adjustments requested:
  - Pension reform benchmark reset to end-April 2017.
  - Land reform benchmark reset to end-May 2017.

### Program financing, reviews, and transparency commitments
- Requests and amounts:
  - Request completion of the third review and a disbursement in the amount of SDR 734.05 million based on the end-December 2016 performance criteria.
  - Request that the fourth review be based on the end-March 2017 performance criteria and that remaining amounts be allocated over the next seven purchases (see Table 3 in source).
  - Request completion of the financing assurances review.
- Commitment to IMF consultation and data provision:
  - Will consult in advance with the IMF on adoption of additional measures or revisions to MEFP policies, per IMF policies on such consultation.
  - Will provide IMF staff with data and information requested for program monitoring.
- Transparency commitment:
  - Consent to IMF publication of the letter, the MEFP, the Technical Memorandum of Understanding, and accompanying Executive Board documents immediately upon completion of the review.

### Monetary and exchange rate policies
- Institutional commitment:
  - Fully committed to an institutionally strong and independent National Bank of Ukraine (NBU) focused on price and financial stability.
- Inflation targeting framework and targets:
  - Monetary Policy Guidelines for 2017 and Medium Term set inflation targets of 8, 6 and 5 percent for 2017, 2018 and 2019, respectively.
- Policy stance and objectives:
  - Monetary policy aimed at reducing inflation, rebuilding reserves, repairing viable banks and reviving bank lending.
  - Stance to remain appropriately tight; easing gradually as inflation and risks abate and reserve targets are met, maintaining key policy rate appropriately positive in real terms.
  - In event of unexpected shocks endangering inflation targets, will use the key policy rate and other tools to bring inflation to target within a reasonable forecast horizon.
- Foreign exchange strategy and restrictions:
  - New foreign exchange intervention strategy to increase transparency and deepen liquidity; consistent with strengthening reserves and a fundamentals-driven exchange rate.
  - Gradual removal of remaining foreign exchange restrictions guided by a revised conditions-based roadmap; prioritizes easing distortive current account restrictions and reducing disincentives for foreign direct investment, conditional on meeting reserve targets and ensuring macro-financial stability.
  - NBU will monitor impact of relaxation measures and adjust easing steps as needed.
- Institutional strengthening at the NBU:
  - Appointed a new audit committee to improve oversight of internal controls.
  - Reformed emergency liquidity assistance (ELA) framework adopting international best practices; ELA to replace stabilization loans with emphasis on preparatory work and terms to minimize moral hazard and safeguard the NBU balance sheet.

### Financial sector policies and bank restructuring
- Overall progress:
  - Most of the largest 20 banks (group I), accounting for 88 percent of banking system assets, are making good progress toward meeting regulatory capital norms in line with recapitalization plans.
  - Banks in group I unable to meet a minimum CAR of at least 5 percent, and banks in group II unable to reach at least zero capital, have been resolved (a prior action), including nationalization of PrivatBank given its systemic importance.
  - As of mid-January 2017, 88 banks, accounting for almost 50 percent of banking system assets at the beginning of 2014, have been resolved.
- PrivatBank-specific measures and timelines:
  - New supervisory and management board appointed; supervisory board comprises seven members meeting criteria in paragraph 27b and c of the Principles of State Banking Sector Strategic Reforms.
  - Addressing immediate capital needs:
    - Loan losses of UAH 155 billion adjusted by bail-in of creditors for UAH 29 billion.
    - Ministry of Finance recapitalized the bank through government bonds in the amount of UAH 117 billion, issued at market-based rates.
    - NBU stands ready to purchase a portion of these instruments or provide refinancing loans secured by the recapitalization bonds, ensuring consistency with the NBU’s monetary program.
    - Currently outstanding NBU liquidity facilities will not be restructured to undermine former owners’ personal guarantees associated with such facilities.
  - Depositor protection and guarantee policy:
    - Legislation passed to temporarily protect PrivatBank’s household deposits in full; intend to gradually remove the government guarantee on deposits held in state-owned banks (SOBs) in line with Principles of State Banking Sector Strategic Reforms.
  - Due diligence, restructuring and monitoring actions:
    - Supervisory board selected an internationally recognized audit firm to perform due diligence of the bank’s balance sheet at intervention date, as required by the Deposit Guarantee Fund (DGF) law.
    - Approved establishment of a specialized unit to manage and restructure loans and financial leasing agreements of about UAH 155 billion identified by the NBU as related to former bank owners, as well as other impaired loans.
    - Before end-March 2017, the bank’s General Meeting of Shareholders to approve terms of reference and launch hiring of an internationally recognized firm (IRF) to negotiate restructuring and collection of identified loans; supervisory board to select the IRF by end-April 2017 on basis of a transparent process and select a reputable international audit firm to conduct semi-annual detailed independent loan reviews for the next two years (new structural benchmark).
    - Interim reports by the audit firm to be completed by end-September 2017, end-March 2018, end-September 2018, and end-March 2019.
    - IRF expected strategy approval by mid-May 2017 and to restructure the loans through end-June 2017; brief summary and bi-monthly implementation progress reports to be made public at the bank’s website, consistent with banking secrecy and data protection.
    - By end-May 2017, based on due diligence and the bank’s business plan, final steps to complete restructuring and coverage of additional capital needs to be decided; MoF (through its FPD) and NBU to require bi-monthly progress reports on business plan implementation.
    - By end-June 2017, IRF to seek to complete restructuring and collateral enhancement or collection of impaired loans so that losses accounted by the DGF at intervention are reversed.
    - By mid-March 2017, NBU to extend and expand internationally recognized firms’ work, including expanding mandate to perform a forensic audit of PrivatBank’s operations to identify wrongdoing or bad banking practices, with aim to complete audit by mid-September 2017.
  - Commitment to pursue legal and commercial means to recover loans in a timely manner and follow international best practices and banking law.
- Bank group recapitalization timetable updates:
  - Group II (largest 19): Diagnostics Board Approval End-May 2016; Completion of Recapitalization End-July 2016; Zero Tier 1 CAR of 5 percent Mid-January 2017; to End-April 2017.
  - Group III (next 21): Diagnostics Board Approval End-September 2016; Completion of Recapitalization End-December 2016; Zero Tier 1 CAR End-March 2017; to End-June 2017.
  - Remaining banks: Continuous process to be completed by no later than End-September 2017.
- Restructuring plans and supervision deadlines:
  - Banks in groups I and II showing negative operating profitability through 2017 must submit restructuring plans (including quarterly targets) by end-April 2017; measures to be adopted over next 36 months to restore viability. NBU to review and approve by end-June 2017 in consultation with IMF and World Bank staff.
  - Banks in group III showing negative profitability through 2018 must submit restructuring plans by end-May 2017; NBU to complete review by end-July 2017.
  - Diagnostics of remaining banks (accounting for less than 2 percent of system assets) to be completed by end-September 2017; applicable banks to submit restructuring plans on a continuous process to be reviewed and approved by NBU no later than end-December 2017.
  - Ensure that by mid-July 2017 all banks hold at least a minimum capital of UAH 200 million; banks failing to meet this requirement will be resolved.
- Related-party exposures and monitoring:
  - RPMO to oversee banks’ adherence to unwinding plans and by end-March 2017 will complete a 12-month work plan based on revised objectives, coordination modes and monitoring procedures agreed with recent IMF TA mission.
  - Commitment to keep RPMO as the undisputed center of expertise on related-party issues.

### Credit registry and information sharing
- Credit registry establishment:
  - By end-March 2017, seek parliamentary approval of legislation authorizing NBU to establish a credit registry to start collecting information from banks by end-September 2017 and by end-December 2018 commence sharing this information with the banking industry (disclosing borrowers’ exposures loan by loan, but without indicating what individual institution is the creditor).
  - Legislation will introduce reporting requirements for nearly 80 banks under liquidation and allow NBU to share such information with private credit risk bureaus.
- Implementation steps:
  - Within two months of law adoption, NBU to issue corresponding regulations and action plan to ensure timely implementation.
  - By end-April 2017, in consultation with IMF staff, define procedures to share NBU information on composition of related economic groups with the industry to enhance monitoring of credit concentration limits.

### Supervision, regulation, and Basel compliance
- Basel Core Principles (BCPs) and supervisory improvements:
  - By end-March 2017, with IMF and World Bank input, NBU to complete identification of remaining key policy measures required to ensure compliance with BCPs and prepare an action plan through end-2019, to be approved by NBU Board by end-April 2017.
  - NBU amended its new regulation on credit risk to better align with best practices; potential impacts to be communicated to institutions with additional capital needs arising from the changes.
- Specific supervisory actions and timelines:
  - By end-April 2017, prepare an interim report to the board on progress toward adopting risk-based supervision by end-June 2017.
  - By end-May 2017, with technical external assistance, benchmark revised supervisory structure, internal procedures (including coordination between offsite supervision and onsite inspection) and administrative arrangements (including staff count and budgets) against peer countries.

- Additional operational measures:
  - RPMO oversight, credit registry establishment, and strengthened ELA framework complement the supervisory and recapitalization agenda to enhance financial stability and support resumption of bank lending.

*Source: Attachment I. Ukraine: Memorandum of Economic and Financial Policies (excerpts) from the provided IMF content unit.*

### 12.      We will take steps to ensure effective corporate governance in banks. We have

### 12.      We will take steps to ensure effective corporate governance in banks. We have

### Corporate governance in banks (paragraph 12)
- Completed initial assessment of current regulatory and supervisory framework for sound risk governance practices against the 2015 Basel’s Guidelines for Corporate Governance for banks.
- Issued prudential regulations to enhance governance at banks, including guidelines on the functioning of internal audit functions.
- Actions going forward:
  - By end-March 2017, the NBU will submit draft legislation to parliament to address legal loopholes arising from the assessment above mentioned. We expect parliament to adopt this legislation by end-June 2017. The NBU will adopt revised or new resolutions reflecting the findings of the assessment for full implementation no later than end-December 2017.
  - The NBU, with external support, will:
    - (i) by end-September 2017 approve a regulation on minimum organizational and functioning conditions for an effective risk management system at banks; and
    - (ii) by end-April 2018 complete its assessment of the collective suitability of the board and qualifications of senior management of the 10 largest banks and, where applicable, instruct banks to adopt corrective measures within 90 days. By end-July 2018, a similar assessment for the next 10 largest banks will be completed. The remaining banks will be subject to the same review through end-April 2019 in line with a calendar to be agreed with IMF staff by end-September 2017.

### Public banks strategy (paragraph 13)
- Implementing strategy for public banks based on the Principles of State Banking Sector Strategic Reforms approved by the Cabinet of Ministers of Ukraine (CMU) in early February 2016.
- MoF to prepare amendments to the strategy in light of the nationalization of PrivatBank, to be approved by the CMU by end-April 2017.
- Specific measures:
  - The CMU will assume the role of controlling shareholder of the SOBs, supported by the MoF’s FPD.
  - In consultation with IMF staff, in March 2017 submit to parliament the draft law on SOBs to facilitate adoption of the new corporate governance approach and expect this law to be adopted by end-March 2017.
  - By end-March 2017, with IMF technical assistance, complete a new organizational structure of the FPD and an action plan for its strengthening through end-June 2017.
  - By end-June 2017, the MoF’s Financial Policy Department (FPD), in consultation with IMF staff, will establish Memoranda of Understanding with all SOBs (PrivatBank, Oschadbank, Ukreximbank, Ukrgasbank) to define a relationship framework and safeguard commercial independence.
  - Supervisory boards of each SOB will be selected in line with the Principles of State Banking Sector Strategic Reforms, requiring candidates to be proposed by a reputable international recruitment firm; if SOBs receive private participation, independent member selection will follow the Law on State-Owned Enterprises.
  - Will refrain from making operational the recently created Export Credit Agency until all related cost and capital needs for the next three years are clearly identified on the basis of an independent assessment and included in the government budget.

### Deposit Guarantee Fund (DGF) enhancements (paragraph 14)
- Centralized unit at the DGF to consolidate management and control of bank assets from nearly 80 resolved institutions.
- Commitments:
  - Submit legislation to parliament to enhance the DGF's ability to work with assets in a timely and efficient manner, increase net cash recoveries, and provide legal protection to DGF staff; expect law to be adopted by end-March 2017.
  - The first executive summary of the forensic audits was published and the second will be published by mid-March 2017. By mid-March 2017, the DGF will launch the selection process for the next three forensic audit exercises.
  - Dispose of assets through international platforms of distressed assets, aiming to dispose of at least UAH 10 billion worth of assets by end-June 2017.
  - By end-September 2017, the DGF will publish its review of a selected pool of assets sold in the preceding two years. By end-March 2017, the DGF will agree with IMF and World Bank staff the terms of reference for its regular examinations of asset sales, including scope and frequency.

### Corporate debt restructuring and creditors’ rights (paragraph 15)
- Parliament adopted amendments to the Law on Enforcement Procedures to speed up enforcement.
- Benchmarks and legislative actions:
  - By end-September 2017, parliament is expected to adopt amendments to the Law on Restoration of Debtor’s Solvency or Declaration of its Bankruptcy (draft bill No. 3132(d)) to facilitate restructuring procedures and increase the efficiency of liquidation (structural benchmark reset from end-September 2016).
  - By end-September 2017, parliament will adopt legislation to strengthen provisions in the Code of Civil Procedure and the Code on Commercial Procedure and related laws on automated collection and enforcement of debts Orders for Payments for domestic transactions and Garnishment of Bank accounts (structural benchmark reset from end-September 2016).
  - By end-June 2017 the MoF, in consultation with the NBU, will submit legislative changes to the tax code to change the definition of “bad debts” to allow write-off of uncollectable debts without having to initiate or complete a bankruptcy process (e.g., 360 days post default) and to extend tax incentives on a temporary basis to out-of-court restructurings under the Law on Financial Restructuring to debt restructurings subject to the insolvency law.
  - Regarding possible restructuring of mortgage loans denominated in foreign currency, will support only legislative initiatives consistent with the existing agreement between the NBU and the banking industry.

