## 1ukrea2020001 — Executive Summary

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---

### Context
- Ukraine achieved strong macro-stabilization over the last 5 years under successive Fund programs but lacked sustained and comprehensive structural reform to deliver robust and inclusive growth.
- Political conditions in 2019 were favorable for reforms, with the President’s anti-corruption platform backed by an unprecedented absolute parliamentary majority.
- The COVID-19 pandemic significantly worsened the outlook, creating large uncertainty, a sharp projected economic contraction, a sharp decline in revenues, large emergency spending needs, and an urgent balance of payments need due to de facto capital market closure.

### Policy recommendations (high-level)
- Immediate focus: mitigate economic and social impact of the crisis while safeguarding achievements to date.
- Fiscal policy:
  - Use available fiscal space to absorb the shock and support recovery.
  - Prioritize transparent public spending to meet urgent healthcare needs, protect employment, and enhance social assistance.
- Monetary and exchange rate policy:
  - Continue to provide a stable anchor in the context of the inflation targeting regime.
  - Allow orderly exchange rate adjustment and prevent liquidity stress.
- Financial policy:
  - Balance preserving financial stability with assisting recovery.
- Institutional safeguards:
  - Maintain hard-won improvements to institutional frameworks; preserving these gains is key to minimizing economic costs and laying the ground for stabilization and recovery.

### Request for a new Stand-By Arrangement (SBA)
- Authorities requested a new 18-month SBA to provide balance of payments and budget support and to safeguard achievements, recognizing constraints on advancing deep structural reforms during the crisis.
- This SBA succeeds the 14-month SBA approved in December 2018.
- Proposed access: SDR 3.6 billion (equivalent to about US$5 billion or 179 percent of quota).
  - Financing aim: help cover Ukraine’s balance of payments needs, balance reserve draw down, catalyze support from other official lenders, and help Ukraine regain access to international capital markets when they re-open.
- Program policy focus on four priorities:
  1. Mitigating the economic impact, including supporting households and businesses, while safeguarding medium-term fiscal sustainability.
  2. Ensuring continued central bank independence and a flexible exchange rate, with the central bank’s inflation target as a nominal anchor.
  3. Safeguarding financial stability while recovering costs from past bank resolutions.
  4. Advancing key governance and anti-corruption measures to preserve and deepen recent gains.

### Prior actions (selected)
- Fiscal:
  - Supplementary budget to accommodate the revenue shock and allocate fiscal space to urgent spending.
  - Legislation enacted to eliminate regional tax and customs offices as independent legal entities.
- Financial stability:
  - Legislation enacted to enhance the bank resolution framework.
  - Contingency plan adopted to address potential risks from adverse court rulings related to past bank resolution decisions.
- Governance:
  - Legislation enacted to strengthen the AML framework.
  - Illicit enrichment re-criminalized.
- Energy sector:
  - Cap on heating tariffs eliminated to avoid re-emergence of quasi-fiscal deficits.

### Risks to the program
- Very large risks from:
  - Possible deepening of the COVID-19 crisis and further deterioration in global economic and financial conditions.
  - Domestic policy slippages and reversals, with vested interests potentially pushing back against reforms.
  - Ongoing conflict in eastern Ukraine.
- Historical challenge: sustaining ownership has been difficult for Fund-supported programs in Ukraine; windows for macro-critical structural reforms close quickly once macro-stability is achieved.
- Program design lessons incorporated:
  - Importance of prior actions that break gridlocks and kickstart reforms.
  - Parsimonious structural benchmarks focused on core reforms crucial to maintain macroeconomic stability and preserve past achievements.

### Economic developments and outlook (key findings and projections)
- Pre-COVID indicators and milestones:
  - Growth: resumed in 2016 from the 2014–15 contraction, rising from just over 2 percent in 2016 to 3¼ percent in 2019.
  - Overall fiscal deficit limited to just above 2 percent of GDP in the last three years prior to the crisis.
  - Public debt: reduced from a peak of 85 percent of GDP in 2014 to 50 percent of GDP by end-2019.
  - Inflation: reduced to just over 4 percent by end-2019, within the NBU’s target range of 5±1 percent.
  - Current account: deficit fell to below 3 percent of GDP in 2019 (excluding a one-off US$2.9 billion arbitration award).
  - Reserves: recovered from less than US$6 billion in 2015 to over US$25 billion (86 percent of the ARA metric) by end-2019.
- COVID-19 impact and baseline outlook:
  - Health statistics as of May 27: 21,905 verified cases and 658 deaths (likely underestimated due to limited testing).
  - Containment measures: extensive restrictions; gradual relaxation began in May as new cases leveled.
  - Growth: contracted by 1½ percent y/y in Q1 2020 and projected to contract by 8 percent over 2020 (versus a pre-crisis projection of 3 percent growth).
  - Sectoral impacts: manufacturing, retail trade, and transportation particularly hard hit.
  - Recovery: anticipated to start in late 2020; output expected to remain some 6 percent below its end-2019 level by end-2021.
  - Long-run: growth pace projected to pick up gradually to around 4 percent as reforms progress; output not expected to reach pre-crisis levels until 2023–24.
  - Inflation: expected to rise to about 7½ percent by year-end 2020, then return to the NBU’s 5±1 percent target band over 2021.
  - Exchange rate: depreciated by almost 15 percent since end-2019, recently stabilized.
  - Remittances: expected to decline by up to 25 percent.
  - Reserves: with additional external support, could be maintained at about US$19 billion by end-2020 (3 months of import coverage, 70 percent of the ARA metric) and recover close to pre-crisis levels by end-2021 (3½ months of import coverage, about 80 percent of the ARA metric).

### Fiscal policies: crisis response and medium-term sustainability
- Immediate actions:
  - 2020 supplementary budget allows general government deficit to expand to UAH 300 billion (about 8 percent of GDP).
  - Higher spending of about 3 percent of GDP on health care and social support (including pensions); offset in part by deferring investment spending.
  - Creation of temporary budget program “Fund to Fight Against COVID-19 and its Impact” with transparency and audit safeguards.
- Fiscal package (tentative allocation - Percent of GDP; TOTAL 3.1):
  - COVID Fund & Reserve Fund 1.7
  - Healthcare 1.1
  - Social protection 0.5
  - Transfers to PF (for loss of SSC revenue) 0.5
  - Social funds 0.1
  - Reserve fund 0.1
  - Other healthcare (explicit wages) 0.4
  - Other expenditures 1.0
  - Pension top-ups 0.8
  - Debt servicing 0.1
  - Other 0.1
- Fiscal targets and path:
  - Crisis-related expenditures to be phased out, reducing the budget deficit to about 4-5 percent of GDP in 2021.
  - Further consolidation aims for primary surpluses of about 1–1½ percent of GDP—implying an overall deficit of around 2½ percent of GDP by 2023—and to gradually return public debt to close to 50 percent of GDP by 2025.
- Revenue administration reforms and benchmarks:
  - Legislation and institutional changes to form State Tax Service (STS) and State Customs Service (SCS) as single legal entities.
  - Structural benchmarks: new organizational structures for STS and SCS by end-September 2020; fully operational as single legal entities by end-December 2020.

### Monetary and exchange rate policies
- Maintain central bank independence; preserve flexible inflation targeting and exchange rate flexibility.
- NBU eased policy: reduced policy rate by 550 basis points to 8 percent since end-2019 as inflation declined to 2.1 percent by April 2020 (from end-2019 inflation of 4.1 percent).
- Program instruments:
  - Monetary policy consultation clause; indicative target on NBU’s net domestic assets retained to guard against excessive expansion.
  - Gross reserves floor: targeted to remain above 3 months of import coverage and reach almost 80 percent of the ARA metric by program end.
  - Continue elimination of remaining exchange restrictions and liberalization of CFMs as conditions permit.

### Financial sector policies and stability
- Bank resolution and legal protections:
  - Legislative package enacted to enhance early intervention and resolution; require courts to defer to technical expertise and limit remedies to monetary compensation based on bank market value.
  - FSC approved a contingency plan to address risks from adverse court rulings against past resolution decisions.
- Banking system resilience:
  - Banking sector average CAR of 20 percent and high liquidity.
  - Use of regulatory flexibility to absorb crisis impact while maintaining prudential and accounting requirements.
- Post-crisis sequencing and benchmarks:
  - Asset quality reviews (AQRs) to be conducted post-crisis.
  - Structural benchmark: improvements to banking law to enhance corporate governance and grant NBU powers to calibrate capital and liquidity requirements—adoption by end-November 2020.
  - DGF legal amendments to improve liquidation and asset recovery—end-October 2020 structural benchmark.
  - State-owned banks to develop time-bound NPL reduction strategies—end-June 2020 structural benchmark.
- Deposit Insurance Fund:
  - Time-bound plan to restore DGF solvency by end-2021 to be prepared by end-July 2020 and adopted by FSC by end-August 2020.

### Anti-corruption, rule of law, and governance
- Prior actions:
  - Illicit enrichment re-criminalized; AML amendments enacted consistent with FATF standards.
- Institutional strengthening:
  - Protect independence and resources of NABU, SAPO, HACC.
  - NABU to have full access to asset declaration database and powers to intercept communications; implementing regulations to be issued by end-July 2020; interception capability for landlines by end-September 2020.
  - HACC to be provided permanent offices by end-August 2020 and to publish performance reports.
- Judicial reform benchmarks:
  - Amend HCJ Law to enhance pre-selection and integrity processes—end-October 2020 structural benchmark.
  - Create permanent inspectorate in HCJ by end-November 2020.
- AML/CFT measures and benchmarks:
  - Strengthen beneficial ownership register and reporting regimes; improve public access and sanctioning mechanisms by end-December 2020.

### Energy sector policies
- Objective: avoid re-emergence of quasi-fiscal deficits while protecting vulnerable households.
- Key measures and benchmarks:
  - Household gas tariffs fully market-determined effective January 1, 2020.
  - Cap on household heating tariffs eliminated (prior action); structural benchmark end-August 2020 to simplify supplier switching and align heating tariffs with gas and non-gas cost components.
  - New corporate charter for Naftogaz to be adopted by end-September 2020 to align with OECD corporate governance recommendations.
  - Legislation to align NEURC powers with EU Third Energy Package by end-March 2021.

### Program modalities, access, and financing assurances
- Access: SDR 3.6 billion (about US$5 billion, 179 percent of quota).
- Objective: meet financing needs and rebuild reserve buffers to 3½ months of imports (nearly 80 percent of the ARA metric) by end of program.
- Phasing and disbursement schedule (over 4 reviews):
  - First purchase: SDR 1.5 billion (about US$2.1 billion) available upon approval.
  - Two purchases of SDR 500 million each after end-June and end-September 2020 performance criteria.
  - Two reviews in 2021 disbursing another SDR 1.1 billion during 2021.
- Financing assurances include commitments from:
  - World Bank: new US$0.7–1 billion Development Policy Loan.
  - EU: release of second €0.5 billion tranche under existing MFA and a new €1.2 billion MFA in response to the crisis.
  - Swap line with the central bank of the People’s Republic of China provides additional liquidity buffers.
- Staff recommends completion of the financing assurance review.

### Capacity to repay and external debt dynamics
- Public and publicly-guaranteed debt (percent of GDP):
  - 2019: 50.4
  - 2020 (Proj): 65.4
  - 2021–2025 (Proj): 62.7, 60.5, 57.0, 54.2, 51.8
- External debt (percent of GDP, baseline):
  - 2019: 78.8
  - 2020: 93.0
  - 2025: 60.8
- Gross international reserves (end-period, US$ billions):
  - 2019: 25.3
  - 2020 (Proj): 19.3
  - 2021–2025 (Proj): 23.4, 26.5, 30.0, 32.4, 36.7
- Staff assessment: capacity to repay remains adequate but subject to significant risks; expectation that Ukraine will regain market access supporting projected repurchases averaging about US$2.6 billion per year during 2022–25.

### Key macroeconomic projections (selected)
- Real GDP (percent change):
  - 2018: 3.4
  - 2019: 3.2
  - 2020 (Proj): -8.2
  - 2021–2025 (Proj): 1.1, 3.0, 3.4, 3.8, 4.0
- Consumer prices (period average):
  - 2019: 7.9
  - 2020 (Proj): 4.5
  - 2021–2025 (Proj): 7.2, 5.6, 5.1, 5.0, 5.0
- Unemployment rate (percent):
  - 2019: 8.5
  - 2020 (Proj): 12.6
  - 2021–2025 (Proj): 12.0, 11.5, 10.7, 9.9, 9.4
- Nominal GDP (UAH billions):
  - 2019: 3,975
  - 2020 (Proj): 3,908
  - 2021–2025 (Proj): 4,277; 4,659; 5,088; 5,551; 6,065

### Downside risks and program assumptions
- Downside risks characterized as very large.
- Program baseline built on four key assumptions:
  - (i) a one-quarter period of strict containment measures followed by gradual re-opening and slow recovery;
  - (ii) full and timely implementation of policies under the program;
  - (iii) timely external financing from the official sector, sufficient domestic liquidity, and re-opening of international capital markets in late 2020;
  - (iv) non-intensification of the conflict in eastern Ukraine.
- Mitigants include exchange rate flexibility and buffers built up in recent years; authorities committed to implement measures, in consultation with staff, to close financing gaps.

### Technical Memorandum, reporting, and safeguards
- TMU sets definitions, quantitative targets, adjustment mechanisms, and reporting obligations, including:
  - Program accounting exchange rate: 23.6862 UAH per US$.
  - Official accounting exchange rates for major currencies and SDR accounting rate specified.
  - NIR definition and adjustments tied to disbursements, Eurobond flows, swaps, and confiscated asset transfers.
  - Detailed reporting requirements for NBU, Ministry of Finance, DGF, STS, SCS, Naftogaz, SOEs, NABU, HACC, NAPC, and others with specified frequencies and timeliness.
- Safeguards assessment update (May 2019): NBU maintains a broadly robust safeguards framework; some legal refinements and governance clarifications needed.

### Annex I (External Sector Assessment) — Selected findings
- Staff assessment: Ukraine’s external position at end-2019 broadly in line with fundamentals and desirable policy settings.
- NIIP improved from -38 percent of GDP in 2014 to -13 percent at end-2019.
- Currency invoicing:
  - Exports: 73 percent invoiced in US dollars and 20 percent in euro.
  - Imports: 56 percent invoiced in US dollars and 39 percent in euros.
- Nord Stream 2 completion projected to reduce gas transit fees by about US$1.5 billion per year in the medium term.
- EBA-lite assessment: modest policy and REER gaps; external sustainability approach suggests moderate over-valuation at end-2019 of about 7.5 percent.

### Annex II (DSA) — Key stress-test findings
- Baseline external debt (percent of GDP): 2019: 78.8; 2020: 93.0; 2025: 60.8.
- One-time 30 percent real depreciation shock in 2020 would push external debt-to-GDP ratio up to 97 percent.
- Stress-tests show debt dynamics particularly vulnerable to shocks to growth and the exchange rate; combined macro-fiscal shock has significant adverse impact.

