## cr1903 ## Source details **Canonical URL:** [cr1903](https://www.imf.org/-/media/files/publications/cr/2019/cr1903.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1903.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1903.pdf.json) --- ### Program overview and financing - Request for a new 14-month Stand-By Arrangement (SBA) in the amount of SDR 2.8 billion (about US$3.9 billion, 139 percent of quota). - SBA to succeed and cancel the Extended Fund Facility (EFF). - Immediate disbursement upon approval: SDR 1 billion (about US$1.4 billion); remainder available upon completion of semi-annual reviews. - Complementary financing commitments for the arrangement’s duration: - European Union Macro Financial Assistance program: €1 billion. - World Bank Policy-Based Guarantee enabling authorities to raise US$1 billion (footnote: World Bank will provide a guarantee (PBG) of USD750mn in 2019). - Ukraine recently raised US$2 billion in capital market financing. ### Program objectives and policy focus - Four policy priorities: - (i) continuing fiscal consolidation to keep public debt on a downward path; - (ii) further reducing inflation while maintaining a flexible exchange rate regime; - (iii) strengthening the financial sector, promoting asset recovery, and reviving bank lending; - (iv) advancing a focused set of structural reforms, particularly to improve tax administration, privatization and governance. - Program modality and phasing: - First purchase SDR 1.0 billion upon approval; two purchases of SDR 0.9 billion each in spring and fall 2019 tied to end‑March 2019 and end‑September 2019 performance criteria and structural benchmarks. - Retention of exchange restrictions and Multiple Currency Practices approved for 12 months on grounds of being non-discriminatory, for balance of payments reasons, and temporary. ### Macroeconomic outlook and key indicators (selected figures) - Nominal GDP (billions of Ukrainian hryvnias): 2,385 (2016); 2,983 (2017); 3,447 (2018); 3,916 (2019 proj.); 4,433 (2020 proj.). - Real GDP (percent change): 2.4 (2016); 2.5 (2017); 3.3 (2018); 2.7 (2019 proj.); 3.0 (2020 proj.). - Contributions to real GDP growth (domestic demand / net exports): Domestic demand: 7.1 (2016); 7.1 (2017); 5.4 (2018); 4.6 (2019 proj.); 4.9 (2020 proj.). Net exports: -4.6 (2016); -4.7 (2017); -2.2 (2018); -1.9 (2019 proj.); -1.9 (2020 proj.). - Inflation and price measures: - GDP deflator: 17.1 (2016); 22.0 (2017); 11.9 (2018); 10.6 (2019 proj.); 9.9 (2020 proj.). - Consumer prices (period average): 13.9 (2016); 14.4 (2017); 11.0 (2018); 9.2 (2019 proj.); 5.9 (2020 proj.). - Labor and wages: - Nominal monthly wages (average): 23.3 (2016); 37.1 (2017); 23.0 (2018); 17.2 (2019 proj.); 11.0 (2020 proj.). - Unemployment rate (ILO definition; percent): 9.3 (2016); 9.5 (2017); 9.2 (2018); 8.6 (2019 proj.); 8.0 (2020 proj.). - Public finance: - General government balance (percent of GDP): -2.2 (2016); -2.2 (2017); -2.5 (2018); -2.3 (2019 proj.); -2.3 (2020 proj.). - Public and publicly guaranteed debt (percent of GDP): 81.2 (2016); 71.9 (2017); 65.2 (2018); 64.3 (2019 proj.); 59.8 (2020 proj.). - Money and credit (end of period, percent change): - Broad money: 10.9 (2016); 9.6 (2017); 9.8 (2018); 8.7 (2019 proj.); 13.8 (2020 proj.). - Credit to nongovernment: -1.1 (2016); 2.1 (2017); 8.4 (2018); 3.2 (2019 proj.); 11.2 (2020 proj.). - External sector: - Current account balance (percent of GDP): -1.5 (2016); -2.2 (2017); -3.3 (2018); -2.9 (2019 proj.); -2.2 (2020 proj.). - Total external debt (percent of GDP): 122.5 (2016); 104.1 (2017); 95.5 (2018); 92.3 (2019 proj.); 86.7 (2020 proj.). - Gross reserves (end of period, billions of US$): 15.8 (2016); 18.8 (2017); 18.8 (2018); 19.5 (2019 proj.); 20.9 (2020 proj.). - Months of next year’s imports of goods and services: 3.0 (2016); 3.3 (2017); 3.2 (2018); 3.1 (2019 proj.); 3.2 (2020 proj.). - Percent of IMF composite metric (float): 55.5 (2016); 65.0 (2017); 66.3 (2018); 66.5 (2019 proj.); 69.6 (2020 proj.). - Program accounting exchange rate: 28.2794 (hryvnia per U.S. dollar) as of August 31, 2018 (TMU). ### Progress under prior EFF and rationale for SBA - EFF-supported outcomes: - Current account deficit reduced from over 9 percent of GDP in 2013 to 2 percent of GDP in 2017. - Overall fiscal deficit fell from 10 percent of GDP in 2014 to just above 2 percent of GDP in 2017. - Public debt declined from a peak of 85 percent of GDP in 2014 to below 70 percent by end-2018. - Shortcomings under EFF: - Delays in reforms, only three reviews completed out of originally planned 15, slower-than-projected official disbursements, inflation above targets, and uneven structural reform progress (anticorruption, privatization, land market opening). - Rationale for SBA: - Preserve recent gains amid balance of payments needs and election-year risks of policy backsliding; SBA to provide anchor for policies and sequencing for liberalization and reserve buildup. ### Program financing, assumptions, and conditionalities - Program financing table (selected rows, US$ billion): - Financing Gap: 2015 18.6; 2016 6.3; 2017 6.2; 2018 4.0; 2019 4.1. - IMF: 2015 6.5; 2016 1.0; 2017 1.0; 2018 1.4; 2019 2.5. - Gross international reserves (memorandum): 2015 13.3; 2016 15.8; 2017 18.8; 2018 18.8; 2019 19.5. - % of composite metric: 2015 51.3; 2016 55.5; 2017 65.0; 2018 66.3; 2019 66.5. - Key program assumptions (three): (i) full and timely implementation of policies; (ii) timely external financing from official sector and continued capital market access; (iii) non-intensification of the conflict in eastern Ukraine. - Debt service and repayment capacity: - External debt service obligations expected to pick up to US$6–8 billion per year in coming years; post-program financing needs considered manageable with capital market borrowing for large repurchases in 2022 and 2023 if necessary. - Arrears and lending-into-arrears: - Authorities committed to continue efforts to resolve outstanding official arrears; lawsuit filed by Russia in UK courts ongoing regarding the US$3 billion bond; staff assesses good‑faith efforts and conditions met to proceed with Fund support. ### Fiscal policy and pension reform - Fiscal consolidation targets and measures: - 2019 budget deficit: 2.3 percent of GDP; primary surplus: 1½ percent of GDP; projected public debt: 64 percent of GDP by end-2019. - Wage and pension measures: minimum wage raised by 12 percent; pension benefits on average increase by 8½ percent; pension spending projected to fall slightly in 2019 to just over 10 percent of GDP. - Revenue measures: increases in excise rates; royalty rate increases for oil, gas condensate, iron ore and forestry usage; environmental tax on CO2 emissions raised; import duties on used cars; cap on wages subject to social security contributions will be lifted. - Pension reform (October 2017 law) key elements: - Retirement corridors and qualifying years: retire within 60–65 years; 25 years of service required for retirement at 60 in 2018 increasing yearly to 35 by 2028; other service thresholds as specified. - Indexation: benefits indexed to formula equal to 50 percent of consumer price inflation in preceding year and 50 percent of average salary growth rate in preceding three years. - Fiscal projections: pension expenditures projected to stabilize at around 10 percent of GDP in the medium term; social security contributions grow towards 8 percent of GDP; pension fund deficit reduced by about 3 percentage points of GDP in the long run; average replacement rates around 35 percent. ### Financial sector, NPLs, and state-owned banks - Banking sector recapitalization and supervision: - Since 2014, 95 banks intervened and resolved (out of 180 in 2014); as of end-July 2018, all banks met the capital adequacy ratio (CAR) target of 7 percent. - By end-March 2019, all banks must meet minimum 7 percent Tier 1 capital and 10 percent CAR; transition to Basel III structure with AT1 up to 0.75 percent allowed. - Largest 24 banks to address capital needs from 2018 stress testing; NBU to take supervisory actions, including resolution, by end-June 2019 if banks fail baseline requirements (structural benchmark). - NPL resolution and asset recovery: - System provisioning at 87 percent; new insolvency law (#8060) adopted. - By end-June 2019, NBU with World Bank support to issue regulation on NPL work-out aligned with ECB guidance. - DGF to post list of unresolved borrowers by end-March 2019; DGF to put on sales assets for at least UAH 20 billion by end-March 2019. - State-owned banks governance: - Independent supervisory boards appointed at Naftogaz, Ukrzaliznytsia, and Ukrenergo; independent boards to be appointed in OschadBank and UkrEximBank by end-March 2019. - Ministry of Finance to publish quarterly KPIs of state-owned banks from end-December 2018 and regular reporting on asset recovery (first report by end-March 2019). ### Structural reforms, privatization, land market, and governance - Privatization and SOE governance: - New privatization law approved February (year as in source); advisors hired for privatization of six SOEs; tender for Centrenergo to be launched by end-2018; prioritized sales by early-2019. - Small-scale privatization launched September 2018 for assets under UAH 250 million. - Draft law for agricultural land market prepared; technical preparations and outreach planned to boost public support for adoption after election season. - External audits of largest SOEs by reputable international companies planned. - Regulatory streamlining and business climate: - Reviewing and abolishing obsolete sub-legislative acts; reduce time for land allocation; simplify access to geological information; pilot online auctions for subsoil licenses; risk-based audits; simplify cash register usage; widen possibilities for cashless transactions. - Governance and anti-corruption: - Operationalize High Anti-Corruption Court (HACC); appointment target: at least thirty-five anti-corruption judges by end‑April 2019 and HACC to begin operations by end-June 2019 (structural benchmarks). - NABU external audit to be finalized by end-July 2019; legislative steps to strengthen NABU investigative powers by end-June 2019. - NAPC to ensure NABU direct secure electronic access to full asset declarations by end-December 2018. ### External sector, reserves, and exchange rate - External position and reserves: - Staff’s overall assessment: Ukraine’s external position in 2018 broadly in line with fundamentals, conditional on timely and steadfast program implementation. - Reserves: projected to remain at about three months of imports (gross reserves: 18.8 (2018); 18.8 (2019); 19.5 (2020); 20.9 (2021) in later projections). - Percent of composite metric: around mid-60s (2018: 66.3; 2019 proj.: 66.5). - Competitiveness and REER signals (model-based for 2018): - EBA‑lite CA model: -2.5 - EBA‑lite ES model: 4.8 - EBA‑lite REER model: -10.3 - Staff summary: CA and ES models point to exchange rate in line with fundamentals; effective exchange rate index model points to slight overvaluation of about 10 percent. - Key external risks: - Possible large loss of transit fees from Nord Stream 2 starting around 2020–2021; baseline assumes considerable reduction in transit fees starting in 2021. - Dividend repatriations increased to US$2.8 billion in first ten months of 2018 (compared to US$1.8 billion in 2017). ### Risks, stress tests, and vulnerabilities - Main risks identified: - Domestic: unresolved conflict in the east, political risk and election‑period pressures for populist policies or policy reversals, implementation capacity constraints. - External: adverse terms of trade shocks, global/regional growth moderation, financial market volatility, deterioration in capital market access. - Stress-test scenarios (summary of types, illustrative assumptions for 2018–2023): - Baseline, Historical, Constant Primary Balance, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock (detailed scenario parameter series provided in Annex II). - Stress-test outputs: - External debt and public debt bound tests show vulnerability under combined shocks, with combined shock outcomes materially increasing debt ratios (examples in figures: combined shock results of 90 and extended presentation 121 against baseline 74 in external debt percent of GDP presentation). ### Program reporting, monitoring, and TMU highlights - Technical Memorandum of Understanding (TMU) dated December 5, 2018 outlines quantitative performance criteria, definitions, adjustment mechanisms and reporting requirements. - Key quantitative targets and reporting items (selected): - Ceiling on the cash deficit of the general government (end-2019 target: UAH 90 billion, equivalent to 2¼ percent of GDP; specific ceiling values reported in Table 1). - Floor on cumulative change in net international reserves (in millions of US$): targets/projections include 1,218; 1,229; 1,955; 334; 893 (as presented). - Ceiling on cumulative change in net domestic assets of the NBU (UAH values presented: targets/projections include 16,865; 6,225; 8,952; 51,795; 64,269). - Program accounting exchange rate (hryvnia per U.S. dollar): 28.2794. - Monetary Policy Consultation Clause (MPCC) with inflation mid-point targets and outer/inner consultation bands as specified. - Extensive reporting commitments by NBU, Ministry of Finance, DGF, SFS, Naftogaz and other agencies with daily/weekly/monthly/quarterly frequencies covering reserves, NIR, NDA, liquidity, bank‑by‑bank data, external debt schedules, SOE consolidated financials, HUS data, and anti‑corruption transparency metrics. ### Staff appraisal, program support and policy recommendations - IMF staff supports SBA request as an appropriate anchor for policies during a challenging year; staff notes risks are large and full, timely implementation is critical. - Policy recommendations and priorities: - Fiscal: maintain fiscal discipline, no space for tax cuts in 2019, focus on improving tax and customs administration, continue recovery of losses from bank failures. - Monetary/financial stability: protect NBU independence, maintain tight monetary stance, keep policy rate positive in real terms, sequence easing of FX restrictions conditionally. - Financial sector: continue bank recapitalization, strengthen supervision, address NPLs, ensure DGF solvency and transparent asset sales. - Structural reforms and governance: operationalize anti-corruption court, strengthen NABU and SAPO prosecution, privatize larger SOEs, improve SOE governance, advance land market reforms, streamline regulations to improve business climate. - External: build additional reserve buffers, secure timely external financing, mitigate potential loss of transit fees from Nord Stream 2. *Source: IMF staff reports and Executive Summary (December 7, 2018); excerpts from IMF country report cr1903.* ### 2.8 billion (about US$3.9 billion, 139 percent of quota). The Board also took note of Ukraine’s ### UKRAINE REQUEST FOR STAND-BY ARRANGEMENT AND CANCELLATION OF ARRANGEMENT UNDER THE EXTENDED FUND FACILITY ### Program overview and financing - Request for a new 14-month Stand-By Arrangement (SBA) in the amount of SDR 2.8 billion (about $3.9 billion, 139 percent of quota) to help meet Ukraine’s balance of payments needs. - The SBA will succeed the arrangement under the Extended Fund Facility (EFF), which will be cancelled. - The approval of the SBA enables the immediate disbursement of SDR 1 billion (about US$1.4 billion). The remainder will be available upon completion of semi-annual reviews. - The authorities believe the SBA can anchor policies during the upcoming election period (presidential elections scheduled for March 2019 and parliamentary elections scheduled for October 2019) and until a new government is formed by end-2019. ### Program objectives and policy focus - The program will build on progress made under the EFF arrangement and focus on maintaining macro-economic and financial stability during 2019. - Four policy priorities: - (i) continuing the ongoing fiscal consolidation to keep public debt on a downward path; - (ii) further reducing inflation, while maintaining a flexible exchange rate regime; - (iii) strengthening the financial sector, promoting asset recovery, and reviving bank lending; - (iv) advancing a focused set of structural reforms, particularly to improve tax administration, privatization and governance. - Complementary support from the World Bank and the European Union is noted as part of the financing and reform support package. ### Immediate policy actions and structural priorities - Authorities’ preparatory steps noted: - Adopting a sound 2019 budget; - Raising gas and heating tariffs; - Adopting legislation to improve governance in state-owned banks. - Structural reform priorities highlighted: - Operationalizing the anti-corruption court; - Privatizing large state-owned enterprises; - Streamlining regulations; - Advancing land reform; - Improving tax administration and public financial management; - Addressing nonperforming loans, recovering assets from failed banks, and improving governance in state-owned banks. - Emphasis on safeguarding central bank independence as critical to monetary policy objectives. ### Macroeconomic outlook and key indicators (selected figures from projections) - Nominal GDP (billions of Ukrainian hryvnias): 2,385 (2016); 2,983 (2017); 3,447 (2018); 3,916 (2019 proj.); 4,433 (2020 proj.). - Real GDP (percent change): 2.4 (2016); 2.5 (2017); 3.3 (2018); 2.7 (2019 proj.); 3.0 (2020 proj.). - Contributions to real GDP growth: - Domestic demand: 7.1 (2016); 7.1 (2017); 5.4 (2018); 4.6 (2019 proj.); 4.9 (2020 proj.). - Net exports: -4.6 (2016); -4.7 (2017); -2.2 (2018); -1.9 (2019 proj.); -1.9 (2020 proj.). - Inflation and price measures: - GDP deflator: 17.1 (2016); 22.0 (2017); 11.9 (2018); 10.6 (2019 proj.); 9.9 (2020 proj.). - Consumer prices (period average): 13.9 (2016); 14.4 (2017); 11.0 (2018); 9.2 (2019 proj.); 5.9 (2020 proj.). - Labor and wages: - Nominal