### Regulatory framework for securities markets and non-bank financial institutions (paragraph 16)
- Objective: establish strong regulatory framework for securities markets, non-bank financial institutions, and banks.
- Actions:
  - Reinforce powers, independence and institutional capacity of the National Securities and Stock Market Commission (NSSMC), aiming to allow it to become a signatory to IOSCO’s Multilateral Memorandum of Understanding. Seek parliamentary approval by end-April 2017 of legislation meeting objectives in points a through j of paragraph 22 of the MEFP dated September 1, 2016.
  - With international donor assistance, NSSMC is reforming internal organization and procedures: introducing a functional structure to replace the sectoral one; redesign of key processes including governance mechanisms, decision-making procedures, responsibilities, internal controls and operational risk prevention systems to be developed and implemented during the next 18 months. By end-April 2017 agree with IMF staff an action plan with clear quarterly targets.
  - Reassign supervisory responsibilities from the National Commission of Financial Services (NCFS) to the NBU and the NSSMC: NBU responsible for insurance and leasing companies, credit unions, credit bureaus and other non-bank lenders, pawnshops and other financial companies; NSSMC for private pension funds, issuers of mortgage certificates, funds for construction financing and real estate funds. Relevant legislation adopted by parliament in first reading in July 2016; aim for adoption in second reading by end-March 2017 and full implementation by end-December 2017.
  - Adopt a new Audit Law and a revised Accounting Law based on EU standards to improve financial market functioning, transparency, and issuer disclosures; these laws will be adopted by end-July 2017.

### Income policies and minimum wage (paragraph 17)
- Increased minimum wage to UAH 3,200, effective January 1, 2017, to reduce extensive labor informality and support vulnerable households.
- Commitments and mitigation measures:
  - Refrain from further increasing the minimum wage in 2017; any increases in 2018 and thereafter will consider impact on employment and competitiveness.
  - Adjust the minimum subsistence level in 2017 in line with inflation.
  - Expect comprehensive pension reform (paragraph 21a) to open fiscal space for better pensions over time.
- Specific policy strands:
  - Fiscal sustainability: increase in minimum wage expected to increase the wage bill of the general government to 11.3 percent of GDP in 2017. To ensure decline over time, accelerate fiscal structural reforms including health and education reforms, comprehensive pension reform, civil service reform (including delinking civil service wage grid from the minimum wage) and revisiting the new civil service law in consultation with the EU and the IMF (see paragraph 21b).
  - Informality: accelerate tax administration reforms, including tightening the simplified tax regime, abolishing the moratorium on tax audits and labor inspections of small enterprises, increasing penalties for undeclared labor, and enhancing inspections (see paragraphs 19–20).
  - Competitiveness: decouple collective agreements from the minimum wage and accelerate productivity-enhancing reforms specified in paragraphs 27–28.
  - Employment: limit adverse impacts by (i) improving apprenticeship system through removal of restrictions in the labor code; (ii) modernizing vocational training; (iii) removing outdated norms that limit employers’ ability to adjust employment; and (iv) limiting scope of “protected” categories of employment by end-December 2018. Revise labor code to remove rigidities by end-December 2017.

### Fiscal policies (paragraph 18)
- Fiscal policy anchored by medium-term consolidation plan under IMF-supported program.
- Parliament adopted a budget for 2017 and supporting legislation consistent with a general government deficit ceiling of 3.1 percent of GDP (a prior action for this review).
- Targets:
  - Reduce general government budget deficit to 2½ percent of GDP in 2018 and 2¼ percent of GDP in 2019.
- Strategy: mainly reduce current spending, increase capital investment spending, use any revenue over-performance to clear corporate income tax prepayments, further increase capital spending, or save; regularly review central and subnational revenue sharing and expenditure assignments.

### Revenue measures and tax administration reform (paragraphs 19–20)
- Tax policy stance:
  - Refrain from major tax cuts and not introduce new tax exemptions and amnesty schemes.
  - Substantially tighten the simplified tax regime from January 1, 2018.
  - Refrain from introducing preferential tax treatment—other than for local property taxes—for companies operating in industrial zones.
  - Submit legislation to harmonize filing and payment of social security contributions and personal income tax by end-April 2017.
  - Legalize amber mining and gambling to provide additional revenues not later than in 2018.
- Revenue administration reform objectives:
  - Transparency and accountability:
    - Establish strong MoF oversight of the State Fiscal Service (SFS) with Key Performance Indicators (KPI) for SFS to be published quarterly.
    - By end-June 2017 complete an external audit of SFS’ IT systems and databases; by end-March 2017 MoF will issue a resolution setting standards and goals for development and integrity of SFS software; resolution will allow MoF access to non-identifiable tax data in SFS MIS in online format and ability to monitor and audit changes in taxpayer data.
    - Conduct and publish semi-annual surveys of taxpayers to assess perception of corruption at the SFS and quality of SFS services.
  - Institutional strengthening of the SFS:
    - Full merger of tax and customs administrations into a single legal entity expected to be completed by end-March 2017 (structural benchmark reset from end-December 2016).
    - Consolidate regional tax and customs offices into a single office per region by end-March 2017.
    - Agree methodology and process for accelerating vetting of SFS staff; adopt new funding model to ensure adequate salaries for vetted SFS staff by end-March 2017.
    - Restored powers to audit small- and medium-size taxpayers from January 1, 2017. Expect parliament to adopt by end-December 2017 legislation granting SFS powers to use indirect methods to ascertain tax and social security contribution obligations.
    - Establish a new analytical risk-management unit responsible for identification of risk criteria by mid-March 2017.
  - Reform of customs operations:
    - Cabinet to approve new comprehensive customs reform strategy by end-March 2017 with detailed action plan including reducing inland clearance facilities during 2017 by at least one third.
    - Multi-agency mobile groups under MoF operational since September 2016 to fight fraud and smuggling outside border crossing points.
    - Approve action plan on accession to convention on a common transit procedure and the convention on a Single Administrative Document (SAD), and start implementing the New Computerized Transit System (NCTS) by end-2017.
    - By end-June 2017 the SFS will create a unified customs value reference database and build capacity to ensure regular update and analysis of prices on international markets and effective oversight of valuation field work at regional SFS offices.
    - Publish by mid-March 2017 both the new Code of Conduct and the Anti-Corruption Program.
  - Reduction in compliance burden:
    - Single-level dispute resolution system effective at SFS headquarters from March 1, 2017.
    - Introduce record-keeping of outcomes of court decisions after completion of administrative appeals procedure.
    - Aim for at least 70 percent of taxpayers filing tax returns electronically by end-December 2017.
  - Reform of financial police:
    - Parliament expected to adopt legislation to establish by end-April 2017 a new civil service under the MoF to replace the current tax police and consolidate responsibilities for investigating financial offences against the State (new structural benchmark).
    - New financial police will have a much smaller staff, majority hired outside current law enforcement system, better paid and equipped; responsibilities with SFS to be clearly delineated while maintaining adequate SFS capacity to fight tax fraud.

*International Monetary Fund — Country Report content as provided in the supplied PDF excerpt.*

### 21.      We will accelerate structural fiscal reforms to improve the structure of public finances

### 21.      We will accelerate structural fiscal reforms to improve the structure of public finances

### Pension reform
- Rationale and problem statement:
  - Structural labor market problems: low compliance of social security contributions and low participation rates.
  - Unfavorable demographics and outdated pension rules have eroded sustainability.
  - Pension expenditure is very high while most individual pensions are relatively low.
  - The number of pensioners has grown disproportionate to the active labor force.
  - The deficit of the pension fund exceeded UAH 140 billion in 2016 (about 6 percent of GDP) and is set to widen without changes.
- Reform commitments and features:
  - Parliament will adopt by end-April 2017 a comprehensive pension reform (delayed from end-December 2016) that will become effective by January 1, 2018.
  - Features of the reform:
    - (i) A new set of retirement options, with a wider range of retirement ages than at present, offering choice dependent on total years of service, and with pension benefits that provide incentives for longer employment and later retirement.
    - (ii) Savings of at least 3 percent of GDP over the long term, including by lengthening the effective years of service at retirement.
    - (iii) Assurance that Ukrainian citizens have pensions that are proportionate to their contributions and adequate in real terms.
  - Coverage and exceptions:
    - The general system will apply to all categories of employment except for a limited number of hazardous occupations.
    - For hazardous occupations, a surcharge on social security contributions payable by employers will be introduced, actuarially fair, accumulated on personified accounts, and used as bridge financing between early retirement and the new system.
  - Additional measures:
    - Increased efforts to expand the base for social security contributions.

### Public administration and remuneration reforms
- Immediate measures:
  - Delinked base salaries for civil servants from the minimum wage to limit effect of the doubling of minimum wage in 2017.
  - Suspended application of the provision in the civil service law envisaging a gradual increase in the base salary.
- Review and downsizing commitments:
  - By end-June 2017, undertake a comprehensive review of the overall remuneration system of the public sector considering legal framework, wage structure, compression, and overall wage bill.
  - Start a medium-term program of public sector downsizing:
    - Reduce size of employment in the budgetary sector (excluding the military) by at least 4 percent by end-2017, and by a further 10 percent by end-2019.
    - In the civil service, reduce the number of staff by 5 percent by end-2017 and by a further 10 percent by end-2019.
  - Build a central civil service information system and begin semi-annual reporting on the number of civil servants and budgetary sector employees.
  - An indicative target on employment downsizing has been established to monitor progress.

### Healthcare reform
- Reform objectives:
  - Increase efficiency of spending and improve outcomes through deep and comprehensive reforms.
- First-phase actions and timeline:
  - Introduce a new financing mechanism in primary healthcare based on "money follows the patient".
  - From July 1, 2017, primary healthcare facilities will receive budget financing based on the number of individuals registered with a chosen physician; financing will be universal and sized by age.
  - Establish the single national purchasing agency (the National Health Service) in the first half of 2017.
  - From 2018, the National Health Service will fund specialized and hospital care and outpatient pharmaceuticals.
- Hospital and pharmaceutical reforms:
  - From early 2017, establish about 100 regional hospital districts within a defined territory in each oblast to eliminate duplication and reduce excess capacity.
  - In 2017, introduce an outpatient drugs reimbursement program with gradual expansion of coverage.

### Social assistance administration reform
- Objectives:
  - Strengthen control over social payments, improve targeting, and minimize leakages to non-eligible beneficiaries.
- Legislative and administrative actions:
  - 2017 budget legislation amended to allow MoF, during verification of social payments, to access the unified database of civil status, the registry of voters, and other relevant databases.
  - By end-June 2017, parliament will adopt legislation to establish means testing for recipients of all social assistance based on households' income and assets; payments to non-eligible recipients will be discontinued.
  - Establish a single centralized database under the MoF of all recipients of social assistance and their benefits (a new structural benchmark for end-December 2017).

### Institutional reforms (public finance management)
- Strategy and implementation:
  - Approved a comprehensive public finance management reform strategy for 2017-21 and started implementation.
  - Ensure full-fledged implementation of the Medium-Term Budget Framework and strategic planning for effective and efficient resource allocation.
- Fiscal rules and risk management:
  - Plan to develop a fiscal rule by mid-2018.
  - Introduce a comprehensive fiscal risk management system and adopt necessary legislative changes by end-December 2017 to cover/reduce macroeconomic risks, SOE and public asset management risks, public guarantees, local borrowings, public-private partnerships, and other risks.
- Public investment and control:
  - Implement strategic planning of public investments, create a single 'entry point' for investment proposals, and institutionalize project management by end-December 2017.
  - Improve efficiency of internal control and audit functions in central and local authorities during 2017–18.

### Energy Policies
- Social assistance and energy efficiency measures:
  - Reduced consumption norms effective May 1, 2017:
    - Gas for individual heating: from 5.5 to 5.0 cm per m2.
    - Electricity used for individual heating: from 65 to 51 kwh per m2.
    - Centralized heating: from 0.0548 to 0.0431 Gcal per m2.
  - By end-July 2017, committed actions (effective August 1, 2017 unless otherwise noted):
    - (i) Revise other parameters of the household utility subsidies (HUS) system to improve targeting.
    - (ii) Introduce an adjustment to the social norm for off-peak heating months.
    - (iii) Apply a capacity-based distribution tariff for gas and heat to shift some costs to the summer.
  - Target: Limit HUS outlays to UAH 47 billion in 2017.
- Gas sector transformation:
  - (a) Tariff adjustment and domestic gas price:
    - Revised Public Service Obligations (CMU Resolution 758) introduced an interim mechanism to automatically adjust retail gas and heating tariffs on a semi-annual basis if tariffs deviate from full cost-recovery levels (based on import parity as defined in the TMU) by 10 percent or more (a prior action).
    - Interim mechanism remains until tariffs are fully liberalized.
    - Adjust the price of domestic gas (UGV price) semi-annually starting April 1, 2017 to keep it in line with import prices.
  - (b) Market liberalization and monetization of subsidies:
    - By end-August 2017, adopt a CMU Resolution to monetize benefits of the HUS program at the level of utility companies as of end-September 2017 (a new structural benchmark) so private gas traders can compete with Naftogaz.
    - Work toward monetization of utility subsidies at the household level to improve energy efficiency.
    - By end-September 2017, further amend CMU Resolution 758 so tariffs on gas transportation and distribution are separated from the gas cost as commodity.
    - Cancel the 12-month installment plan for paying heating bills for households that do not receive subsidies (CMU Resolutions 630 and 357) by May 1, 2017.
    - Reintroduce the sunset clause to CMU Resolution 217 that earmarks heating company revenues for specific (non-gas) operating costs by April 1, 2017.