### Annex IV (Ex-Post PRA) — Lessons from past programs
- Program performance (2005–2019) uneven: macro stabilization generally achieved but structural reform progress slow and fragile.
- Lessons for future engagement:
  - Frontload prior actions to capitalize on windows of opportunity.
  - Streamline conditionality to focus on politically difficult but macro-critical institutional reforms.
  - Tailor program horizons to political realities and build broad-based ownership.
  - Strengthen independent institutions to make reforms resilient to backtracking.

### Staff appraisal and conclusion
- Staff supports the authorities’ request for an SBA to provide an anchor for the crisis response and to preserve macroeconomic stability.
- Risks to the program and capacity to repay are “clearly large” but mitigated by “strong steps already taken by the authorities.”
- Steadfast implementation, completion of financing assurances, and monitoring of conditionality and reporting are emphasized as critical for program success.

*Source: International Monetary Fund — Executive Summary (1ukrea2020001)*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Ukraine achieved strong macro-stabilization over the last 5 years under successive Fund programs but lacked sustained and comprehensive structural reform to deliver robust and inclusive growth.
- Political conditions in 2019 were favorable for reforms, with the President’s anti-corruption platform backed by an unprecedented absolute parliamentary majority.
- The COVID-19 pandemic significantly worsened the outlook, refocusing policies on containment and stabilization, creating large uncertainty, a sharp projected economic contraction, a sharp decline in revenues, large emergency spending needs, and an urgent balance of payments need due to de facto capital market closure.

### Policy recommendations
- Immediate focus: mitigate economic and social impact of the crisis while safeguarding achievements to date.
- Fiscal policy:
  - Use available fiscal space to absorb the shock and support recovery.
  - Prioritize transparent public spending to meet urgent healthcare needs, protect employment, and enhance social assistance.
- Monetary and exchange rate policy:
  - Continue to provide a stable anchor in the context of the inflation targeting regime.
  - Allow orderly exchange rate adjustment and prevent liquidity stress.
- Financial policy:
  - Balance preserving financial stability with assisting recovery.
- Institutional safeguards:
  - Maintain hard-won improvements to institutional frameworks; preserving these gains is key to minimizing economic costs and laying the ground for stabilization and recovery.

### Request for a new Stand-By Arrangement (SBA)
- Authorities requested a new 18-month SBA to provide balance of payments and budget support and to safeguard achievements, recognizing constraints on advancing deep structural reforms during the crisis.
- This SBA succeeds the 14-month SBA approved in December 2018.
- Proposed access: SDR 3.6 billion (equivalent to about US$5 billion or 179 percent of quota).
  - The financing aim: help cover Ukraine’s balance of payments needs, balance reserve draw down, catalyze support from other official lenders, and help Ukraine regain access to international capital markets when they re-open.
- Program policy focus on four priorities:
  1. Mitigating the economic impact, including supporting households and businesses, while safeguarding medium-term fiscal sustainability.
  2. Ensuring continued central bank independence and a flexible exchange rate, with the central bank’s inflation target as a nominal anchor.
  3. Safeguarding financial stability while recovering costs from past bank resolutions.
  4. Advancing key governance and anti-corruption measures to preserve and deepen recent gains.

### Prior actions
- Fiscal: supplementary budget to accommodate the revenue shock and allocate fiscal space to urgent spending.
- Financial stability:
  - Legislation enacted to enhance the bank resolution framework.
  - Contingency plan adopted to address potential risks from adverse court rulings related to past bank resolution decisions.
- Governance:
  - Legislation enacted to strengthen the AML framework.
  - Illicit enrichment re-criminalized.
- Fiscal sustainability:
  - Legislation enacted to eliminate regional tax and customs offices as independent legal entities.
- Energy sector:
  - Cap on heating tariffs eliminated to avoid re-emergence of quasi-fiscal deficits.

### Risks to the program
- Very large risks from:
  - Possible deepening of the COVID-19 crisis and further deterioration in global economic and financial conditions.
  - Domestic policy slippages and reversals, with vested interests potentially pushing back against reforms.
  - Ongoing conflict in eastern Ukraine.
- Historical challenge: Ex-Post Assessment and Ex-Post Evaluation reports show sustaining ownership has been difficult for Fund-supported programs in Ukraine; the window for macro-critical structural reforms closes quickly once macro-stability is achieved.
- Program design lessons:
  - Importance of prior actions that break gridlocks and kickstart reforms.
  - Parsimonious structural benchmarks.
  - The proposed SBA incorporates these lessons by prioritizing a focused set of reforms crucial to maintain macroeconomic stability and preserve past achievements.

### Economic developments and outlook
- Pre-COVID gains (selected indicators and milestones):
  - Growth: resumed in 2016 from the 2014–15 contraction, rising from just over 2 percent in 2016 to 3¼ percent in 2019.
  - Fiscal: overall fiscal deficit limited to just above 2 percent of GDP in the last three years prior to the crisis; energy sector quasi-fiscal deficit eliminated.
  - Pensions: following 2017 reforms, pension spending broadly stabilized as a share of GDP.
  - Public debt: reduced from a peak of 85 percent of GDP in 2014 to 50 percent of GDP by end-2019 (aided by the 2015 debt restructuring).
  - Inflation: reduced to just over 4 percent by end-2019, within the NBU’s target range of 5±1 percent.
  - Current account: deficit fell to below 3 percent of GDP in 2019 (excluding a one-off US$2.9 billion arbitration award).
  - Reserves: recovered from less than US$6 billion in 2015 to over US$25 billion (86 percent of the ARA metric) by end-2019.
  - Capital flow measures (CFMs): NBU nearly eliminated all but one restriction on current transactions and lifted or eased CFMs as conditions allowed.
- Remaining vulnerabilities:
  - Large government financing needs ahead and slow implementation of structural fiscal reforms.
  - Fiscal consolidation relied significantly on reductions in the real value of wages and social benefits and a shift from labor to indirect taxation.
  - Banking system improvements remain vulnerable to adverse court rulings on NBU resolution decisions (e.g., PrivatBank recapitalization cost to the budget was some 5 percent of GDP).
- Impact of COVID-19:
  - Health statistics as of May 27: 21,905 verified cases and 658 deaths (likely underestimated due to limited testing).
  - Containment measures: extensive restrictions on movement and economic and social activity; gradual relaxation began in May as new cases leveled.
  - Growth: economy contracted by 1½ percent y/y in Q1 2020 and is projected to contract by 8 percent over 2020 (versus a pre-crisis projection of 3 percent growth).
  - Sectoral impacts: manufacturing, retail trade, and transportation hit particularly hard.
  - Recovery: anticipated to start in late 2020 but tempered by limited fiscal space and weakened balance sheets; output expected to remain some 6 percent below its end-2019 level by end-2021.
  - Long-run: pace of growth projected to pick up gradually to around 4 percent as reforms progress; output not expected to reach pre-crisis levels until 2023–24.
  - Inflation: expected to rise to about 7½ percent by year-end 2020 due to adverse supply shocks and exchange rate depreciation, then return to the NBU’s 5±1 percent target band over 2021.
  - External position:
    - Exchange rate: depreciated by almost 15 percent since end-2019, recently stabilized.
    - Trade: imports and exports expected to fall significantly; exports decline less due to food staples.
    - Remittances: expected to decline by up to 25 percent.
    - Reserves: projected to fall absent additional support; with additional external support, reserves could be maintained at about US$19 billion by end-2020 (3 months of import coverage, 70 percent of the ARA metric).
    - Recovery: reserves expected to recover close to pre-crisis levels by end-2021 (3½ months of import coverage, about 80 percent of the ARA metric).

*International Monetary Fund — Executive Summary (1ukrea2020001)*

### 16.      In the face of the COVID-19 pandemic, the authorities are requesting a new 18-

### 16.      In the face of the COVID-19 pandemic, the authorities are requesting a new 18-

### Overview
- The authorities are requesting a new 18-month SBA to support Ukraine’s crisis-related balance of payments and fiscal financing needs and to provide an anchor for a policy framework focused on addressing the impact of the crisis, ensuring macro-economic and financial stability and preserving and deepening key reforms.
- Fiscal, monetary, and financial policies will be temporarily loosened to absorb the shock, within available policy space—augmented by international support—and to support an economic recovery as containment measures are lifted.
- An Ex-Post Evaluation (EPE) of the previous extended arrangement under the EFF informed the modalities of the proposed program; recommendations regarding the use of prior actions and the need to focus on a core set of reforms have been taken on board.
- The SBA envisages a streamlined set of critical structural reforms, some already delivered as prior actions, focusing on fiscal, financial, and energy sector policies, and on governance.

### Fiscal Policies: Addressing the Crisis, while Ensuring Medium-Term Fiscal Sustainability
- Objective: Direct fiscal policies at addressing the impact of the crisis, while ensuring medium-term fiscal sustainability.

Findings and projections
- The general government deficit widened from 2¼ percent of GDP in the original budget to almost 8 percent of GDP in the approved revised budget (MEFP ¶2c).
- The larger deficit largely reflects automatic stabilizers (estimated to contribute to about 70 percent of the increase), some tax relief to small and medium-sized businesses, and additional social support spending.
- Indirect taxes are expected to hold up relatively well in line with consumption; large expected losses in corporate income taxes from private enterprises will be partly offset by large payments by the state-owned gas company Naftogaz following last year’s settlement paid by Russia’s Gazprom.
- Non-tax revenues will be boosted by a mandated increase in the share of profits that SOEs must transfer to the budget, as well as a large profit transfer by the NBU.
- Higher spending of about 3 percent of GDP on health care and social support (including pensions) are in part offset by deferring spending elsewhere in the budget, particularly investment.
- Public debt will be kept at manageable levels, although up considerably from 50 percent of GDP at end-2019.
- Outturn of the first four months suggests revenues are in line with fiscal targets: revenues from import VAT, customs duties and royalties are lower due to a stronger than anticipated exchange rate and lower import and commodity prices, but shortfalls are offset by higher than expected PIT, SSC and domestic VAT.

Ukraine: Changes to the 2020 Budget (In percent of GDP 1/)
- Revenues - 4.6
- Tax revenues - 5.2
- Direct taxes - 2.3
- Indirect taxes - 2.2
- Other taxes - 0.7
- Non-tax revenues 0.6
- Expenditures 0.8
- Current spending 2.3
- Capital spending - 1.5
- Balance - 5.3

Fiscal Package (Tentative allocation - Percent of GDP)
- COVID Fund & Reserve Fund 1.7
- Healthcare 1.1
- Social protection 0.5
- Transfers to PF (for loss of SSC revenue) 0.5
- Social funds 0.1
- Reserve fund 0.1
- Other healthcare (explicit wages) 0.4
- Other expenditures 1.0
- Pension top-ups 0.8
- Debt servicing 0.1
- Other 0.1
- TOTAL 3.1

Policy commitments and reforms
- Public procurement under expedited COVID-19 procedures will remain fully transparent and include information on beneficial owners; all procurement notices and tender documents will be published and electronically accessible on the eProcurement site; an ex-post procurement audit will be conducted by the State Audit Service of Ukraine in consultation with external/third party auditors at the time of closing the fund but no later than 12 months after its establishment (MEFP¶2e).
- As recovery sets in, fiscal policy will be tightened to place public debt back on a downward path: crisis-related expenditures can be phased out, reducing the budget deficit to about 4-5 percent of GDP in 2021. Further consolidation aims for primary surpluses of about 1–1½ percent of GDP—implying an overall deficit of around 2½ percent of GDP by 2023—and to gradually return public debt to close to 50 percent of GDP by 2025.
- Authorities will develop proposals in 2020, with Fund staff assistance, to broaden the tax base (MEFP¶2d); legislation regarding base erosion and profit shifting (BEPS) has already been adopted.
- A renewed effort to strengthen revenue administration: establishment of the State Tax Service (STS) and the State Customs Service (SCS), legislation enabling elimination of regional offices as separate legal entities (a prior action), appointment of new management, creation of reform offices and steering committees, and preparation of detailed time-bound reform plans. Structural benchmarks:
  - Develop new organizational structure for STS and SCS as single legal entities (end-September 2020 structural benchmark).
  - Fully operational as single legal entities by end-2020 (end-December 2020 structural benchmark).
- Public financial management: 2020 supplementary budget suspended several MTBF provisions due to uncertainty, but commitment to improve MTBF and fiscal risk assessments, conduct spending reviews of pension fund and other social funds, operationalize a new debt management office in the Ministry of Finance, and expand analysis and reporting of contingent liabilities including those associated with SOEs (MEFP ¶7).
- Targeting of social assistance: consolidate social programs into the existing guaranteed minimum income (GMI) program with World Bank assistance, gradually increase minimum subsistence level, and link databases to enhance beneficiary verification (MEFP ¶4).

### Monetary and Exchange Rate Policies: Maintaining Stability and Providing a Liquidity Backstop
- Authorities remain committed to safeguarding central bank independence (MEFP ¶9); past reforms strengthened NBU autonomy and governance.

Monetary policy stance
- Monetary policy will remain focused on price stability and exchange rate flexibility will be maintained.
- The NBU has eased monetary policy: reduced policy rate by 550 basis points to 8 percent since end-2019 as inflation declined to 2.1 percent by April 2020 (from end-2019 inflation of 4.1 percent).
- The NBU aims to keep inflation within the target band and will be ready to adjust policy if inflation pressures emerge that could risk achieving its inflation target over the policy horizon.
- Program includes a monetary policy consultation clause to align conditionality with the NBU’s inflation-targeting framework (MEFP ¶10); an indicative target on the NBU’s net domestic assets is retained to safeguard against excessive expansion of its balance sheet.

Exchange rate and reserves
- The NBU will continue to allow exchange rate flexibility and aim to maintain—and gradually rebuild—adequate reserve buffers (MEFP ¶10).
- Gross reserves are targeted to remain above 3 months of import coverage, with a corresponding floor set under the level of reserves, and to reach almost 80 percent of the ARA metric by the end of the program period.
- Elimination of remaining exchange restrictions and liberalization of CFMs and the capital account will proceed as conditions permit, in line with the roadmap previously agreed with the Fund.

Liquidity support
- The NBU will ensure sufficient financial system liquidity; the banking system is currently highly liquid with average CAR of 20 percent.
- NBU actions include providing greater liquidity management flexibility, extending maturities of liquidity provision operations, and expanding eligible collateral (MEFP ¶10).
- NBU has postponed introduction of additional capital buffers and the annual stress-testing exercise, suspended on-site inspections, and encouraged voluntary and prudent loan restructuring while not relaxing prudential and accounting requirements.

### Financial Sector Policies: Ensure Financial Stability and Limit Fiscal Costs
- Authorities have improved resolution and crisis management arrangements (MEFP ¶22–23): legislative package enacted (a prior action) enhancing early intervention and resolution, ensuring courts defer to technical expertise of NBU, DGF, and Ministry of Finance, preventing reversal of resolution measures, and providing redress via monetary compensation based on bank market value, verified by an internationally reputable independent auditor.
- Financial Stability Council (FSC) approved a robust contingency plan to address potential risks from court rulings against past resolution decisions (a prior action).