monthly wages (average): 23.3 (2016); 37.1 (2017); 23.0 (2018); 17.2 (2019 proj.); 11.0 (2020 proj.). - Unemployment rate (ILO definition; percent): 9.3 (2016); 9.5 (2017); 9.2 (2018); 8.6 (2019 proj.); 8.0 (2020 proj.). - Public finance: - General government balance (percent of GDP): -2.2 (2016); -2.2 (2017); -2.5 (2018); -2.3 (2019 proj.); -2.3 (2020 proj.). - Public and publicly guaranteed debt (percent of GDP): 81.2 (2016); 71.9 (2017); 65.2 (2018); 64.3 (2019 proj.); 59.8 (2020 proj.). - Money and credit (end of period, percent change): - Broad money: 10.9 (2016); 9.6 (2017); 9.8 (2018); 8.7 (2019 proj.); 13.8 (2020 proj.). - Credit to nongovernment: -1.1 (2016); 2.1 (2017); 8.4 (2018); 3.2 (2019 proj.); 11.2 (2020 proj.). - Interbank o/n rate (annual average, percent): 16.9 (2016); 11.9 (2017); 16.6 (2018); ... (2019 proj.); ... (2020 proj.). - Balance of payments and external: - Current account balance (percent of GDP): -1.5 (2016); -2.2 (2017); -3.3 (2018); -2.9 (2019 proj.); -2.2 (2020 proj.). - Foreign direct investment (percent of GDP): 3.5 (2016); 2.3 (2017); 1.7 (2018); 1.6 (2019 proj.); 1.7 (2020 proj.). - Total external debt (percent of GDP): 122.5 (2016); 104.1 (2017); 95.5 (2018); 92.3 (2019 proj.); 86.7 (2020 proj.). - Gross reserves (end of period, billions of US$): 15.8 (2016); 18.8 (2017); 18.8 (2018); 19.5 (2019 proj.); 20.9 (2020 proj.). - Months of next year’s imports of goods and services: 3.0 (2016); 3.3 (2017); 3.2 (2018); 3.1 (2019 proj.); 3.2 (2020 proj.). - Percent of IMF composite metric (float): 55.5 (2016); 65.0 (2017); 66.3 (2018); 66.5 (2019 proj.); 69.6 (2020 proj.). - Exchange rate: - Hryvnia per U.S. dollar (end of period): 27.2 (2016); 28.1 (2017); ... (2018); ... (2019 proj.); ... (2020 proj.). - Real effective rate (deflator-based, percent change): 0.5 (2016); 11.6 (2017); ... (2018); ... (2019 proj.); ... (2020 proj.). ### Progress under the prior EFF arrangement (summary points) - EFF-supported policies helped sharply reduce fiscal and current account deficits, partly rebuild reserves, and return the economy to growth. - Current account deficit fell from over 9 percent of GDP in 2013 to 2 percent of GDP in 2017. - Overall fiscal deficit fell from 10 percent of GDP in 2014 to just above 2 percent of GDP in 2017. - Public debt declined from a peak of 85 percent of GDP in 2014 to below 70 percent by the end of 2018. - Challenges and shortcomings under the EFF included delays in reforms, only three reviews completed out of originally planned 15, slower-than-projected official disbursements, inflation above targets, and uneven progress on structural reforms (anticorruption, privatization, land market opening). ### Risks and program conditionality - Program implementation is subject to significant risks, both domestic and external. - Key risk factors include the unresolved conflict in the eastern part of Ukraine, an unsettled external environment, and pressures for populist policies or policy reversals ahead of elections. - Mitigating actions undertaken by the authorities include frontloaded measures: approval of the 2019 budget, raising gas and heating tariffs, and adopting legislation to improve governance in state-owned banks. - The staff emphasizes that full and timely implementation of the program will be critical for its success. ### Executive Director statement (Mr. David Lipton, First Deputy Managing Director and Acting Chair) - Noted successful restoration of macro-economic stability and growth with international support. - Reiterated that the SBA will provide an anchor for policies, preserve recent gains, and help meet financing needs together with World Bank and European Union support. - Emphasized commitments: - Fiscal discipline to keep public debt on a downward path and resist pressures to increase spending or lower taxes; - Monetary policy to reduce inflation and rebuild international reserves within a flexible exchange rate regime; - Measures to address NPLs and improve governance in state-owned banks; - Further progress on anti-corruption reforms and privatization to attract investment and improve the business climate. - Reiterated that program implementation faces difficult challenges and risks. *Source: IMF staff reports and Executive Summary (December 7, 2018).* ### Box 1. Progress Under the EFF Arrangement (concluded) ### Box 1. Progress Under the EFF Arrangement (concluded) ### Program objectives and financing - Authorities request a new 14-month SBA in the amount of SDR 2.8 billion (about US$3.9 billion, 139 percent of quota) to succeed the EFF arrangement, which will be cancelled. - Program policy focus: - (i) continuing the ongoing fiscal consolidation to keep public debt on a steady downward path; - (ii) further reducing inflation to within the central bank’s 5±1 percent target range, while maintaining a flexible exchange rate regime; - (iii) strengthening the banking system, promoting asset recovery, and reviving bank lending; - (iv) advancing a limited set of structural reforms, particularly to improve tax administration and governance. - With the policy mix under the SBA and prospective financing from other IFIs and capital markets, Ukraine should be able to meet its sizable financing needs: - Access, both in terms of annual purchases and outstanding credit, would remain below exceptional access thresholds. - Would help maintain reserves at a level equivalent to three months of imports. - Despite sizable foreign exchange purchases by the National Bank of Ukraine (NBU) in 2018 and targeted also for 2019, reserves will remain well below the level equivalent to 100 percent of the composite metric targeted under the EFF arrangement, affecting the pace of removal of remaining restrictions and capital flow measures. - Firm financing commitments in place for the arrangement’s duration: - European Union Macro Financial Assistance program: €1 billion. - World Bank Policy-Based Guarantee enabling the authorities to raise US$1 billion. - Ukraine recently raised US$2 billion in capital market financing. - Arrears and lending-into-arrears considerations: - Authorities committed to continue efforts to resolve outstanding official arrears consistent with the policy on lending into arrears to official bilateral creditors. - A lawsuit filed by Russia in the UK courts is ongoing; staff assesses Ukrainian authorities have continued to pursue good-faith efforts, including offering out-of-court restructuring terms for the US$3 billion bond. - Staff view: conditions have been met for the Fund to proceed with providing financial support to Ukraine. ### Program financing table (Ukraine: Program Financing, US$ billion) — key rows - Financing Gap: 2015 18.6; 2016 6.3; 2017 6.2; 2018 4.0; 2019 4.1 - Reserve accumulation: 2015 5.8; 2016 2.5; 2017 3.0; 2018 0.0; 2019 0.7 - Underlying BOP gap: 2015 12.8; 2016 3.7; 2017 3.2; 2018 4.0; 2019 3.5 - Financing: 2015 18.6; 2016 6.3; 2017 6.2; 2018 4.0; 2019 4.1 - IMF: 2015 6.5; 2016 1.0; 2017 1.0; 2018 1.4; 2019 2.5 - Other multilateral/bilateral: 2015 3.3; 2016 1.8; 2017 0.8; 2018 0.6; 2019 1.6 - Multilateral: 2015 1/1.0; 2016 0.4; 2017 0.2; 2018 0.0; 2019 1.0 - European Union: 2015 0.9; 2016 0.1; 2017 0.6; 2018 0.6; 2019 0.6 - Other bilateral: 2015 1.4; 2016 1.3; 2017 ...; 2018 ...; 2019 ... - Debt operation: 2015 5.7; 2016 3.5; 2017 4.4; 2018 2.0; 2019 ... - Other exceptional financing: 2015 3.1; 2016 ...; 2017 ...; 2018 ...; 2019 ... - Memorandum items: - Capital market access: 2015 0.0; 2016 0.0; 2017 3.2; 2018 2.7; 2019 2.0 - Gross international reserves: 2015 13.3; 2016 15.8; 2017 18.8; 2018 18.8; 2019 19.5 - % of composite metric: 2015 51.3; 2016 55.5; 2017 65.0; 2018 66.3; 2019 66.5 - Footnote: The World Bank will provide a guarantee (PBG) of USD750mn in 2019. ### Key program assumptions and conditionalities - Program’s success hinges on three key assumptions: - (i) full and timely implementation of policies under the program; - (ii) timely external financing from the official sector and continued capital market access; - (iii) non-intensification of the conflict in the eastern part of Ukraine. - These assumptions are incorporated in, and are critical for, the program. ### Macroeconomic outlook and risks - Recent outcomes and near-term projections: - Growth: reached 2.5 percent in 2017 and is expected to reach 3.3 percent in 2018 on strong domestic demand. - Current account deficit: widened to 3.3 percent of GDP in 2018. - Inflation: peaked at 16.5 percent in September 2017; expected to reach 10 percent by end-2018 due inter alia to higher energy prices (including higher gas and heating tariffs). - Medium-term projection baseline: - Without substantial reforms, growth constrained to about 3 percent annually. - Growth projected at 2.7 percent in 2019 due to worsening terms of trade and rising production costs (notably wages) offsetting robust domestic demand. - Inflation expected to decline to just under 7 percent by end-2019 and within the NBU’s target range of 5±1 percent in early 2020. - Current account and reserves outlook: - Under the baseline, current account deficit projected to remain at around 3 percent of GDP in coming years. - Exports expected to increase at 4–6 percent annual volume growth. - Gas transit revenues expected to decline once Nord Stream 2 is completed around 2020. - Reserves projected to remain at three months of import coverage, or about 65-70 percent of the composite metric. - Downside risks (very large): - Domestic: risk of policy slippages, rising pressure for populist policies ahead of elections, weakening of authorities’ ability to implement the program, intensification of conflict in the east. - External: deterioration in Ukraine’s terms of trade, moderation in global and regional growth, worsening market sentiment toward emerging markets making capital market access difficult. ### Program policies - Overall policy mix: - Maintain a primary fiscal surplus for debt sustainability and to moderate absorption, in line with available external financing. - Continued tight monetary stance to bring inflation down and allow further reserve accumulation. - Gradual removal of remaining exchange restrictions as conditions permit. ### A. Fiscal policies: continuing consolidation to bring public debt down - Achievements to date: - Budget deficit reduced from 4.5 percent of GDP in 2014 to 2.2 percent of GDP in 2017 (below program target of 3.1 percent of GDP). - Including Naftogaz quasi-fiscal deficit, combined deficit reduced from 10 percent of GDP in 2014 to 2 percent of GDP in 2017. - Public debt declined from 85 percent of GDP in 2014 to 72 percent at end-2017. - Recent weakening in fiscal discipline: - Parliament-approved supplementary budget and pension legislation in 2017 included large wage and pension increases, increasing current spending in 2018 by almost 1 percentage point of GDP. - 2018 budget deficit target of 2.5 percent of GDP expected to be met only by curtailing capital spending. - 2019 budget and measures (prior action): - 2019 budget deficit: 2.3 percent of GDP. - Primary surplus: 1½ percent of GDP. - Projected public debt: 64 percent of GDP by end-2019. - Budget based on conservative revenue assumptions; defense spending elevated; aims to contain current spending. - Key expenditure and revenue measures to meet deficit target: - Wage policy: - Wage increases contained to stabilize the wage bill as a share of GDP. - Significant increases for military wages; limited increases for civil servants and public administration employees. - Minimum wage raised by 12 percent. - Pensions: - Pensions raised in line with indexation rules of the new 2017 pension law. - Pension benefits on average increase by 8½ percent; retirees at subsistence minimum see a 9½ percent increase. - Pension spending projected to fall slightly in 2019 to just over 10 percent of GDP. - Pension fund deficit projected to decline to 4¼ percent of GDP in 2019, compared to over 6 percent of GDP in 2016. - Social assistance and utility subsidies: - Sufficient social assistance provided with improved targeting. - Utility subsidies covering about 5 million households. - Means-testing enhanced; HUS budget outlays contained to 1½ percent of GDP. - Revenue measures: - Increases in excise rates. - Royalty rates for oil, gas condensate, iron ore and forestry usage raised. - Environmental tax on CO2 emissions by stationary sources raised. - Increase in the wholesale price of gas for household use increases royalty and VAT payments. - Import duties levied on used cars. - Cap on wages subject to social security contributions will be lifted. *Sources: Ukrainian authorities, IMF staff calculations.* ### Box 2. Pension Reform ### Box 2. Pension Reform ### Background and rationale - Pension spending had reached over 11 percent of GDP in 2016, one of the highest levels in Europe, despite that average pension benefits were very low. - Demographic and fiscal pressures: - About 12 million pensioners, representing almost 30 percent of the population, and an equal number of contributors to the pension system. - Pension fund revenues declined significantly following the halving of the social security contribution rate adopted in late 2015, raising the pension fund deficit to around 6 percent of GDP. - Unfavorable demographic trends: low fertility, an ageing population, and migration abroad of a growing number of workers. - The pension reform was long overdue and repeatedly delayed despite the critical need to place the pension system on a sound financial footing for future generations. ### Key elements of the October 2017 pension law - Lengthening of qualifying years needed to receive a pension and strengthening incentives to contribute. - Retirement age corridor and service requirements: - Individuals can retire within an age corridor of 60–65 years, depending on their years of service. - Retiring at the earliest possible age of 60 will require at least 25 years of service in 2018 for both men and women (from 15 years previously), increasing by one year each year to 35 years by 2028. - Retirement at the age of 63 will require 15 years of service in 2018, rising by one year each year to 25 years by 2028. - Retirement at 65 will require a minimum of 15 years of service. - Incentives and restrictions: - A bonus of 6 percent for each year of delayed retirement (and 9 percent per year if the deferment is more than 5 years). - Options for early retirement have been substantially reduced. - Indexation rule: - Pension benefits are indexed to a non-discretionary formula (which equals to 50 percent of consumer price inflation in the preceding year and 50 percent of the average salary growth rate in the preceding three years). ### Projected fiscal and benefit outcomes - Pension expenditures are projected to stabilize at around 10 percent of GDP in the medium term. - Social security contributions would grow steadily towards 8 percent of GDP. - These trends would reduce the pension fund deficit by about 3 percentage points of GDP in the long run, from over 6 percent of GDP in 2016. - Average replacement rates would improve but would still remain relatively modest at around 35 percent. - Further improvement in pension benefit levels would require further parametric changes. *Source: IMF staff calculations as presented in the original text.* ### 37. While no major privatization has taken place in the last several years, a start has been ### 37. While no major privatization has taken place in the last several years, a start has been made with selling selected state-owned enterprises (SOEs) ### Privatization efforts and agricultural land market - A new privatization law was approved in February (this year) and reputable advisors were hired for the privatization of six SOEs. - A tender for the sale of power generation company Centrenergo will be launched by end-2018, followed by the six companies on the priority list by early-2019. - Small-scale privatization (sales of assets under a UAH 250 million (about US$ 9 million)) was successfully launched in September 2018, with several small companies already sold. - A draft law for establishing a transparent market for agricultural land has been prepared; authorities will scale up technical preparations and outreach (MEFP ¶18) to boost public support for adoption of the law after the election season. ### SOE governance reforms - New majority-independent supervisory boards appointed at Naftogaz, Ukrzaliznytsia, and Ukrenergo; selection processes for independent supervisory boards for other large SOEs, including Boryspil airport and Ukrposhta, are well underway (MEFP ¶16b). - Authorities will seek parliamentary approval of the law on SOE governance to clarify and strengthen the powers of supervisory boards and grant legal immunity and indemnity to its members. - External audits of the largest SOEs will be conducted by reputable international companies. ### Fiscal risks and public asset/debt management - A fiscal risks management division has been established in the Ministry of Finance (MEFP ¶16c). - Further steps include setting up a comprehensive fiscal risk management system and adopting necessary legislative changes to better manage and reduce fiscal risks and enhance public asset and debt management (including public guarantees, public private partnerships, and local government borrowing). ### Regulatory streamlining - In the last two years the regulatory framework was substantially streamlined by: reviewing and abolishing non-relevant sub-legislative acts; streamlining procedures for permits and licenses; and improving clarity and transparency in the construction, telecom, and natural resource sectors. - Planned further actions (MEFP ¶17) include: - reducing time required for land allocation; - simplifying access to geological information; - piloting online auctions for subsoil licenses; - implementing risk-based approaches to audits and inspections by state authorities; - simplifying cash register usage by introducing new technologies and widening possibilities for cashless