### Governance, Anticorruption, Business Climate, and SOE reform

Anticorruption

- E-declaration:
  - Enforced submission of the 2015 income and asset declaration by high-level officials; declarations made publicly available.
  - NAPC reported cases of officials who did not submit a declaration to NABU as required by law 2014/49 (a prior action).
  - Number of high level officials that filed asset declarations was close to 22,000 and number of non-filers reported to NABU was 10.
  - NAPC will publish quarterly statistics on verification of asset declarations on a webpage freely available to the public (per the template in paragraph 98 of the TMU).
  - NBU and FIU will inform counterparts in key financial centers that absence of declaration of assets owned or beneficially owned by PEPs or their family members and associates in foreign jurisdictions may constitute a crime under Ukrainian law and a money laundering offence in those jurisdictions.
  - Enforce filing of comprehensive asset declarations by all high-level officials including managers of SOEs for calendar year 2016, as defined under Article 46 of law 2014/49, by April 1, 2017; subsequently evaluate effectiveness and consider amendments to categories required to submit declarations.
- NABU operations:
  - Parliament will adopt legislation to strengthen NABU powers in line with paragraph 36a of the September 2016 MEFP by end-May 2017 (deadline reset from November 2016).
  - By end-December 2016, NABU had hired 542 staff out of a full complement of 700 staff and opened three regional offices.
  - NABU investigations since start: 8 members of parliament, 39 judges, 23 prosecutors, and 52 SOE managers under investigation.
  - NABU investigations led to more than 40 cases sent to court and to the lifting of immunity of a member of parliament.
  - Maintain NABU’s exclusive authority to investigate corruption by high-level officials.
  - NABU will continue publishing quarterly statistics on investigations (per revised template in paragraph 99 of TMU).
  - By end-April 2017, the President, Parliament, and Cabinet will each nominate one expert for the commission of external control (Article 26.6 of NABU Law).
  - The commission will approve terms of reference for an annual external audit of NABU by end-June 2017, in agreement with IMF staff.
  - Audit report finalized by end-October 2017 and appended to subsequent NABU bi-annual report; if auditors unanimously conclude criteria in Article 6.4.11 of NABU Law are met, they will include detailed rationale and recommendation.
- Anticorruption court:
  - Operationalize the anticorruption court established by June 2016 Law on the Judiciary in line with European Convention of Human Rights and Council of Europe standards.
  - By mid-April 2017 submit relevant legislation to parliament; expect adoption by mid-June 2017 (a new structural benchmark).
  - Legislation will include budgetary autonomy, security of the judiciary framework, and establish the selection process for anticorruption judges with specific requirements for impeccable reputation, high professional qualities, and relevant specific skills.
  - Selection procedure to include tests and tasks, transparent evaluation by the High Qualification Commission of Judges with support from respected experts; assessment of integrity will involve the Civic Integrity Council.
  - Selection will ensure for each available position an applicant is presented by the High Council of Justice to the President for appointment by mid-January 2018.
  - The anti-corruption court will begin operations by end-March 2018.
- AML implementation:
  - AML/CFT on-site inspections targeted at PEP-related measures have increased implementation and suspicious transaction reporting to the FIU.
  - NBU implemented enforcement actions on 13 banks since July 2016, including revocation of a bank’s license for failure to implement PEP requirements.
  - In 2016, the FIU disseminated 71 cases involving PEPs to NABU, including 24 members of parliament.
  - Implement legal and institutional measures in paragraph 36e of the September MEFP by end-March 2017:
    - Adopt amendments to ensure a three-tier reporting system:
      - (i) suspicious transaction reports as defined by the FATF,
      - (ii) threshold-based reporting of cash transactions and international funds transfers,
      - (iii) mandatory reporting of transactions related to high-risk jurisdictions and politically exposed persons.
    - Strengthen operational capacity and integrity of the FIU.
    - Ensure definition of persons related to PEPs is consistent with FATF risk-based approach and that proportionate and dissuasive sanctions can be implemented by NBU for breaches.
  - FIU will continue publishing quarterly statistics on information disseminated to NABU (template in paragraph 99 of TMU).
  - NBU will continue at least four quarterly inspections of banks at higher risk of laundering proceeds of corruption, focused on customer due diligence and PEPs.
  - By January 2018, when sanctions are imposed for breaches of AML/CFT requirements, NBU will publish the bank name, enforcement actions, and brief description of breaches, allowing case-by-case exceptions where publication jeopardizes financial stability or ongoing investigations.
- Business ombudsman:
  - Parliament expected to adopt legislation on the Business Ombudsman in line with paragraph 36g of the September 2016 MEFP by end-March 2017.
  - Since start of operations, Business Ombudsman received more than 1,450 complaints, with a 95 percent satisfaction rate from complainants and estimated direct financial impact of interventions of more than UAH 8 billion.

Business climate

- Deregulation and licensing:
  - CMU adopted decisions abolishing many regulatory acts, notably in telecommunications and agriculture.
  - Revised deregulation action plan; expect implementation of items 7, 8, 73, 83, and 108 and adoption of the law on the electricity market by end-March 2017.
  - Conduct rolling review of regulatory burdens in energy, infrastructure, construction, and agriculture; CMU to adopt specific reform proposals in each area by end-April 2017.
  - CMU will adopt all remaining licensing conditions by end-March 2017.
  - Steps to make the Single State Register of legal entities and natural persons operational by end-June 2017.
- Land reform:
  - Liberalizing the land market including sale of agricultural land is essential to boost growth potential.
  - Established a working group with relevant ministries and World Bank to draft legislation to open the land market with safeguards.
  - Parliamentary approval of the law on agricultural land circulation expected by end-May 2017 (modification and new deadline for missed end-September 2016 structural benchmark), allowing the current moratorium on sale of agricultural land to expire by end-2017 so sale of state-owned and private land can start immediately thereafter.
  - Launch a public information campaign to explain benefits of the reform.

*Source: IMF staff report excerpt (cr1783).*

### 28.      Albeit with some delays, we continue to make progress with the implementation of

### 28.      Albeit with some delays, we continue to make progress with the implementation of

### Oversight of SOEs fiscal risks
- Strengthen through adequate legislation the fiscal risks management unit in the MoF, tasked with monitoring and analyzing SOE fiscal risks.
- Prepare an initial analysis of these fiscal risks by end-April 2017.
- Include a comprehensive statement of fiscal risks emanating from the SOE sector in the 2018 budget documentation and publish it on the MoF website.

### SOE governance and reform
- Comprehensive strategy to reform and increase the sector’s efficiency includes governance, triage, and exploration of a single national Holding Company to manage strategic commercial SOEs.

- Governance
  - Following adoption of the SOE corporate governance law, the CMU will adopt the decisions regulating the establishment of supervisory boards by end-March 2017.
  - Complete the appointment of independent supervisory boards in the largest 15 SOEs by end-June 2017.
  - Expect audit reports for the largest SOEs, prepared by reputable auditors selected on the basis of the CMU decree on criteria for auditor selection in large SOEs, to be completed by end-June 2017.

- Triage of all SOEs
  - Continue triage of all SOEs in consultation with IMF staff.
  - SOEs without a clear national strategic interest will be privatized or liquidated.
  - By end-August 2017, the cabinet will adopt, and publish on the MoEDT website, the triage and transfer of SOEs to the State Property Fund of Ukraine (SPFU) (a new deadline for this structural benchmark, reset from end-October 2016).

### Liquidation of SOEs
- Plan to centralize the liquidation of non-operating SOEs under the SPFU based on triage results.
- SPFU, in consultation with relevant ministries, preparing a draft law to enable the SPFU to liquidate SOEs with zero assets or where assets are smaller than liabilities, under streamlined procedures.
- Conduct an analysis of the bankruptcy law as relevant for SOEs and introduce necessary changes where needed.
- Expect parliament to adopt this draft bill by end-June 2017.

### Privatization
- Recognize need to accelerate privatization of large SOEs to raise Ukraine’s growth potential.
- Key elements:

  - Improving the legal framework
    - Parliament will adopt amendments to the privatization law to improve transparency and safeguards, and to further streamline the privatization process for medium-sized enterprises by end-August 2017 (a new deadline for this structural benchmark, reset from end-December 2016).

  - Creating a larger pipeline of enterprises for privatization
    - Based on triage and facilitated by adoption of legislation to reduce the list of companies banned from privatization, expected by end-June 2017, develop a schedule for transferring additional SOEs from the line ministries to the SPFU.
    - The shares of all companies planned to be offered for sale in 2017 will be transferred to the SPFU by end-March 2017.

  - Privatization of small SOEs and assets
    - Streamline and accelerate privatization of small SOEs and thousands of small assets (buildings, machinery, etc.), including by holding electronic auctions through the Prozorro system.
    - Expect to conduct first auctions in this new platform by end-June 2017.

  - Privatization of large SOEs
    - Committed to privatization of PJSC Odessa Portside Plant and will implement necessary measures to attract reputable international investors and complete its privatization by the first half of 2017.
    - Initiate privatization of a number of large SOEs identified for privatization by end-September 2017, including PJSC Centrenergo, Turboatom (shares already transferred to the SPFU), and regional energy distribution companies, obloenergos (shares to be transferred to the SPFU by end-April 2017).
    - Expect adoption of legislation allowing full privatization of Ukrspirits (about 150 related SOES) by end-March 2017, with objective to have the contest sale completed by end-September 2017.

### Quantitative criteria and indicative targets (Table 1) — selected figures preserved exactly as in source
- Ceiling on the cash deficit of the general government (- implies a surplus):
  - September PC: 35,000
  - September Act.: 42,212
  - December PC: 39,451
  - December Act.: 84,900
  - Proposed PC (June 2017): 15,000
  - Proposed PC (September 2017): 29,000
  - Proposed PC (December 2017): 45,000
  - Proposed PC (end period): 80,970
- Ceiling on the cash deficit of the general government and Naftogaz (- implies a surplus):
  - September PC: 30,500
  - September Act.: 23,977
  - December PC: 22,208
  - December Act.: 90,000
  - Proposed PC (June 2017): -1,100
  - Proposed PC (September 2017): 16,200
  - Proposed PC (December 2017): 52,000
  - Proposed PC (end period): 80,970
- Floor on cumulative change in net international reserves (in millions of U.S. dollars):
  - September PC: 1,776
  - September Act.: 2,234
  - December PC: 2,283
  - December Act.: 2,317
  - Proposed PC (June 2017): 2,288
  - Proposed PC (September 2017): 3,734
  - Proposed PC (December 2017): 3,292
  - Proposed PC (end period): 5,032
- Ceiling on cumulative change in net domestic assets of the NBU:
  - September PC: -2,886
  - September Act.: -10,103
  - December PC: -16,808
  - December Act.: 9,923
  - Proposed PC (June 2017): 22,584
  - Proposed PC (September 2017): 11,183
  - Proposed PC (December 2017): 26,351
  - Proposed PC (end period): 17,955
- Ceiling on publicly guaranteed debt:
  - September PC: 28,200
  - September Act.: 28,200
  - December PC: 0
  - December Act.: 28,200
  - Proposed PC (June 2017): 15,000
  - Proposed PC (September 2017): 15,000
  - Proposed PC (December 2017): 15,000
  - Proposed PC (end period): 15,000

- Continuous performance criterion
  - Non-accumulation of new external debt payments arrears by the general government:
    - All test dates: 0

- Indicative targets (selected)
  - Ceiling on cumulative change in base money:
    - September PC: 25,123
    - September Act.: 25,123
    - December PC: 19,192
    - December Act.: 46,452
    - Proposed PC (June 2017): 58,655
  - Inflation (mid-point, percent):
    - December Act.: 12.4
    - Proposed PC (June 2017): 10.0
    - Proposed PC (September 2017): 8.0
  - Ceiling on stock of VAT refund arrears:
    - September Act.: 2,566
    - December PC: 0
    - December Act.: 494

- Memorandum items (selected)
  - Naftogaz deficit (- implies a surplus):
    - September PC: -4,500
    - September Act.: -18,235
    - December PC: -17,243
    - December Act.: 5,100
    - Proposed PC (June 2017): -16,100
    - Proposed PC (September 2017): -12,800
    - Proposed PC (December 2017): 7,000
    - Proposed PC (end period): 0
  - Government bonds issued for banks recapitalization and DGF financing:
    - September PC: 166,000
    - September Act.: 14,275
    - December PC: 166,000
    - December Act.: 129,216
    - Proposed PC (June 2017): 207,000
    - Proposed PC (September 2017): 227,000
  - Program accounting exchange rate, hryvnia per U.S. dollar: 15.7686 (all listed dates)

### Prior actions and structural benchmarks (Table 2) — selected items and dates preserved exactly
- Prior Actions (Met)
  - Parliamentary approval of the 2017 budget and supporting legislation consistent with the program target of 3.1 percent of GDP. Status: Met.
  - Resolution of all large banks that do not meet the minimum capital requirements. Status: Met.
  - Revise the Public Service Obligations (CMU Resolution 758) to introduce an interim mechanism to automatically adjust gas and heating tariffs on a semi-annual basis if tariffs deviate from full cost-recovery levels by 10 percent or more. Status: Met.
  - Reduce consumption norms effective May 1, 2017. Status: Met.
  - Enforce the filing of asset declarations for 2015 by high-level officials. Status: Met.

- Proposed New Structural Benchmarks (completion dates)
  - Selection of an international reputable firm to negotiate restructuring and collection terms of PrivatBank’s impaired loans; selection of a reputable international audit firm — End-April 2017.
  - Parliamentary approval of pension legislation — End-April 2017.
  - Parliamentary approval of legislation to establish a new civil service responsible for investigation of financial offences under the MoF to replace the current tax police — End-April 2017.
  - Parliamentary approval of a law on agricultural land circulation allowing the moratorium to expire by the end of 2017 — End-May 2017.
  - Parliamentary approval of legislation to establish an anticorruption court — June 15, 2017.
  - Revise parameters of the household utility subsidies (HUS) system to limit household utility subsidy outlays to UAH 47 billion in 2017 — End-July 2017.
  - Adopt CMU resolution to monetize utility subsidies at the level of utility companies — End-August 2017.
  - Establish a centralized database in the MoF of recipients of social assistance — End-December 2017.

- Previous Structural Benchmarks not met and resets (selected)
  - Submit law on agricultural land circulation to parliament: Not met; Reset and modified for end-May 2017.
  - Cabinet approval and publication in the MEDT website of the completed triage of all SOEs and transfer to the SPFU: Not met; Reset for end-August 2017.
  - Parliamentary approval of legislation ensuring NABU investigative tools and protections: Not met; Reset for end-May 2017.
  - Parliamentary approval of comprehensive pension-related legislation: Not met; Reset and modified for end-April 2017.
  - Parliamentary approval of amendments to the privatization law to improve transparency and safeguards: Not met; Reset for end-August 2017.
  - Adopt legislation to merge the customs and tax administration into a single legal entity: Not met; Reset for end-March 2017.

### Proposed schedule of purchases under the Extended Arrangement (Table 3) — selected rows preserved exactly
- March 11, 2015: 3,546.00 Millions of SDRs; 4,872.00 Millions of US$; 258.45 Percent of quota.
- June 15, 2015 3/: 1,182.10 Millions of SDRs; 1,650.00 Millions of US$; 86.16 Percent of quota.
- September 15, 2015 3/: 716.11 Millions of SDRs; 999.80 Millions of US$; 35.60 Percent of quota.
- November 15, 2016: 734.05 Millions of SDRs; 987.34 Millions of US$; 36.49 Percent of quota.
- May 15, 2017: 1,418.48 Millions of SDRs; 1,906.91 Millions of US$; 70.51 Percent of quota.
- Total: 12,348 Millions of SDRs; 16,794 Millions of US$; 614 Percent of quota.