Key measures and benchmarks
- NBU utilizing regulatory flexibility to enable banks to absorb crisis impact (MEFP ¶14):
  - Banking sector average CAR of 20 percent and liquidity position expected to absorb increase in NPLs to some extent.
  - Use of flexibility in triggering corrective measures, without relaxing prudential and accounting requirements.
- Post-crisis resumption of broader efforts (MEFP ¶15):
  - Asset quality reviews (AQRs) to assess banks’ asset quality and capital shortfalls.
  - Undercapitalized banks required to develop time-bound plans to restore capital adequacy; supervisory measures for non-compliance.
  - Improvements to banking law to enhance corporate governance and grant NBU powers to calibrate capital and liquidity requirements based on bank risk profiles; adoption is an end-November 2020 structural benchmark (MEFP ¶21).
  - NBU to introduce capital conservation buffers in 2021 based on amendments.
- Asset recovery and accountability (MEFP ¶19):
  - Enhanced coordination between Prosecutor General’s Office (PGO), NBU and DGF; criminal investigations launched into several failed banks by PGO and NABU.
  - Legislative amendments to improve liquidation framework and DGF legal capacity to claim damages from bank owners and related parties to be adopted (end-October 2020 structural benchmark).
  - Former owners of failed banks to be declared unsuitable to be owners or senior managers of non-bank financial institutions.
  - Transparent and regular reporting on progress in asset recoveries.
- Governance in state-owned banks (MEFP ¶16-18):
  - Establishment of majority-independent supervisory boards; Memoranda of Understanding (MoU) to delineate boundaries between banks and finance ministry.
  - Establish oversight unit for shareholding management in finance ministry.
  - State-owned banks to develop time-bound NPL reduction strategies addressing legacy NPLs, including resolution options to realize final losses; plans to be endorsed by the shareholder (end-June 2020 structural benchmark).

### Anti-Corruption Policies and Rule of Law: Completing Setting Up Anti-Corruption Institutions and Strengthening Judicial Independence
- Governance reforms aim for concrete results in tackling corruption, building on progress in anti-corruption reforms.

Measures and benchmarks
- Ensure independence, adequate resources, and effectiveness of new anti-corruption institutions (e.g., NABU, SAPO and the HACC) (MEFP ¶25).
  - Enactment of legislation to recriminalize illicit enrichment (a prior action) and amendments to anti-money laundering legislation (a prior action).
  - Strengthen NABU’s investigative effectiveness through full access to the asset declaration database and resources to implement powers to independently intercept communications (under a 2019 law).
  - Strengthen beneficial ownership register via enhanced verification and effective sanctioning.
- Strengthen selection and disciplinary processes for the judiciary consistent with European judicial standards (MEFP ¶26):
  - Ensure judicial governance officials are of high competence, trustworthiness and integrity.
  - Strengthen pre-selection process for High Council of Justice (HCJ) candidates to ensure members have impeccable reputation and integrity (end-October 2020 structural benchmark).

### Energy Sector Policies: Avoiding the Re-Emergence of Quasi-Fiscal Deficits
- The energy sector’s quasi-fiscal deficit has been eliminated and energy security improved, but further reforms are needed to put the sector on a solid commercial footing and prevent destabilizing losses.

Findings and measures
- Household gas tariffs are now set consistent with import parity following tariff increases and a drop in international gas prices.
- Transit pipeline was unbundled from Naftogaz as an independent, commercially-oriented gas transmission operator effective January 1, 2020, helping secure a new 5-year transit agreement with Gazprom.
- Revenues from gas transit are projected to fall once the Nord Stream 2 pipeline is completed, reducing Naftogaz’s ability to invest in maintaining or increasing production.
- Recent changes to Naftogaz’s charter reversed corporate governance reforms.
- Authorities will adopt a new corporate charter for Naftogaz (a structural benchmark, by end-September 2020) to bring it in line with the OECD’s corporate governance recommendations (MEFP ¶29).

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

### 25.       Energy policy aims to avoid the re-emergence of quasi-fiscal deficits, while

### 1ukrea2020001 - 25.       Energy policy aims to avoid the re-emergence of quasi-fiscal deficits, while

### Energy policy and household tariffs
- Energy policy aims to avoid the re-emergence of quasi-fiscal deficits while continuing to provide utility subsidies to low-income and vulnerable households to help defray the impact of gas and heating tariffs on their incomes.
- Household gas tariffs became fully market-determined effective January 1, 2020 (MEFP ¶27a).
- The authorities eliminated the cap on household heating tariffs (a prior action) to allow pass-through of gas prices to heating tariffs (MEFP ¶27b).
- The obligation for Naftogaz to supply gas for household use will cease this summer, with a supplier of last resort being set-up as a temporary backstop.
- Structural benchmark (end-August 2020, MEFP ¶27b): as of the next heating season,
  - households will be able to switch supplier more easily, and
  - heating tariffs will be revised to fully reflect changes in the gas and non-gas cost components of heat supply companies.
- Legislation to align the powers and responsibilities of the energy regulator (NEURC) with the EU Third Energy Package and Energy Community Treaty will be adopted by end-March 2021 (MEFP ¶27d).

### Program modalities and access
- Access proposed at SDR 3.6 billion (about US$5 billion, 179 percent of quota).
- Objective: help Ukraine meet financing needs and rebuild reserve buffers to 3½ months of imports (nearly 80 percent of the ARA metric) by the end of the program.
- Access is within but close to normal cumulative access limits, leaving no room for augmentation within the normal-access framework should downside risks materialize.
- Authorities intend to use all Fund support for budget support to help cover fiscal financing needs driven largely by external debt service obligations.
- Authorities committed to a memorandum of understanding between the NBU and the MoF clarifying responsibilities for timely servicing of financial obligations to the IMF.
- Public debt assessed to be sustainable, although risks remain high (see attached DSA).

### Financing assurances and external support
- Commitments for financial support include:
  - World Bank: new US$0.7–1 billion Development Policy Loan.
  - EU: release of the second €0.5 billion tranche under existing MFA and a new €1.2 billion MFA operation in response to the crisis.
- Baseline assumes only limited market access in the second half of the year, with a smaller placement than the US$1.4 billion issued in January.
- A swap line with the central bank of the People’s Republic of China provides additional liquidity buffers.
- Authorities committed to continue efforts to resolve outstanding official arrears consistent with the policy on lending into arrears; a lawsuit filed by Russia in the UK courts is ongoing.
- Staff assessment: Ukrainian authorities have continued to pursue good-faith efforts, offering to meet with Russian authorities to reach an out-of-court agreement on restructuring the US$3 billion bond; terms offered have been proportionate to other official bilateral creditors.

### Capacity to repay and external debt service
- Ukraine’s capacity to repay the Fund assessed to remain adequate but subject to significant risks.
- External debt service obligations are sizable in the years to come, including to the Fund, but expected to be manageable if fiscal and monetary policies remain on track.
- Expectation: Ukraine will regain market access following stabilization of global conditions, supporting projected repurchases averaging about US$2.6 billion per year during 2022–25.

### Phasing and disbursement schedule
- Phasing spread over 4 reviews:
  - First purchase: SDR 1.5 billion (about US$2.1 billion) available upon approval.
  - Two purchases of SDR 500 million each after end-June and end-September 2020 performance criteria — total SDR 2.5 billion (about US$3.5 billion) in purchases in 2020.
  - Two reviews in 2021, based on end-December 2020 and end-June 2021 performance criteria, disbursing another SDR 1.1 billion (about US$1.5 billion) during 2021.
- Rationale: schedule fits timing of balance of payments needs and external environment; two reviews in remainder of 2020 mitigate risk of policy slippages.

### Safeguards, audits, and exchange practices
- Safeguards assessment update completed in May 2019: NBU maintains a broadly robust safeguards framework.
  - External and internal audit arrangements and financial reporting practices well established.
  - Legal framework needs some further refinements; scope to improve governance arrangements from the 2015 legal reform by operationalizing clear delineation of roles among NBU decision-making bodies and clarifying NBU’s status as a secured creditor.
  - Staff to monitor outstanding SA recommendations and assist authorities; a fiscal safeguards review will need to be conducted.
- Ukraine maintains one exchange restriction and two Multiple Currency Practices (MCPs), with a roadmap to phase them out:
  - Exchange restriction: limits on availability of foreign exchange for certain non-trade current international transactions (limit on corporates’ investments abroad may capture some current transactions).
  - MCPs:
    - use of multiple price foreign exchange auctions conducted by the NBU without mechanism to prevent a spread deviation of more than 2 percent between auction and market rates;
    - use of the official exchange rate for exchange transactions with the government without mechanism to prevent a spread deviation of more than 2 percent between official and market exchange rates.
  - These were approved under Article VIII, Section 2(a) and 3 in December 2018 for a period of one year.

### Downside risks and program assumptions
- Downside risks characterized as very large (see Risk Assessment Matrix, Annex III).
- Program baseline built on four key assumptions:
  - (i) a one-quarter period of strict containment measures followed by a gradual re-opening and slow recovery;
  - (ii) the full and timely implementation of policies under the program;
  - (iii) timely external financing from the official sector, sufficient domestic liquidity, and a re-opening of international capital markets in late 2020; and
  - (iv) the non-intensification of the conflict in the eastern part of Ukraine.
- Uncertainties highlighted:
  - severity and length of the global downturn and cyclical/structural impacts of containment measures,
  - uncertainty about direction of domestic economic policies and potential opposition from vested interests,
  - risks that pending judiciary reform may leave courts perceived as subject to undue influence, and
  - risk of populism displacing sound policies in the stressed environment.
- Mitigants: flexible exchange rate and buffers built up in recent years; authorities committed to implementing measures, in consultation with staff, to close financing gaps.

### Staff appraisal and reforms
- Ukraine reduced external and internal imbalances in recent years; external position at end-2019 broadly in line with fundamentals and desirable policy settings.
- Successes include macro-structural reforms: strengthening independence and governance of the central bank, adopting pension reforms, eliminating the quasi-fiscal energy deficit — which reduced fiscal deficits, brought inflation within target range, and rebuilt international reserves.
- COVID-19 pandemic refocused policy priorities and precluded implementation of a bold reform agenda (e.g., comprehensive tax reform and near-term divestment of state interests).
- Staff view: a critical set of macro-significant reforms and sound policies merit support under a new Fund arrangement.
  - Authorities’ policy response to the shock assessed as appropriate.
  - Credibility of the NBU and flexible IT regime helped anchor inflation expectations, allowing NBU to lower rates and mitigate liquidity stress; FX intervention limited to smoothing disorderly market conditions.
  - Prior actions have mitigated vulnerabilities in the financial sector, anti-corruption framework, tax administration, and energy policy.
  - Program includes a small set of feasible structural benchmarks building on prior actions; MEFP commitments aim to protect resources and independence of anti-corruption institutions and safeguard corporate governance progress.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ukrea2020001.pdf*

### 36.      Staff supports the authorities’ request for a Stand-By Arrangement. The new

### 1ukrea2020001 - 36.      Staff supports the authorities’ request for a Stand-By Arrangement. The new

### IMFs support for Stand-By Arrangement and program design
- Staff supports the authorities’ request for a Stand-By Arrangement to provide an anchor for addressing the crisis and ensuring macroeconomic stability.
- The risks to the new program and to Ukraine’s capacity to repay are described as “clearly large,” but mitigated by “strong steps already taken by the authorities.”
- Steadfast implementation is identified as critical for program success.
- Firm financing assurances are in place; the program is expected to catalyze additional official financial assistance—excluding project financing and swaps—equivalent to US$3 billion.
- Staff recommends completion of the financing assurance review.
- Staff supports the authorities’ request for approval, for a period of 12 months, of the retention of the exchange restrictions and multiple currency practices on the grounds that these are non-discriminatory, imposed for balance of payments reasons, and are temporary.

### Key fiscal and financing arrangements
- IMF availability schedule for the Stand-By Arrangement (Table 7):
  - June 2020: 1,500 (Millions of SDR) — 74.6 percent of Quota — Board approval of the Stand-by arrangement
  - September 1, 2020: 500 (Millions of SDR) — 24.9 percent of Quota — First review and continuous and end-June 2020 performance criteria
  - December 1, 2020: 500 (Millions of SDR) — 24.9 percent of Quota — Second review and continuous and end-September 2020 performance criteria
  - May 15, 2021: 400 (Millions of SDR) — 19.9 percent of Quota — Third review and continuous and end-December 2020 performance criteria
  - October 15, 2021: 700 (Millions of SDR) — 34.8 percent of Quota — Fourth review and continuous and end-June 2021 performance criteria
  - Total: 3,600 (Millions of SDR) — 178.9 percent of Quota
- Memorandum item: Quota = 2,011.8 (Millions of SDR).

### Fiscal outlook and near-term impacts (selected figures from public finance tables)
- General government overall balance (percent of GDP):
  - 2019: -2.0
  - 2020 (Pre-COVID estimate shown in tables and projections): -7.7
  - 2020 (Post outbreak projection): -5.3
  - Projected 2021–2025: -3.5, -2.4, -2.4, -2.4
- Public and publicly-guaranteed debt (percent of GDP):
  - 2018: 60.6
  - 2019: 50.4
  - 2020 (Proj): 65.4
  - 2021–2025 (Proj): 62.7, 60.5, 57.0, 54.2, 51.8
- Gross financing needs (in % of GDP): 8.7 (2018), 11.7 (2019), 10.5 (2020), 15.7 (2021), 14.5 (2022), 9.4 (2023), 9.4 (2024), 11.0 (2025), 9.4 (2025 repeated in table).

### Macroeconomic projections and selected real sector indicators (from Table 1)
- Real GDP (percent change):
  - 2018: 3.4
  - 2019: 3.2
  - 2020 (Proj): -8.2
  - 2021–2025 (Proj): 1.1, 3.0, 3.4, 3.8, 4.0
- Consumer prices (period average):
  - 2018: 10.9
  - 2019: 7.9
  - 2020 (Proj): 4.5
  - 2021–2025 (Proj): 7.2, 5.6, 5.1, 5.0, 5.0
- Unemployment rate (ILO definition; percent):
  - 2018: 9.0
  - 2019: 8.5
  - 2020 (Proj): 12.6
  - 2021–2025 (Proj): 12.0, 11.5, 10.7, 9.9, 9.4
- Nominal GDP (billions of Ukrainian hryvnias):
  - 2018: 3,561
  - 2019: 3,975
  - 2020 (Proj): 3,908
  - 2021–2025 (Proj): 4,277; 4,659; 5,088; 5,551; 6,065
- Output gap (percent of potential GDP):
  - 2019: -0.5
  - 2020 (Proj): -7.3
  - 2021–2025 (Proj): -5.1, -2.0, -0.8, -0.4, 0.0

### External sector and reserves (selected figures)
- Gross international reserves (end of period, billions of U.S. dollars; Table 1 and Table 3):
  - 2018: 20.8
  - 2019: 25.3
  - 2020 (Proj): 19.3
  - 2021–2025 (Proj): 23.4, 26.5, 30.0, 32.4, 36.7
- Current account balance (percent of GDP):
  - 2018: -3.3 (memorandum; Table 1)
  - 2019: -0.7
  - 2020 (Proj): -1.7 (Table 1) / -2.2 (Table 3 main series)
  - 2021–2025 (Proj, Table 1): -2.0, -1.9, -1.8, -1.8, -2.0
- Total external debt (percent of GDP, Table 3 memorandum):
  - 2018: 87.8
  - 2019: 78.8
  - 2020 (Proj): 93.0
  - 2021–2025 (Proj): 84.6, 77.9, 72.2, 65.7, 60.8

### Financial sector soundness and liquidity positions (selected findings)
- Banking system:
  - Described as well capitalized and highly liquid.
  - High stock of NPLs (mostly legacy loans at state-owned banks) are “almost fully provisioned.”
  - Banks hold large stocks of NBU CDs and have limited reliance on NBU loans.
- Bank profitability and capital (selected indicators from Figure 5 and Table 6):
  - Regulatory capital ratios and profitability trends indicate resilience; some banks (notably Privat) are highly profitable “now” after elevated provisioning years.
  - Liquidity indicators show liquid assets (maturity up to 1 year) to total assets and customer deposits to non-interbank loans remain strong.
- Monetary measures:
  - NBU has cut the policy rate by 300 basis points since the outbreak of the crisis (figure note).
  - Deposits continued to grow, including recent growth in foreign currency deposits.
  - Bank credit is significantly lower than during past crises, implying less vulnerability from macro-financial linkages.