transactions; - imposing sanctions for violating cash turnover regulations. ### Program modalities, phasing, and safeguards - Phasing under the program proposed over two semi-annual reviews: - A first purchase of SDR 1.0 billion upon approval; - Two purchases of SDR 0.9 billion each in the spring and fall of 2019, based on end-March 2019 and end-September 2019 performance criteria and a core set of structural benchmarks. - Semi-annual review schedule intended to better fit implementation capacity and the phasing of program measures. - An update safeguards assessment to be completed by the time of the first review. The NBU implemented all recommendations from the last assessment, conducted in April 2015. ### External obligations, repayment capacity, and MCPs - External debt service obligations expected to pick up to US$6–8 billion per year in the coming years; Ukraine expected to be able to meet these provided fiscal and monetary policies remain on track. - Post-program financing needs considered manageable with potential for capital market borrowing to support relatively large repurchases in 2022 and 2023 if necessary. - Risks to the Fund are large if policies deviate from the program or regional tensions intensify. - Exchange restrictions and Multiple Currency Practices (MCPs) remain, with a roadmap to phase them out. - Exchange restrictions arise from: (i) absolute limits on availability of foreign exchange for certain non-trade current international transactions; and (ii) a partial ban on the transfer abroad of dividends received by nonresident investors from foreign investments in Ukraine. - MCPs arise from: (i) use of multiple price foreign exchange auctions by the NBU without a mechanism to prevent a spread deviation of more than 2 percent between the auction and market exchange rates; (ii) 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; and (iii) requirement to transfer any gains from the purchase of foreign exchange to the state budget if it is unused and resold. ### Staff appraisal — achievements and remaining challenges - Achievements under the EFF arrangement: - Large fiscal and quasi-fiscal deficits have been reigned in and public debt is on a downward path. - Exchange rate is broadly flexible. - Inflation, while still elevated, is declining. - Central bank’s international reserves have increased substantially. - Growth has returned. - Key reforms advanced: strengthening independence and governance of the central bank; cleaning up the banking system; adopting pension reforms; raising gas tariffs; setting up new, independent institutions to tackle corruption. - Remaining challenges and missed opportunities: - Slow progress in structural reforms has limited transformation of the economy: large and inefficient state enterprise sector not fully reformed/privatized; agricultural land market and gas sector not fully opened. - Economic structure largely unchanged with key sectors dominated by oligarchs, stifling competition and deterring new entrants. - Few convictions for those who benefited from corrupt schemes, leaving a sense of impunity and disappointing societal expectations; investment remains low and worker emigration persists. - Rationale for a new Fund-supported program: - Preserve recent gains amid continued balance of payments needs and election-year risks of policy backsliding. - Authorities developed a policy agenda prioritizing macroeconomic stability and value continued engagement with the international community, including the Fund through a new SBA. - Importance of keeping the program on track and meeting commitments vis-a-vis other institutions for timely implementation. ### Policy recommendations and priorities - Fiscal policy and administration: - No space for tax cuts in 2019 given spending needs and imperative of continuing to reduce public debt; efforts should focus on improving tax and customs administration. - Continue efforts to recover losses to the state from bank failures. - Central bank and financial stability: - Protect the transformation and independence of the NBU; maintain commitment to low and stable inflation and prudent FX management. - Structural reforms and governance: - Firm implementation of a narrowly focused set of reforms critical to program success: strengthen revenue administration; continue to improve governance and business climate to attract investment; continue anti-corruption efforts; begin sale of larger state-owned companies. - Operationalize an independent anti-corruption court and ensure a credible anti-corruption prosecutor supports investigative efforts of NABU, prosecutes robust cases related to high-level officials, and ensures evenhanded adjudication. - Leverage strong societal support for reforms to overcome resistance from vested interests. *International Monetary Fund — selected excerpts from the Ukraine staff report (CR1903).* ### 50. Staff supports the authorities’ request for a Stand-By Arrangement, to succeed the EFF ### cr1903 - 50. Staff supports the authorities’ request for a Stand-By Arrangement, to succeed the EFF ### IMF assessment and program support - Staff supports the authorities’ request for a Stand-By Arrangement (SBA) to succeed the EFF arrangement. - The new SBA is intended to provide an important anchor for the authorities’ economic policies during a challenging year. - The program is described as having an appropriate balance between adjustment and financing, aiming to further reduce Ukraine’s economic vulnerabilities. - Staff notes that the risks to the new program—and to Ukraine’s capacity to repay—are clearly large, especially: - political risk; - risk of policy slippages; - risks from the unresolved conflict in the eastern part of the country. - Steps already taken by the authorities have partly mitigated these risks, but steadfast implementation will be critical for the program’s success. - Staff calls for the continued support of the international community for the authorities’ efforts. ### Retention of exchange restrictions and multiple currency practices - Staff supports the authorities’ request for approval, for a period of 12 months, of the retention of the exchange restrictions and multiple currency practices. - The retention is supported on the grounds that these measures are: - non-discriminatory; - imposed for balance of payments reasons; - temporary. ### Key macroeconomic projections and indicators (selected) - Real economy (percent change, unless otherwise indicated): - Real GDP 1/: 2018: 2.5; 2019: 3.3; 2020: 2.7; 2021: 3.0; 2022: 3.1; 2023: 3.2; 2024 (proj.): 3.3. - Nominal GDP (billions of Ukrainian hryvnias) 1/: 2018: 2,983; 2019: 3,447; 2020: 3,916; 2021: 4,433; 2022: 4,918; 2023: 5,420; 2024: 5,970. - Consumer prices (period average): 2018: 14.4; 2019: 11.0; 2020: 9.2; 2021: 5.9; 2022: 5.4; 2023: 5.0; 2024: 5.0. - Unemployment rate (ILO definition; percent): 2018: 9.5; 2019: 9.2; 2020: 8.6; 2021: 8.0; 2022: 7.3; 2023: 6.8; 2024: 6.6. - GDP deflator: 2018: 22.0; 2019: 11.9; 2020: 10.6; 2021: 9.9; 2022: 7.6; 2023: 6.8; 2024: 6.6. - Public finance (percent of GDP): - General government balance 2/: 2018: -2.2; 2019: -2.5; 2020: -2.3; 2021: -2.3; 2022: -2.2; 2023: -2.0; 2024: -2.0. - Public and publicly-guaranteed debt: 2018: 71.9; 2019: 65.2; 2020: 64.3; 2021: 59.8; 2022: 56.1; 2023: 52.0; 2024: 48.7. - Balance of payments and external sector: - Current account balance (percent of GDP): 2018: -2.2; 2019: -3.3; 2020: -2.9; 2021: -2.2; 2022: -3.6; 2023: -3.2; 2024: -2.6. - Gross reserves (end of period, billions of U.S. dollars): 2018: 18.8; 2019: 18.8; 2020: 19.5; 2021: 20.9; 2022: 20.8; 2023: 22.9; 2024: 23.5. - Months of next year's imports of goods and services: 2018: 3.3; 2019: 3.2; 2020: 3.1; 2021: 3.2; 2022: 3.0; 2023: 3.1; 2024: 3.2. - Gross external financing requirements (selected, Billions of U.S. dollars): - Total financing requirements (Act./Proj.): 2018: 57.0; 2019: 57.9; 2020: 46.0; 2021: 48.3; 2022: 50.6; 2023: 51.2; 2024: 52.4. - Total financing sources (Act./Proj.): 2018: 59.4; 2019: 56.5; 2020: 44.5; 2021: 49.8; 2022: 51.1; 2023: 54.3; 2024: 56.5. - Official financing (net): 2018: 2.4; 2019: 0.2; 2020: 2.2; 2021: -0.1; 2022: -0.6; 2023: -1.3; 2024: -3.5. - IMF (net): 2018: 0.1; 2019: -0.7; 2020: 0.9; 2021: -1.1; 2022: -1.4; 2023: -2.5; 2024: -3.5. - Monetary and financial indicators (selected): - Broad money (end of period, percent change): 2018: 9.6; 2019: 9.8; 2020: 8.7; 2021: 13.8; 2022: 13.7; 2023: 13.5; 2024: 13.1. - Base money (end of period, percent change): 2018: 4.6; 2019: 12.9; 2020: 8.5; 2021: 8.8; 2022: 8.9; 2023: 8.7; 2024: 8.7. - Credit to nongovernment (end of period, percent change): 2018: 2.1; 2019: 8.4; 2020: 3.2; 2021: 11.2; 2022: 10.9; 2023: 10.7; 2024: 10.8. ### Program risks and implementation priorities - Main risks identified: - political risk; - policy slippages; - unresolved conflict in the eastern part of the country. - Mitigation: steps already taken by authorities have partly mitigated risks. - Implementation priority: steadfast implementation of program policies emphasized as critical for program success. - International support: staff stresses that the authorities deserve continued support of the international community. *Source: IMF staff report (cr1903 - 50).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall assessment - Staff’s overall assessment: Ukraine’s external position in 2018 is broadly in line with fundamentals. - Key caveat: the assessment hinges upon the timely and steadfast implementation of the program. - Reserves: would remain at adequate levels although well below 100 percent of the composite metric. - Main risks to the outlook: - policy slippages and political uncertainty, - adverse terms of trade shocks, - financial market volatility, - possible escalation of the conflict in eastern Ukraine. ### Real exchange rate and competitiveness - Post-2014 developments: - Competitiveness improved markedly in 2014 after moving to a flexible exchange rate regime, but some of those gains have been eroded in recent years. - The nominal effective exchange rate has depreciated in the last few years. - Inflation has been declining, but remains relatively high compared to trading partners. - On balance, the real effective exchange rate (REER) has been gradually appreciating. - Unit-labor-cost REER: - The appreciation of the REER in unit-labor cost terms is more pronounced. - Contributing factor: large migration of workers to new markets (mostly Poland), leading to a sizable increase in remittances inflows and upward pressure on wages in Ukraine as firms compete for workers. - Trade tensions and transport disruptions: - The ongoing conflict in the eastern part of Ukraine (more than four years after its beginning) continues to affect production capacity and trade. - Construction by Russia of a bridge in the Sea of Azov has resulted in delays in transportation of mostly metallurgical products from the eastern part of Ukraine; some companies switched to rail at increased cost and lower efficiency. - Recent financial market turmoil in Turkey, one of Ukraine’s main trading partners, is adversely affecting Ukrainian exports. - U.S.–China trade tensions and associated tariffs have so far had limited impact on Ukrainian exports, but could change quickly if measures escalate and spread. - Model-based REER signals for 2018: - EBA‑lite CA model: -2.5 - EBA‑lite ES model: 4.8 - EBA‑lite REER model: -10.3 - Staff summary: CA and ES models point to the exchange rate being in line with fundamentals; the effective exchange rate index model points to a slight overvaluation of the hryvnia of about 10 percent. ### Current account and external sustainability - 2018 current account: - The current account widened in 2018 to about 3 percent of GDP due to increased imports and dividend repatriations. - Exports recovered after the 2017 drought that had hurt agriculture, but robust domestic demand led a faster increase in imports. - Tourism has been permanently impacted by Russia’s annexation of Crimea. - A pick-up in remittances has provided sizable inflows, helping finance the current account deficit. - Transit fees and Nord Stream 2: - Completion of the Nord Stream 2 pipeline could result in large losses in transit fees for Ukraine. - Baseline projection assumes a considerable reduction in transit fees starting in 2021. - External sustainability models: - Both the current account (CA) and the external sustainability models indicate the exchange rate is in line with fundamentals. ### Foreign asset and liability position - International investment position: - Ukraine’s international investment position has marginally improved in recent years due to lower current account deficits and lower FDI and other inflows. - Projection: expected to deteriorate to about 27 percent in 2023 as Ukraine continues to tap international markets and more capital flows into the economy. ### Capital and financial account flows; reserve buffers - Capital flows since 2015–16: - Ukraine has maintained access to international capital markets and continued building reserves. - Most net inflows of FDI since 2015–16 have been directed at the banking sector as debt-to-equity or debt-forgiveness operations between subsidiaries and parent banks. - In early 2018, non-residents purchased domestic government securities, but these flows reversed in the fall as the outlook for emerging markets deteriorated. - Introduction of Clearstream in 2019 could facilitate further inflows of non-residents into the Ukrainian securities market. - NBU continued gradual removal of foreign exchange restrictions. - Dividend repatriations: - Dividend repatriations increased substantially in 2018, reaching US$2.8 billion in the first ten months of the year, compared to US$1.8 billion in the whole of 2017. - Reserves and adequacy: - Ukraine made considerable efforts to rebuild international reserves, but these fall short of levels suggested by the IMF’s reserve adequacy metric. - The 2015 EFF envisioned surpassing 100 percent of the metric by the end of the program; delays in program implementation and additional external challenges made this unattainable. - Under the proposed SBA, Ukraine would be able to meet its sizable external obligations in coming years while maintaining its current reserve buffers. - Policy implication: - Further efforts should be made to build additional buffers. ### Summary of vulnerabilities and outlook - Main vulnerabilities: - Exposure to the ongoing conflict in eastern Ukraine and related transport disruptions. - Sensitivity to external market volatility (e.g., Turkey financial turmoil, broader emerging-market conditions). - Potential large loss of transit fees from Nord Stream 2 starting in 2021. - Outlook dependencies: - The external outlook and reserve adequacy depend critically on program implementation and continued market access. - A reversal in recent external adjustment, sharper-than-expected tightening in global financial conditions, or escalation of geopolitical tensions could materially worsen external and reserve positions. *Source: Annex I. External Sector Assessment (IMF staff). * ### Annex II. Figure 4. Ukraine: Public DSA—Composition of Public Debt and ### cr1903 - Annex II. Figure 4. Ukraine: Public DSA—Composition of Public Debt and ### Underlying assumptions and alternative scenarios - Baseline scenario (Real GDP growth, Inflation, Primary Balance, Effective interest rate): - Real GDP growth: 3.3, 2.7, 3.0, 3.1, 3.2, 3.3 - Inflation: 11.9, 10.6, 9.9, 7.6, 6.8, 6.7 - Primary Balance: 1.3, 1.5, 1.1, 1.2, 1.4, 1.2 - Effective interest rate: 6.9, 7.7, 7.2, 7.4, 7.6, 7.7 - Historical scenario (Real GDP growth, Inflation, Primary Balance, Effective interest rate): - Real GDP growth: 3.3, -1.8, -1.8, -1.8, -1.8, -1.8 - Inflation: 11.9, 10.6, 9.9, 7.6, 6.8, 6.7 - Primary Balance: 1.3, -1.2, -1.2, -1.2, -1.2, -1.2 - Effective interest rate: 6.9, 6.9, 5.6, 5.0, 4.6, 4.0 - Constant Primary Balance Scenario: - Real GDP growth: 3.3, 2.7, 3.0, 3.1, 3.2, 3.3 - Inflation: 11.9, 10.6, 9.9, 7.6, 6.8, 6.7 - Primary Balance: 1.3, 1.3, 1.3, 1.3, 1.3, 1.3 - Effective interest rate: 6.9, 6.9, 6.5, 6.9, 7.1, 7.1 - Source attribution for assumptions: IMF staff. ### Composition of public debt and financing needs (figures and projections) - Gross Nominal Public Debt presented as percent of GDP (historical series and projections for 2016–2023). - Public Gross Financing Needs presented as percent of GDP (historical series and projections for 2016–2023). - Debt composition by maturity (2007–2023 series, showing short-term and medium and long-term shares, in percent of GDP). - Debt composition by currency (2007–2023 series, showing local currency-denominated and foreign currency-denominated shares, in percent of GDP). ### Macro-fiscal stress tests (scenarios, shocks, and illustrative assumptions) - Stress test scenarios and illustrative underlying assumptions (selected series shown for 2018–2023): - Primary Balance Shock: - Real GDP growth: 3.3, 2.7, 3.0, 3.1, 3.2, 3.3 - Inflation: 11.9, 10.6, 9.9, 7.6, 6.8, 6.7 - Primary balance: 1.3, 0.2, -0.2, 1.2, 1.4, 1.2 - Effective interest rate: 7.0, 6.9, 6.6, 7.0, 7.2, 7.1 - Real GDP Growth Shock: - Real GDP growth: 3.3, -3.8, -3.5, 3.1, 3.2, 3.3 - Inflation: 11.9, 9.0, 8.3, 7.6, 6.8, 6.7 - Primary balance: 1.3, 1.5, 1.1, 1.2, 1.4, 1.2 - Effective interest rate: 7.0, 6.9, 6.6, 7.0, 7.1, 7.1 - Real Interest Rate Shock: - Real GDP growth: 3.3, 2.7, 3.0, 3.1, 3.2, 3.3 - Inflation: 11.9, 10.6, 9.9, 7.6, 6.8, 6.7 - Primary balance: 1.3, 1.5, 1.1, 1.2, 1.4, 1.2 - Effective interest rate: 7.0, 8.9, 7.2, 8.4, 9.1, 9.6 - Real Exchange Rate Shock: - Real GDP growth: 3.3, 2.7, 3.0, 3.1, 3.2, 3.3 - Inflation: 11.9, 26.8, 9.9, 7.6, 6.8, 6.7 - Primary balance: 1.3, 1.5, 1.1, 1.2, 1.4, 1.2 - Effective interest rate: 7.0, 8.9, 6.1, 6.6, 6.8, 6.8 - Combined Shock: - Real GDP growth: 3.3, -3.8, -3.5, 3.1, 3.2, 3.3 - Inflation: 11.9, 9.0, 8.3, 7.6, 6.8, 6.7 - Primary balance: 1.3, 0.2, -0.2, 1.2, 1.4, 1.2 - Effective interest rate: 7.0, 8.9, 6.3, 7.8, 8.6, 