- Note: For 2015–18, the average USD/SDR rates used in this table are: 1.399, 1.396, 1.362, and 1.361, respectively.

### Technical Memorandum of Understanding (Attachment II) — exchange rate definition (selected)
- All exchange rates used to evaluate reserve levels and monetary aggregates are:
  - Official exchange rate of the Ukrainian hryvnia to the U.S. dollar of 15.7686 set by the National Bank of Ukraine (NBU) as of December 31, 2014.
  - Reference exchange rates of foreign currencies reported by the European Central Bank (ECB) on its web site as of December 31, 2014, which the NBU used to set official exchange rates of hryvnia to those currencies.
  - Swiss Franc is valued at 0.9904 per dollar; the Euro is valued at (value truncated in source).

*Source: Ukrainian authorities; and IMF staff estimates and projections (excerpts from the March 2, 2017 TMU and MEFP).*

### 1.2141 dollars, the Pound Sterling is valued at 1.5587 dollars, the Australian dollar is valued at

### cr1783 - 1.2141 dollars, the Pound Sterling is valued at 1.5587 dollars, the Australian dollar is valued at

### Exchange rates, gold, and GDP definition
- Exchange-rate valuations used for program accounting:
  - Australian dollar: 0.8187 U.S. dollars
  - Canadian dollar: 0.8633 dollars
  - Chinese Yuan: 0.1611 U.S. dollars
  - Japanese yen: 119.6195 per dollar
  - Norwegian Krone: 0.1343 dollars
  - Pound Sterling: 1.5587 dollars
  - U.S. dollar (implicit reference): 1.2141 dollars (as stated in the title context)
  - Accounting exchange rate for the SDR: 0.690224 per dollar
- Official gold holdings valuation: 1,206.00 dollars per fine ounce.
- These accounting exchange rates are kept fixed over the program period and differ from actual market exchange rates in Ukraine. Setting a program exchange rate for computing monetary aggregates does not imply a target exchange rate for policy purposes.
- For program purposes, gross domestic product is compiled as per the System of National Accounts 2008 and excludes Crimea and Sevastopol.

### Net International Reserves (NIR) — definition and components
- Definition:
  - NIR of the NBU are the dollar value of the difference between usable gross international reserve assets and reserve-related liabilities to nonresidents, evaluated at program exchange rates.
- Usable gross international reserves comprise readily available claims on nonresidents in convertible foreign currencies consistent with BPM6 and SDDS (Table 6.1, item A).
- Exclusions from usable reserves include, inter alia:
  - any assets denominated in foreign currencies held at, or claims on, domestic institutions;
  - all foreign currency claims of the NBU on domestic banks, and NBU deposits held at the Interbank Foreign Currency Exchange Market and domestic banks for trading purposes;
  - any precious metals or metal deposits other than monetary gold and gold deposits held by the NBU;
  - any assets corresponding to claims of commercial banks in foreign currency on the NBU and any reserve assets that are encumbered, pledged as collateral (unless already included in foreign liabilities or excluded from reserve assets), or frozen;
  - any reserve assets not readily available for intervention in the foreign exchange market (e.g., not fully under control of the NBU or lacking quality/liquidity).
- Reserve-related liabilities comprise:
  - all short-term liabilities of the NBU vis-à-vis nonresidents in convertible currencies with original maturity of one year or less;
  - the stock of IMF credit outstanding;
  - the nominal value of all derivative positions (including swaps, options, forwards, and futures) of the NBU and general government implying the sale of foreign currency or other reserve assets (notional value of commitments, not market value);
  - all foreign exchange liabilities of the NBU to resident entities, excluding foreign exchange liabilities to the general government or related to deposit guarantees.
- Table A (components listed in the source) maps types of foreign reserve assets/liabilities to NBU balance sheet and memorandum accounts (accounts listed exactly as in the source).

### Assumptions underpinning NIR/NDA targets
- The NIR/NDA targets assume a rollover of central government’s domestic foreign exchange debt liabilities of 82 percent in 2017. The rollover will be achieved through issuance of new central government foreign exchange bonds with maturity of at least one year.
- The targets assume no early repayment of domestic foreign exchange bonds, in line with authorities’ commitment.

### NIR adjustment mechanism and projected external flows (Table B, C, D)
- NIR targets adjustments:
  - Adjust upward (downward) by full amount of cumulative excess (shortfall) in program disbursements relative to baseline projection (Table B). Program disbursements defined as external disbursements (including grants and long-term credit to the NBU, excluding project-financing disbursements) from specified official creditors and external bond placements usable for financing the central government budget deficit or reserve assets.
  - Adjust upward (downward) by full amount of cumulative excess (shortfall) in net issuance (gross issuance minus debt service) of central government’s domestic foreign exchange debt liabilities relative to baseline (Table C).
  - Symmetric adjustor for conversion of non-reserve currency under central bank swap agreements into reserve currency via outright sale: upward adjustment by amount converted at time of conversion; downward adjustment by amount of reserve currency repaid (principal and interest) when repaying the non-reserve currency.
  - Adjust upward (downward) by full amount of cumulative excess (shortfall) in net financing from debt operations relative to baseline (Table D).
- Table B. Eurobond Placements and Disbursements from IFIs and Official Sources: Projections for NIR/NDA Adjustment (Cumulative flows from January 1, 2016, millions of U.S. dollars at program exchange rate)
  - End-June 2017: Eurobond placement 1,000; World Bank 40; EU 880; Others (Japan, Sweden, Switzerland, Turkey) 559; Total 2,479
  - End-September 2017: Eurobond placement 1,000; World Bank 70; EU 880; Others 584; Total 2,534
  - End-December 2017: Eurobond placement 2,000; World Bank 100; EU 1,609; Others 659; Total 4,368
- Table C. Net Issuance of Central Government Domestic FX Debt: Projections for NIR/NDA Adjustment (Cumulative flows from January 1, 2016, millions of U.S. dollars at program exchange rate)
  - End-June 2017: Net issuance 1000
  - End-September 2017: Net issuance 852
  - End-December 2017: Net issuance 701
- Table D. Net Financing from Debt Operations: Projections for NIR/NDA Adjustment (Cumulative flows from January 1, 2016, millions of U.S. dollars at program exchange rate)
  - End-June 2017: Net Financing 2,545
  - End-September 2017: Net Financing 4,877
  - End-December 2017: Net Financing 5,846

### Net Domestic Assets (NDA) — definition, monetary base, and adjustments
- Definition:
  - NDA of the NBU are the difference between the monetary base (defined below) and the NIR of the NBU (excluding conversion of non-reserve currency to reserve currency through outright sale under central bank swap agreements). For computing the NDA target, the NIR is valued at program exchange rates defined in paragraph 3 and expressed in hryvnia.
- Monetary base comprises:
  - domestic currency outside banks and banks' reserves, including cash in vault of commercial banks, and funds of customers at the NBU.
  - Currency outside banks defined by specific NBU account combinations (accounts listed exactly as in the source); banks’ reserves defined as cash in vault at deposit money banks (DMB accounts listed) plus DMB correspondent account deposits at the NBU in hryvnia (NBU liabilities accounts 3200, 3203, and 3204) plus funds of customers at the NBU in hryvnia (NBU liabilities accounts of groups 323, 3250, 4731, 4732, 4735, 4736, 4738, 4739, and 4750), plus accrued interest on demand deposits of DMBs in national currency (NBU accounts 3208L), plus accrued interest on client’s current accounts in national currency.
- NDA adjustment mechanisms:
  - Consistent with NIR adjustments, NDA targets adjusted downward (upward) by full amount of cumulative excess (shortfall) in program disbursements relative to baseline (Table B) and evaluated at program exchange rates.
  - NDA targets adjusted upward (downward) by full amount of cumulative excess (shortfall) in total amount of NBU loans (net) to the Deposit Guarantee Fund (DGF) and total amount of NBU purchases of government bonds issued for DGF financing and NBU purchases from Privatbank of government bonds issued for bank recapitalization (net of change in Privatbank’s NBU outstanding loans since nationalization), relative to baseline and evaluated at program exchange rates if provided in foreign exchange (Table E). For the June, September, and December 2017 targets, the combined upward adjustment is up to a cumulative maximum of the bank recapitalization and DGF financing bonds issued from January 1, 2017; indicative cumulative limits derived from Table 1 of the MEFP.
  - Symmetric adjustor if another central bank uses hryvnia provided under a central bank swap agreement: NDA adjusted upward by amount of hryvnia placed in a commercial bank’s account at the NBU when used; adjusted downward by amount of hryvnia (principal and interest) when repaid.
  - NDA targets adjusted downward (upward) by full amount of cumulative excess (shortfall) in net financing from debt operations relative to baseline (Table D) and evaluated at program exchange rates.
  - NDA targets adjusted downward (upward) by full amount of cumulative excess (shortfall) in rollover of central government’s domestic foreign exchange debt liabilities relative to baseline (Table C).
- Table E. NBU Net Loans to DGF and Purchases of Government Bonds Issued for DGF Financing or Banks Recapitalization: Projections for NDA/Monetary Base Adjustment (Cumulative flows from January 1, 2016, millions of hryvnia)
  - Net NBU loans to DGF and purchases of government bonds issued for DGF Financing:
    - End-June 2017: 3,501
    - End-September 2017: 1,834
    - End-December 2017: 1,834
  - NBU purchases of government bonds issued for Bank Recapitalization (net of change in NBU loans since nationalization):
    - End-June 2017: 24,526
    - End-September 2017: 23,146
    - End-December 2017: 21,766

### Headline inflation (indicative target)
- Definition:
  - Headline inflation is the year-on-year rate of change of the Consumer Price Index as measured by Ukraine’s State Statistics Service.
- Targeting rule:
  - The indicative target is met if headline inflation falls within a range of +/- 3 percentage points around the mid-point target by end-March, end-June and end-September 2017.
  - By end-December 2017 the acceptable range narrows to +/- 2 percentage points around the mid-point target.

### Cash deficit of the general government — definition and automatic adjustors
- Definition of general government:
  - Comprises the central (state) government, including the Road Fund (UkrAvtoDor), all local governments, and all extra budgetary funds (including the Pension Fund, Unemployment Fund, and the Fund for Social Insurance of Ukraine).
  - The budget includes (i) the state budget; (ii) all local government budgets; and (iii), if not included in (i), budgets of listed extra budgetary funds and any other extra budgetary funds included in NBU monetary statistics.
  - Government will inform IMF staff of creation or reclassification of new funds, programs, or entities immediately.
- Cash deficit measurement (net financing flows, excluding valuation changes), comprises:
  - total net treasury bill sales (hryvnias and foreign currency) as measured by NBU registry of treasury bill sales (net treasury bill sales defined as cumulative funds realized from primary auction sales and government securities issued for recapitalization of banks and SOEs, less cumulative principal redemption), excluding bonds issued to recapitalize Naftogaz and other SOEs when used as collateral or sale for financing;
  - other net domestic banking system credit to general government as measured by NBU monetary statistics (all non-treasury bill financing in domestic or foreign currency extended to general government less change in government deposits in banking system) plus any other financing by entities not reflected in NBU monetary statistics;
  - total receipts from privatization received by the State Property Fund and local governments (including change in stock of refundable participation deposits and net sale of nonfinancial assets) and proceeds from uncompensated seizures;
  - difference between disbursements and amortization on any bond issued by general government or the NBU to nonresidents for financing the deficit;
  - difference between disbursements of foreign credits to general government (including on-lent project loans) and amortization of foreign credits by general government (including on-lent project loans);
  - net sales of SDR allocation in the SDR department;
  - net change in general government deposits in nonresident banks or other nonresident institutions;
  - net proceeds from any promissory note or other financial instruments issued by general government.
- Foreign-currency flows to/from the budget are accounted in hryvnias at the official exchange rate as of the date of the transaction. Financing changes from exchange rate valuation of foreign currency deposits are excluded from the deficit. Government deposits exclude VAT accounts used for electronic administration and escrow accounts used for customs clearance.
- Automatic adjustors to the ceiling on the cash deficit of the general government:
  - Automatic adjustor based on deviations of external project loans (disbursements from bilateral and multilateral creditors to consolidated general government for specific project expenditure) from program projections (Table F):
    - If cumulative proceeds from external project financing (in hryvnia evaluated at actual exchange rates) exceed program projections, the ceiling is adjusted upward by 100 percent of the excess.
    - If cumulative proceeds fall short, the ceiling is adjusted downward by 100 percent of the shortfall.
  - Automatic downward (upward) adjustment by 100 percent of the amount of budget support grants received in excess (shortfall) of program amounts (Table F).
- Table F. External Financing of General Government Projects and Budget—Adjustment (Cumulative flows from January 1, 2017, in millions of hryvnia)
  - External project financing (Technical assumption for the adjustor purpose) / Budget support grant (Technical assumption for the adjustor purpose)
    - End-March 2017: 4,000 / 0
    - End-June 2017: 8,000 / 0
    - End-September 2017: 12,000 / 0
    - End-December 2017: 16,000 / 0
  - Automatic adjustor corresponding to full amount of government bonds issued for banks recapitalization and DGF financing, up to a cumulative maximum UAH 227 billion from January 1, 2016. The amount included in the targets is zero; indicative cumulative amounts presented in Table 2 of the MEFP.
  - Automatic adjustor on stock of budgetary arrears on social payments: arrears comprise all arrears of consolidated budget on wages, pensions, and social benefits owed by Pension Fund and central or local governments; arrears defined as payments not made 30 days after due date; excludes unpaid pensions to individuals residing in territories temporarily outside government control.
  - Ceiling on the cash deficit automatically adjusted downward by VAT refund arrears accumulated as defined in Section E from January 1, 2017.
  - Automatic downward adjustor corresponding to full savings on budgetary interest bill resulting from any restructuring or reprofiling of existing government debt held by the NBU, and automatic upward adjustor corresponding to increase in budgetary interest bill arising from any recapitalization of state-owned banks and the DGF after approval of the 2017 budget. Savings from restructuring/reprofiling determined as difference between actual and projected payments on government bonds held by the NBU (projected payments in Table G).
- Table G. Projected Payments of Interest on Government Bonds held by NBU (Cumulative flows from January 1, 2017, In billions of hryvnia)
  - End-March 2017: 10.6
  - End-June 2017: 22.9
  - End-September 2017: 33.3
  - End-December 2017: 44.8

*International Monetary Fund — cr1783 (excerpted program technical memorandum content).*

### 14.      The modalities of monitoring fiscal performance, including the adjustors listed above, can be

### 14.      The modalities of monitoring fiscal performance, including the adjustors listed above, can be revisited in agreement with IMF staff to ensure the achievement of the primary fiscal balance and debt targets under the program.