### Policy recommendations and conditionalities
- Steadfast implementation of the program’s measures is emphasized as critical.
- Completion of the financing assurance review is recommended by staff.
- Retention of exchange restrictions and multiple currency practices is provisionally supported for 12 months under the conditions stated (non-discriminatory, balance of payments reasons, temporary).
- The program is expected to catalyze additional official financing equivalent to US$3 billion (excluding project financing and swaps).

*Source: IMF staff report material in content unit 1ukrea2020001 (excerpts provided).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall staff assessment
- Staff’s overall assessment: Ukraine’s external position at end-2019 is broadly in line with fundamentals and desirable policy settings.
- Since transition to a floating exchange rate regime, the hryvnia depreciated significantly vis-à-vis the US dollar and other currencies, restoring external competitiveness.
- Over the last two years (pre-COVID), Ukraine experienced real appreciation pressures from a positive inflation differential relative to trading partners, nominal appreciation, and domestic wage increases.
- Since the outbreak of the COVID-19 crisis, the hryvnia has depreciated by some 15 percent.
- Short-run risks: broad risk aversion in capital markets, ongoing tensions with Russia, and domestic policy uncertainty.
- Medium-run potential: implementation of structural reforms could provide upside.

### Structure of trade and trade relationships
- Exports:
  - Concentrated on industrial supplies (mostly iron-related) and food (corn, wheat, soybeans).
  - Remaining items account for around one quarter of export revenues.
  - Export destinations have become more diversified; Russia remains the main single destination but is less important than the sum of all EU countries (Poland and Italy take the biggest shares).
- Imports:
  - Concentration somewhat higher: about 15 percent of imports from Russia, Germany 11 percent, Poland 8 percent.
- Invoicing currency composition:
  - Exports: 73 percent invoiced in US dollars and 20 percent in euro.
  - Imports: 56 percent invoiced in US dollars and 39 percent in euros.

### Exchange rate pass-through, exports, and imports
- Ukraine’s current account mostly responds to exchange rate movements via changes in imports.
- Because exports and imports are predominantly invoiced in foreign currency, appreciation/depreciation of the hryvnia does not change export partner prices; export volumes are relatively insensitive to exchange rate changes.
- Importers face higher import bills when the hryvnia depreciates, making import volumes more sensitive to exchange rate movements (and affecting export-sector profitability).

### Effects of trade tensions with Russia and others
- Russia actions (April 18, 2019):
  - Intensified end-2018 ban on Ukrainian imports (mostly metallurgical products).
  - Introduced “special permissions” from Russia’s Economy Ministry to export coal and coke, gasoline/diesel fuel, and LNG to Ukraine (impact largely temporary).
- Sea of Azov tensions increased transport costs for metallurgical sector due to route deviations; rail diversion limited by locomotive shortages and repair works.
- Recently imposed quota and tariffs on steel imports by the EU and Turkey are thought to have limited impact.

### Real exchange rate (REER) developments and drivers
- Since 2016, Ukraine’s REER has appreciated significantly.
- Main drivers:
  - Inflation in Ukraine outpacing trading partners without adequate depreciation of the hryvnia.
  - Unit labor cost (ULC)-based REER shows stronger reduction in competitiveness driven by broad wage increases—minimum wage nearly tripled since late 2015—and negative labor supply shocks from emigration.
- Balassa-Samuelson expectation: increased productivity improvements expected to lead to modest real appreciation going forward.

### Current account developments and projections
- 2019 current account deficit tightened to 0.7 percent of GDP, down from 3.3 percent of GDP in 2018.
- One-off item: a $2.9 billion arbitration award to Naftogaz is included in secondary income; excluding it puts the 2019 current account deficit at 2.6 percent of GDP.
- 2020 outlook:
  - COVID-19 projected to depress both exports and imports; exports (dominated by food items) expected to fall by less than imports.
  - Nord Stream 2 completion starting 2020 projected to reduce gas transit fees for Ukraine by about US$ 1.5 billion per year in the medium term, exerting a permanent drag on the current account.

### Capital and financial account, market access, and official financing
- Market access since 2015 debt operation:
  - Eurobond issuances: US$3.2 billion in 2017; US$2.7 billion in 2018; US$1.5 billion in 2019.
  - January 2020: raised US$1.4 billion through a euro-denominated 10-year Eurobond issued at 4.375 percent.
- Clearstream adoption increased foreign participation in domestic bond market: non-resident holdings rose from less than 5 percent to over 20 percent of market-held government securities.
- Dividend repatriation liberalization:
  - Limit dropped in July 2019.
  - Dividend repatriation grew by 80 percent to US$3.3 billion in 2018 and US$3.4 billion in 2019.
  - Expected modest increase in FDI in medium run, contingent on deeper structural reforms.
- COVID-19 impact on capital flows:
  - Temporary inability to tap international markets; non-resident inflows into domestic bond market dried up.
  - Significant official financing inflows expected to cover shortfalls.
  - Limited risk of significant outflows because non-resident investors are primarily in longer-term, illiquid bonds; residents hoarding FX cash expected to weigh on financial account and FX reserves.

### FX reserves and reserve adequacy
- End-2019 reserves: 4 months of 2019 imports, corresponding to about 86 percent of the Fund’s reserve adequacy metric for Ukraine.
- Projection: reserves expected to fall to around 3 months of imports as COVID-19 weighs on BoP.
- Over projection horizon: reserves expected to grow to 100 percent of the Fund’s metric, supported by IMF support and resumption of foreign inflows.
- External public debt service burden expected to average about US$10 billion per year over 2020–25 (compared with less than US$6 billion per year over 2015–19).

### Exchange restrictions and capital flow measures (CFMs)
- Law "On Currency and Currency Transactions" effective February 7, 2019, aims to liberalize currency control regime.
- Liberalizations:
  - Exchange restriction from dividend repatriation limit lifted in July 2019.
  - Surrender requirement canceled in May–June 2019.
- Remaining ERs/CFMs:
  - Limits on capital outflows (constraining some current transactions).
  - Limit on banks’ long open positions.
  - Ban on FX derivatives transactions other than for hedging purposes with non-banks.
- Further capital account liberalization should proceed only as reserve accumulation and macroeconomic and financial stability allow.

### Net international investment position (NIIP)
- NIIP improved from -38 percent of GDP in 2014 to -13 percent at end-2019.
- Drivers: lower current account deficits and reduced financial flows into the country (net FDI fell to 1.6 percent of GDP from an average of around 4 percent).
- Projections: NIIP expected to fall to about -24 percent of GDP by 2025 on the back of increased capital inflows.

### Overall EBA-lite assessment and external sustainability
- Current account-based EBA-lite suggests Ukraine’s external position is broadly in line with fundamentals (Table 1).
- EBA-lite mapping: CA gap mapped back to REER using CA/REER elasticity.
- EBA-lite results (end-2019):
  - Adjusted CA/GDP (a): 1/-2.6%
  - Fitted CA/GDP (b): -2.0%
  - Residual (a-b): -0.6%
  - Cyclical contributions (c): 0.0%
  - Cyclically adjusted CA/GDP (d=a-c): -2.6%
  - Cyclically adjusted CA/GDP norm (e): -2.9%
  - CA/GDP gap (f=d-e): -0.2%
  - Assumed CA/REER Elasticity (g): 0.32
  - REER gap (-f/g, positive is overvaluation): 0.6%
  - ln (Actual REER) (a): 4.54
  - ln (Fitted REER) (b): 4.54
  - Residual (a-b): 0.00
  - ln (REER Norm) (c): 4.53
  - Policy gap: 0.3%
  - REER gap (a-c, positive is overvaluation): 0.8%
  - Note: CA adjusted to exclude the inflow from the one-off US$2.9 bln arbitration award to Naftogaz (1.9% of 2019 GDP).
- External sustainability approach (stabilizing NFA) suggests moderate over-valuation at end-2019 of about 7.5 percent.

### COVID-19 depreciation and outlook
- Since 2020Q1, the hryvnia traded almost 15 percent lower against the US$ since the beginning of the year.
- If the shock is temporary, depreciation may be partly reversed over 2020.
- Medium-term: productivity improvements expected to produce modest real appreciation.

---

*Source: Annex I. External Sector Assessment, 1ukrea2020001*

### Annex II. Table 1: Public and Publicly Guaranteed Debt, end-2019

### Annex II. Table 1: Public and Publicly Guaranteed Debt, end-2019

### Public and publicly guaranteed debt — stock and composition (end-2019)
- Public and publicly guaranteed debt: 2004.6 UAH (billion); 78.1 USD (billion); 50.4 percent of GDP; 100.0 percent of total
- Domestic debt: 834.1 UAH (billion); 32.5 USD (billion); 20.9 percent of GDP; 41.5 percent of total
  - Direct debt in UAH: 737.4 UAH (billion); 28.7 USD (billion); 18.5 percent of GDP; 36.7 percent of total
  - Direct debt in FX: 88.7 UAH (billion); 3.5 USD (billion); 2.2 percent of GDP; 4.4 percent of total
  - Guaranteed (domestic): 8.0 UAH (billion); 0.3 USD (billion); 0.2 percent of GDP; 0.4 percent of total
- External debt: 1,170.6 UAH (billion); 45.6 USD (billion); 29.5 percent of GDP; 58.5 percent of total
  - Multilateral 1/: 264.6 UAH (billion); 10.3 USD (billion); 6.7 percent of GDP; 13.3 percent of total
    - of which: IMF budget support: 97.5 UAH (billion); 3.8 USD (billion); 2.5 percent of GDP; 4.9 percent of total
  - Bilateral 2/: 126.7 UAH (billion); 4.9 USD (billion); 3.2 percent of GDP; 6.3 percent of total
  - Sovereign Eurobonds: 549.2 UAH (billion); 21.4 USD (billion); 13.8 percent of GDP; 27.4 percent of total
  - Local government Eurobonds 3/: 7.8 UAH (billion); 0.3 USD (billion); 0.2 percent of GDP; 0.4 percent of total
  - External guaranteed debt: 222.3 UAH (billion); 8.7 USD (billion); 5.6 percent of GDP; 11.1 percent of total
    - of which: IMF loans to NBU: 170.4 UAH (billion); 6.6 USD (billion); 4.3 percent of GDP; 8.5 percent of total

Sources: Ministry of Finance

1/ Includes IMF, WB, EBRD, EIB.
2/ Includes EU.
3/ Issued by the city of Kyiv.

### Debt dynamics, DSA findings, and projections
- Fan chart analysis:
  - Debt-to-GDP ratio is unlikely to return to levels seen prior to the 2015 debt operation (nearly 100 percent of GDP projected then).
  - Assuming a symmetric distribution of shocks, debt level will most likely remain below 80 percent of GDP.
  - Under an adverse scenario (no positive primary balances; real exchange rate only depreciates), debt is most likely to stay below 100 percent of GDP over the projection horizon.
  - Caution warranted given relatively low debt-to-GDP ratios at which debt proved unsustainable in Ukraine’s past and heightened risks from the COVID-19 shock.
- Stress-test sensitivity:
  - Debt dynamics are particularly vulnerable to shocks to the growth rate and the exchange rate.
  - Combined macro-fiscal shock has the most significant adverse impact on debt sustainability.

### External sector DSA — trends and projections (public and private external debt)
- Historical and near-term path:
  - External debt fell from a peak of 130.6 percent of GDP in 2015 to 79 percent of GDP by end-2019.
  - COVID-19 shock expected to increase external debt-to-GDP ratio by about 15 percentage points, to 93 percent of GDP in 2020 (Table 2).
  - Baseline projects external debt to decline to 61 percent of GDP by 2025.
  - Gross external financing needs: remained below 30 percent of GDP; expected to decline to about 20 percent of GDP over 2021–25.
- Sensitivity to exchange rate shocks:
  - External debt is most sensitive to real depreciation shocks because most external debt is US$-denominated.
  - Baseline: external debt falls to 61 percent of GDP by 2025.
  - One-time 30 percent real depreciation shock in 2020 would push external debt-to-GDP ratio up to 97 percent.
  - External sector assessment does not point to major overvaluation of Ukraine’s currency; risk remains from non-materialization of anticipated productivity improvements.