9.3 - Contingent Liability Shock: - Real GDP growth: 3.3, -3.8, -3.5, 3.1, 3.2, 3.3 - Inflation: 11.9, 9.0, 8.3, 7.6, 6.8, 6.7 - Primary balance: 1.3, -2.5, 1.1, 1.2, 1.4, 1.2 - Effective interest rate: 7.0, 7.6, 6.6, 7.0, 7.2, 7.1 - Stress test outputs presented: - Gross Nominal Public Debt (in percent of GDP) over 2018–2023 under baseline and shocks. - Gross Nominal Public Debt (in percent of Revenue) over 2018–2023 under baseline and shocks. - Public Gross Financing Needs (in percent of GDP) over 2018–2023 under baseline and shocks. - Longer historical series shown for Gross Nominal Public Debt (in percent of GDP and percent of Revenue) and Public Gross Financing Needs. ### External debt sustainability: bound tests and shocks - External debt in percent of GDP presented with baseline and a range of shocks: - Historical average and baseline values highlighted: Historical 132, Baseline 74 (labels in figure). - Specific shock outcomes (box averages shown in figure): - Interest rate shock: 77 (baseline 74) - Growth shock: 87 (baseline 74) - Noninterest current account shock: 84 (baseline 74) - Combined shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance): 90 (baseline 74) - Combined shock 2/ (permanent 1/4 sd shocks) shown as 121 (baseline 74) in extended presentation - Real depreciation shock (one-time real depreciation of 30 percent in 2016): Depreciation 30% (baseline 74; scenario/historical box figures included) - Average projections in boxes for baseline and scenarios: baseline: 2.4, 3.1, 6.4 (associated with variables shown alongside historical and scenario figures); scenario: 0.5, 0.4, 7.1; historical: 1.5, -1.8, 6.6 (these values appear in figure boxes adjacent to variable labels). ### Program intentions, prior actions, and policy commitments (Letter of Intent and MEFP highlights) - Request and financing: - Request for a 14-month Stand-By Arrangement (SBA) in the amount of SDR 2.8 billion (139.2 percent of quota) to succeed the EFF arrangement. - Request that IMF Executive Board make available SDR 1 billion (49.7 percent of quota) upon approval. - Program focus areas: - Maintain macroeconomic stability and keep the economy on a path toward sustainable growth. - Continue fiscal consolidation to keep public debt on a steady downward path. - Maintain a flexible exchange rate and a tight monetary stance to bring inflation down and allow further accumulation of international reserves. - Reforms to strengthen tax administration, the financial sector and the energy sector, and improve governance and address corruption. - Prior actions already taken: - Enacted a government budget for 2019 with tax policy changes limiting the budget deficit to 2.3 percent of GDP (paragraph 5b of the attached MEFP). - Household gas tariffs have been raised, and heating tariffs will have been raised at least one week before consideration by the IMF Executive Board of the request; adopted a path for further tariff adjustment next year (paragraph 8a of the attached MEFP). - Enacted legislation to improve the governance of state-owned banks (paragraph 9 of the attached MEFP). - Monetary and exchange rate commitments (MEFP): - Commitment to an institutionally strong and independent National Bank of Ukraine (NBU), maintaining inflation targeting within a flexible exchange rate regime. - Inflation objectives: bring inflation down to below 7 percent by end-2019 and within the NBU’s target range of 5 percent +/-1 percentage points in 2020. - NBU will keep its policy rate firmly positive in real terms on a forward-looking basis and stands ready to raise the policy rate if inflation pressures threaten the disinflation path. - Any easing of foreign exchange restrictions and capital control liberalization will be sequenced and conditions-based, aligned with meeting the program’s reserve targets. *Source: IMF staff; content unit: cr1903 - Annex II. Figure 4. Ukraine: Public DSA—Composition of Public Debt and (from provided IMF document excerpts).* ### 4. We will take further steps to strengthen the effectiveness of monetary policy and ### 4. We will take further steps to strengthen the effectiveness of monetary policy and support the development of financial markets ### Monetary policy and liquidity forecasting - The NBU, in consultation with IMF staff, will adjust its operational framework to make it applicable to varying structural liquidity conditions. - The Ministry of Finance will provide the NBU with enhanced daily and monthly cash flow projections of the Single Treasury Account, as needed for improved liquidity forecasting. ### Fiscal policies — overall framework and targets - Fiscal policy in 2018 and 2019 will be anchored by a medium-term consolidation path aimed at ensuring fiscal sustainability. - General government budget deficit limits: - no more than 2½ percent of GDP in 2018. - 2¼ percent of GDP in 2019. ### 2018 Budget execution and measures - Budget execution is broadly in line with the approved budget, but spending pressures are expected due to higher than envisaged social spending (including pensions and utility subsidies). - Measures to ensure compliance with the 2½ percent of GDP deficit target: - Strictly curtail discretionary spending, notably spending on goods and services. - Defer some capital spending. - Raise additional excise revenues on tobacco products according to the current schedule of increases. - Additional profit transfers from state-owned enterprises. - The Ministry of Finance will not release any resources to spending units that would cause the deficit to exceed the target and will inform all spending units of changes to the payment schedule. ### 2019 Budget specifics - General government budget deficit limited to UAH 90 billion, equivalent to 2¼ percent of GDP. - State budget estimates: - Revenues: UAH 1,026 billion. - Spending: UAH 1,116 billion. - Tax and revenue measures included in the budget: - No major changes in tax policy other than already scheduled increases in excise rates. - Further increase in the excise on tobacco products by 9 percent effective from July 1, 2019. - Increase in the rates of royalty payments for hydrocarbons (oil extraction and gas condensate extraction) by 2 percentage points and for iron ores by 0.8 percentage points. - Increase in the royalty payment for forestry usage by 2 percentage points. - Increase in the environmental tax rate for carbon dioxide (CO2) emissions by stationary sources from UAH 0.41 per ton to UAH 10 per ton. - Reduction of the threshold for VAT exemption for parcels sent through international express shipment from €150 to €100. - Introduction of customs duties of US$1,000 on imported cars with foreign registration. - Introduction of electronic excise stamps. - Compensation and social measures: - Civil service wages kept at their 2018 level; the average wage increase for public sector employees limited to 9.4 percent in 2019. - Minimum monthly wage raised by 12 percent to UAH 4,173. - Pension benefits, including for military and other special pension schemes, will increase on average by 8½ percent in accordance with the pension reform law adopted in 2017. - Health and subsidy reforms: - In 2019 the Ministry of Health will continue to outsource procurement of pharmaceuticals to reputable international organizations. - Targeting of housing and utility subsidies improved, including reducing social norms for calculation of housing and utility subsidies on average by 11 percent. - Specific norm reductions: subsidized gas consumption from 4.5 cubic meters to 4.0 cubic meters per one square meter of heated space and a commensurate reduction in the norm for centralized heating, effective May 1, 2019. - Governance and prior actions: - Parliamentary approval and enactment of this budget is a prior action. - In early 2019, caps on the base for social security contribution assessments will be removed. - If reductions in social norms are insufficient to keep housing and utility subsidies within the budgeted amount, further reductions or changes to the subsidy calculation formula will be implemented. ### Fiscal constraints during the program period - The government will refrain from: - Granting any tax amnesty, introducing new tax exemptions or privileges, and further earmarking of revenues. - Reducing or altering corporate income taxation (CIT) directly or indirectly by replacing the CIT regime. - Introducing new special pensions or privileges. - Introducing (elements of) a funded second pillar to the pension system. - Policy intentions: - Continue working with IMF staff to develop proposals to improve corporate taxation and make the tax system more growth friendly, including by addressing tax gaps, broadening the tax base, and reducing opportunities for tax avoidance, but not enacting legislation during the program period that undermines fiscal sustainability. - Any revenue over-performance will be used to reduce public debt, settle arrears, or increase infrastructure investment. - Remain current on all payment obligations and not accumulate spending arrears. - Review revenue sharing and expenditure assignment responsibilities between central and local government budgets to avoid accumulation of subnational imbalances. ### Public Financial Management reforms - Commitment to implement a full-fledged medium-term budget framework (MTBF) for the 2019 budget year as part of the Public Financial Strategy for 2017–2021. - Planned actions to strengthen the fiscal framework: - Amend the budget code to reflect core elements of the MTBF in line with IMF recommendations, establish the mandate for fiscal risk monitoring and reporting, and strengthen debt management by requiring a credit risk assessment for issuing government guarantees. - Introduce binding budget ceilings for key spending units in the annual budget declaration. - Regularize assessments of public expenditure efficiency through rolling spending reviews. - Seek IMF technical assistance to further strengthen the MTBF by adopting a rule-based fiscal policy framework to avoid procyclical behavior and anchor public debt sustainability. ### Revenue administration reforms - Overall objective: move toward modern and efficient tax and customs administrations. - Structural and timing commitments: - Consolidate the current central and regional units of the State Fiscal Service (SFS) into two separate legal entities: the Tax Service and the Customs Service by end-April 2019 (a structural benchmark). Both will report to the Minister of Finance. - Abolish the many current legal entities comprising the SFS as part of this process. - Transform the tax police into a new financial investigation service under the Ministry of Finance, in line with IMF technical advice, while ensuring assessment of tax liabilities remains solely with the Tax Service. - Management and governance: - Appoint effective and reform-oriented management for both the tax and customs administrations through a transparent recruitment process by end-April 2019. - New managers to develop and implement transformational improvement plans; agency heads to present transformational reform plans to the Minister of Finance within one month following their appointments. - The tax administration plan will be guided by the roadmap suggested by the IMF’s technical assistance report of September 2017. - Oversight and accountability: - Increase the Ministry of Finance’s role in oversight by strengthening supervision and control functions. - Develop detailed reporting requirements for the tax and customs administrations and the methodology for calculating KPIs to enable the Ministry to verify and better assess KPIs, including indicators related to anti-corruption efforts. - By end-December 2018, the Ministry of Finance will begin conducting annual independent surveys of taxpayers to assess their perception of corruption at tax and customs administrations. - Complete an audit of the tax and customs administrations’ IT systems by end-December 2018 to detect weaknesses and risks for data security; implement necessary steps to address any security threats by March 2019. - Process improvements for taxpayers and customs: - Rebalance the audit program away from mandatory audits (such as liquidation audits and audits at the request of other agencies) towards targeted audits based entirely on assessed compliance risks. - Enhance the online taxpayer portal (e-cabinet) to allow for online registration, electronic payment for businesses and updating of taxpayer information. - Improve taxpayers information services. - In customs: establish a one-stop process for clearance, continue efforts to fight fraud and corruption, facilitate information exchange with major trading partners, and build effective oversight of and support to valuation field work of regional offices. ### Energy policies — gas sector reform and tariffs - Gas and heating tariff actions: - Raised the wholesale price for gas supplied to households and district heating companies to UAH 6,236 per thousand cubic meters (excluding transmission and distribution tariffs, supplier’s mark-up and VAT), effective November 1, 2018. - Revised the automatic gas price adjustment mechanism so that the wholesale price for gas supplied to households and for heating will be adjusted automatically effective May 1, 2019 to 80 percent of the base market price as defined in CMU Resolution 867 (as defined also in paragraph 25 of the TMU). - The National Energy and Utilities Regulatory Commission (NEURC) has given final approval to—and published in the official gazette—increases in the heating tariffs, effective January 1, 2019, to fully reflect the increase in the wholesale gas price, for all the heating companies licensed by NEURC together accounting for about 60 percent of the total centralized heating supply (a prior action). - Necessary decisions for raising heating tariffs, effective January 1, 2019, for remaining heating companies—thus together covering at least 95 percent of the total centralized heating supply—are expected to be taken by end-December 2018 (a structural benchmark). - As of January 1, 2020, Naftogaz will sell gas for household and district heating companies’ use at prevailing market prices and the Public Service Orders will be cancelled by May 1, 2020. - The scheme allowing a 12-month installment plan to pay heating bills for households that do not receive subsidies (CMU Resolutions 630 and 357) has been cancelled. - Monetization of subsidies: - Working with the World Bank to gradually monetize the benefits of the HUS program to facilitate retail market competition and incentivize households to reduce gas consumption. - The Ministry of Social Policy has created the public registry of utility subsidy recipients. - The Ministry of Finance and the Ministry of Social Policy will complete verification of recipients of all social benefits and allowances by end-December 2018. - In March 2019, a pilot project of monetization of subsidies will be launched. - Upon a successful trial period, aim to implement monetization of subsidies at end-user level starting from January. *Source: cr1903 - 4. We will take further steps to strengthen the effectiveness of monetary policy and support the development of financial markets* ### 2020. Additionally, starting from July 2019, we will set up an Energy Efficiency Fund to help ### cr1903 - 2020. Additionally, starting from July 2019, we will set up an Energy Efficiency Fund to help ### Energy sector reforms and gas sector measures - Energy Efficiency Fund: - Starting from July 2019, an Energy Efficiency Fund will be set up to help facilitate the decrease in gas consumption in Ukraine. - Unbundling and TSO certification: - Establishment of Mahistralni Gazoprovody Ukrayiny (MGU) as a certifiable Transmission System Operator (TSO) on January 1, 2020 requires transfer of selected activities and staff from Naftogaz (UTG) to MGU. - As a result of the Stockholm arbitration, only non-core transit activities can be transferred from Naftogaz to MGU until the end of 2019; core transit activities can be transferred after January 1, 2020. - Naftogaz will prepare the list of non-core transit activities by December 31, 2018 and these will be transferred to MGU during 2019. - Selection will prioritize activities not yet fully established in UTG, such as metering and market balancing operations, network development, and planning. - MGU is expected to reach its target staffing level of about 4000 and meet all preconditions for certification as a TSO by end-September 2019. - Gas production and exploration: - Procedures for obtaining permits for exploration and development of gas fields will be simplified and accelerated, while ensuring transparency. - Open permit and production sharing agreement tenders will be held at least on a quarterly basis, offering at least 20,000 km2 during 2019. - Investment promotion in existing fields to increase extraction will be pursued, ensuring compliance with environmental standards. ### Financial sector policies — recapitalization, supervision, and NPLs - Bank resolution and recapitalization to date: - Since 2014, 95 banks were intervened and resolved (out of 180 in 2014), including PrivatBank. - As of end-July 2018, all banks met the capital adequacy ratio (CAR) target of 7 percent. - Capitalization requirements and timelines: - By end-March 2019, all banks will have to meet a minimum 7 percent Tier 1 capital and 10 percent CAR. - Transition to Basel III capital structure: banks may include additional Tier 1 (AT1) up to 0.75 percent in Tier 1; Tier 1 will consist of at least 6.25 percent of common equity. - Largest 24 banks will address capital needs arising from the 2018 stress testing under the baseline scenario for 2018 only; these banks will have until end-2019 to address potential capital needs under the adverse scenario. - When banks fail to comply with baseline scenario requirements, the NBU will take appropriate supervisory actions, including resolution, by end-June 2019 (a structural benchmark). - By end-March 2019, NBU will