### E. Ceiling on Cash Deficit of the General Government and Naftogaz (Performance Criterion) — Definition
- The cash deficit of the General Government and Naftogaz is the cash deficit of the General Government as defined above plus the cash deficit of Naftogaz. (Paragraph 15)
- Naftogaz is defined as the national joint stock company “Naftogaz of Ukraine.” The cash deficit of Naftogaz is measured from below the line as the sum of: (Paragraph 16)
  - net domestic banking system credit to the company (this consists of all financing in either domestic or foreign currency extended to the company by banks less the change in company deposits in the banking system);
  - the difference between disbursements of private foreign loans to Naftogaz (including private placements) and the amortization of private foreign loans (including private placements);
  - the difference between disbursements of official foreign credits to Naftogaz (including project loans) and the amortization of official foreign credits (including project loans);
  - the disbursements of trade credits to import gas;
  - the difference between disbursements and amortization on any bonds issued by Naftogaz;
  - the net change in deposits of Naftogaz in nonresident banks, or other nonresident institutions;
  - net proceeds from any promissory note or other financial instruments issued by Naftogaz;
  - net receipts from sale of financial assets (including recapitalization or other form of treasury securities issued to Naftogaz, irrespective of their issuance date);
  - any other forms of financing of the company not identified above.
- All flows in foreign currency will be accounted in hryvnias at the official exchange rate as of the date of the transaction. When there are arrears outstanding as of the test date, the official exchange rate on the test date will apply to their valuation. (Paragraph 17)

### E. Adjustment mechanism (for ceiling on cash deficit of the general government and Naftogaz)
- All the adjustors as specified in section E for the Cash Deficit of the General Government also apply to the general government component of this ceiling.
- The ceiling will be adjusted upward by the amount of loan financing by multilateral institutions and official bilateral creditors disbursed to Naftogaz for investment projects.
- The ceiling will be adjusted downward by the net transfers made by Gazprom (advance transit fee). These transfers are measured on a cumulative basis from the beginning of each calendar year.
- The ceiling will be adjusted by the net amount of accumulated domestic arrears by Naftogaz to Ukrgazvydobuvannya and Ukrtransgaz, measured on a cumulative basis from the beginning of the year.

### F. Ceiling on VAT Refund Arrears (Indicative Target)
- The ceiling on the stock of VAT refund arrears is set to UAH 0 billion. (Paragraph 18)
- The stock of VAT refund arrears is defined as claims not settled within 74 days after the VAT refund claim has been submitted to the State Fiscal Service (SFS). Settlement includes cash refund, netting out against obligations of taxpayers, payment with a government bond (VAT bond) or an official decision to reject the claim. (Paragraph 18)

### G. Ceiling on State Budget Current Primary Expenditure (Indicative Target)
- Defined as current cash expenditure of the general fund of the central (state) government of Ukraine net of interest payments on domestic and external debt and plus payments of any past expenditure arrears.
- The ceiling is based on the definition as reported in the monthly treasury report (Kv_1ek) adjusted for Ukravtodor debt repayment. (Paragraph 19)
- Subject to an automatic downward adjustor on the accumulation of new budgetary arrears on wages and social benefits owed by the state budget. Budgetary arrears are defined as payments not made 30 days after they are due. (Paragraph 20)

### H. Ceiling on the Stock of General Government Employment (Indicative Target)
- Defined as the number of staff positions by the general government sector excluding military personnel receiving salaries from the state (“monetary provision”).
- This ceiling is set semi-annually for end-June and for end-December. (Paragraph 21)

### I. Ceiling on Non-Accumulation of New External Debt Payments Arrears by the General Government (Continuous Performance Criterion) — Definition
- An external debt payment arrear is a payment by the general government to nonresidents, which has not been made within the due date (including grace period, if any). This includes direct and guaranteed debt by the general government. (Paragraph 22)
- Arrears resulting from nonpayment of debt service for which a clearance framework has been agreed or for which a restructuring agreement is being sought are excluded.
- The performance criterion applies on a continuous basis throughout the program period. (Paragraph 22)

### J. Ceiling on Publicly Guaranteed Debt (Performance Criterion) — Definition
- Applies to the amount of guarantees issued by the central (state) government.
- The official exchange rate will apply to all non-UAH denominated debt.
- This ceiling excludes guarantees issued by the Ministry of Finance for NBU borrowings from IMF. (Paragraph 23)

### K. Other Continuous Performance Criteria
- During the Extended Arrangement, Ukraine will not: (Paragraph 24)
  - (i) impose or intensify restrictions on the making of payments and transfers for current international transactions;
  - (ii) introduce or modify multiple currency practices;
  - (iii) conclude bilateral payments agreements that are inconsistent with Article VIII; and
  - (iv) impose or intensify import restrictions for balance of payments reasons.

### L. Key Performance Indicators for the Revenue Administration
- The SFS will provide on a quarterly basis but no later than 25 days after the end of each quarter, data on performance indicators. (Paragraph 25)
- Selected Quantitative Key Performance Indicators for 2016–17 (targets as provided):
  - Tax returns filed on time (in percent of total number of tax returns): Mar-17 Target 97.0; Jun-17 Target 97.0; Sep-17 Target 97.5; Dec-17 Target 97.5; (end target) 98.0.
  - Taxes paid (in percent of total audit-assessed tax liabilities): Mar-17 n.a.; Jun-17 15.0; Sep-17 20.0; Dec-17 25.0; (end target) 30.0.
  - Audits to address SSC and PIT non-compliance (total number, cumulative from the beginning of the year) 1/: Dec-16 9,853; Mar-17 Target 2,366; Jun-17 Target 4,722; Sep-17 Target 7,215; Dec-17 Target 10,143.
  - Payroll tax audits (in percent of total number of audits) 1/: Dec-16 23; Mar-17 Target 31; Jun-17 Target 31; Sep-17 Target 33; Dec-17 Target 33.
  - Post-clearance customs audits (total number, cumulative from the beginning of the year) 1/: Dec-16 335; Mar-17 Target 80; Jun-17 Target 170; Sep-17 Target 270; Dec-17 Target 380.
  - Reduction in tax debts (percentage changed from the previous year) 2/: Dec-16 10.0; Mar-17 Target 2.5; Jun-17 Target 5.0; Sep-17 Target 7.5; Dec-17 Target 10.0.
  - Number of scheduled offsite tax audits (in percent of total number of audits): Dec-16 35.0; Mar-17 Target 36.0; Jun-17 Target 37.0; Sep-17 Target 38.0; Dec-17 Target 40.0.
  - Tax returns filed electronically (in percent of total number of tax returns): Dec-16 55.0; Mar-17 Target 55.0; Jun-17 Target 60.0; Sep-17 Target 65.0; Dec-17 Target 70.0.
  - Number of taxpayer calls on corruption hotline reviewed by SFS (in percent of total number of calls received on the hotline) 3/: Dec-16 100.0; Mar-17 Target 100.0; Jun-17 Target 100.0; Sep-17 Target 100.0; Dec-17 Target 100.0.
  - The maximum amount of time needed to complete customs clearance for goods for which the customs risk assessment system (ASAUR) did not generate the need for formal procedures (in minutes) 4/: Import: Dec-16 115.0; Mar-17 Target 105.0; Jun-17 Target 95.0; Sep-17 Target 85.0; Dec-17 Target 75.0. Export: Dec-16 45.0; Mar-17 Target 45.0; Jun-17 Target 40.0; Sep-17 Target 35.0; Dec-17 Target 30.0. Transit: Dec-16 18.0; Mar-17 Target 18.0; Jun-17 Target 17.0; Sep-17 Target 16.0; Dec-17 Target 15.0.
  - Number of customs declarations for which discrepancies have been actually established (in percent of total number of customs declarations identified by ASAUR as risky): Dec-16 n.a.; Mar-17 Target 1.0; Jun-17 Target 2.0; Sep-17 Target 3.0; Dec-17 Target 4.0.
  - Cap on the number of customs declarations that are subject to audit (in percent of total number of suspected cases identified outside the ASAUR system): Dec-16 n.a.; Mar-17 Target 1.0; Jun-17 Target 2.0; Sep-17 Target 3.0; Dec-17 Target 3.5.
  - VAT refund arrears (in UAH billions): Dec-16 0.0; Mar-17 0.0; Jun-17 0.0; Sep-17 0.0; Dec-17 0.0.
  - Total assessed and due liabilities paid (percent): Dec-16 n.a.; Mar-17 Target 93.5; Jun-17 Target 94.0; Sep-17 Target 94.5; Dec-17 Target 95.0.
- Notes:
  - 1/ For end-2016 data are actuals.
  - 2/ The targeted reduction is relative to the stock that does not include debt accumulated in the course of the year.
  - 3/ Service "pulse" is an anti-corruption portal of SFS.
  - 4/ Data for 2015 is the average for 4th quarter, for 2016 is the average for the second half. (From table footnotes)

### II. Official Exchange Rate — Determination of the Official Exchange Rate
- The NBU will, on a daily basis, set the official rate calculated as a weighted average of the exchange rates of the interbank market deals on the same day.
- To calculate the official exchange rate, all deals concluded until 5:30 pm on the day will be considered regardless of the settlement date. Specifically, tod, tom and spot (T+2) deals will be included.
- NBU will make public its official exchange rate by no later than 18:00 of the day, preceding the one for which it is set. (Paragraph 26)

### III. Cost Recovery of Gas and Heating Tariffs
- The threshold deviation from cost recovery based on import parity to trigger an automatic adjustment each half-year of gas year (April 1, October 1) in retail gas and heating tariffs will apply to the retail gas price, which includes transmission costs (Ukrtransgas), distribution costs (oblgases), provider markup, in effect at the date of calculation as officially published by the regulator and VAT. (Paragraph 27)
- The date of calculation shall be two months prior to the effective date of the adjustment.
- The import parity shall be calculated based on monthly average German gas hub (NCG) prices, transmission and entry costs multiplied by monthly average exchange rates of USD/EUR “spot” and recalculated in UAH at the average exchange rate per NBU for the last 2 months of the calculation period.
- Calculation period for the import parity calculation cannot exceed 12 months and is defined since the last retail gas prices determination date to the month preceding the calculation date for the first calculation, and further since the month preceding the last calculation date to the month preceding the next calculation date. (Paragraph 27)

### IV. Reporting Requirements — A. National Bank of Ukraine (NBU)
- The NBU will provide to the IMF on a monthly basis sectoral balance sheets for the NBU and other depository corporations (banks) according to the standardized reporting forms (SRFs), no later than the 25th day of the following month. (Paragraph 28)
- Daily reporting (to be provided to the IMF on a daily basis): (Paragraphs 29–31, 33, 40–41)
  - the stock of net and gross international reserves, at both actual and program exchange rates, and full breakdown of NBU accounts included in net international reserves;
  - information on obligatory, voluntary and total foreign exchange sales (including total from nonresidents and sales by clients in the interbank market) and approved foreign exchange demand in the interbank market, including Naftogaz foreign exchange purchases;
  - information on official foreign exchange interventions and intervention quotations and results of any foreign exchange auctions;
  - information on balances held in analytical account 2900 “Accounts payable per transactions for the foreign exchange, banking and precious metals purchase and sale on behalf of banks’ clients”;
  - data on foreign exchange export proceeds and obligatory foreign exchange sales; data on import transactions for goods and services; data on amounts of foreign exchange transferred from abroad to the benefit of physical persons—residents and nonresidents—to be paid in cash without opening an account; data on foreign exchange wires from Ukraine abroad for current foreign exchange nontrade transactions on the basis of the orders of physical persons; data on sales and purchases of foreign exchange cash by individuals (incl. through banks, exchange offices, and Ukrposta); summary data on the implementation of T+n verification system (total number and volume of transactions screened and total number and volume of transactions blocked, with separate information on imports);
  - data on foreign assets and liabilities of the overall banking system (excl. the NBU); data on banks’ open foreign exchange positions by main groups of banks; data on deposits and loans for the overall banking system (excl. the NBU) broken down by households and legal entities, maturity, and by national and foreign currency; on a daily basis data on deposits and credits aggregated excluding banks in liquidation starting from the beginning of 2014.
  - weekly data on the volumes of noncash foreign exchange purchases on behalf of banks’ clients and banks broken down by reasons (form N 538).
- Monthly reporting (no later than the 25th of the following month, or within 30 days as specified): (Paragraphs 29, 32, 35–39, 41)
  - the currency composition of reserve assets and liabilities;
  - broken down daily holdings of treasury bills at primary market prices, by type of holders (including state-owned banks and private banks) at primary market prices at the rate fixed on the day of auction; t-bills sales including in the foreign exchange from the beginning of the year at the official rate as of the date of placement; t-bills in circulation by principal debt outstanding at the official exchange rate as of the date of placement; reports on each treasury bill auction; and the monthly report on treasury bills in the agreed format;
  - information on daily transactions (volumes and yields) on the secondary market treasury bills (including over-the-counter transactions and breakout for any NBU transactions);
  - the NBU financial statements (income and expenses as well as balances on the general reserves) for the current and, if available, projections for the following year, as approved by the NBU’s Council; IMF to be notified immediately of any update;
  - daily and monthly data on NBU financing operations (including swaps or refinancing) of the banks of Ukraine, and on operations mopping up liquidity (including through CDs issuance) in formats and timeliness agreed with IMF staff;
  - weekly bank-by-bank information on the outstanding amount and weighted-average interest rates of loans from the NBU, reported by type of lending;
  - monthly information on collateral pledged to the NBU for loans (by bank and loan type as well as by collateral type, haircut and currency). Weekly and monthly reporting will separately identify which banks are under temporary administration or liquidation. (Paragraph 35)
  - monthly report on the banking sector indicators in the format agreed with IMF staff, provided no later than 30 days after the reporting month; provision of core and expanded FSIs for the aggregate as well as individual banks in State Participation Group, Foreign Banking Group and Group 1. (Paragraph 36)
  - monthly projections for external payments falling due in the next 12 months. (Paragraph 38)
- Quarterly reporting:
  - data on actual settlement of external obligations reflecting separately principal and interest payments as well as actual outturns for both the public and private sectors, to be provided on a quarterly basis, within 80 days following the end of the quarter. (Paragraph 38)
  - the stock of short- and long-term external debt (including arrears) for both public and private sectors, to be provided on a quarterly basis. (Paragraph 39)
- Additional bank-level reporting:
  - on a weekly basis, the NBU will provide the IMF data on foreign assets and foreign liabilities (broken down by domestic and foreign currency) for the individual banks in State Participation Group, Foreign Banking Group and Group 1;
  - on a monthly basis, foreign assets will be broken down by type (cash and deposits, government securities, nongovernment securities, loans, other) and foreign liabilities by type, holder and remaining maturity (less than one month, one to three months, three to 12 months and over 12 months). For foreign credit lines from banks and for securities, rollover rates will also be provided. (Paragraph 41)