### External debt sustainability framework (selected rows from Annex II. Table 2, 2015–2025)
- Baseline: external debt (percent of GDP)
  - 2015: 130.6
  - 2016: 121.6
  - 2017: 104.1
  - 2018: 87.8
  - 2019: 78.8
  - 2020: 93.0
  - 2021: 84.6
  - 2022: 77.8
  - 2023: 72.2
  - 2024: 65.7
  - 2025: 60.8
- Change in external debt (percent of GDP): 33.9; -9.0; -17.5; -16.3; -8.9; 14.2; -8.4; -6.7; -5.7; -6.5; -4.9 (2015–2025)
- Identified external debt-creating flows (4+8+9) (percent of GDP): 37.6; -6.0; -20.6; -13.5; -14.5; 8.7; -0.8; -2.5; -3.0; -3.1; -2.8 (2015–2025)
- Current account deficit, excluding interest payments (percent of GDP): -7.8; -4.3; -3.8; -3.2; -4.9; -4.8; -3.9; -3.5; -2.9; -2.4; -1.9 (2015–2025)
- Net non-debt creating capital inflows (negative, percent of GDP): -3.5; -3.6; -2.4; -1.8; -1.7; -0.7; -1.9; -2.2; -2.4; -2.5; -2.5 (2015–2025)
- Automatic debt dynamics (percent of GDP): 48.9; 1.8; -14.4; -8.4; -7.9; 14.2; 5.0; 3.2; 2.4; 1.9; 1.6 (2015–2025)
  - Contribution from nominal interest rate (percent of GDP): 6.1; 5.8; 6.0; 6.5; 5.6; 6.5; 5.9; 5.5; 4.8; 4.4; 4.0
  - Contribution from real GDP growth (percent of GDP): 13.7; -3.1; -2.5; -3.0; -2.4; 7.6; -0.9; -2.3; -2.4; -2.5; -2.4
  - Contribution from price and exchange rate changes 2/: 29.2; -0.9; -17.9; -11.9; -11.1; ..........
- External debt-to-exports ratio (percent): 246.9; 247.0; 217.0; 194.4; 192.4; 245.3; 218.4; 203.1; 191.6; 177.8; 167.7 (2015–2025)
- Gross external financing need (billions of U.S. dollars): 40.3; 24.6; 30.3; 31.7; 38.6; 37.2; 32.4; 32.9; 34.1; 39.5; 38.7 (2015–2025)
  - As percent of GDP: 44.6; 26.3; 27.0; 24.2; 25.0; 28.5; 21.9; 20.1; 19.2; 20.4; 18.3
- Key macroeconomic assumptions underlying baseline (selected)
  - Real GDP growth (percent): -9.8; 2.4; 2.5; 3.4; 3.2; 0.5; 4.9; -8.2; 1.1; 3.0; 3.4; 3.8; 4.0 (note: table lists multiple years; preserved as presented)
  - GDP deflator in U.S. dollars (change in percent): -23.2; 0.7; 17.3; 12.9; 14.5; 3.1; 14.9; -8.3; 12.3; 7.0; 5.1; 5.1; 5.1
  - Nominal external interest rate (percent): 4.3; 4.6; 5.9; 7.3; 7.5; 6.5; 1.5; 7.0; 7.2; 7.1; 6.8; 6.7; 6.7

### Stress-test results (Annex II. Figures and Bound Tests)
- External debt sensitivity (Annex II. Figure 6, bound tests):
  - Historical: 65 (presumably percent of GDP)
  - Baseline: 61
  - Interest rate shock: 63
  - Growth shock: 69
  - Noninterest current account (CA) shock: 80
  - Combined shock 2/: 73
  - Real depreciation shock 3/ (one-time 30 percent depreciation): 97
- Notes on shocks:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Combined shock uses permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - Real depreciation shock simulates the impact of a one-time real depreciation of 30 percent in 2016 (standard IMF stress-test).

### Policy-relevant implications and recommended responses (from Risk Assessment Matrix and DSA)
- Main vulnerabilities:
  - Sensitivity of debt to growth and exchange rate shocks; COVID-19 increases these risks.
  - External debt rise in 2020 driven by exchange rate depreciation and pandemic-related shocks.
  - Concerns about debt sustainability could affect market access and financing needs.
- Policy responses and recommendations (as presented):
  - Maintain prudent fiscal and monetary policies.
  - Reallocate fiscal spending to social policies within the existing budget envelope.
  - Resist policy reversals that undermine domestic and global investor confidence.
  - Use exchange rate flexibility as a first line of defense against external shocks.
  - Ease monetary policy as appropriate while making use of exchange rate flexibility.
  - Allow automatic stabilizers to work; use growth-supportive fiscal measures (reducing the labor tax wedge and raising infrastructure spending) without undermining debt sustainability.
  - Maintain financial stability, tight supervision to monitor banking risks, and implement an efficient mechanism to resolve NPLs in a timely manner.
  - Decisive progress on structural reforms (rule of law and business environment) to anchor confidence and improve competitiveness.

*Sources: Ministry of Finance; IMF staff.*

### Annex IV. Ex-Post Peer Reviewed Assessment (PRA)

### Annex IV. Ex-Post Peer Reviewed Assessment (PRA)

### A. Background
- Ukraine became member of the International Monetary Fund in 1992.
- Total IMF arrangements since independence: 11 arrangements, including one arrangement under the Systemic Transformation Facility (STF), eight Stand-By Arrangements (SBA), and two arrangements under the Extended Fund Facility (EFF).
- Combined program access: SDR 51.4 billion; drawn: SDR 21.9 billion.

### B. Recommendations from Past Ex-Post Assessment
- The October 2005 Ex-Post Assessment (EPA) judged Ukraine’s performance since 1994 as weak: stabilization achieved with delay and lack of progress on structural reforms undermined the 1998 EFF-supported program.
- EPA recommended future IMF-supported programs focus on:
  - Re-orienting the monetary framework toward achieving low and stable inflation and shifting to a more flexible exchange rate regime.
  - Maintaining a tight fiscal stance, restoring a viable public pension fund, introducing systemic tax reform, and strengthening transparency of fiscal and quasi-fiscal operations.
  - Strengthening banking sector resilience and developing domestic capital markets.
  - Improving the investment climate through stronger governance and institutions.
- EPA also recommended streamlining conditionality to focus on critical institutional bottlenecks and core Fund areas; requiring good track records of macro policies and structural reform implementation to test authorities’ commitment prior to further engagement.

### C. Fund-supported Programs 2005–2019
- Program pillars (2005–2019):
  - Achieve macroeconomic stabilization supported by an independent monetary policy, a flexible exchange rate and a prudent fiscal policy.
  - Eliminate quasi-fiscal deficits by reforming the energy sector.
  - Restore soundness in the financial sector.
  - From the 2014 SBA onward, improve governance, business climate and the judiciary.

- 2004 precautionary SBA:
  - Went off track ahead of elections; aimed at establishing a track record.

- 2008 24-month US$16 billion (exceptional access) SBA:
  - Requested to address a balance of payments crisis caused by tumbling export prices and global demand; turned into a financial and fiscal crisis.
  - Program goals: stabilize the banking system and facilitate economic adjustment.
  - Outcomes:
    - Program went off-track after a year; only two of eight envisaged reviews completed.
    - Short-term objectives met: economy stabilized and timid recovery in 2009.
    - Medium-term objectives not met: exchange rate pegging resumed; incomplete bank resolution framework; continued quasi-fiscal deficits; energy sector unreformed; little progress on legal and governance fronts.
    - Weak ownership and implementation left core medium-term vulnerabilities.

- 2010 29-month US$15.2 billion SBA:
  - Objectives: consolidate public and energy sector finances; restore banking soundness; develop robust monetary policy framework focused on domestic price stability with greater exchange rate flexibility.
  - Outcomes:
    - Market confidence restored initially; only one of nine reviews completed.
    - Achievements: progress in pension reform; adoption of a new NBU law.
    - Incomplete reforms: VAT refund system, social assistance, corporate insolvency law, foreign exchange regulations, resolution of intervened banks, NPL framework.
    - Reluctance on exchange rate flexibility undermined reserve buffer objectives.

- 2014 2-year US$15 billion (exceptional access) SBA (post-“Maidan” and annexation of Crimea):
  - Objectives: stabilize macroeconomic situation short-term; implement deep-reaching governance and transparency reforms; lay foundation for robust balanced growth.
  - Design: strong use of prior actions, upfront conditionality, bi-monthly reviews.
  - Realized risks: conflict escalation worsened macroeconomic conditions beyond projections.
  - Outcome: after one of eight reviews, SBA canceled in March 2015; replaced with a three-year EFF.
  - Notable steps: energy tariffs raised; governance in Naftogaz improved; exchange rate allowed to adjust; monetary framework moved toward inflation targeting; steps taken to identify financial sector problems; diagnostic on corruption and governance prepared.

- March 2015 4-year US$17.5 billion (exceptional access) EFF:
  - Objectives: (i) restore confidence and financial-economic stability through strong adjustment policies (stabilize FX market, repair banks’ balance sheets, restore banking sector viability, strengthen public finances); (ii) boost medium-term growth through structural reforms improving business climate and competitiveness.
  - Conditionality: built on unfinished agenda—financial sector, energy sector, fiscal reforms—with greater emphasis on governance and anti-corruption; substantial use of prior actions.
  - Outcomes:
    - Initial successes in reforms; macro-stability and growth restored; market access regained.
    - Structural reform implementation fell short; significant steps in the financial sector (about half of existing banks resolved), fiscal and energy sectors (debt reduced via a debt operation; Naftogaz transformed into a profitable company).
    - Reform momentum weakened; long delays in completing the fourth review evidenced stalled reforms.

- December 2018 14-month US$3.9 billion SBA (within normal access limits):
  - Objective: preserve macroeconomic stability and advance key reforms.
  - Conditionality streamlined; some prior actions targeted pending EFF reforms (heating tariffs adjustment and governance reform).
  - No reviews completed due to early parliamentary elections called in 2019.
  - Outcome: preserved macro-stability; most structural conditionality met.

- Post-2019:
  - Following 2019 parliamentary elections, discussions started on a three-year EFF to preserve macro stability and implement an ambitious structural reform agenda focused on improving business environment and increasing competition.

### D. Lessons and Risks
- Overall program performance (2005–2019):
  - Performance under Fund-supported programs remained uneven and disappointing relative to expectations.
  - None of the programs in the period went past the third review; two programs completed only one review.
  - Programs were generally successful in restoring or achieving macroeconomic stability and helping authorities navigate difficult periods.
  - Progress on structural reforms was generally slow and incomplete, contributing to persistent vulnerabilities and repeat requests for Fund support.

- Notable progress achieved:
  - NBU transformed into a modern central bank with an inflation targeting regime and a flexible exchange rate.
  - Financial sector resilience strengthened: about half of banks closed; the largest bank nationalized; legal framework for impaired loans developed.
  - Public debt placed on a sustainable path ensuring medium-term fiscal sustainability.
  - Long-term pension system sustainability improved.
  - Energy sector transformed and quasi-fiscal deficits eliminated.
  - Governance improved and steps taken to improve the judicial system.

- Persistent vulnerabilities and challenges:
  - Progress slow and vulnerable to setbacks; ownership for structural reforms took a long time to build.
  - Reversals in macro stabilization occurred (e.g., discretionary spending increases, exchange rate fixing).
  - Vested interests are influential and organized, with sway over parliamentarians, policymakers and the judiciary.
  - External volatility makes the economy vulnerable; increased exchange-rate flexibility with inflation targeting appears to improve resilience.
  - Energy market: major steps taken under the 2015 EFF, but an open and competitive energy market has yet to be created; political pressure to influence utility prices remains strong.
  - Governance and anti-corruption: new institutions created since 2014, but concrete results in adjudicating corrupt officials have yet to be achieved.
  - An unreformed judiciary remains a major obstacle to tackling corruption.

- Program ownership dynamics:
  - Ownership tends to weaken as macro goals are achieved; stabilization often reduces urgency for reforms once market access is regained.
  - Newly elected reform-minded governments often lose momentum due to political divisions, dwindling popularity, and pressures from vested interests.

- Value of continued Fund engagement:
  - Even with few completed reviews, the Fund has been useful by: supporting macroeconomic and financial stability; engaging and influencing policy proposals; preventing worse outcomes; cooperating with IFIs and NGOs to mobilize reform support; providing technical assistance for capacity building; and mobilizing international support.

- Lessons for future program engagement:
  - With weak and fickle ownership, capitalize on short “windows of opportunity” by frontloading conditionality with prior actions, especially for politically sensitive or difficult reforms where vested interests are stronger.
  - Prior actions and frontloaded conditionality should focus on measures that break gridlocks and kickstart reforms, with emphasis on implementation of legal changes.
  - Backloading access can help maintain commitment and limit risks to the Fund but may not sustain traction after market access is regained.
  - Program horizons should be tailored to political realities: shorter arrangements might be preferable, or longer arrangements should include mechanisms to terminate the program if irretrievably off track.
  - Assist authorities in building broad-based ownership for reforms, which takes time.
  - Build strong and independent institutions to make reforms more resilient to backtracking.
  - Address governance issues head-on when they are macro-critical.
  - Progress with structural reforms requires persistence and coordination across IFIs; leveraging prior actions and coordinated messages helped build consensus and enable reform progress.

*Source: Annex IV. Ex-Post Peer Reviewed Assessment (PRA), 1ukrea2020001 - Annex IV. Ex-Post Peer Reviewed Assessment (PRA).*

### 4.      We have focused our policies on saving people’s lives and livelihoods and ensuring that

### 4.      We have focused our policies on saving people’s lives and livelihoods and ensuring that

### Overview
- Policies temporarily relax fiscal and financial stances to absorb the shock while aiming to maintain macroeconomic and financial stability.
- Key priorities: step up public spending for urgent healthcare needs, protect employment and viable businesses, and increase social assistance for the most vulnerable households and the elderly.
- Commitment to strong control, audit, reporting, and transparency for all crisis-related government spending.
- Monetary and exchange rate policies aim to ensure an orderly exchange rate adjustment and prevent liquidity distress.
- Financial sector policies aim to balance preserving financial stability and sustaining economic activity.
- The attached Memorandum of Economic and Financial Policies (MEFP) describes goals and policies in more detail.

### Program request and financing
- Request an 18-month Stand-By Arrangement (SBA) in the amount of SDR 3.6 billion (178.9 percent of quota and equivalent to about US$5 billion) for balance of payments and budget support.
- Request approval to make available SDR 1.5 billion (74.6 percent of quota, equivalent to about US$2.1 billion) upon approval of the arrangement.
- Request approval of the retention of the exchange restriction and multiple currency practices maintained temporarily due to balance of payments difficulties and inconsistent with Article VIII Sections 2 (a) and 3 of the Fund’s Articles of Agreement.
- Commitments during the SBA period:
  - Ukraine will not introduce or intensify exchange restrictions.
  - Ukraine will not introduce or modify multiple currency practices.
  - Ukraine will not introduce or intensify import restrictions for balance of payments reasons nor conclude bilateral payment agreements inconsistent with Article VIII.

### Prior actions and structural reforms (selected)
- Enacted amendments to the customs and tax codes and other laws to enable elimination of regional tax and customs offices and create the Tax and Customs Services as single legal entities (paragraph 8b of the MEFP).
- Enacted amendments to the banking law, the law on the Deposit Guarantee Fund (DGF) and the code of administrative justice to ensure courts defer to the NBU’s, the DGF’s and the Ministry of Finance’s expertise and discretion in bank resolution matters, allowing only compensation limited to proven losses as a remedy (paragraph 22 of the MEFP).
- Adopted a contingency plan to mitigate potential risks posed to financial stability and public finances by adverse court rulings against past resolution decisions (paragraph 23 of the MEFP).
- Enacted legislation to re-criminalize illicit enrichment consistent with international standards and Ukraine’s Constitution (paragraph 25a of the MEFP).
- Enacted amendments to the AML law consistent with FATF standards (paragraph 25f of the MEFP).
- Lifted the cap on household heating tariffs (paragraph 27b of the MEFP).

### Program monitoring and reviews
- Program will be monitored through four reviews.
- Quantitative conditions (periodic and continuous performance criteria, indicative targets) and a monetary policy consultation clause are in Table 1 of the MEFP; Table 2 describes structural benchmarks.
- The four reviews are expected to be completed on or after:
  - September 1, 2020
  - December 1, 2020
  - May 15, 2021
  - October 15, 2021
- Commitment to consult in advance with the IMF on adoption of additional measures or revisions to MEFP policies and to provide IMF staff with requested data and information for program monitoring.
- Consent to IMF publication of the letter, MEFP, TMU, and accompanying Executive Board documents immediately upon consideration by the IMF’s Executive Board.