complete its viability assessment of the smallest 56 banks’ business models, conducted by the NBU Committee of Supervision with IMF and World Bank staff as observers. - Related-party exposures and data sharing: - By end-December 2018, NBU will publish amendments to related-party exposures regulation and adopt revisions to capital regulations to subtract loan exposures to related parties above regulatory limits from regulatory capital (an end-December 2018 structural benchmark). - By end-December 2018, NBU will sign a Memorandum of Understanding with the Ministry of Justice and the Securities Market Authority on information sharing to build a data registry for the Related Party Monitoring Office (RPMO). - Deposit Guarantee Fund (DGF) and solvency measures: - A tripartite working group (Ministry of Finance, NBU, DGF) will submit measures to the Financial Stability Council (FSC); FSC to decide by end-March 2019 on steps to bring the DGF back into solvency by end-December 2019. - Parliamentary approval of draft amendments to the DGF law aimed at strengthening its effectiveness as resolution authority will be pursued by end-March 2019. - Supervision, regulation, and governance assessments: - By end-December 2018, NBU will approve a resolution on use of AT1 instruments to meet Tier 1 capital for the current recapitalization process, including minimum triggers and limits. - Collective suitability and qualifications assessments schedule: - 20 largest banks: by end-December 2018. - Next 15 largest banks: by end-September 2019. - Next 15 largest banks: by end-December 2019. - Remaining banks: to be assessed in 2020. - Adoption of Supervisory Review and Evaluation Process (SREP), except for ICAAP and ILAAP: - For the 13 largest banks by end-2018. - For all banks by end-June 2019. - By end-December 2018: complete and introduce new regulation on banks’ registration and licensing (replacing NBU Regulation No. 306); complete draft new regulation on internal control to be introduced as of July 1, 2019. - Asset recovery and DGF asset sales: - Beginning by end-March 2019, DGF will post on its website a list of all borrowers, management, and former bank shareholders of resolved banks yet to honor their debts as ruled by court decisions. - By end-March 2019, DGF will put on sales assets for at least UAH 20 billion. - DGF will continue selling assets through electronic platforms, ensuring ultimate buyers of defaulted related party loans and bank owners are not the same person. - Ministry of Finance will publish regular reporting summarizing progress in asset recovery and litigation efforts related to the four state-owned banks, with the first report by end-March 2019 (a structural benchmark). - NPL resolution framework: - New insolvency law (# 8060) adopted. - By end-June 2019, NBU, with World Bank support, will issue a regulation on NPL work-out aligned with ECB guidance and local structural issues. - FSC-established working group (Ministry of Finance, NBU, DGF) to prepare policy principles to guide restructuring of troubled borrowers of SOBs; FSC to approve these principles by end-December 2018 and communicate them to state-owned banks’ supervisory boards. ### Strengthening state-owned banks’ governance and transparency - Supervisory boards and MOUs: - Following the law on state-owned banks, appoint independent supervisory board members in OschadBank and UkrEximBank by end-March 2019 (after establishing majority independent supervisory boards at PrivatBank and UkrGasBank). - By end-April 2019, Ministry of Finance to sign a Memorandum of Understanding with each state-owned bank defining relationship boundaries to ensure commercial operations and isolation from political interference on operational matters. - Reporting and KPIs: - From end-December 2018 onward, Ministry of Finance financial unit will publish quarterly Key Performance Indicators (KPIs) of state-owned banks and report on progress in strategic planning and NPL restructuring. - Market participation and guarantees: - Steps to pave the way for entry of EBRD into OschadBank and IFC into UkrGasBank. - Aim to unwind the current full state guarantee of OschadBank’s deposits by end-December 2019. ### Legal and regulatory agenda for financial markets - Legislative priorities and timing: - By end-March 2019, expect parliament to adopt the “split” law revisiting supervisory responsibility for financial intermediaries (#2413a; a structural benchmark) and legislation establishing powers, independence and institutional capacity of the National Securities and Stock Market Commission (# 6303). - By end-March 2019, amendments to the Law on Banks and Banking to address legal loopholes identified against the 2015 Basel’s Guidelines for Corporate Governance will be submitted in coordination with IMF and World Bank staff. - Work toward adoption by mid-2019 of laws on derivatives and financial markets, consumer protection and money transfers. ### Governance, anticorruption, and AML/CFT measures - High Anti-Corruption Court (HACC): - Operationalize HACC as established under Law 2018/2447. - Six members of the Public Council of International Experts (PCIE) have been appointed by the High Qualification Commission of Judges (HQCJ). - By end-April 2019, at least thirty-five anti-corruption judges will be appointed to the HACC following nomination by the High Council of Justice (a structural benchmark). - HACC expected to begin operations by end-June 2019 and will receive adequate resources, staffing, IT, security, and transfer of pending corruption cases within its jurisdiction. - NABU audit and powers: - An external audit of NABU will be conducted; terms of reference developed in consultation with IMF staff. - Audit report to be finalized by end-July 2019 and appended to subsequent NABU report (a structural benchmark). - By end-June 2019, parliament will adopt legislation to strengthen NABU powers for investigative techniques (undercover operations, intercepting communications, accessing computer systems, controlled delivery) while maintaining NABU’s exclusive authority to investigate acts of corruption by high-level officials. - E-declaration and asset declaration access: - By end-December 2018: - NAPC will ensure NABU has direct and secure electronic access to full asset declarations of all persons under NABU investigative jurisdictions. - NAPC will revise electronic declaration form to facilitate identification of PEPs, ensuring online search criteria for PEPs and publication of PEP’s year and month of birth. - NAPC will start publishing quarterly statistics to monitor progress in detecting absence or false declarations on a publicly available webpage (in line with TMU paragraph 94 template). - Ministry of Justice will prepare a study on steps needed to transfer responsibility for verification of asset declarations of persons under NABU’s jurisdiction to NABU. - AML/CFT framework strengthening: - By end-March 2019, and in agreement with IMF staff, adopt amendments to the AML legal framework to ensure: - Implementation of a three-tier reporting system (suspicious transaction reports as defined by the FATF, threshold-based reporting of cash transactions and international funds transfers, and mandatory reporting of transactions related to high-risk jurisdictions and PEPs). - Definition of persons related to PEPs is consistent with FATF risk-based approach. - Proportionate and dissuasive sanctions can be implemented by the NBU for AML breaches. - Information on beneficial owners of companies is up-to-date and accurate. - FIU will continue publishing quarterly statistics on information it disseminates to NABU (in line with TMU paragraph 96 template). - NBU will continue to conduct at least four quarterly inspections of banks at higher risk of laundering proceeds of corruption, focused on customer due diligence and PEP requirements. - By end-January 2019, NBU, with IMF technical assistance, will prepare a roadmap to focus AML/CFT supervision on adequacy of financial institutions’ frameworks and discontinue investigative functions. ### Privatization, SOE reform, and fiscal risk oversight - Privatization targets and processes: - New privatization law enacted and CMU adopted triage of all SOEs. - Preparations started for sale of six large SOEs with advisors; by end-December 2018 launch tender for sale of PJSC Centrenergo. - Tenders for Coal Company Krasnolymanska, Indar, and the President Hotel Kiev planned in first half of 2019. - Small companies and assets sale via electronic auctions (ProZorro) targeting at least 500 small companies and assets sold by end-April 2019. - Draft legislation to reduce list of companies banned from privatization to be submitted by end-April 2019. - New law on leasing of state property and work on a bankable concessions law with concession pilots in first half of 2019. - SOE governance and oversight: - Parliament expected to adopt law on SOE governance (draft bill # 6428) by [end-June 2019], clarifying supervisory board powers and legal immunity/indemnity. - Selection of majority-independent supervisory boards for largest SOEs (Ukrenergo, Boryspil, Ukrposhta) expected completed by end-December 2018. - External audits of the largest SOEs by international reputable companies to be conducted by end-December 2019. - Fiscal risks management division in Ministry of Finance to monitor and assess SOE fiscal risks; a comprehensive fiscal risk management system and necessary legislative changes to be adopted by end-July 2019 to better manage public guarantees, PPPs, and local government borrowing. ### Business climate, deregulation, and land market - Deregulation measures: - Reviewed and abolished about 700 obsolete and non-relevant sub-legislative acts over the last two years. - Continued review and streamlining of sub-legislation, reduce time for land allocation, simplify access to geological information, improve subsoil use right auctions, implement risk-based audits and inspections, simplify cash register usage and widen possibilities for cashless transactions, and impose sanctions for violating cash turnover regulations. - Land market: - Preparations for establishing a transparent market for agricultural land continue. - A working group, with World Bank collaboration, drafted a land turnover law to allow sale of land under adequate safeguards and launched a public information campaign. ### Selected quantitative and program targets (as reported) - Banking and financial targets and program accounting: - All banks met CAR target of 7 percent as of end-July 2018. - By end-March 2019, all banks to meet minimum 7 percent Tier 1 capital and 10 percent CAR; Tier 1 to include AT1 up to 0.75 percent and consist of at least 6.25 percent of common equity. - DGF asset sales and recovery: - DGF will put on sales assets for at least UAH 20 billion by end-March 2019. - NBU inspection frequency: - NBU to conduct at least four quarterly inspections of banks at higher AML/CFT risk focused on customer due diligence and PEPs. - MGU staffing target: - Expected target staffing level for MGU is about 4000 by end-September 2019. - Gas tenders area offered: - At least 20,000 km2 to be offered during 2019 in open permit and production sharing agreement tenders. - Program accounting exchange rate listed in the table: - Program accounting exchange rate, hryvnia per U.S. dollar: 28.2794 (reported multiple times in table). - Inflation target (end of period, year-on-year headline inflation) listed in the table: - 6.0; 5.75; 5.5; 5.25; 5.0 (as shown under MPCC in Table 1). - Selected quantitative items from Table 1 (end-of-period, millions of Ukrainian hryvnias, unless otherwise indicated): - Ceiling on the cash deficit of the general government: -86,168 (2017 Act.); targets and projections: 35,000; 50,000; 75,000; 90,071. - Floor on cumulative change in net international reserves (in millions of U.S. dollars): 6,691 (2017); targets/projections: 1,218; 1,229; 1,955; 334; 893. - Ceiling on publicly guaranteed debt: - ; targets: 15,000; 20,000; 20,000; 20,000; 20,000. - Ceiling on cumulative change in net domestic assets of the NBU: 209,845 (2017); targets/projections: 16,865; 6,225; 8,952; 51,795; 64,269. - Net new NBU loans to DGF and operations with government bonds issued for DGF financing or banks recapitalization (net of repayments to NBU): -9,384 (2017); targets/projections: -10,984; -10,984; -10,984; -10,984. - Programmed disbursements of international assistance except IMF (millions of U.S. dollars): - ; targets/projections: 3,297; 4,297; 5,882; 5,882; 6,882. - Government bonds issued for banks recapitalization and DGF financing: - ; targets/projections: 0 (2017); 14,000; 14,000; 14,000; 14,000. - Naftogaz deficit (- implies a surplus): -0 (2017 Act. as reported). - Use of confiscated assets for FX payments or transfer to NBU gross international reserves: - ; targets/projections: 0; 0; 0; 0; 0. - Net issuance of central government domestic FX debt: - ; targets/projections include -30; -3; 12; -356; -419; -479 (as reported). - Notes on program bands and definitions: - Outer consultation band for inflation: +4.75/-3.5 percentage for March 2019 and September 2019. - Inner consultation bands for inflation: +/- 2 percentage points for December 2018, March 2019, June 2019 and September 2019 and +/- 1 percentage point for December 2019. - Definitions and adjustors specified in the Technical Memorandum of Understanding (TMU). *Source: IMF staff summary of the Ukrainian authorities’ policy commitments and program tables as presented in the supplied document.* ### 1. Parliamentary approval and enactment of the 2019 budget and ### 1. Parliamentary approval and enactment of the 2019 budget and ### Prior actions and specified measures - Parliamentary approval and enactment of the 2019 budget and supporting tax legislation consistent with the program target of 2.3 percent of GDP (as specified in ¶5b). — Met - (i) Raising the wholesale price for gas supplied to households and district heating companies to UAH 6,236 per thousand cubic meters (excluding transmission and distribution tariffs, supplier’s mark-up and VAT), effective November 1, 2018; - (ii) revision of the automatic gas price adjustment mechanism to ensure that the wholesale price for gas supplied to households and for heating will be adjusted automatically effective May 1, 2019 to 80 percent of the base market price as defined in CMU Resolution 867; - (iii) approval and publication by the National Energy and Utilities Regulatory Commission (NEURC) of increases in the heating tariffs, effective January 1, 2019, to fully reflect the increase in the wholesale gas price, of all the heating companies licensed by NEURC (as specified in ¶8a). ### Other met prior action - Enactment of the law on State-Owned Bank Corporate Governance (law #2491). — Met ### Proposed Structural Benchmarks (with deadlines) - Raising heating tariffs, effective January 1, 2019, to reflect the higher wholesale gas price, of all remaining heating companies with an output of up to the NEURC-set threshold for volumes of annual production and supply of heating energy—thus together covering at least 95 percent of the total centralized heating supply (as specified in ¶8a). End-December 2018 - Adoption by the NBU of revisions to its capital regulations to subtract loan exposures to related parties above regulatory limits from regulatory capital (as specified in ¶10b). End-December 2018 - Parliamentary approval of the law revisiting the supervisory responsibility for a variety of financial intermediaries (“split” law; #2413a) (as specified in ¶14a). End-March 2019 - Publication of first report summarizing progress in asset recovery and litigation efforts related to the four state-owned banks (as specified in ¶11). End-March 2019 - Consolidate the current central and regional units of the State Fiscal Service (SFS) into two separate legal entities: the Tax Service and the Customs Service by end-April 2019, which will both report to the Minister of Finance (as specified in ¶7a). End-April 2019 - Following nomination by the High Council of Justice, at least thirty-five anti-corruption judges with impeccable reputation and relevant professional skills will be appointed to the HACC in line with law 2018/2447, and with rules of procedures guaranteeing the objectivity and transparency of the process (as specified in ¶15a). End-April 2019 - The NBU to take appropriate supervisory actions against banks that fail to comply with capital requirements (as specified in ¶10a). End-June 2019 - Complete an external audit of the NABU, conducted by a panel of respected experts with international experience selected in accordance with the requirements set out in the NABU Law (#1698-VII) (as specified in ¶15b). End-July 2019 ### Attachment II: Technical Memorandum of Understanding (TMU) — overview - TMU dated December 5, 2018 sets out understandings between the Ukrainian authorities and IMF staff regarding definitions of variables subject to quantitative targets (performance criteria and indicative targets) for the Stand-By Arrangement described in the LOI dated December 5, 2018 and attached MEFP. - Quantitative performance criteria shown in Table 1 of the MEFP. Prior actions and structural benchmarks listed in Table 2 of the MEFP, with corresponding definitions in Section I of the TMU. - Official exchange rates for program evaluations: - Official exchange rate of the Ukrainian hryvnia to the U.S. dollar: 28.2794 set by the NBU as of August 31, 2018. - Reference exchange rates reported by the ECB as of August 31, 2018 used by the NBU: - Swiss Franc: 0.9698 per dollar - Euro: 1.1692 dollars - Pound Sterling: 1.3026 dollars - Australian dollar: 0.7301 U.S. dollars - Canadian dollar: 0.7734 dollars - Chinese Yuan: 0.1464 U.S. dollars - Japanese yen: 111.4608 per dollar - Accounting exchange rate for the SDR: 0.713578 per dollar - Official gold holdings valued at 1,202.35 dollars per fine ounce - These accounting exchange rates are kept fixed over the program period; the program’s