*Document: cr1783 - 14. The modalities of monitoring fiscal performance, including the adjustors listed above, can be revisited in agreement with IMF staff to ensure the achievement of the primary fiscal balance and debt targets under the program.*

### 42.      The NBU will provide, on a daily basis, bank-by-bank data for the largest 35 banks and

### cr1783 - 42.      The NBU will provide, on a daily basis, bank-by-bank data for the largest 35 banks and

### NBU — Daily reporting
- Provide, on a daily basis, bank-by-bank data for the largest 35 banks and aggregate data for the State Participation Group, Foreign Banking Group, Group 1 and Group 2 separately (all excluding banks in temporary administration) on:
  - liquidity ratio and amounts of cash and cash equivalents
  - available funds in NBU accounts (excl. reserve requirements)
  - correspondent accounts with well-known international banks (excl. encumbered accounts)
  - deposits from customers
- Provide, on a daily basis, bank-by-bank data for State Participation Group, Foreign Banking Group, and Group 1 banks and aggregate for Group 2 on:
  - total assets and liabilities
  - loans and claims (by households, legal entities, and banks)
  - foreign exchange net open position
- The daily data will be reported by domestic and foreign currency.
- Deposits data will be reported by households and legal entities and by maturity (current accounts, saving accounts, and time deposits).
- For the aggregate of the banking sector as well as groups of banks, provide data on deposits and credits excluding those banks in liquidation since 2014.
- Provide, on a daily basis, aggregated data on main currency flows, including government foreign receipts and payments by currencies as well as interbank market operations by currencies.
- Continue to provide daily information on exchange market transactions including the exchange rate.

### NBU — Reserve requirements, interest rates, and projections
- Provide to the IMF information on reserve requirements.
- Provide, on a monthly basis, bank-by-bank for State Participation Group, Foreign Banking Group and Group 1 banks the average interest rate on deposits to customers:
  - by domestic and foreign currency
  - by legal entities and households
  - by maturity—demand, savings, and time accounts
- Provide, on a weekly basis, the average interest rate on interbank borrowings:
  - by domestic and foreign currency
  - by maturity—overnight, 1–7 days, and over one week
- Upon request, provide two-week projections of bank-by-bank cash flows for the State Participation Group, Foreign Banking Group and Group 1 banks.

### NBU — Bi-weekly and two weekly risk and capital data
- Provide, on a two weekly basis, in an agreed format, data for the entire banking sector—aggregate for Group 2 and on a bank-by-bank basis for State Participation Group, Foreign Banking Group and Group 1 banks—covering:
  - risk weighted assets and other risk exposures (for ratio H2 calculation), including for the excess of long-term asset to funding and foreign exchange open position
  - total regulatory (Tier 1 and Tier 2) and core (Tier 1) capital
  - capital adequacy ratio for total regulatory (H2) capital
  - loans and claims by maturity buckets for households, legal entities, and banks in domestic and foreign currencies
  - deposits by maturity buckets for households, legal entities, and banks in domestic and foreign currencies
  - foreign exchange net open position, split between total foreign exchange assets (long position) and foreign exchange liabilities (short position), and between on- and off-balance sheet

### NBU — Monthly supervisory and portfolio detail
- Provide, on a monthly basis, in an agreed format, data for the entire banking sector—aggregates for Group 2 and on a bank-by-bank basis for State Participation Group, Foreign Banking Group and Group 1 banks—covering:
  - amount of loans and claims (by households in domestic and foreign currency, legal entities in domestic and foreign currency, banks in domestic and foreign currency, maturity, and by loan classification categories I, II, III, IV, and V)
  - collateral for loans and claims (by type of collateral, legal entities in domestic and foreign currency, households in domestic and foreign currency, banks in domestic and foreign currency, and by loan classification categories I, II, III, IV, and V)
  - provisions on loans and claims (by households in domestic and foreign currency, legal entities in domestic and foreign currency, banks in domestic and foreign currency, and by loan classification categories I, II, III, IV, and V)
  - large exposures (loans equal to or greater than 10 percent of equity), refinanced loans, and restructured loans (by households, legal entities, and banks)
  - the average interest rate on the outstanding stock of loans to customers (by legal entities and households)
  - accrued interest on loans (by domestic and foreign currency)
  - securities held for trading and available for sale, with government securities reported separately (by domestic and foreign currency)
  - securities held to maturity and as investment, with government securities reported separately (by domestic and foreign currency)
- Provide, on a monthly basis, bank-by-bank for the State Participation Group, Foreign Banking Group and Group 1 banks the amount of:
  - deposits of related parties (by domestic and foreign currencies, and households and legal entities)
  - deposits of related parties pledged as (cash cover) collateral (by domestic and foreign currencies, and households and legal entities)
  - other liabilities to related parties (by domestic and foreign currencies)
  - related-party loans (by households, legal entities, and banks)
  - counterparty names and amounts of the largest 20 loans to related parties
  - collateral for loans and claims on related parties (by type of collateral, legal entities, households, and banks in domestic and foreign currencies, as well as by loan classification categories I, II, III, IV, and V)
  - provisions on loans and claims on related parties (by households, legal entities, and banks in domestic and foreign currencies, as well as by loan classification categories I, II, III, IV, and V)

### NBU — Monthly and bank-by-bank sectoral financials and reporting
- Provide, on a monthly basis, aggregate and bank-by-bank and by region data on:
  - loans and provisions (by households and legal entities, domestic and foreign currencies, and by loan classification categories I, II, III, IV, and V)
  - deposits (by households and legal entities, and domestic and foreign currencies)
  - due from banks (by domestic and foreign currencies)
- Report, on a monthly basis, data for the entire banking sector (and aggregates for Group 2) as well as on a bank-by-bank basis for State Participation Group, Foreign Banking Group and Group 1 banks on cumulative income statements, including:
  - total revenues
  - interest revenues (from loans to households, loans to legal entities, interbank loans, placements with the NBU, securities)
  - revenues from fees and commissions
  - total expenses
  - interest expenses (on deposits to legal entities, deposits to households, interbank borrowing, borrowing from NBU, securities issued)
  - fees and commissions paid
  - salaries and other staff compensation
  - other operational expenses
  - net earnings before loan loss provisions
  - loan loss provisions
  - net earnings after loan loss provisions
  - taxes paid
  - net earnings
- Report, on a bi-weekly basis and bank-by-bank, the amount by which the State Participation Group, Foreign Banking Group and Group 1 banks' regulatory capital has been increased, disclosing the instrument or transactions by which the regulatory capital has been increased (e.g., capital injection, conversion of subordinated debt to equity, etc.)
- Once a month, inform the IMF of any regulatory and supervisory measures against banks violating the NBU regulations on capital adequacy, liquidity ration, large exposures, and related or connected lending, as well as about decisions on declaring a bank as problem or insolvent.
- Provide the NBU Internal Audit Department assurance report to the Fund, no later than six weeks after each test date, confirming that:
  - (i) the monetary data are in accordance with program definitions and have been verified and reconciled to accounting records; and
  - (ii) that there have been no changes to the chart of accounts or valuation methods that would impact the data reporting.
- Continue to provide the Fund with a copy of the annual management letter from the external auditor within six weeks of completion of each audit; this remains in effect for the duration of the arrangement and for as long as credit remains outstanding.
- Provide data relative to the interest income and principal received from January 1, 2016 on its portfolio of government bonds on a monthly basis but no later than 15 days from the end of the reporting period.
- Monthly provide data on the monthly coupons and principal to be paid (in hryvnia and foreign currency, separately) on the outstanding stock of government securities held by NBU and the public.

### NBU — Balance of payments and other alerts
- Continue to provide detailed quarterly balance of payments data in electronic format within 80 days after the end of the quarter.
- Provide data on credit to nongovernment units that are guaranteed by the NBU on a monthly basis no later than 25 days after the end of the month.
- Inform IMF staff if the Treasury does not pay interest or principal on domestic government bonds due to the NBU, deposit money banks, or nonbank entities and individuals; in such case provide information on outstanding interest and principal payments.
- Inform IMF staff of any changes to reserve requirements for other depository corporations.
- Communicate (electronically) to the IMF staff any changes in the accounting and valuation principles applicable to the balance sheet data and notify the staff before introducing any changes to the Charts of Accounts and reporting forms of both the NBU and the commercial banks.

### Deposit Guarantee Fund (DGF) reporting
- Provide, on a monthly basis, data on the total number and volume of household deposits broken down in groups by deposit size; data reported bank-by-bank for the largest 35 banks and on aggregate for the remaining banks.
- Report, on a monthly basis and bank-by-bank for all banks in the banking system, the amount of insured deposits and total household deposits; data reported by domestic and foreign currency in an agreed format.
- Report, on a monthly basis and bank-by-bank, the total insured deposits and remaining insured deposits to be paid by the DGF for the banks under liquidation and under provisional administration; data reported by domestic and foreign currency in an agreed format.
- Report, on a monthly basis, the financial position of the DGF, including information about the cash balance, bond holdings, credit lines, and loans; data reported in an agreed format.
- Report, on a monthly basis, the financing arrangements of the DGF, including information about contracted financing from MoF; data reported in an agreed format.
- Report, on a monthly basis, a one-year forecast of the amount and type of financial resources that the DGF expects to receive from MoF, NBU and other entities, the amount that DGF expects to pay out to insured depositors in banks in liquidation, and the amount of asset recoveries expected by DGF; data reported in an agreed format.

### Ministry of Finance — monthly, weekly, daily reporting and arrears
- Provide the IMF with the monthly consolidated balances (end-month) of other non-general government entities, including SOEs, holding accounts at the Treasury no later than 25 days after the end of the month.
- The Treasury will continue to provide to the IMF:
  - reports on daily operational budget execution indicators
  - daily inflow of borrowed funds (by currency of issuance) to the state budget and expenditures related to debt service (interest payments and principals)
  - weekly balances of Treasury cash flow (outturn and forecast), including data on government foreign exchange deposits, in a format agreed with IMF staff
  - 10-day basis data on the execution of the state, local, and consolidated budgets on the revenue side and data on revenues from the social security contributions
  - monthly data on funds deposited with the Single Treasury Account, on the registration accounts of the entities which are not included in the state sector, information on balance of funds as of the 1st day of the month on the account #3712 “accounts of other clients of the Treasury of Ukraine,” on inflow to the State budget from placing Treasury or any other liabilities to households in foreign and domestic currency and their redemption
- Provide to the IMF in electronic form monthly and quarterly treasury reports, no later than 25 and 35 days after the end of the period respectively.
- Provide the final fiscal accounts at the end of each fiscal year, no later than March of the following year.
- Report monthly data on the public wage bill (excluding SOEs) in line with the template agreed with the IMF staff.
- Provide monthly reports on the borrowing (disbursements, interests, and amortization) of UrkAvtoDor in line with the format agreed with IMF staff.
- Report to the IMF on a monthly basis information on municipal borrowing and amortization of debt in format agreed with IMF staff.
- Report to the IMF on a monthly basis, no later than 15 days after the end of the month, the cash deficit of the general government, with details on:
  - budget execution data for privatization receipts of the state and local governments
  - disbursements of external credits (including budget support and project loans for on lending) to the consolidated budget and amortization of external debt by the consolidated budget
  - net domestic borrowing of the general government, including net t-bill issuance, issuance of other government debt instruments, and change in government deposits
- Provide data on the stock of all budgetary arrears on a monthly basis, no later than on the 1st day of the second subsequent month, including separate line items for wages, pensions, social benefits, energy, communal services, and all other arrears on goods and services.
- The Treasury will report monthly data on accounts payable for state and local budgets (economic classification of expenditures).
- The Pension Fund will provide monthly reports on net unpaid pensions to the individuals who resided or continue to reside in the territories that are temporarily outside the government control.

### Ministry of Finance — debt and guarantees
- Provide monthly information, no later than 25 days after the end of each month, on the amounts and terms of all external debt contracted or guaranteed by the central government.
- Provide to the IMF in electronic form on a monthly basis, no later than 25 days after the end of the month:
  - (a) data on the outstanding stock of domestic and external debt of the state and local budgets (including general and special funds)
  - (b) the standard files planned and actual external debt disbursement, amortization, and interest payments (including general and special funds), broken down in detail by creditor categories as agreed with Fund staff
  - (c) the report on external debt amortization and interest payments by days and currencies
- Report the accumulation of any budgetary arrears on external and domestic debt service.
- Provide monthly debt (domestic and external) amortization schedules updated on a weekly basis.
- Provide data on external and domestic credit to key budgetary spending units as well as nongovernment units (including Naftogaz, State Mortgage Institution, DGF, and Agrarian Fund) that is guaranteed by the government on a monthly basis no later than 25 days after the end of the month, including:
  - amount of sovereign guarantees extended by executive resolutions and actually effectuated
  - total amount of outstanding guarantees and list of their recipients

### Ministry of Finance — extra-budgetary funds and employment reporting
- Provide data on the approved budgets and quarterly operational data (daily for the Pension Fund only) on the revenue, expenditures, and arrears, and balance sheets of the Pension Fund, the Fund for Social Insurance, Employment Fund, and any other extra budgetary funds managed at the state level no later than 50 days after the end of each quarter (each month in case of the Pension Fund).
- Any within-year amendments to the budgets of these funds will be reported within a week after their approval.
- Report the annual financial statement including the final fiscal accounts of those funds at the end of each fiscal year, no later than April of the following year.
- Report data on the general government employment levels by sector semi-annually, no later than April 1 and October 1 on the employment levels as of January 1 and July 1 of the same year, respectively.
- After any public sector wage increase, provide an estimate of its costs for the current and two subsequent fiscal years, for the state and local government budgets.
- The employment levels report will be provided in the following format (columns preserved from source):
  - The maximum number of staff positions, units
  - Number of actual staff employed (including contractual), units
  - Total wage bill (incl. social security contributions), in UAH millions
  - Average monthly wage (UAH)
  - Sector breakdown includes Healthcare; Physical culture and sports; Social assistance and social protection; Education; Culture; Science; Other activities; Judiciary; Local administrations; Central government bodies (including territorial bodies); Pension fund; Diplomatic installments; Prosecutor’s office; Defense; Public Order and Security; Local self-governance bodies; Total

*Source: cr1783 - 42.      The NBU will provide, on a daily basis, bank-by-bank data for the largest 35 banks and (IMF country report content provided).*

### 80.      The Ministry of Finance will provide, no later than 15 days after the end of each month,

### cr1783 - 80.      The Ministry of Finance will provide, no later than 15 days after the end of each month,

### A. Ministry of Finance — fiscal reporting on recapitalization and expenditure plans
- The Ministry of Finance will provide, no later than 15 days after the end of each month, monthly data on the budgetary costs associated with the recapitalization of banks and SOEs.
  - This cost includes the upfront impact on the cash deficit of the general government of the recapitalization of banks and SOEs as well as the costs associated with the payment of interests, including the respective changes as a result of supplementary budgets.
- The Ministry of Finance will provide monthly data on their expenditure plans (ROSPIS) for state budget.