### Fiscal policies and COVID-19 response
- Short-term: focus on emergency response to COVID-19 while preserving fiscal sustainability in the medium term.
- Medium-term fiscal objectives:
  - Return to primary budget surpluses of around 1–1½ percent of GDP.
  - Reduce public debt to around 60 percent of GDP by the end of the program.
- 2019 Budget:
  - General government budget deficit kept below the target of 2.3 percent of GDP.
  - Shortfalls in VAT, royalties and excise on imports and customs duties partly offset by higher personal income tax and social security contributions and higher SOE revenues.
- 2020 Budget (adopted late 2019):
  - Consistent with a general government budget deficit of 2.3 percent of GDP as projected at approval.
  - Payroll fund for civil service increase limited to 5.3 percent in 2020.
  - Minimum monthly wage raised by 13.2 percent to UAH 4,723.
  - Pension benefits budgeted to increase in accordance with the pension reform law adopted in 2017.
  - Increases in taxation: effective taxation of iron ore; from January 1, 2021, harmonization of taxation of heated tobacco products with traditional tobacco products.
- 2020 supplementary budget (response to COVID-19):
  - Allows general government deficit to expand to UAH 300 billion (about 8 percent of GDP).
  - Revenue-side measures: raise thresholds for simplified tax regime, temporary exemption from tax fines and penalties for delays in filing tax returns, exemptions for land and property taxes and the unified social tax for qualifying entities, temporary moratorium on tax audits and inspections.
  - Exempt medicines and medical devices used to prevent or combat COVID-19 infections from import duties and VAT.
  - Expenditure-side measures: increase health care, pensions, and social protection by about 3 percent of GDP; partially offset by reduction in capital and non-priority current expenditures.
  - Temporary cap on all public sector wages and salaries, including those in other state bodies and state-owned entities; cap to be lifted by end-June as containment measures ease.
  - Pension increases to take the form of (i) an advanced date of indexation of pensions, and (ii) one-off additional pension payments to low-income pensioners and elderly pensioners (80 years or older).
  - Creation of temporary budget program “Fund to Fight Against COVID-19 and its Impact” for administration of these expenditures.
- Fiscal management commitments:
  - Expect improvements in tax and customs administration to yield some higher-than-budgeted revenues; if revenues underperform, curtail non-priority spending to avoid exceeding deficit target.
  - Any revenue over-performance to be used to reduce public debt, settle arrears, increase infrastructure investment, or raise social benefits for the most vulnerable.
  - Remain current on all payment obligations and not accumulate spending arrears.
  - Work with IMF staff in 2020 to develop proposals to reform the tax system to be more growth friendly; will not enact legislation that undermines fiscal sustainability during the program period.
  - Refrain from introducing new tax exemptions or privileges during the program period (except COVID-related healthcare exemptions already approved).
  - Plan to develop with IMF staff a voluntary disclosure scheme for possible consideration by end-September-2020 consistent with international best practices and AML/anti-corruption legislation and linked to BEPS legislation.
- Fund to Fight Against COVID-19 and its Impact:
  - Will be temporary, transparent, and expenditures efficient; used primarily for additional health care and social expenditures directly related to COVID-19.
  - Operations governed by CMU regulations covering re-allocation procedures, authorization processes, budget execution rules, detailed monthly reporting to CMU and parliament, requirement that all cash transactions be executed through and reported by the Treasury, and rules for discontinuing operations and use of remaining resources.
  - An ex-post procurement audit of the COVID-19 program will be conducted by the State Audit Service of Ukraine, in consultation with external/third party auditors, of all transactions conducted under CMU resolution 302 at the time of closing the fund but no later than 12 months after its establishment (a structural benchmark for end-March 2021).
  - Prepare a detailed progress report regarding disbursements and commitments of the fund by program and economic classification within 30 days of the Fund’s closure; these reports will be made public in full at completion.
  - Publish all procurement notices and make all purchase orders, including information on beneficial owners of participating bidding companies, electronically accessible to the public on the ProZorro internet site (https://prozorro.gov.ua).
  - The fund will operate only until the emergency situation so requires, but not beyond 31 December 2020.

### Pension and social protection policies
- Continue implementing pension reform measures introduced in 2017 to provide better pensions while ensuring financial stability of the pension system.
- Commitments regarding pensions:
  - Refrain from introducing new special pensions or privileges.
  - Refrain from providing further discretionary benefit increases.
  - Refrain from adopting changes that would lead to lowering the effective retirement age.
  - Any proposed legal amendments that increase pension expenditures must be accompanied by a medium-term fiscal impact analysis and identification of commensurate resources.
  - Strive to ensure that, over the medium term, payments to pensioners approach statistically measured subsistence minima and that dates for annual pension indexation be specified in the Law on Compulsory Pension Insurance.
  - Continue collaboration with development partners to establish preconditions for introducing well-regulated privately-managed funded pension schemes.
- Social assistance improvements:
  - Aim to create a well-targeted (means-tested) and affordable social safety net to support poor and vulnerable households.
  - With World Bank assistance, plan to:
    - Consolidate selected existing assistance programs into the guaranteed minimum income (GMI) scheme while increasing the size of the program.
    - Combine the GMI program with active labor market policies.
    - Implement improvements to the management information system to enhance verification of beneficiaries and improve targeting.
  - Take further steps to ensure sustainability of social funds, including streamlining administration.

*Attachment I. Memorandum of Economic and Financial Policies, May 28, 2020.*

### 5.      The implementation of the health care reform will proceed in 2020 by expanding the

### 5.      The implementation of the health care reform will proceed in 2020 by expanding the

### Health care reform implementation (2020)
- Health care financing reform was rolled out on April 1,    2020, expanding strategic purchases by the National Health Service of Ukraine (NHSU) to emergency, intensive and specialized care.
- The NHSU—a government executive agency funded by the state budget—will function as a single payer in public health care and will closely monitor service delivery and financial performance of providers.
- Health care providers’ gradual transformation into municipally owned non-profit legal entities will continue; financing will be based on performance contracts concluded with the NHSU.
- Actions to complete:
  - Delineate a defined, NHSU-financed package of health services, including primary, specialized, palliative and emergency care.
  - Control demand through financial incentives to service providers.
  - Allow for the possibility to introduce co-payments for patients if needed, while ensuring accessibility and quality of services improves.
- Governance and procurement safeguards:
  - NHSU decision making will be transparently protected from conflict of interest, in particular by excluding participation of service providers in its governance structures.
  - The Ministry of Health will continue to outsource procurement of key pharmaceuticals to reputable international organizations.
  - Starting in 2020, the Ministry of Health will pilot centralized procurement of medicines through the newly created state-owned enterprise Medical Procurement of Ukraine, using ProZorro in line with the Law on Public Procurement, following best international practices of transparency, accountability, and competition.

### Education reform (post-crisis acceleration)
- Once the crisis abates, accelerate reform of the education system:
  - Continue right-sizing of the school network for primary and secondary education.
  - Increase capital expenditure to renovate buildings and ensure needed infrastructure.
  - Start reform of curricula.
  - Submit amendments to the law on education to parliament to modify the salary structure to align teachers’ incentives and keep the system fiscally affordable.
- Higher education:
  - Transform funding system of universities and link salaries to performance.

### Public financial management improvements
- Strengthen fiscal framework to facilitate sustainable fiscal adjustment and improve credibility and predictability of fiscal policies.
- Implement and improve the first full-fledged medium-term budget framework (MTBF) enabled by budget code amendments approved in late 2018.
- With IMF technical assistance, actions include:
  - (i) clarify mechanisms for adjusting expenditure ceilings;
  - (ii) review arrangements which limit multi-annual commitments;
  - (iii) improve methodology to produce forward baseline estimates and fiscal impact assessments via capacity building within the Ministry of Finance and key spending units.
- Expand coverage and strengthen quantitative analysis of spending reviews based on 2018-19 pilot projects; conduct a review of the social funds, including the Pension Fund.
- Improve assessment of fiscal risks by developing tools within the Ministry of Finance and expanding financial model to include major SOEs.
- Increase efficiency of government investments by considering simplification of authorization procedure for multi-year contracts and carryover of unspent appropriations.
- Budget code amendment allows pre-financing of the budget deficit; pre-financing will be subject to limits to preserve fiscal stability.
- Operationalize the debt management office (DMO) to improve institutional capacity to manage public debt, optimize debt structure, and reduce financing cost; publish strategies, operations and results yearly in the debt management strategy.

### Revenue administration and tax/customs reform
- Key legislative and administrative actions:
  - Enacted legislation to introduce a single account for tax payments unifying requirements for social security contributions and personal income tax payments, effective January 1, 2021.
  - Adopted legislation to establish fiscal accountability for cash receipts issued by participants of the simplified regime, with mandatory use of cash registers and electronic cash registering, and customer ability to verify tax reporting online, effective January 1, 2021.
- Policy commitments and assessments:
  - Assess impact of new legislation on preventing tax avoidance and abuse of the simplified tax regime; take steps to incentivize SMEs to participate in the universal tax regime.
  - Refrain from widening eligibility criteria for the simplified tax regime and from introducing new groups of taxpayers benefiting from a simplified tax regime.
  - Ensure that the automated system for VAT refunds will continue to operate while continuing efforts to detect abuse and refer cases to law enforcement.
  - Develop ways to share information on taxes due to local budgets (land, property, and personal income taxes) with local governments to improve collection; improve process for determination of tax base of land and property taxes.
- Institutional restructuring:
  - Established the State Tax Service (STS) and State Customs Service (SCS) as new legal entities responsible for tax and customs collection; legislative changes to remove obstacles were enacted as a prior action.
  - Develop new organizational structures and frameworks for delegation of authorities and accountabilities in both organizations (structural benchmark for end-September 2020).
  - Test consolidated legal entities in selected pilot offices of the STS and SCS; liquidate the State Fiscal Service (SFS) and transfer its assets, including IT systems, to the STS and SCS no later than end-December 2020.
  - From January 1, 2021, the STS and SCS will operate nationally as two single legal entities with functionally organized headquarters and field offices; regional and other legal entities of the STS, SCS, and SFS will cease to exist (structural benchmark for January 1, 2021).
- Reform governance and operational improvements:
  - Set up reform offices in STS and SCS with time-bound, measurable reform plans for 2020-22 and Reform Steering Committees led by STS and SCS heads with monthly reporting.
  - Transform tax and customs administration operations: discontinue redundant processes, improve/simplify/digitalize processes to reduce administrative cost and improve integrity.
  - By end-September 2020, set up a centralized risk-management unit in the STS to select audit cases (including VAT refund checks) based on perceived tax compliance risks.
  - Abolish the system of planned tax audits by end-September 2020; tax audit selection will be fully based on risk analyses.
  - Increase internal capacity of the debt settlement department and re-launch the legal department in the STS to enhance tax arrears collection; Ministry of Justice removed barriers to enforcement of tax debt collection.
- Consolidation of investigative authority:
  - Adopt legislation to establish a financial investigative authority effective January 1, 2021, to take over responsibility for investigating economic, financial, and tax fraud and crimes from national police, state secret service, and tax police, except cases under the National Anti-corruption Bureau of Ukraine (NABU).
  - Law to set clear rules for management selection, internal decision-making, and oversight to ensure operational independence and proper oversight and accountability; head appointed through an open competition.

### Monetary and exchange rate policies
- Commitment to an institutionally strong and independent National Bank of Ukraine (NBU); steps to implement recommendations of the 2019 Safeguards Assessment.
- Request IMF technical assistance to review capital management and profit distribution framework to ensure NBU’s financial autonomy and policy credibility.
- Strengthen within upcoming DGF Law amendments the NBU’s secured creditor status in case of bank failures.
- Avoid actions implying political interference with NBU’s independence (policy decisions, term limits and legal protection of managers and staff).
- Monetary framework:
  - NBU will continue flexible inflation targeting (IT) within a floating exchange rate regime, with strong focus on maintaining financial stability.
  - Intent to contain inflation within the NBU’s target range of 5 percent +/-1 percentage point.
  - NBU stands ready to adjust the policy rate to reach its inflation target over a policy horizon of 9-18 months.
  - Progress in meeting inflation targets to be monitored under the program by consultation bands around the central points of inflation targets; if actual inflation falls outside the outer (inner) band, the NBU will consult with the IMF Executive Board (staff) on reasons and policies to return inflation within the band.
- Exchange rate and reserves:
  - Let the exchange rate adjust in line with economic fundamentals and purchase foreign exchange to meet the program’s reserve targets.
- Capital controls and liquidity:
  - Gradual capital control liberalization envisaged in the February 2019 currency law will be carefully sequenced and conditions-based, without specific deadlines for removal of existing restrictions.
  - Banking system currently highly liquid, with free liquidity equal to about 30 percent of client liabilities.
  - In response to crisis, NBU adapted operating framework to provide greater liquidity management flexibility: increased frequency and maturities of liquidity provision tenders, expanded eligible collateral.
  - NBU will continue to monitor financial conditions and maintain sound risk management practices; ensure sufficient liquidity so banks can function normally and finance private sector and government at market rates in line with fundamentals.
- Market development:
  - Strengthen regulatory framework for financial markets and work with stakeholders to enhance efficiency and robustness of money and securities markets to improve monetary policy transmission.

### Financial sector policies and banking system stability
- Progress since 2014:
  - Intervened and resolved almost 100 banks since 2014; nationalized PrivatBank.
  - Increased capital and liquidity requirements, tightened credit risk rules, improved procedures for assessing bank ownership structures.
  - Strengthened regulatory and oversight framework for related-party exposures, developed risk-based supervision, established centralized credit registry.
  - Direct fiscal costs of the banking crisis estimated at about 15.7 percent of GDP.
  - Outcomes: weak banks exited, capital buffers of remaining banks increased, related-party exposures fell, most banks returned to profitability.
- Priorities to ensure financial stability and limit fiscal costs:
  - (i) implement targeted and temporary supervisory policies in response to the COVID-19 crisis;
  - (ii) further strengthen bank capital requirements as the crisis passes;
  - (iii) reduce legacy non-performing loans (NPLs) and recover assets from resolved banks;
  - (iv) implement reform strategy for state-owned banks;
  - (v) improve the Deposit Guarantee Fund’s (DGF) financial position;
  - (vi) upgrade the supervisory and resolution framework;
  - (vii) develop the non-bank financial sector and financial markets.
- Crisis measures and supervisory adjustments:
  - Legislation adopted prohibiting banks from imposing additional fees and penalties on retail customers that miss regular payments during quarantine.
  - NBU suspended on-site inspections during quarantine, postponed introduction of additional capital buffers and annual stress-testing, and encouraged voluntary/prudent loan restructuring for heavily impacted sectors or firms.
  - Use flexibilities within current regulatory framework for corrective measures; temporary decline in capital ratios must be accompanied by credible capital restoration plans.
  - Not contemplating relaxation of minimum capital and liquidity requirements, loan classification and provisioning rules, to prevent excessive risk taking and hiding poor underwriting practices and losses.
  - Ensure banks revise their 2019 dividend distribution planning to help absorb potential losses from the crisis.
- Post-crisis actions:
  - Conduct asset quality reviews (AQRs) once crisis abates to guide regulatory and supervisory policies; AQRs to provide information on asset quality and size of capital shortfalls.
  - Require undercapitalized banks to present time-bound plans to restore capital adequacy ratios; take supervisory measures against banks that fail to implement action plans.
  - Resume efforts to align capital rules with international standards once crisis passes and economy returns to stable growth path.
  - Based on new Banking Law amendments, implement the capital conservation buffer and finalize regulation on new capital structure to meet the Basel capital standard.
- State-owned banks governance and divestment:
  - Majority-independent supervisory boards for all state-owned banks are operational following transparent selection and fit and proper assessments without political interference.
  - Continue to adhere to these processes for filling vacancies and offer market-based remuneration to attract qualified professionals.
  - By end-July:
    - (i) finalize relationship agreements with each state-owned bank to ensure commercial operation without political interference;
    - (ii) hire staff for the oversight unit in the Ministry of Finance in charge of shareholding management to operationalize the unit in line with IMF technical assistance recommendations.
  - Ensure each state-owned bank develops a code of ethics to clarify procedures for recommending dismissal of supervisory board members (in line with article 7 of the Banking Law), include disciplinary processes, and establish an ethics committee to handle complaints and conflicts.
  - Committed to divesting the state’s shares in state-owned banks in line with Principles of State Banking Sector Strategic Reforms.
  - IFC has approved a loan to UkrGas Bank convertible into equity; ensure all triggers for entry of the EBRD into OschadBank capital will be met by end-October 2020.
  - Ensure state-owned banks remain adequately capitalized and meet capital requirements; implementation will be monitored through Key Performance Indicators (KPIs).
  - Review, in consultation with international partners, the Strategy of State-owned banks (to be endorsed by the CMU), including actions to respond to economic shocks caused by COVID-19 pandemic.