accounting exchange rate differs from the actual exchange rate set in the foreign exchange market of Ukraine. - For the purpose of the program, gross domestic product is compiled as per the System of National Accounts 2008 and excludes Crimea and Sevastopol. ### I. Quantitative performance criteria, indicative ceilings, consultation clause, and continuous performance criteria — Net International Reserves (NIR) definition - Floor on Cumulative Change in Net International Reserves (Performance Criterion) - NIR of the NBU defined as 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 — exclusions (inter alia) - Any assets denominated in foreign currencies held at, or which are claims on, domestic institutions (i.e., institutions headquartered domestically, but located either domestically or abroad, or institutions headquartered abroad, but located domestically). Also excluded are 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 that correspond to claims of commercial banks in foreign currency on the NBU and any reserves assets that are (i) encumbered; or (ii) pledged as collateral (in so far as not already included in foreign liabilities, or excluded from reserve assets); or (iii) frozen; and - Any reserve assets that are not readily available for intervention in the foreign exchange market, inter alia, because they are not fully under the control of the NBU or because of lack of quality or lack of liquidity that limits marketability at the book price. ### Reserve-related liabilities (for the purpose of the program) - All short-term liabilities of the NBU vis-à-vis nonresidents denominated in convertible foreign currencies with an 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; - All foreign exchange liabilities of the NBU to resident entities (e.g., claims in foreign exchange of domestic banks, and NBU credits in foreign exchange from domestic market), which are not already excluded from reserve assets, but excluding foreign exchange liabilities to the general government, or related to deposit guarantees. ### Table A. Ukraine: Components of Net International Reserves — selected line items (as presented) - NBU Balance Sheet and Memorandum Accounts - International reserves: - Monetary gold - Foreign exchange in cash - Demand deposits at foreign banks - Short-term time deposits at foreign banks - Long-term deposits at foreign banks - SDR holdings and Reserve Position in the IMF - Securities issued by nonresidents - Accounting codes (as presented): 1100, 1107; 1011, 1017; 1201, 1202, 2746, minus 4746; 1211; 1212; IMF, Finance Department: 1300, 1305, 1307, 1308, minus 1306 *Source: cr1903 - 1. Parliamentary approval and enactment of the 2019 budget and (TMU excerpts).* ### 2. Short-term liabilities to nonresidents (in convertible currencies) ### 2. Short-term liabilities to nonresidents (in convertible currencies) ### Definitions and Components - Correspondent accounts of nonresident banks: 3201 - Short-term deposits of nonresident banks: 3211 - Operations with nonresident customers: 3230, 3232, 3233, 3401, 8805 - Operations with resident banks: 8815 - Use of IMF credit: IMF, Finance Department - Note: Definitions correspond to the system of accounts in existence on December 31, 2014. Authorities will inform staff before introducing any change to the Charts of Accounts of the NBU and the Commercial Banks, and changes in the reporting forms. - Prior to receiving monthly data from the IMF’s Finance Department, components calculated on the basis of preliminary data from the NBU and memorandum accounts. ### Assumptions in Line With the Authorities’ Commitments - NIR/NDA targets assume an average rollover of central government’s domestic foreign exchange securities of at least 70 percent in 2018Q4 and 2019Q1 and 100 percent in 2019Q2-Q4. This refers to the notional value of the commitments, not the market value. - The rollover will be achieved through issuance of new central government foreign exchange securities with a maturity of at least 6 months, without options of early repayment. ### Adjustment Mechanism for NIR Targets - NIR targets adjusted upward (downward) by the full amount of cumulative excess (shortfall) in program disbursements relative to the baseline projection (Table B). Program disbursements defined as external disbursements (including grants and long-term credit to the NBU, excluding project-financing disbursements) from official multilateral creditors (World Bank, European Commission, European Investment Bank, and European Bank for Reconstruction and Development), official bilateral creditors (net), and external bond placements usable for financing central government budget deficit or reserve assets. - NIR targets adjusted upward (downward) by the full amount of the cumulative excess (shortfall) in net issuance (gross issuance minus debt service) of central government’s domestic foreign exchange securities over (under) baseline amounts (see Table 1 of the MEFP). - If the NBU converts any non-reserve currency provided under a central bank swap agreement into a reserve currency through an outright sale, a symmetric adjustor applied: - Adjust upward by amount converted into a reserve currency at time of conversion. - Adjust downward by amount of reserve currency (principal and interest due) when NBU repays non-reserve currency under swap agreement. - If NBU draws any reserve currency provided under a central bank swap agreement with maturity over 1 year, symmetric adjuster applied: - Adjust upward by amount used with maturity over 1 year; adjust downward when repaid. - NIR targets adjusted upward (downward) by full amount of cumulative excess (shortfall) from transfer of unencumbered confiscated foreign exchange assets to international reserves at the NBU or, if not transferred, by use of confiscated assets held at other accounts to make government FX payments, over (under) baseline (see Table 1 of the MEFP). ### Table B — Eurobond Placements and Disbursements from IFIs and Official Sources: Projections for NIR/NDA Adjustment (Cumulative flows from January 1, 2018, millions of U.S. dollars at program exchange rate) - Eurobond and private placement / EU / Others / Total - End-December 2018: 2,695 / 603 / 0 / 3,297 - End-March 2019: 3,695 / 603 / 0 / 4,297 - End-June 2019: 4,695 / 1.187 / 0 / 5,882 - End-September 2019: 4,695 / 1.187 / 0 / 5,882 - End-December 2019: 5,695 / 1.187 / 0 / 6,832 ### Net Domestic Assets (NDA) — Definition and Adjustment Mechanism - NDA of the NBU defined as difference between monetary base and NIR of the NBU (excluding conversion of a non-reserve currency to a reserve currency through an outright sale under a central bank swap agreement). For NDA target computation, NIR valued at program exchange rates and expressed in hryvnia. - Monetary base comprises national currency outside banks and banks' reserves, including cash at banks, and other NBU liabilities included in broad money and denominated in national currency. - Currency in circulation outside banks = Currency—banknotes and coins (NBU accounts of group 300 minus NBU accounts of group 100) minus cash at banks (banks’ accounts of group 100). - Banks’ reserves = cash at banks (banks’ accounts of group 100) plus banks’ demand deposits at the NBU in national currency (NBU liabilities accounts 3200, 3203, 3204 and 3208). - Other NBU liabilities: deposits at the NBU included in broad money and denominated in national currency (NBU liabilities accounts of groups 323, and accounts 3250, 4731, 4732, 4735, 4736, 4738, 4739, and 4750). - Adjustment Mechanisms: - NDA targets adjusted downward (upward) by full amount of cumulative excess (shortfall) in program disbursements relative to baseline (Table B), evaluated at program exchange rates. - NDA targets adjusted upward (downward) by full amount of cumulative excess (shortfall) in total amount of new NBU loans (net of repayments) to the Deposit Guarantee Fund (DGF) and 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), relative to baseline and evaluated at program exchange rates if provided in foreign exchange (Table C). Combined upward adjustment up to cumulative maximum of bank recapitalization and DGF financing bonds issued from January 1, 2018; indicative cumulative limits derived from Table 1 of the MEFP. - NDA targets adjusted downward (upward) by full amount of cumulative excess (shortfall) in net issuance (gross issuance minus debt service) of central government’s domestic foreign exchange debt liabilities over (under) baseline amounts (see Table 1 of the MEFP). - NDA targets adjusted downward (upward) by full amount of cumulative excess (shortfall) from transfer of confiscated foreign exchange assets to international reserves at NBU or, if not transferred to NBU, by use of confiscated assets held at other institutions to make budget FX payments, over (under) baseline (see Table 1 of the MEFP). ### Table C — NBU Net Loans to DGF and Purchases of Government Bonds Issued for DGF Financing or Banks Recapitalization: Projections for the NDA Adjustment (Cumulative flows from January 1, 2018, millions of hryvnia) - Net NBU loans to DGF and purchases of government bonds issued for DGF Financing / NBU purchases of government bonds issued for Bank Recapitalization (net of change in NBU loans) - End-December 2018: -4,884 -4,500 - End-March 2019: -6,484 -4,500 - End-June 2019: -6,484 -4,500 - End-September 2019: -6,484 -4,500 - End-December 2019: -6,484 -4,500 ### Monetary Policy Consultation Clause (MPCC) - Headline inflation defined as year-on-year rate of change of the Consumer Price Index as measured by Ukraine’s State Statistics Service. Inflation mid-point targets and consultation bands specified in Table 1 of the MEFP. - Consultation with IMF Executive Board triggered if observed headline inflation falls outside an outer band of +4.75/-3.5 percentage points around the mid-point targets for end-March 2019 and end-September 2019. Consultation focuses on (i) stance of monetary policy and program track, (ii) reasons for deviations, taking into account compensating factors, and (iii) proposed remedial actions, if necessary. - If observed headline inflation falls outside an inner band of +/- 2 percentage points around mid-point targets for December 2018, March 2019, June 2019 and September 2019, and an inner band of +/- 1 percentage point around the mid-point target for December 2019, authorities will consult with IMF staff on reasons and proposed policy response. ### Ceiling on Cash Deficit of the General Government (Performance Criterion) - General government comprises 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. - Cash deficit measured by net financing flows excluding valuation changes as: - total net treasury bill sales (in hryvnias and foreign currency) as per NBU registry (net treasury bill sales = cumulative total funds realized from sales of treasury bills at primary auction and government securities issued for recapitalization of banks and SOE, less cumulative total redemption of principal on treasury bills), excluding bonds issued to recapitalize Naftogaz and other SOEs; - other net domestic banking system credit to general government (monetary statistics provided by NBU) plus any other financing extended by entities not reflected in NBU monetary statistics; - total receipts from privatization (including change in stock of refundable participation deposits and sale of nonfinancial assets) and proceeds from uncompensated seizures; - difference between disbursements and amortization on any bond issued by general government or NBU to nonresidents for financing deficit; - difference between disbursements of foreign credits to general government (including on-lent project loans) and amortization of foreign credits by general government; - 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 promissory notes or other financial instruments issued by general government. - All flows to/from budget in foreign currency accounted in hryvnias at official exchange rate as of transaction date; financing changes from exchange rate valuation of foreign currency deposits excluded from deficit. - Government deposits exclude VAT accounts used for electronic administration and escrow accounts of taxpayers used for customs clearance. Adjustment Mechanism for Cash Deficit Ceiling - Ceiling subject to 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 D): - If cumulative proceeds from external project financing (in hryvnia evaluated at actual exchange rates) exceed program projections, ceiling adjusted upward by 100 percent of the excess. - If fall short, ceiling adjusted downward by 100 percent of the shortfall. - Ceiling subject to automatic downward (upward) adjustment by 100 percent of amount of budget support grants received in excess (shortfall) of program amounts (Table D). - Ceiling subject to automatic adjustor corresponding to full amount of government bonds issued for bank recapitalization and DGF financing, up to cumulative maximum UAH 15 billion from January 1, 2019. Amount included in targets is zero; indicative cumulative amounts in Table 1 of MEFP. - Ceiling will be adjusted downward by full amount of any increase in stock of budgetary arrears on social payments accrued since start of fiscal year. Budgetary arrears defined as payments not made 30 days after due. Definition excludes unpaid pensions to individuals residing in territories temporarily outside government control. - Ceiling adjusted downward by full amount of any increase in stock of VAT as defined in section F. - Ceiling subject to automatic downward adjustment corresponding to full amount of profits transferred by the NBU in excess of amount accounted for in the 2019 budget, as approved by the Rada on November 22, 2018. - Modalities of monitoring fiscal performance and adjustors can be revisited in agreement with IMF staff to ensure achievement of primary fiscal balance and debt targets. ### Table D — External Financing of General Government Projects and Budget—Adjustment (Cumulative flows from January 1, 2018 and January 1, 2019, in millions of hryvnia) - External project financing (Technical assumption for the adjustor purpose) / Budget support grant (Technical assumption for the adjustor purpose) - End-December 2018: 17,000 / 0 - End-March 2019: 5,000 / 0 - End-June 2019: 10,000 / 0 - End-September 2019: 15,000 / 0 - End-December 2019: 21,161 / 0 - Ceiling adjusted upward by amount Naftogaz’s investment expenditure in excess of UAH 15 billion, but by no more than UAH 25 billion (corresponding to total investment expenditure of UAH 40 billion). ### Ceiling on VAT Refund Arrears (Indicative Target) - Ceiling on stock of VAT refund arrears set to UAH 0 billion. - Stock defined as claims not settled (cash refund, netting out against obligations, payment with a government bond (VAT bond) or official decision to reject claim) within 74 days after VAT refund claim submission to the State Fiscal Service (SFS). ### Ceiling on State Budget Current Primary and Pension Expenditure (Indicative Target) - Defined as current cash expenditure of the general fund of the central government net of interest payments on domestic and external debt and net of transfers to/from the state budget to the pension fund, plus total expenditures of the pension fund, plus payments of any past expenditure arrears. - Ceiling based on monthly treasury report (Kv_1ek) adjusted for Ukravtodor debt repayment and pension fund information. - Ceiling subject to automatic downward adjustor on accumulation of new budgetary arrears on wages and social benefits owed by the state budget (arrears defined as payments not made 30 days after due). ### Ceiling on Non-Accumulation of New External Debt Payments Arrears by the General Government (Continuous Performance Criterion) - External debt payment arrear defined as payment by general government to nonresidents not made within due date (including grace period, if any). Includes direct and guaranteed debt by general government. - Arrears resulting from nonpayment of debt service for which a clearance framework has been agreed or restructuring agreement being sought are excluded. - Performance criterion applies on continuous basis throughout program period. ### Ceiling on Publicly Guaranteed Debt (Performance Criterion) - Ceiling applies to amount of guarantees issued by central (state) government. Official exchange rate applies to all non-UAH denominated debt. - Ceiling excludes guarantees issued by the Ministry of Finance for NBU borrowings from IMF. ### Other Continuous Performance Criteria - During Stand-By Arrangement, Ukraine will not: - impose or intensify restrictions on making payments and transfers for current international transactions; - introduce or modify multiple currency practices; - conclude bilateral payments agreements inconsistent with Article VIII; - impose or intensify import restrictions for balance of payments reasons. ### Official Exchange Rate — Determination - NBU sets official UAH/USD rate daily based on weighted average of exchange rates from day’s interbank market deals, excluding outliers. - To calculate official exchange rate, information on all deals concluded and provided to NBU by trade information systems until 3:30 pm considered regardless of settlement date; includes tod, tom and spot (T+2) deals. - Outliers: transactions where exchange rate deviates from arithmetic mean for all transactions by more than 2 percent and the rate or volume deviates from arithmetic mean for all transactions by more than 2 standard deviations. - Back-up mechanism: if number of transactions by noon is less than or equal to 10 percent of average daily value for previous month, rate calculated as arithmetic mean of all quotations for purchases or sales of $1 million submitted by banks from noon to 1pm. - NBU will aim to make public its official exchange rate by no later than 4 pm of the day preceding the one for which it is set. ### Cost Recovery of Gas and Heating Tariffs - From November 1, 2018 through December 31, 2019 (inclusive), Naftogaz