### B. State Fiscal Service (SFS) — tax arrears, VAT refunds, and monthly reporting
- Tax arrears reporting (monthly, no later than 25 days after the end of the month) in the following format:
  - Beginning Stock
  - Netting out during month
  - Deferrals during month
  - Write-offs (arrears written off during month)
  - Collections of outstanding debt at beginning of month
  - New Arrears (tax liabilities becoming overdue during month)
  - Ending Stock
  - Columns: Total, Principal, Interest, Penalties, Tax arrears
- Quarterly listing of all tax exemptions (no later than two months after the end of the quarter) specifying:
  - the beneficiary the exemption provided, the duration, and the estimated subsequent revenue loss for the current fiscal year.
- VAT refunds reporting (monthly, no later than 25 days after the end of the month) including:
  - (i) beginning stock of refund requests;
  - (ii) refund requests paid in cash;
  - (iii) refunds netted out against obligations of the taxpayer;
  - (iv) denied requests;
  - (v) new refund requests;
  - (vi) end-of-period stock of requests;
  - (vii) stock of VAT refund arrears according to the definition in paragraph 11 (unsettled VAT refund claims submitted to the SFS more than 74 days before the end of period).
- Monthly reports 1.P0 on actual tax revenue and 1.P6 on tax arrears (no later than 25 days after the end of each month).
- Quarterly information (no later than 25 days after the end of each quarter) on tax appeals:
  - number of tax appeals and associated disputed amounts received in each reporting period;
  - number of internally resolved appeals indicating appeals resolved in favor of the controlling body, in favor of taxpayer and partial satisfaction.

### C. Energy, Naftogaz, and utilities sector reporting
- Quarterly information on actual levels of communal service tariffs in all regions for major services (heating, water supply, sewage and rent) and their level of cost recovery provided by the Ministry of Regional Development, Construction, and Housing and Municipal Economy.
- Ministry of Economic Development and Trade and the NCSREU will provide the methodology underlying the tariff calculations for full cost recovery, including heating and gas.
- Monthly gas and heating sector financial indicators (no later than the 25th of the following month) in electronic form (agreed format “Ukraine: The Financial Position of Gas Sector”) covering:
  - prices and volumes of domestically produced (by production entity) and imported (by sources of imports) gas;
  - sales, tariffs, arrears, payments to the budget, subsidies, and debt.
- Naftogaz monthly reporting to IMF staff:
  - updated information on the company’s financial liabilities, with a schedule of loan-by-loan interest and principal payments.
  - cash flows and deficit of the company (monthly, no later than the 25th of the following month) provided by the Ministry of Economic Development and Trade based on Naftogaz information; report will break down total cash outlays for gas imports from Gazprom by month in a separate table mutually agreed with IMF staff.
  - monthly information (no later than the 25th of the following month) on domestic gas used by Naftogaz for sales to households, heating utilities, budget institutions, and industries, including gas produced by SC “Ukrgasvydobuvannya,” and OJSC “Ukrnafta.”
- Ministry of Housing and Municipal Economy quarterly reporting (no later than the 25th of the following month) on the quantity of heating energy meters installed at a building level measured also as a ratio to the applicable buildings.
- The National Commission for State Energy and Public Utilities Regulation will:
  - provide breakdown by licensees regarding levels of tariffs for heat energy for households, centralized heating services and centralized hot water supply to households (with definition of average tariff levels net of VAT and VAT included) in the event of changes;
  - inform in advance (10 days before the day of the meeting at which it is planned to adopt such a decision) about any amendments that can be made to the Commission's decisions regulating the distribution accounts for companies in the natural gas sector;
  - on the day following the adoption of the Resolution on the approval of Register of norms for the transfer of funds received as payment for provided heat and/or utilities including centralized heating, centralized hot water supply to all categories of consumers and as a payment of heat supplying enterprises for heat produced by heat-generating enterprises for respective month and on the changes to the Register of norms, will inform about them in the electronic format.
- NJSC Naftogaz will report on a weekly basis data on Naftogaz daily market purchases of foreign exchange.

### D. State-Owned Enterprises (SOEs) consolidated reporting
- The Ministry of Economy will provide on a quarterly basis, but no later than 80 days after the end of each quarter, consolidated information from the financial statements of 50 largest SOEs (excluding Naftogaz), including:
  - (a) gross profit/losses;
  - (b) net financial results;
  - (c) subsidies received from the budget;
  - (d) guarantees granted from the budget;
  - (e) stock of debt, broken down by domestic and foreign;
  - (f) taxes and dividends paid;
  - (g) wage arrears;
  - (h) other payment arrears.
- The report will also include information on the number of all SOE (a) making profits, (b) making loss or (c) balanced with aggregated financial results for each of these groups.

### E. State Statistics Service — GDP revisions
- In case of any revisions of gross domestic products, the State Statistics Service will provide to the IMF revised quarterly data on gross domestic product (nominal, real, deflator) and their components (economic activities, expenditure, income), no later than 10 days after any revisions have been made.

### F. Ministry of Social Policy — HUS and energy privileges monitoring
- The Ministry of Social Policy will collect and submit to IMF and World Bank staff on a monthly basis data on HUS and privileges for energy consumption in an agreed excel format, showing for each program:
  - (a) the number of households which applied for HUS;
  - (b) number of approvals extended to such HUS applications;
  - (c) number of households-recipients of HUS and privileges in the reporting month;
  - (d) total value of transfers;
  - (e) number of refusals extended to such applications;
  - (f) income per capita of participants, both for HUS and privileges;
  - (g) number of household members;
  - (h) main reasons for refusal for HUS application (e.g., lack of residency information).
- Data to be presented by overall, by region and for rural/urban areas.

### G. National Agency for Prevention of Corruption (NAPC) — asset declaration transparency
- NAPC will publish on a website freely available to the public quarterly data, no later than at the end of the month following the quarter, on action taken regarding the asset declaration of high level officials in the following format:
  - Number of Full Verifications of Asset declarations by the NAPC (Article 50 Law on Prevention of Corruption) with categories:
    - Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others — Number
  - Reports sent by the NAPC to NABU with same category breakdown
  - Number of reports for absence of declaration
  - Number of reports for false declaration

### H. National Anti-Corruption Bureau (NABU) — prosecutions and convictions reporting
- NABU will publish on a website freely available to the public quarterly data, no later than at the end of the month following the quarter, on:
  - Number of persons indicted, number of persons convicted by a first instance court decision, and number of persons convicted pursuant a final court decision.
- Reporting format includes:
  - Number of Persons Indicted by Penal Code Article and by category: Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others (listing of Penal Code articles such as Art. 191, Art. 206-2, Art. 209, Art. 210, Art. 211, Art. 354, Art. 364, Art. 368, Art. 368-2, Art. 369, Art. 369-2, Art. 410).
  - Number of Persons Convicted—First Instance by Penal Code Article and category, with fines (total value in UAH) and jail (total months and suspended jail) distinctions.
  - Number of Persons Convicted—Final Decision by Penal Code Article and category, with fines (total value in UAH) and jail (total months and suspended jail) distinctions.

*Source: cr1783 - 80.      The Ministry of Finance will provide, no later than 15 days after the end of each month,*

### 100.      The Financial Intelligence Unit (FIU) will continue to publish on a website freely available to

### The Financial Intelligence Unit (FIU) will continue to publish on a website freely available to

### FIU publication requirement
- The Financial Intelligence Unit (FIU) will continue to publish on a website freely available to the public quarterly data, no later than at the end of the month following the quarter, information on reports sent to NABU in relation to suspicions of laundering of the proceeds of corruption, in the following format:
  - Table headings as presented: "Reports sent by the FIU to NABU" with categories including "Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others, Number of reports disseminated, Aggregated value of suspected money laundering."

### Fund relations and financial arrangements
- SDR Department: Net cumulative allocation 1,309.44 SDR Million 100.00 percent Allocation.
- Holdings 2,011.30 SDR Million 153.60 percent (as presented).
- Outstanding Purchases and Loans: Stand-by Arrangements 2,972.67 SDR Million 147.76 percent Quota; Extended Arrangements 5,444.21 SDR Million 270.61 percent Quota.
- Latest Financial Arrangements (type, date of arrangement, expiration date, amount approved (SDR million), amount drawn (SDR million)):
  - EFF 03/11/15 03/10/19 12,348.00 5,444.21
  - Stand-By 04/30/14 03/10/15 10,976.00 2,972.67
  - Stand-By 07/28/10 12/27/12 10,000.00 2,250.00
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming 2017 2018 2019 2020 2021 — Principal 628.83 1,486.34 1,153.00 788.02 907.37
  - Charges/Interest 193.87 163.88 117.39 85.23 55.26
  - Total 822.71 1,650.21 1,270.39 873.25 962.63

### Exchange arrangements and monetary policy
- Since September 1996, the hryvnia (UAH) was introduced at KrB 100,000 to UAH 1.
- Monetary policy strategy for 2016–20: NBU to maintain a floating exchange rate arrangement; use foreign currency interventions for accumulation of international reserves, smoothing FX market functioning, and maintaining transmission of the key interest rate as core instrument.
- Effective March 31, 2015, the NBU sets the official hryvnia–U.S. dollar exchange rate as a weighted average rate based on all foreign exchange deals concluded between banks and their clients on tod, tom, and spot terms.

### Standards, assessments, and safeguards
- FSAP participation:
  - FSAP assessment in 2003; FSSA (IMF Country Report No. 03/340) considered May 14, 2003.
  - FSAP update in 2007; FSSA considered as part of the 2008 Article IV consultation.
  - Assessed standards and codes include: Basel Core Principles, Code of Good Practices on Transparency in Monetary and Financial Policies, CPSS Core Principles for Systemically Important Payment Systems, OECD Principles for Corporate Governance, Accounting and Auditing Practices, World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights System, and AML/CFT Methodology.
- ROSCS: Data ROSC Module conducted April 3–17, 2002; considered August 5, 2003 (IMF Country Report No. 03/256). Fiscal Transparency Module issued September 1999, update April 2004 (IMF Country Report No. 04/98).
- Safeguards Assessments:
  - Update safeguards assessment completed on August 14, 2015, confirming progress since 2014.
  - Amendments to legal framework entered into force in July 2015.
  - New Council established in November 2016 and constituted an Audit Committee.
  - Loan origination/management process enhanced; senior-level credit committee established in June 2015.
  - Quarterly data audits ongoing and results timely conveyed to the IMF.

### IMF consultation cycle and technical assistance (2014–16)
- Ukraine is on a 24-month consultation cycle; last Article IV consultation concluded on December 16, 2013.
- IMF Technical Assistance 2014–16 (selected entries by department):
  - Fiscal Affairs Department: Tax Policy visits 6/2014, 6/2015; Restoring a Strategic Approach to Tax Reform 9/2014; Review of the Extractive Industries Fiscal Regimes 11/2014; Extractive Industries: Petroleum Fiscal Regime and Associated Legal Design Issues, and Tax Admin 3/2015; Transfer Pricing 3/2015; Fiscal Regime for Natural Gas 6/2015, 4/2016; Reducing S.S. Contributions and Improving Corporate and Small Business Tax System 7/2015.
  - Revenue Administration: Tax Administration Reform and Governance Options 6/2014; staff visit 11/2014; Capacity in Oil and Gas Administration 6/2015, 3/2016, 9/2016; Reforming the State Fiscal Service 7/2015, 7/2016, 11/2016; Customs Administration 1/2016, 9/2016.
  - Monetary and Capital Markets Department: Accounting IFRS Related TA Mission 10/2014; Accounting and Auditing 2/2016, 6/2016; Bank Restructuring—Resolving Systemic Banks 1/2016, 3/2016, 10/2016; Bank Contingency Planning 10/2015; Bank Licensing 1/2016, 3/2016; Central Credit Registry 12/2015, 12/2016; Central Bank Reorganization 11/2014, 6/2016; Monetary Policy Communication 12/2014, 7/2015, 12/2015.
  - Legal Department: AML to Support Anti-Corruption Efforts 5/2015, 6/2015, 10/2015, 11/2015, 12/2015, 2/2016, 3/2016, 6/2016, 10/2016, 12/2016.
  - Statistics Department: National Accounts 9/2014; Prices 6/2015, 8/2016.