*International Monetary Fund — UKRAINE (excerpts from the specified content unit)*

### 18.      We are stepping up efforts to address the high level of legacy non-performing loans

### 1ukrea2020001 - 18.      We are stepping up efforts to address the high level of legacy non-performing loans

### NPL management in state-owned banks
- July 2019: NBU issued a regulation on the organizational arrangements for the management of problem assets to guide banks on how to deal with their troubled borrowers.
- September 2019: Extended for three years the Law on financial restructuring (Kyiv approach), which was set to expire in October 2019.
- April 2019: New Insolvency Law enacted; October 2019: the Insolvency Law operationalized.
- April 2020: CMU approved a resolution that determines the criteria and conditions for the determination by state-owned banks of instruments to resolve NPLs.
- Requirement: State-owned banks to develop time-bound and credible NPL reduction plans in line with the NBU regulation on problem assets.
- Structural benchmark (end-June 2020): State-owned banks’ legacy NPL reduction plans, including the option of taking NPL resolution decisions that could realize final losses, to be endorsed by the shareholder and approved by the Financial Stability Council (FSC) and the NBU.
- Oversight and monitoring:
  - Implementation subject to quarterly monitoring by the FSC and the NBU.
  - Annual evaluation under the NBU’s Supervisory Review and Evaluation Process (SREP).
  - Plans to be part of banks' annual KPIs.
- Working group (end-June 2020): Set up to identify obstacles to bank lending, including mortgage lending, and to formulate recommendations and proposed legislative changes (e.g., remaining weaknesses in credit rights).

### Asset recovery and accountability for failed banks
- Policy aim: Make tangible progress in reducing the cost of bank failures to the state; promptly pursue all commercial and legal avenues to recover assets and hold former owners and managers accountable.
- Coordination and legal steps:
  - FSC’s NPL Working Group on state-owned banks to meet regularly with law enforcement representatives; continue to review significant restructuring cases.
  - NBU and DGF to coordinate with the Prosecutor General’s Office (PGO) and NABU by providing necessary documentation (including forensic audit reports) without prejudice to prosecutorial and investigative autonomy.
  - DGF to start pursuing the recovery of assets abroad.
  - Recent amendments allow the DGF to continue realizing remaining assets of banks close to the end of statutory liquidation timeframe.
  - Structural benchmark (end-October 2020): Adopt legal amendments to the DGF and other laws to improve bank liquidation mechanisms and asset recovery. Amendments will:
    - Underscore the DGF’s ability to claim damages from related parties without showing a deficit in the liquidation estate, and subject to a special statute of limitation.
    - Authorize the DGF to enter into a settlement with related parties only if clear and strong safeguards are in place (e.g., independent audit confirming limited recovery prospects, protections of DGF pre-settlement rights including via collateral, transparent public information).
    - Facilitate interim measures against related parties during civil lawsuits and recognize the DGF’s victim status in criminal proceedings.
- Administrative mechanisms and disqualification:
  - Strategy paper (proposed by end-June 2020) to present credible measures to improve asset recoveries from former owners of failed banks and related parties, including administrative mechanisms.
  - Draft law replacing the Law on Financial Services: beneficial owners of failed banks will be disqualified from being involved in non-bank financial institutions as an owner or senior manager, supported by appropriate declaration requirements.
  - NBU will take enforcement actions against such owners and managers under the new framework.
- Transparency in asset recovery:
  - CMU to publish semi-annual reports summarizing progress in asset recovery and litigation efforts related to state-owned banks.
  - DGF to continue reporting on liquidated banks and publish on its website the list of all borrowers, managers, and former bank shareholders of resolved banks that are yet to honor their debts as ruled by court decisions.
  - New banking law amendments will require banks to disclose related parties that are in default for more than 180 calendar days.

### Deposit insurance and DGF solvency
- Context: Large depositor payouts following liquidations of around 100 banks since 2014 and low asset recovery rates led to the DGF’s insolvency.
- Plan (time-bound): Ministry of Finance and the DGF, in consultation with the NBU, IMF and World Bank, to prepare a time-bound plan by end-July 2020 to restore the DGF’s solvency by end-2021 while maintaining incentives to maximize recoveries from failed banks.
- Adoption: Financial Stability Council to adopt this plan by end-August 2020.

### Bank supervision, corporate governance, and capital framework
- Objective: Align bank supervision framework with good practices.
- Banking Law amendments (structural benchmark for end-November 2020) to:
  - Address gaps vis-à-vis sound corporate governance practices against the 2015 Basel’s Guidelines for Corporate Governance for banks (including collective suitability of the supervisory board).
  - Introduce a new capital structure (with appropriate implementation schedule) and capital buffers.
  - Grant the NBU legal powers to calibrate capital and liquidity requirements based on the bank’s risk profile.
  - Strengthen licensing and shareholder requirements.

### Early intervention, resolution, and crisis management enhancements
- Prior action: Legislative package enacted (in consultation with IMF staff) amending the Banking Law, the DGF Law, the Code of Administrative Justice, and other procedural codes to enhance early intervention and resolution.
- Key elements:
  a. Banking law amendments:
    - Introduce professional judgement to support the NBU’s discretionary assessments.
    - Require NBU’s prior approval of all supervisory board members before they assume duty.
    - Enhance early intervention framework, including problem bank designation and entry into resolution; underscore NBU’s flexibility to move a problem bank to resolution within the 120-days period and improve resolution triggers based on capital and liquidity grounds.
  b. Judicial review of resolution decisions:
    - Protect CMU’s and Ministry of Finance’s involvement in systemic bank resolution against injunctive orders; allow NBU and DGF officials to perform duties without interference by such orders.
    - Require courts to defer to technical expertise and discretion of NBU, DGF, CMU and Ministry of Finance on bank resolution matters.
    - Ensure judicial actions cannot result in reversal of bank resolution measures (including provisional administration and liquidation); redress provided only by monetary compensation for proven damages. Damages determination process:
      - Determined by an internationally reputable audit company appointed by court and meeting predefined criteria based on the value of shares as of the resolution date.
      - No share value considered to exist if a bank’s net worth was negative in view of all available information, including post-resolution information, and after excluding any public financial support extended to the bank and by deducting any shareholder recoveries during resolution/liquidation.
    - Require that bank resolution decisions are duly substantiated; NBU to continue strengthening its decision-making process.
  c. Resolution tools:
    - Introduced flexibilities to timelines of resolution tools where the State is involved, including establishment of a bridge bank before resolution and for a longer period, with a grace period (3 months) for compliance with prudential ratios.
    - Suspension of payments is discretionary if the State is involved in resolution.
    - Clarified specifics of sale of shares to the State (including partial stakes), defined mechanism for determination of assets and liabilities to be transferred (including list of non-transferable liabilities such as claims of related parties).
    - Facilitated bulk acquisition of assets and liabilities with contracts by an assuming bank or bridge bank, as part of liquidation process, and allowed subsequent rectification of account balance errors.

- Contingency planning and crisis management:
  - Prepared, in consultation with IMF staff and adopted by the Financial Stability Council (prior action), a credible and robust contingency plan to mitigate risks posed by adverse court rulings against past resolution decisions.
  - The plan is required to be: (a) legally sound; (b) operationally feasible; (c) safeguards financial stability; (iv) minimizes fiscal costs; and (v) minimizes moral hazard risks.
  - Financial Stability Council to review preparedness of stakeholders at regular meetings and update the plan upon material developments.

### Non-bank financial markets, credit registry, and structural policies on governance and anti-corruption
- Non-bank supervision:
  - Enacted split law transferring supervisory responsibility for non-bank financial intermediaries to the NBU.
  - Draft law formerly #6303 (to be adopted by end-October 2020): enhance independence, institutional capacity, cross-border and domestic cooperation mandate, and enforcement powers of the National Securities and Stock Market Commission to meet IOSCO standards.
  - Law simplifying investments and introducing financial instruments (#2284) to be adopted by end-June 2020.
  - Expand coverage of the centralized credit registry to non-bank credit institutions and lower threshold for submitting information for both banks and non-banks.
- Anticorruption and rule of law commitments:
  - Maintain independence and integrity of NABU, SAPO, and HACC, including adequate resources.
  - Strengthen and implement asset declaration and AML/CFT frameworks and prevent backtracking.
- Specific anticorruption measures and timelines:
  a. Illicit Enrichment:
    - Re-criminalized illicit enrichment as a prior action; will monitor implementation, including link to asset declaration income, prosecution thresholds, and acquisition via third-parties.
  b. Anticorruption court (HACC):
    - HACC formally began operations in September 2019 (established under Law No. 2018/2447-VIII).
    - Law No. 2019/100-IX passed to streamline HACC jurisdiction for NABU/SAPO cases prior to the court’s establishment.
    - By end-August 2020: HACC to be provided ownership of permanent offices (first instance and appellate levels) appropriate for needs, and security services and protocols for personnel and buildings.
    - HACC to publish reports on performance with respect to number and types of corruption cases, decisions on convictions or acquittals, and penalties imposed (in line with template in the TMU).
  c. NABU operations:
    - Uphold institutional and operational independence consistent with Law No. 2014/1698-VII; maintain limited and serious grounds for dismissal of its head.
    - Maintain NABU’s exclusive authority to investigate acts of corruption involving significant amounts or committed by high-level officials.
    - Strengthen investigative powers including undercover operations, intercepting communications, accessing computer systems and controlled delivery, without reliance on other agencies’ infrastructure, in line with AML/CFT standards.
    - Law No. 2019/187-IX amended to allow NABU to independently intercept communications.
    - Implementing regulations to be issued by end-July 2020.
    - NABU to be provided adequate resources and equipment to implement interception of communications for landlines by end-September 2020.
    - Ensure conduct of an external audit of NABU by a three-member panel of reputable experts with considerable international experience; audit to include clear and prioritized recommendations on effectiveness and independence.
    - Ensure proposed financial investigative body for economic crimes will not have overlapping criminal jurisdiction with NABU; NABU will retain primary jurisdiction over criminal corruption cases.
    - NABU and SAPO to publish quarterly statistics on corruption cases investigated and prosecuted and pending cases before HACC (in line with TMU template).
  d. SAPO:
    - Ensure autonomy, review legal framework to improve selection procedures, strengthen capacity to regulate organizational activities similar to regional prosecutorial offices, and assess performance via external audit by reputable experts.
  e. E-declaration:
    - Amendments to NAPC law ensure NABU has direct, unconditional, full and secure electronic access to NAPC’s database of asset declarations for persons under NABU’s jurisdiction (Law No. 2019/140-IX).
    - Implementing regulations issued and registered through the Ministry of Justice.
    - Mechanisms to facilitate NABU’s automatic and unrestricted electronic access to NAPC database of asset declarations by end-June 2020.
    - Strengthened NAPC governance to focus verification efforts toward PEPs.
  f. AML implementation:
    - Prior action: amendments to the AML legal framework to ensure:
      (i) 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);
      (ii) definition of persons related to PEPs consistent with FATF risk-based approach;
      (iii) proportionate and dissuasive sanctions can be implemented by the NBU and other supervisory authorities for AML breaches;
      (iv) information on beneficial owners in the Unified State Register of Legal Entities, Entrepreneurs, and Public Associations is up-to-date, accurate and publicly accessible;
      (v) conviction for a predicate offense is not necessary for investigation or prosecution of money laundering.
    - By end-December 2020: improve beneficial ownership information in the Unified State Register with mechanisms to sanction legal entities for non-compliance, ensure open and public access, and require financial institutions to report discrepancies.
    - State Financial Monitoring Service of Ukraine to continue publishing quarterly statistics on information disseminated to NABU (in line with TMU template).
    - NBU to continue at least four quarterly inspections of banks at higher risk of laundering proceeds of corruption, focused on customer due diligence and PEP requirements, including verifying source of wealth and beneficial ownership information.

*Source: 1ukrea2020001 - 18.      We are stepping up efforts to address the high level of legacy non-performing loans*

### 26.      We will strengthen the rule of law, by ensuring the independence, integrity and

### 26.      We will strengthen the rule of law, by ensuring the independence, integrity and

### Judicial independence, integrity and accountability
- Strengthen judicial selection processes and disciplinary mechanisms (including for the Supreme Court) ensuring management and implementation by persons with high competence, trustworthiness and integrity.
- Strengthen administrative procedures to give sufficiently superior level of judicial consideration to cases challenging decisions of national state agencies and provide safeguards against undue influence.
- Actions to be taken (consistent with European judicial standards and Venice Commission opinions):
  - a. Amend the Law on the High Council of Justice (HCJ) to enhance the selection process ensuring that its members have impeccable reputation and integrity (an end-October 2020 structural benchmark). Through an amendment of the HCJ Law (Law No. 2016/1798-VIII), and consistent with the March 2020 decision of the Constitutional Court, an independent commission will be established to pre-screen potential candidates to the HCJ and assess their integrity. This commission will perform a similar one-off screening of existing HCJ members. At least half of the commission’s members will be respected experts with recognized ethical standards and judicial experience, including with relevant experience in other countries. The commission will give said experts a crucial role and decisive vote. The amendment will outline procedures and criteria for the pre-selection process for HCJ candidates, including a call by the commission for applications. The commission will then nominate at least two persons for each vacancy, which will be forwarded to the respective appointing authorities as designated by the Constitution for final selection and approval. In case of negative assessment by the commission of an existing HCJ member, the commission will send and publish a recommendation for dismissal to the respective appointing authority.
  - b. Amend the HCJ’s organic law (Law No. 2016/1798-VIII) by end-November 2020 to create a permanent inspectorate unit in the HCJ responsible for investigating disciplinary cases against judges and submitting recommendations to the HCJ for disciplinary actions and sanctions against judges. The unit will be composed of permanent staff to ensure consistency in investigative practice and continuity and evenhandedness in the treatment of judicial disciplinary cases.
  - c. Amend the procedural codes to transfer the judicial review of exemplary administrative cases against national state agencies to the Supreme Court, as a court of first instance, and to the Grand Chamber of the Supreme Court, as an appellate court. Criteria for determining exemplary administrative cases will be finalized by end-August 2020 (in consultation with stakeholders and agreement with IMF staff). Criteria will include factors such as cases of national importance, cases above a pre-determined threshold amount, or having significant impact or damage to the country, and will cover decisions, acts or omissions of specific national state agencies (such as Cabinet of Ministers, Ministries, National Bank of Ukraine, Anti-Monopoly Committee, HCJ, NABU, NACP, HACC).
  - d. Law No. 2020/460-IX enacted to optimize court procedures by reducing heavy caseload and rationalize administrative courts’ ability to suspend decisions of national state agencies.