shall sell/supply natural gas at price (without VAT, natural gas transportation and distribution tariffs) calculated as: - P = (Pbase* Kd) where: - P – (wholesale) price of selling/supplying natural gas - Pbase - average arithmetic price of selling/supplying natural gas by Naftogaz to industrial consumers under condition of advance payment effective from July 1 through September 30, 2018 according to Price List (UAH 8981 per 1000 cubic meters). - Kd - discount coefficient (ratio) equaling: - 0.6943 - for calculation of natural gas prices starting from November 1, 2018; - 0.8 – for calculation of natural gas prices starting from May 1, 2019. - Starting from January 1, 2020, Naftogaz shall sell/supply natural gas at prices set between vendor and purchaser, but no higher than average arithmetic gas price at which the Company offers gas to industrial consumers under advance payment condition. ### Reporting Requirements — National Bank of Ukraine (NBU) - NBU to provide monthly sectoral balance sheets for NBU and other depository corporations (banks) according to standardized reporting forms (SRFs), no later than the 25th day of the following month (SRFs for end of reporting year: no later than the 41st day). - NBU to provide daily data on stock of net and gross international reserves, at both actual and program exchange rates; full breakdown of NBU accounts included in net international reserves; monthly data on currency composition of reserve assets and liabilities no later than the 25th of the following month. - NBU to provide daily information on obligatory, voluntary and total foreign exchange sales (including total from nonresidents and sales by clients in interbank market) and approved foreign exchange demand in the interbank market, including Naftogaz foreign exchange purchases; daily information on official foreign exchange interventions and intervention quotations; results of any foreign exchange auctions. - NBU to provide daily information on balances held in analytical accounts 2900 “Accounts payable per transactions for the foreign exchange, banking and precious metals purchase and sale on behalf of banks’ clients.” - NBU to continue to provide on its website daily holdings of treasury bills at primary market prices at current exchange rates, broken down by type of holders, and provide monthly report on treasury bills in format agreed with IMF staff. - NBU to provide information on daily transactions (volumes and yields) on secondary market treasury bills (including over-the-counter transactions and breakout for any NBU transactions). - NBU to provide financial statements (income and expenses and balances on general reserves) for current and, if available, projections for following year, as approved by NBU’s Council; IMF to be notified immediately of any update. - NBU to provide daily and monthly data on NBU financing operations (including swaps or refinancing) of banks and on liquidity mop-up operations (including CDs issuance) in formats and timeliness agreed with IMF staff. - Weekly bank-by-bank information on outstanding amount and weighted-average interest rates of loans from the NBU, reported by type of lending; monthly information on collateral pledged to NBU for loans (by bank and loan type, collateral type, haircut and currency). Weekly and monthly reporting to separately identify banks under temporary administration or liquidation. - NBU to provide monthly report on banking sector indicators no later than 30 days after reporting month in format agreed with IMF staff. NBU will also provide core and expanded FSIs, as defined in the IMF Compilation Guide, for aggregate and individual banks in State Participation Group, Foreign Banking Group and Private Capital Group. *Source: cr1903 - 2. Short-term liabilities to nonresidents (in convertible currencies)* ### 35. On a daily basis and on a monthly basis within three weeks following the end of the month, ### cr1903 - 35. On a daily basis and on a monthly basis within three weeks following the end of the month, ### NBU reporting to IMF — monetary, banking, and FX operations (frequency: daily / monthly / weekly / quarterly / bi-weekly / two weekly) - On a daily basis and on a monthly basis within three weeks following the end of the month, the NBU will continue to provide the IMF with the depository corporations surveys, including any additional information needed for IMF staff to monitor monetary policy and developments in the banking sector, in particular: - net domestic assets, including NBU loans and liabilities with banks and detailed information on loans of the banking sector provided to the general government, with detailed breakdown by indebtedness of the central (state) government and local budgets and the DGF, including in national and foreign currency, by loan and by security; - information on the balances of the funds of the government held at the NBU, in particular, the balances of the Single Treasury Account denominated in the national currency (account 3240 A) and the funds of the Treasury denominated in foreign currency (account 3513 A) and DGF. - The NBU will provide to the IMF, on a monthly basis, projections for external payments falling due in the next 12 months. - The 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, shall be provided on a quarterly basis, within 80 days following the end of the quarter. - The NBU will provide to the IMF, on a quarterly basis, the stock of short- and long-term external debt (including arrears) for both public and private sectors. - The NBU will provide to the IMF, on a daily basis: - 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); - data summarizing the implementation of T+n verification system (with n determined by the latest NBU resolution), namely, the total number and volume of transactions screened and the total number and volume of transactions blocked, with separate information on imports. - The NBU will provide to the IMF weekly data on the volumes of noncash foreign exchange purchases on behalf of banks’ clients and banks broken down by reasons (file 3KX). - The NBU will provide to the IMF, on a daily basis: - 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 on the aggregated basis for the overall banking system (excl. the NBU) broken down by households and legal entities, maturity, as well as by national and foreign currency; - data on loans on the aggregated basis for the overall banking system (excl. the NBU) broken down by households and legal entities as well as by national and foreign currency. - In addition, the NBU will provide, on a daily basis, data on deposits and credits on the aggregated basis for the overall banking system (excl. the NBU) without deposits and credits of banks in liquidation starting from the beginning of 2014 and broken down by households and legal entities, as well as by national and foreign currency. - 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 Private Capital Group. - On a monthly basis, foreign assets will be broken down by type (i.e., cash and deposits, government securities, nongovernment securities, loans, other) and foreign liabilities by type, holder (i.e., banks, other financial institutions, nonfinancial corporate, and individuals) 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, the rollover rates will also be provided. ### Bank-level liquidity, positions, and aggregated sector indicators - The NBU will 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, Private Capital Group and Group 2 separately (all excluding banks in temporary administration) on: - the 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. - The NBU will provide, on a daily basis, bank-by-bank data for State Participation Group, Foreign Banking Group, and Private Capital Group 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 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, the NBU will provide data on deposits and credits excluding those banks in liquidation since 2014. - The NBU will provide to the IMF 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, and will continue to provide daily information on exchange market transactions including the exchange rate. - The NBU will provide to the IMF with information on reserve requirements. ### Interest rates, interbank, and risk metrics (frequency: monthly / weekly / two weekly) - The NBU will provide the IMF, on a monthly basis, bank-by-bank for State Participation Group, Foreign Banking Group and Private Capital Group banks the average interest rate on deposits to customers (by domestic and foreign currency, and legal entities and households, and by maturity—demand, savings, and time accounts). - The NBU will provide, on a weekly basis, the average interest rate on interbank borrowings (by domestic and foreign currency, and by maturity—overnight, 1–7 days, and over one week). - The NBU will 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 Private Capital Group banks—on: - 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. ### Asset quality, provisioning, related-party, and income statement reporting (frequency: monthly / upon request / bi-weekly) - The NBU will provide the IMF, 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 Private Capital Group banks the 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). - The NBU will provide, on a monthly basis, bank-by-bank for the State Participation Group, Foreign Banking Group and Private Capital Group 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). - The NBU will provide to the IMF, 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). - The NBU will report to the IMF, 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 Private Capital Group 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. - Upon request, the NBU will provide to the IMF the two-week projections of bank-by-bank cash flows for the State Participation Group, Foreign Banking Group and Private Group banks. - The NBU will report to the IMF on a bi-weekly basis and bank-by-bank the amount by which the State Participation Group, Foreign Banking Group and Private Capital Group 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.). - The NBU will, once a month, inform the IMF any regulatory and supervisory measures against banks violating the NBU regulations on capital adequacy, liquidity ratio, large exposures, and related or connected lending, as well as about decisions on declaring a bank as problem or insolvent. ### Balance of payments, external debt, and securities reporting - The NBU will continue to provide detailed quarterly balance of payments data in electronic format within 80 days after the end of the quarter. - The NBU will 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. - The NBU will 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, the NBU will provide information on outstanding interest and principal payments. - The NBU will provide the Fund with data relative to the interest income and principal received from January 1, 2017 on its portfolio of government bonds on a monthly basis but no later than 15 days from the end of the reporting period. - Monthly, the NBU will also 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. ### Internal controls, audit, and accounting changes - The NBU will inform IMF staff of any changes to reserve requirements for other depository corporations. - The NBU will communicate (electronically) to the IMF staff any changes in the accounting and valuation principles applicable to the balance sheet data and will notify the staff before introducing any changes to the Charts of Accounts and reporting forms of both the NBU and the commercial banks. - The NBU Internal Audit Department will continue to provide an 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. - The NBU will 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. As required under the Fund's safeguard policy, this will remain in effect for the duration of the arrangement and for as long as credit remains outstanding. ### Deposit Guarantee Fund (DGF) reporting (frequency: monthly) - The DGF will provide, on a monthly basis, data on the total number and volume of household deposits broken down in groups by deposit size, reported bank-by-bank for the largest 35 banks and on aggregate for the remaining banks. - The DGF will report to the IMF on a monthly basis and bank-by-bank for all banks in the banking system the amount of insured deposits and total household deposits. The data will be reported according to an agreed format, by domestic and foreign currency. - The DGF will report to the IMF 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. The data will be reported according to an agreed format, by domestic and foreign currency. - The DGF will report to the IMF on a monthly basis the financial position of the DGF, including information about the cash balance, bond holdings, credit lines, and loans. The data will be reported according to an agreed format. - The DGF will report to the IMF on a monthly basis the financing arrangements of the DGF, including information about contracted financing from MoF. The data will be reported according to an agreed format. - The DGF will report to the IMF 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. The data will be reported according to an agreed format. ### Ministry of Finance and Treasury reporting (frequency: daily / 10-day / monthly / quarterly / annual) - The Ministry of Finance will 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. - The Ministry of Finance will continue to 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. - The Ministry of Finance will continue to provide to the IMF in electronic form the final fiscal accounts at the end of each fiscal year, no later than March of the following year. These reports will provide expenditure data by programs and key spending units, as well as based on standard functional and economic classifications. In addition, quarterly reports will contain standard information on budget expenses to cover called government guarantees. - The Ministry of Finance will report monthly data on the public wage bill (excluding SOEs) in line with the template agreed with the IMF staff. It will also provide monthly reports on the borrowing (disbursements, interests, and amortization) of UrkAvtoDor in line with the format agreed with IMF staff. The Ministry of Finance will report to the IMF on a monthly basis information on municipal borrowing and amortization of debt in format agreed with IMF staff. - The Ministry of Finance will 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. - The Ministry of Finance will 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. - The Ministry of Finance will 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. *Source: cr1903 (PDF chapter/section).* ### 73. The Ministry of Finance will provide to the IMF in electronic form on a monthly basis, no ### cr1903 - 73. The Ministry of Finance will provide to the IMF in electronic form on a monthly basis, no ### Debt reporting and schedules - The Ministry of Finance will 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. - The Ministry of Finance will report the accumulation of any budgetary arrears on external and domestic debt service. - The Ministry of Finance will provide monthly debt (domestic and external) amortization schedules updated on a weekly basis. ### Government guarantees and related exposures - The Ministry of Finance will 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. Reporting items include: - amount of sovereign guarantees extended by executive resolutions and actually effectuated; - total amount of outstanding guarantees and list of their recipients. ### Pension Fund and extra-budgetary funds reporting - The Ministry of Finance will 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 (detailed breakdown of revenues and expenditure by main categories expected); - the Fund for Social Insurance; - Employment Fund (detailed breakdown expected); - any other extra budgetary funds managed at the state level. - Timing: 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. - The Ministry of Finance will 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. ### Recapitalization and state budget planning - 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; - costs associated with the payment of interests, including respective changes as a result of supplementary budgets. - The Ministry of Finance will provide monthly data on their expenditure plans (ROSPIS) for the state budget. ### State Fiscal Service (SFS) reporting: tax arrears, VAT, and appeals - SFS will provide monthly data, no later than 25 days after the end of the month, on tax arrears, inclusive of deferred payments, interest and penalties outstanding, in the specified tabular format (Beginning Stock; Netting out during month; Deferrals during month; Write-offs; Collections of outstanding debt at beginning of month; New Arrears; Ending Stock; Total, Principal, Interest, Penalties). - The SFS will provide on a quarterly basis, no later than two months after the end of the quarter, a listing of all tax exemptions granted specifying beneficiary, exemption provided, duration, and estimated subsequent revenue loss for the current fiscal year. - The SFS will provide monthly information, no later than 25 days after the end of the month, on VAT refunds in the following format: (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; and (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). - The SFS will continue to provide 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. - The SFS will provide quarterly information, no later than 25 days after the end of each quarter, on the number of tax appeals and associated disputed amounts received; number internally resolved and breakdown of outcomes (in favor of controlling body, in favor of taxpayer, partial satisfaction). ### Energy, Naftogaz, and utilities reporting - The Ministry of Regional Development, Construction, and Housing and Municipal Economy will provide 