### Relations with the World Bank (January 2017)
- World Bank Group’s CPS 2012–16 aimed at: (i) improving public services and use of public resources; (ii) supporting growth, competitiveness and job creation.
- From May 2014 to June 2016, the World Bank Group committed $4.6 billion in new support: $2.2 billion in investment project financing, $2.25 billion in two series of DPOs, and $250 million in IFC investments.
- Current investment lending portfolio includes eight operations totaling $2.62 billion, of which 18.7 percent has been disbursed. Examples and amounts:
  - Social Safety Net Modernization Project $300 million (approved July 2014)
  - Serving People Improving Health Project $214.7 million (approved March 2015)
  - Second Power Transmission Project $330 million (approved December 2014)
  - Energy Efficiency Project $200 million (approved 2011)
  - District Heating Energy Efficiency Project $265.5 million (approved May 2014, now restructured)
  - Second Urban Infrastructure Project $300 million (approved May 2014)
  - Second Road and Safety Improvement Project $450 million (approved 2012)
  - Road Sector Development Project $560 million (approved November 2015)
  - Gas Supply Security Facility $500 million in IBRD guarantee (approved October 2016)
- Main advisory/analytical focus areas moving forward: (i) anticorruption, state capture, and PFM; (ii) fiscal sustainability and efficiency; (iii) financial sector stability and development; (iv) energy efficiency and governance; (v) investment climate; (vi) municipal governance and service delivery; (vii) social protection; (viii) health sector; (ix) support for peacebuilding and conflict affected populations.
- Bank-Fund collaboration areas and coordination include macroeconomic and fiscal monitoring; strengthening anticorruption institutions; safeguarding fiscal sustainability (tax and pension reform); maintaining financial sector stability (bank resolution, recapitalization, NPL resolution); bolstering private sector competitiveness; improving effectiveness of social services and assistance.

### Relations with the European Bank for Reconstruction and Development (December 2016)
- As of end-November 2016, EBRD’s portfolio in Ukraine reached €4.3 billion with almost half in the private sector.
- In the first 11 months of 2016, disbursements €802 million (highest since 2009), up from €247 million in the same period of 2015.
- From 2014 to November 2016, EBRD invested totals by sector: €455 million into energy sector, €796 million into financial institutions, €810 million into industry, commerce and agribusiness, €400 million into infrastructure.
- EBRD initiatives and programs (selected):
  - Small Business Initiative launched 2014; to date 690 projects started under Advice for Small Businesses; in 2016, 140 projects with local consultants and 14 with international advisers launched.
  - EU and EBRD agreement in May 2016 to provide up to €28 million under EU4Business; creation of 15 business support centers; up to €12 million to support EBRD’s direct financing of SMEs.
  - Energy and infrastructure: €23 million in private deals (solar and hydro) over 2015–16; three-year $300 million revolving working capital facility to NAK.
  - IQ Energy program for residential energy efficiency up to €90 million including €15 million from E5P.
  - FINTECC launched 2016 with $7 million from the GEF expected to leverage about $40 million.
  - Nuclear safety: €300 million Nuclear Safety sovereign loan with Energoatom as part of €1.4 billion project.
  - Municipal loans in 2016: four loans totaling €41 million; co-financing examples include E5P and shareholders’ funds.
- EBRD contribution to financial sector reform: support for disclosure of true beneficial ownership, economic definition of related parties, personal responsibility for related-party lending and fraud; support to strategy for state-owned banks’ development; development/rollout of Financial Restructuring Law (Kiev Approach) expected 2017.

### Statistical issues (assessment of data adequacy for surveillance; December 2016)
- General: Data provision has some shortcomings, but is broadly adequate for surveillance.
- Noted shortcomings: national accounts, government finance statistics (GFS), and external sector statistics.
- National Accounts: Compiled in accordance with the 2008 SNA; volume measures annually chain linked using 2010 benchmark year; quarterly GDP compiled by Production, Expenditure and Income at current and previous years’ prices.
- Price statistics:
  - CPI weights updated annually; compilation methods aligned with international best practices; coverage should be extended to include the cost of owner occupied housing.
  - State Statistics Service of Ukraine (SSSU) compiles PPIs covering mining, manufacturing and quarrying; construction; agriculture; and selected service industries.
  - SSSU launched two quarterly Residential Property Price Indexes (RPPIs) in April 2016 covering new and secondhand multiunit dwellings; indexes based on survey of developers and agents and suffer from deficiencies.
  - Starting in 2016, Ukraine is a beneficiary of the SECO RPPI project running until April 2019 to support RPPI compilation in line with the Handbook on Residential Property Price Indices.
- Government finance statistics:
  - Compilers cognizant of GFSM 2001/2014 methodology and reference materials.
  - Significant shortcomings: lack of a strong legal framework for compiling GFS and incomplete statistical coverage.
  - Authorities plan to improve data by fully implementing the GFSM 2001 framework when implementing the Accounting System Modernization Strategy in General Government for 2007–2015.

*UKRAINE STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION AND THIRD REVIEW UNDER THE EXTENDED FUND FACILITY AND REQUESTS FOR REPHASING OF ACCESS AND FINANCING ASSURANCES REVIEW—INFORMATIONAL ANNEX. Prepared By European Department in consultation with other departments. March 7, 2017.*

### introduction of a common chart of accounts for all government units that is harmonized with

### introduction of a common chart of accounts for all government units that is harmonized with budget classifications and based on GFS

### Fiscal statistics and public finance accounting
- Introduction of a common chart of accounts for all government units harmonized with budget classifications and based on GFS.
- A lack of clarity on the stock of VAT refund claims prevents a full assessment of the underlying fiscal performance.
- Annual government finance statistics have been reported for 1999–2015.
- Revenue, Expenditure, Balance and Composition of Financing—General Government: latest observation Q3/2016; date received 6/2016; frequency of data M; frequency of reporting M; frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing—Central Government: latest observation 11/2016; date received 12/2016; frequency of data M; frequency of reporting M; frequency of publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: latest observation Q3/2016; date received 12/2016; frequency of data M; frequency of reporting M; frequency of publication M.
- Government budget execution in 2016: budget deficit limited to 2.3 percent of GDP compared to a target of 3.7 percent of GDP.
- 2017 government budget approved consistent with deficit target of 3.1 percent of GDP.
- Public debt projection: projections suggest that debt will fall below 70 percent of GDP by 2021, subject to continuing macro stabilization and economic growth.
- Pension reform: total saving effect of the reform is estimated to be at least 3 percent of GDP over the long term.
- In the nationalization of PrivatBank:
  - related parties deposits bailed in equal to about 1¼ percent of GDP;
  - overall capital shortfall of the bank due to related parties lending was nearly 7 percent of GDP.

### Monetary and financial statistics (MFS) and reporting
- Monthly monetary statistics compiled and reported to the Fund by the NBU, based on standardized report forms (SRF) for the central bank (SRF 1SR) and for other depository corporations (SRF 2SR), since September 2006.
- NBU reports monetary data covering Other Financial Corporations (OFCs) on a quarterly basis since December 2008.
- Data for OFCs include several methodological departures from the IMF’s MFS manual and compilation guide, concerning valuation and classification of financial assets.
- Departures were documented by a multisector diagnostic mission that visited the NBU in September 2015, which set out a work plan to improve the MFS.
- On monetary statistics, data have been published since September 2006 using the SRF framework in the IFS and are available online.
- Reserve/Base Money: latest observation 9/30/2016; date received 10/21/2016; frequency of data D; frequency of reporting D; frequency of publication M.
- Broad Money: latest observation 9/30/2016; date received 10/21/2016; frequency of data D; frequency of reporting D; frequency of publication M.
- Central Bank Balance Sheet: latest observation 9/30/2016; date received 10/21/2016; frequency M.
- Consolidated Balance Sheet of the Banking System: latest observation 9/30/2016; date received 10/21/2016; frequency M.
- Interest Rates: latest observation 10/31/2016; date received 11/18/2016; frequency D for data and reporting; frequency of publication M.

### Financial sector surveillance and banking sector reform
- NBU reports Financial Soundness Indicators (FSIs) to STA and EUR on a regular quarterly basis since end-2005.
- FSIs reported include all FSIs for deposit takers and two FSIs for real estate markets.
- More than 90 weak insolvent banks resolved and left the banking market in the period 2014–17.
- 100 percent of remaining banks disclosed their ultimate beneficiary owners (UBO).
- By end-2017 the NBU will have accomplished the most extensive and detailed asset quality review of the Ukrainian banking sector.
- PrivatBank nationalization outcomes and measures:
  - related parties deposits bailed in equal to about 1¼ percent of GDP;
  - overall capital shortfall nearly 7 percent of GDP;
  - a reputable audit firm hired for due diligence and a forensic audit to investigate possible wrongdoing;
  - an international asset management firm to be hired to collect the related parties loan portfolio.
- After nationalization, state banks’ combined market share by assets exceeding 50 percent.
- Authorities intend to:
  - accelerate reform of state banks;
  - introduce new corporate governance and risk management standards;
  - develop efficient business models.
- Banking sector outlook:
  - NBU expects deposits to grow faster in 2017 compared to 2016;
  - the banking sector in general expected to start making profits again in 2017 after three years of heavy losses.
- Restart of lending is the key task for the banking sector in 2017; dependent on corporate solvency recovery and progress with enhancing protection of creditors’ rights.

### External sector statistics and balance of payments
- Compilation system relies heavily on the International Transactions Reporting System, customs declaration database, and enterprise surveys, providing broad coverage of data on a timely basis.
- Recommended improvements:
  - direct data collection through enterprise surveys and more intensive use of available data sources to improve data quality in financial services, travel, compensation of employees, workers’ remittances, and reinvested earnings;
  - improve methodology for estimating the c.i.f./f.o.b. conversion coefficient and align reporting forms and instructions with international guidelines;
  - reconcile direct investment data provided by survey enterprises and ITRS;
  - determine sources of large FX cash held outside of the banking system classified under currency and deposits.
- Improvements needed regarding direct investment by improving coverage of debt instruments data and valuation of equity.
- STA seeking Dutch funding for a TA project aiming to enhance external sector statistics (ESS) over the period 2017–19, covering:
  - (i) improvement of source data on direct investment (DI), including supporting steps for transferring data collection responsibilities from the State Statistical Service of Ukraine to NBU and conducting an improved DI survey and moving towards more comprehensive source data on services through survey-based data collections in line with regional (European Union) practices;
  - (ii) enhancing consistency and coverage of balance of payments and IIP indicators, in particular with regard to the financial flows and stocks.
- External Current Account Balance: latest observation Q3 2016; date received 12/19/2016; frequency M.
- Exports and Imports of Goods and Services: latest observation 9/30/2016; date received 10/28/2016; frequency M.
- Gross External Debt: latest observation Q3/2016; date received 12/2016; frequency Q.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation 10/31/2016; date received 11/21/2016; frequency M.

### Data standards, quality, and reporting to STA
- Participant in the SDDS since January 10, 2003.
- Data ROSC published on August 19, 2003.
- The country’s IFS page has been published since July 1996.
- Data on international investment position compiled and reported since 2002.
- Annual government finance statistics reported for 1999–2015.
- Financial Soundness Indicators disseminated on the IMF’s website with observations beginning in 2005.
- Table of Common Indicators Required for Surveillance includes methodological assessments indicating observance levels (O, LO, LNO, NO) for various datasets as reflected in the 2003 ROSC.

### Economic developments, outlook, and macroeconomic stabilization
- Real GDP growth accelerated to 4.7 percent yoy in Q4 2016, bringing the total tally for 2016 to about 2.2 percent.
- GDP growth outperformed expectations, mainly due to a record high agricultural harvest and strong rebound of investment and rebuilding of inventories.
- Labor market: real wages grew 9 percent following two years of deep decline.
- Current account deficit widened to US$3.4 billion, or 3.6 percent of estimated GDP in 2016.
- Net financial inflows in 2016: US$4.6 billion.
- All continuous and end-December 2016 performance criteria were met.
- Risks to growth include disruption of economic links due to military conflict in the east and Russia’s trade and transit restrictions; suspension of cargo transportation between unoccupied and occupied territories decided on March 15, 2017 could have a significant adverse impact on exports and growth if unresolved.

### Monetary policy, inflation, and reserves
- Inflation reduced from 61 percent in April 2015 to 12.4 percent by end-2016.
- Inflation expected to remain in double digits through most of 2017 given ongoing utility tariff adjustment and return to single digit in Q4 2017.
- NBU officially announced adoption of an inflation targeting regime and successfully met the inflation target for 2016.
- NBU monetary policy guidelines for 2017: inflation target of 8 percent by end 2017 (± 2 percent) and for the medium term.
- Key policy rate was gradually decreasing in the course of 2016 and was always kept positive in real terms.
- Further gradual easing of monetary policy will depend on inflation expectations and reserves accumulation.
- Gross international reserves have increased above US$15 billion.
- Nominal exchange rate stabilized with an average rate of 25.5 in 2016.
- NBU will continue gradually relaxing foreign exchange restrictions and administrative controls to help improve business conditions and deepen the foreign exchange market.
- Conditionality of the program modified to reflect monetary regime evolution; authorities intend to include an indicative target for inflation and remove indicative target for base money, aiming to change conditionality to the Inflation Consultation Clause.

### Structural reforms, governance, and anti-corruption measures
- Authorities committed to structural reforms to restore business environment, elevate private and foreign investments, and increase labor productivity.
- Plans to accelerate reform of state-owned enterprises (SOE), including privatization of larger companies and faster divesture of smaller companies via an electronic platform; legal framework for privatization to be improved.
- Adopting legislation to allow sale of agricultural land and lifting moratorium on land sales planned for 2017.
- Anticorruption measures:
  - operationalize the anticorruption court with legislation to be adopted by parliament in June 2017;
  - legislation to include provisions for budgetary autonomy, adequate security of the anticorruption judiciary framework, and selection process for anticorruption judges.
- Institutional reforms:
  - transform the State Fiscal Service (SFS) into a modern service organization to effectively collect and enforce taxes;
  - strengthen Ministry of Finance oversight of SFS;
  - parliament expected to adopt legislation about a new civil service responsible for investigation of financial offences to replace the current tax police and consolidate responsibilities into a single agency while avoiding duplication.
- Authorities request rephasing of pending structural benchmarks, propose new structural benchmarks, request reduction in the number of reviews to 10, and rephasing of remaining access to align purchases with reform progress and balance of payments needs.

### Concluding assessment by Ukrainian authorities
- Macroeconomic stabilization considered on track and over performing in many areas.
- Key positive outcomes cited:
  - GDP is growing;
  - inflation has declined;
  - official reserves have more than doubled;
  - financial system is getting stronger;
  - current account deficit and fiscal deficit fell sharply.
- Authorities remain committed to the IMF-supported program under the Extended Fund Facility and to reforms including pension reform, land reform, privatization, fighting corruption, establishing the anticorruption court, and comprehensive transformation of the State Fiscal Service.
- Authorities express gratitude for cooperation and support from the IMF, other IFIs and the international community.

*IMF — cr1783 (introduction of a common chart of accounts for all government units that is harmonized with budget classifications and based on GFS)*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1783.pdf_