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. - The Ministry of Economic Development and Trade and the NCSREU will provide the methodology underlying tariff calculations for full cost recovery, including heating and gas. - Monthly, no later than the 25th of the following month, the government (based on information by Ministry of Energy and Coal Industry, Ministry of Economic Development and Trade, SFS/SCS, MoF, NCSREU, and Naftogaz) will provide IMF staff with information in electronic form (agreed format “Ukraine: The Financial Position of Gas Sector”) on financial indicators in the gas and heating sectors, including 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. - Monthly, no later than the 25th of the following month, the Ministry of Economic Development and Trade (based on information by Naftogaz) will provide IMF staff with information in electronic form on the cash flows and deficit of Naftogaz Group and separately for each entity, including volumes and prices of gas purchases and sales and main revenue, expenditure and financing items. - Naftogaz will provide updated information on company financial liabilities, with a schedule of loan-by-loan interest and principal payments. - The report will break down total cash outlays for gas imports from Gazprom by month in a separate table mutually agreed with IMF staff. - The National Commission for State Energy and Public Utilities Regulation will provide licensee-level breakdowns of tariff levels for heat energy for households, centralized heating services and centralized hot water supply when changes occur, defining average tariff levels (net of VAT and VAT included). - The NCSREU will inform 10 days in advance of any amendments planned to Commission decisions regulating distribution accounts for natural gas sector companies; it will inform in electronic format on the day following adoption of relevant Resolutions and changes to the Register of norms. - NJSC Naftogaz will report on a weekly basis data on Naftogaz daily market purchases of foreign exchange. - Quarterly, no later than the 25th of the following month, the Ministry of Housing and Municipal Economy will provide IMF staff with information on the quantity of heating energy meters installed at a building level measured also as a ratio to the applicable buildings. ### SOEs and consolidated SOE financials - 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). The report will include data on: - (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 include information on the number of all SOEs (a) making profits, (b) making loss or (c) balanced with aggregated financial results for each group. ### National statistics and GDP revisions - In case of any revisions of gross domestic product, 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. ### Social policy and household support (HUS) reporting - 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) 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) total value of outstanding HUS debt; - (f) number of refusals extended to such applications; - (g) income per capita of participants, both for HUS and privileges; - (h) number of household members; - (i) main reason for refusal for HUS applications (e.g. lack of residency information); - data to be presented overall, by region and for rural/urban areas. ### Anti-corruption and law-enforcement transparency - The National Agency for Prevention of Corruption (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 actions taken regarding asset declarations of high level officials in the specified tabular format (Number of Full Verifications of Asset declarations by the NAPC; Reports sent by the NAPC to NABU; Number of reports for absence of declaration; Number of reports for false declaration) with breakdowns by categories (Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others). - The National Anti-Corruption Bureau (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; - number of persons convicted pursuant to a final court decision; - reporting will be broken down by Penal Code Article and by categories (Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others) and will report fines (total value in UAH) and jail (total months and suspended jail) where applicable. - The Financial Intelligence Unit (FIU) will 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, reporting: - Number of reports disseminated; - Aggregated value of suspected money laundering; - Breakdown by categories (Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others). ### Prior actions and proposed structural benchmarks (selected items and dates as reported) - Prior actions noted as "Met" include: - Parliamentary approval and enactment of the 2019 budget and supporting tax legislation consistent with the program target of 2.3 percent of GDP (as specified in ¶5b). - (i) Raising the wholesale price for gas supplied to households and district heating companies to UAH 6,236 per thousand cubic meters (excluding transmission and distribution tariffs, supplier’s mark-up and VAT), effective November 1, 2018; (ii) revision of the automatic gas price adjustment mechanism to ensure wholesale price adjustments to 80 percent of the base market price effective May 1, 2019; (iii) approval and publication by NEURC of increases in heating tariffs effective January 1, 2019 (as specified in ¶8a). - Enactment of the law on State-Owned Bank Corporate Governance (law #2491). - Proposed structural benchmarks and target completion dates (selected): - Raising heating tariffs effective January 1, 2019 to cover at least 95 percent of total centralized heating supply. Target: End-December 2018. - Adoption by the NBU of revisions to capital regulations to subtract loan exposures to related parties above regulatory limits from regulatory capital. Target: End-December 2018. - Parliamentary approval of the “split” law (#2413a) revisiting supervisory responsibility for various financial intermediaries. Target: End-March 2019. - Publication of first report summarizing progress in asset recovery and litigation efforts related to the four state-owned banks. Target: End-March 2019. - Consolidation of State Fiscal Service into Tax Service and Customs Service by end-April 2019. - Appointment of at least thirty-five anti-corruption judges to the HACC in line with law 2018/2447. Target: End-April 2019. - NBU to take appropriate supervisory actions against banks failing to comply with capital requirements. Target: End-June 2019. - Complete an external audit of the NABU by a panel selected per NABU Law (#1698-VII). Target: End-July 2019. *Source: cr1903 - 73. The Ministry of Finance will provide to the IMF in electronic form on a monthly basis, no (cr1903.pdf)* ### 3.2 percent in the first nine months of 2018 thanks to favorable terms of trade and robust ### 3.2 percent in the first nine months of 2018 thanks to favorable terms of trade and robust ### Growth and external sector - Real GDP growth of 3.2 percent in the first nine months of 2018 driven by: - Favorable terms of trade. - Robust domestic demand in consumption and investment. - Strong growth in real wages, pension benefits and labor migrant remittances supporting consumption. - Improved business expectations and higher investment due to favorable external prices, alignment of the hryvnia exchange rate with fundamentals, and abated fighting intensity in Donbas. - Merchandise exports growing at a solid pace amid favorable commodity prices, robust growth in Ukraine’s main trading partners, and good harvests. - Imports rose faster than exports due to robust domestic demand and rising energy prices; dividend repatriation increased because of strong earnings and gradual FX liberalization by the NBU. - Massive inflows of remittances. - Current account deficit gradually widening to an expected 3.3 percent of GDP in 2018. - Financial inflows adequate to cover the current account deficit and build reserves: - International reserves rose from US$15.5 billion end-2016 to US$17.7 billion as of end-November 2018, sufficient to cover 3 months of future imports. - Return to international capital markets: - Raised US$3 billion in 2017. - Raised US$2 billion in September 2018. ### Inflation and monetary policy - Consumer inflation: - Accelerated to 13.7 percent in 2017. - Slowed to 10 percent year-on-year in November 2018 due to decreased food price pressures and tight monetary policy. - National Bank of Ukraine (NBU) monetary actions in 2018: - Policy rate raised in six steps by 550 basis points to 18 percent in 2018. - NBU projects inflation to decline to 6.3 percent by the end of 2019 (still above the NBU’s medium-term target range of 5 percent +/- 1 percentage point). - Inflation expected to enter the target range in Q1 2020 and reach the medium-term target of 5 percent by the end of 2020. - Institutional and operational developments: - NBU Council approved the medium-term Monetary Policy Strategy in 2018 to define goals, principles, and tools of monetary policy. - Hryvnia remained relatively stable; NBU bought nearly US$1 billion so far in 2018, after net purchases of US$1.2 billion in 2017, while easing administrative restrictions per the EFF roadmap. - NBU committed to continued prudent monetary and exchange rate policies, anchoring inflation expectations and building reserve buffers. - Authorities committed to maintain and protect NBU independence. ### Financial sector policies and banking system - Banking sector resilience and capitalization: - NBU assessed banks' resilience in three stages in 2018: AQR, extrapolation of AQR results, and stress testing (baseline and adverse). - Test results: capital buffers strengthened since end-2016; capital risks estimated as low. - Capital adequacy improved due to compliance with capitalization program/restructuring plans. - Banks’ profits offset capital decreases from transition to IFRS 9 standards. - Liquidity Coverage Ratio (LCR) tests showed fairly high liquidity despite forecasted structural liquidity deficit in 2019. - Banking sector slowly returning to profitability. - Non-performing loans (NPLs): - Level of NPLs remains high. - System provisioning at 87 percent, mitigating financial stability risk. - Initiatives to facilitate NPL resolution include: - Facilitating out-of-court restructuring. - Removal of tax impediments to NPL resolution. - Launching the Credit Register in the NBU. - Introducing a new insolvency law approved by Parliament. - Policy framework for NPL restructuring in state-owned banks under preparation. - NBU, with World Bank technical support, preparing regulation in line with ECB approach to guide banks on reducing NPL portfolios. - State-owned banks (SOBs) and governance: - After Privatbank nationalization, state-owned banks hold more than 54 percent of net assets. - Government approved Principles of State Banking Sector Strategic Reforms (February 2018) aiming to reduce state stake to 24 percent by end-2022. - Ministry of Finance launched regular detailed reporting of key performance indicators (KPIs) of SOBs; first quarterly KPI publication on November 1, 2018. - Authorities plan to publish a separate report every six months on SOBs’ NPL resolution efforts. - Law approved by Parliament on November 9, 2018 envisages professionalization of SOB governing boards, including majority independent Supervisory Board members. - Ministry of Finance, with IFI cooperation, formulating selection criteria for such members. - Financial market development: - Priority to adopt consolidated model of financial sector supervision (“Split” law) to improve supervision of insurance, leasing, factoring, credit unions, pawnshops and other non-banking financial institutions. ### Fiscal policies - Fiscal consolidation and budget outcomes: - Drastic fiscal consolidation achieved; general government deficit reduced below program targets in 2017 and expected similar development in 2018. - Conservative expenditure approach in 2017 and 2018 kept general government finances under control. - 2019 Budget: - Recently approved 2019 Budget based on conservative assumptions; fiscally prudent and compliant with fiscal consolidation program targets, constraining non-priority spending. - Budget process followed required rules and procedures and benefited from full-fledged discussion. - Ministry of Finance advancing public internal financial control system (PIFC) harmonization with international standards and EU best practices. - Pension and social spending reforms: - Pension reform approved October 2017 to streamline Pension Fund expenditures and aim for long-term sustainability and intergenerational equity. - Pension expenditures projected to stabilize at around 10 percent of GDP in the medium term. - Continued reforms to Education and Health sector financing per World Bank recommendations. - State Fiscal Service (SFS) reform: - Institutional reform of SFS a priority to strengthen tax collection and enforcement under Ministry of Finance supervisory functions. - 2019 efforts concentrated on splitting SFS into three authorities: Tax Service, Custom Service and Financial Investigations Service, consolidating each into a single legal entity. - Fund provided technical assistance to Ministry of Finance and SFS in 2017-2018. - Budget process and fiscal frameworks: - On December 6, 2018, Parliament approved Budget Code amendments introducing medium-term budgeting framework, clear fiscal rules and fiscal risks monitoring and management system from 2019. - From 2019 the Medium-term Budget Declaration will set binding expenditure ceilings for all key spending units and link budget funds with clearly defined results. - Government institutionalized spending reviews for expenditure planning and execution analysis to improve public fund efficiency and support fiscal consolidation. ### Energy policies - Gas and heating tariffs: - Wholesale price for gas supplied to households raised from November 2018. - Increase implemented for heating tariffs for largest heating companies accounting for about 60 percent of total heating supply; tariffs for other heating companies (overall covering no less than 95 percent of total heating supply) expected to be adjusted by the end of 2018. - Further increase of 15 percent in wholesale gas prices for households and heating companies scheduled for May 2019. - From January 2020, household gas tariffs will be fully market-determined. - Naftogaz and fiscal impact: - Deficit of Naftogaz entirely eliminated under EFF policies. - Naftogaz became a major source of budget revenue, accounting for 18 percent of budget revenues in January-November 2018. - Budget revenues from Naftogaz for January-November 2018 are 12 percent higher than the entire previous year. - Social support and energy efficiency: - Measures in 2017-2018 to improve targeting and effectiveness of Housing and Utility Subsidies (HUS): strengthened eligibility rules and reviewed social norms. - Plan to implement full monetization at end-user level by January 2020 to allow private gas traders to compete with Naftogaz and create incentives for energy conservation. - Energy independence and production: - Authorities committed to increasing gas production; open permit and production sharing agreement tenders to be held on at least a quarterly basis. ### Improving the business climate and anticorruption progress - Privatization and SOE governance: - New law on privatization of state and municipal property approved February 2018 streamlines procedures. - Large companies to be sold only with competitively selected investment advisor; as of end-November 2018 seven advisor consortiums selected to lead potential privatization of ten large state companies. - Small-scale privatization (assets under UAH 250 million) to be sold through e-auctions using ProZorro.Sale platform; sales started August 2018 and generated 400 transactions worth more than UAH 0.5 billion. - Governance of SOEs to be improved; external audits of largest SOEs to be conducted by reputable international companies. - Anticorruption institutions and progress: - Authorities committed to build on gains in tackling high-level corruption and deliver concrete results leveraging the efficiency of anticorruption institutions established 2015-2018 under the EFF arrangement: National Agency on Corruption Prevention, State Bureau of Investigations (SBI), National Anticorruption Bureau of Ukraine (NABU), Special Anticorruption Prosecutor’s Office (SAPO), and High Anti-Corruption Court (HACC). - Authorities committed to maintain independence and integrity of these institutions to ensure credible investigation, prosecution, and adjudication of high-level corruption cases. - Operationalization of HACC (established June 2018) identified as the next decisive step to ensure corruption cases are adjudicated by judges with specialized skills and high integrity. ### Concluding remarks - Macroeconomic and institutional progress: - Large fiscal and quasi-fiscal deficits have fallen sharply. - Public debt on a downward path. - Flexible exchange rate, declining inflation, substantially increased international reserves. - Financial system becoming more capitalized, liquid and profitable. - Growth has returned. - Key reforms advanced: strengthened independence and governance of the central bank, cleaning up the banking system, pension reforms, raising gas tariffs, and setting up independent institutions to tackle corruption. - Program support and authorities’ commitment: - New requested program will support covering Ukraine’s balance of payments needs by bolstering confidence, unlocking external financing and supporting needed adjustment. - Authorities remain strongly committed to full and timely implementation of policies under the Fund-supported program to achieve long-term goals. - Authorities express gratitude for cooperation and support from the Fund, other IFIs and the international community. *Source: IMF country report content provided in the supplied PDF excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1903.pdf_