### Energy sector reforms — objectives and measures
- Objective: avoid re-emergence of quasi-fiscal deficits, enhance competition, increase production, and achieve energy independence while providing utility subsidies to low-income and vulnerable households.
- Specific measures:
  - a. Gas prices:
    - Liberalized household gas prices as of January 1, 2020 in line with CMU resolution #867.
    - Wholesale price of gas supplied by Naftogaz under special obligations will correspond to import-parity levels and be determined monthly as the average of the day-ahead spot prices of natural gas at the TTF hub for the period of the 1st to the 22nd day of the month, plus cost of transportation and entry into Ukraine. Naftogaz will post the wholesale price within a few business days of the 22nd of each month.
    - Commit to apply this market-based pricing scheme symmetrically, without any ceiling.
    - Public Service Obligation Order for supply of gas to households will be terminated on July 1, 2020; Public Service Obligation Order will remain in effect until May 2021 only for supply of gas to utility companies and tariffs will be based on fully market-determined gas prices; NEURC will bring distribution tariffs to full cost recovery.
  - b. Heating tariffs:
    - Eliminated cap on household heating tariffs by revoking CMU resolution #560 of June 26, 2019 (a prior action).
    - By end-August 2020, all heating tariffs under NEURC and local authorities are to be reviewed and officially enacted to fully reflect gas and non-gas costs (including capex) (part of a structural benchmark).
    - By end-June legislate an October 1st, 2020 deadline for all new utility service contracts incorporating revised heating tariffs to be concluded.
    - Heating tariffs to be reviewed and set at least once per year before heating season starting 2020–21.
    - Prior to 2020-21 heating season rescind CMU resolution #1082 of December 24, 2019.
    - Develop, in consultation with the World Bank, mechanisms to provide buffers for district heating companies to deal with wholesale gas price volatility.
  - c. Supplier of last resort (SOLR):
    - Set up temporary SOLR mechanism; select SOLR through competitive tender by end-June 2020.
    - Ensure SOLR has full access to consumer database (see joint data hub for gas household consumers).
  - d. Enhancing retail competition:
    - Simplify supplier switching for household consumers so that (i) minimum administrative burden; (ii) new supplier can act as principal point of contact; (iii) start of supply by new supplier not hampered by disputes with previous supplier (part of structural benchmark for end-August 2020).
    - Household consumers must have right to authorize sharing historic consumption data; distribution system operators required to provide access to historic consumption data to any supplier chosen by household consumer, free of charge.
    - Launch a joint data hub for gas household consumers.
  - e. Debt restructuring and collection:
    - Address indebtedness and payment discipline of households, district heating companies and oblgazs.
    - Develop instruments for district heating companies to enforce collection of payments from households (including via higher fines and simplified legal enforcement).
  - f. Gas transit:
    - Established an independent and commercially oriented gas transmission system operator certified by NEURC, following review and confirmation by the European Energy Community that it is in compliance with relevant European legislation.
  - g. Regulation:
    - Adopt legislation to bring NEURC powers and responsibilities in line with the EU Third Energy Package and Energy Community Treaty and the 2016 NEURC law by end-March 2021.
    - Amend and enforce gas market secondary legislation in line with the European gas market acquis.
  - h. Production:
    - Simplify and accelerate procedures for obtaining permits for exploration and development of gas fields, ensuring transparency, including open permit auctions (through ProZorro.Sale) and production sharing agreement tenders.
    - Promote investment in existing fields to increase extraction while ensuring compliance with environmental standards.

### Land reform
- Establish a market for agricultural land by lifting moratorium on land sales and introducing financial support mechanism for small farmers.
- Measures:
  - a. Land property rights:
    - Enacted law “On Agricultural Land Turnover” (developed with World Bank assistance, but with amendments) to allow Ukrainian individuals to purchase and sell land up to 100 hectares effective July 1, 2021, and legal entities owned by Ukrainians up to 10,000 hectares starting in 2024. Will explore opportunities to bring forward greater participation and competition.
  - b. Safeguards:
    - Enacted legislation mandating: (i) automating exchange of information between registry of property rights and land cadaster, digitization and transfer to registry of property rights of all paper records (anti-raider legislation (#0858)); and (ii) ensuring free and open access to cadaster data and interoperability of land cadaster and registry of property rights (#2370).
    - By end-June 2020 enact legislation that (i) establishes a partial credit guarantee fund to ensure financial support to small farmers through provision of portfolio credit guarantees; (ii) streamlines land transfer procedures and decentralizes land management (#2194), transferring state land to communal ownership and shifting land use control functions from cadaster to appropriate bodies; and (iii) establishes a transparent process for electronic land auctions and mandates sale of state and communal land on such auctions (#2195).
  - c. Implementation and monitoring:
    - By January 1, 2021 establish a public monitoring system linking information from cadaster, registry, and fiscal service at parcel level to ensure legal provisions implemented and prevent tax evasion.
    - Implement mechanism to identify ultimate beneficial owners of legal entities that own land to prevent circumvention of AML/CFT rules.
    - Link company registry with registry of property rights and implement safeguards to ensure beneficial ownership data in company registry is accurate and up to date.

### Privatization, SOE reform, and markets
- Commitment to SOE-reform strategy focusing on significant downsizing of state-owned enterprise sector.
- Actions:
  - a. Privatization:
    - Appointed new management at the State Property Fund (SPF); parliament adopted legislation to reduce list of companies banned from privatization, leaving only companies of strategic importance or essential for national security on the list.
    - As of end-March 2020, transferred 530 companies from line ministries to the SPF.
    - SPF will aim to launch tenders for sale of at least 2 large SOEs by end-December 2020, market conditions permitting, and at least 3 more by end-June 2021, including companies from list: the Odesa Portside Plant, United Ore and Mining Company, Centre Energo, Elekrovazhmash, Krasnolymanska mine, and the President Hotel.
    - Continue sale of small companies and assets and leasing of state property through open, competitive and transparent two-tier electronic auctions (ProZorro.Sale).
    - Amend privatization law by end-November 2020 to extend period during which companies can be sold under UK law by at least three years and to enhance SPF’s capacity and streamline procedures.
    - Adopted legislation on leasing of state property and on concessions to attract private investment in public asset management, including in seaports and airports.
  - b. SOE governance:
    - Ensure SOEs—including state-owned banks—operate at arm’s length of government by safeguarding progress in strengthening corporate governance, including maintaining majority-independent supervisory boards.
    - Further strengthen SOE corporate governance by: (i) revising corporate governance framework for SOEs, with assistance of OECD and EBRD, to align with OECD Guidelines on Corporate Governance of State-Owned Enterprises; (ii) adopting draft SOE corporate governance law to broaden powers of supervisory boards to appoint CEOs and approve financial plans; (iii) adopting an overarching state ownership policy; and (iv) adopting a new corporate charter for Naftogaz (structural benchmark, by end-September, 2020), in line with OECD recommendations and applicable legislation, including current law “On Joint Stock Companies”.

### Anti-Monopoly Committee (AMCU) strengthening
- Adopt legislation to ensure:
  - (i) financial and operational independence of AMCU;
  - (ii) appointment and dismissal of AMCU chairperson and commissioners are transparent, competitive and insulated from political interference;
  - (iii) strengthened powers of AMCU to conduct physical searches and confiscate documents and to obtain and share information with law enforcement agencies and other government bodies;
  - (iv) decisions of AMCU gain status of enforcement documents, removing need for court process to enforce decisions.

### Key quantitative targets and indicators (selected items from Table 1)
- Ceiling on the cash deficit of the general government (- implies a surplus):
  - December 2019 Act.: 80,812
  - PC June 2020: 180,000
  - PC September 2020: 217,000
  - PC March 2021: 302,150
  - IT June 2021: 45,000
  - IT September 2021: 90,000
- Floor on net international reserves (in millions of U.S. dollars):
  - December 2019 Act.: 15,785
  - PC June 2020: 12,268
  - PC September 2020: 9,137
  - PC March 2021: 7,567
  - IT June 2021: 9,618
  - IT September 2021: 10,296
- Ceiling on publicly guaranteed debt:
  - December 2019 Act.: 4,900
  - PC June 2020: 40'000
  - PC September 2020: 40'000
  - PC March 2021: 40'000
  - IT June 2021: 20,000
  - IT September 2021: 20,000
- Inflation target (end of period, year-on-year headline inflation):
  - 2020 and 2021: 5.0
  - Outer consultation bands: +/- 3pp for 2020 and 2021.
  - Inner consultation bands: +/- 1pp.
- Ceiling on net domestic assets of the NBU:
  - December 2019 Act.: 103,604
  - PC June 2020: 225,670
  - PC September 2020: 287,818
  - PC March 2021: 319,300
  - IT June 2021: 278,166
  - IT September 2021: 269,552
- Program accounting exchange rate, hryvnia per U.S. dollar: 23.6862 (listed repeatedly as program rate).

### Prior actions and structural benchmarks (selected from Table 2)
- Prior actions marked "Met":
  - 1. Amend the customs and tax codes, and other laws as needed, to eliminate the regional tax and customs offices as independent legal entities (¶8b).
  - 2. Enact legislative package that amended the Banking Law, the DGF Law, the Code of Administrative Justice, and other procedural codes to improve the early intervention and bank resolution frameworks as defined in ¶22.
  - 3. Adoption by the FSC of a contingency plan to mitigate potential risks posed to financial stability and public finances by adverse court rulings against past resolution decisions that is: (a) legally sound; (b) operationally feasible; (c) safeguards financial stability; (iv) minimizes fiscal costs; and (v) minimizes moral hazard risks (¶23).
  - 4. Enact legislation to re-criminalize illicit enrichment consistent with international standards and Ukraine’s Constitution (¶25a).

*Source: Excerpt from the IMF staff report text provided in the content unit.*

### 5. Adopt amendments to the AML law consistent with FATF

### 1ukrea2020001 - 5. Adopt amendments to the AML law consistent with FATF

### Prior actions and immediate outcomes
- 5. Adopt amendments to the AML law consistent with FATF standards and as defined in ¶25f. — Met
- 6. Eliminate the cap on household heating tariffs (¶27b) — Met

### Structural benchmarks (status and completion dates)
- 1. The state-owned banks’ NPL reduction plans to be formally endorsed by the shareholder and approved by the Financial Stability Council (FSC) and the NBU (¶18). — End-June 2020
- 2. Ensure that all heating tariffs under the jurisdiction of both NEURC and local authorities are reviewed and officially enacted to fully reflect gas and non-gas costs (including capex), , and adopt a simplified procedure for households to switch gas supplier, in line with ¶27 b and d. — End-August, 2020
- 3. Develop new organizational structures and frameworks for the STS and SCS for the delegation of authorities and accountabilities in both organizations as single legal entities (¶8b). — End-September 2020
- 4. Enact amendments to the Banking Law, prepared in coordination with the IMF and World Bank staff: (i) to address the gaps vis-à-vis sound corporate governance practices against the 2015 Basel’s Guidelines for Corporate Governance for banks (including the collective suitability of the supervisory board); (ii) to introduce a new capital structure (with appropriate implementation schedule) and capital buffers, (iii) to grant the NBU legal powers to calibrate capital and liquidity requirements based on the bank’s risk profile: and (iv) to strengthen the licensing and shareholder requirements (¶21) — End-November 2020
- 5. Enact amendments to the DGF and other laws to improve the bank liquidation mechanism, and the recovery of assets (¶19a). — End-October 2020
- 6. Enact amendments to the Law on the High Council of Justice (HCJ) to enhance its selection process ensuring that its members have impeccable reputation and integrity, as defined in ¶26a. — End-October 2020
- 7. Strengthen corporate governance in SOEs, including by adopting a new corporate charter for Naftogaz, to bring it in line with the OECD’s recommendations for corporate governance and other applicable legislation, including the law “On Joint Stock Companies (¶29b). — End-September 2020
- 8. The STS and SCS to operate nationally as two single legal entities both comprising of functionally organized headquarters and field offices and the regional and other legal entities of the STS, SCS and SFS have ceased to exist (¶8b). — January 1, 2021
- 9. Complete a compliance audit by the State Audit Service of Ukraine, in consultation with external/third party auditors, of COVID-related spending, as defined in ¶2e. — End-March, 2021

### Technical Memorandum of Understanding (TMU): scope and definitions
- TMU establishes understandings between Ukrainian authorities and IMF staff on quantitative targets (performance criteria and indicative targets) and the monetary policy consultation clause (MPCC) under the Stand-By Arrangement described in the Letter of Intent dated June 2, 2020 and attached MEFP.
- All exchange rates used to evaluate reserve levels and monetary aggregates are:
  - (i) the official exchange rate of the Ukrainian hryvnia to the U.S. dollar of 23.6862 set by the National Bank of Ukraine (NBU) as of December 28, 2019; and
  - (ii) reference exchange rates of foreign currencies reported by Bloomberg (“BFIX quotes”) as of December 27, 2019, which the NBU used to set official exchange rates of hryvnia to those currencies and reported as of December 28, 2019.
- Specific accounting exchange rates noted:
  - Swiss Franc = 0.9759 per dollar
  - Euro = 1.1155 dollars
  - Pound Sterling = 1.3096 dollars
  - Australian dollar = 0.6975 U.S. dollars
  - Canadian dollar = 0.7642 dollars
  - Chinese Yuan = 0.1429 U.S. dollars
  - Japanese yen = 109.5265 per dollar
  - SDR accounting exchange rate = 0.724357 per dollar
  - Official gold holdings valuation = 1,511.52 dollars per fine ounce
- 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.
- Debt is defined as current, i.e., not contingent, liability created under contractual arrangement requiring future payments in assets or services; forms include loans, suppliers’ credits, and leases (with debt for leases equal to the present value at inception of lease payments excluding operation/maintenance).

### Net International Reserves (NIR) — definition and components
- Definition:
  - NIR of the NBU are the dollar value of the difference between usable gross international reserve assets and reserve-related liabilities to nonresidents, evaluated at program exchange rates.
- Usable gross international reserves exclude, inter alia:
  - any assets denominated in foreign currencies held at, or claims on, domestic institutions;
  - all foreign currency claims of the NBU on domestic banks, and NBU deposits held at the Interbank Foreign Currency Exchange Market and domestic banks for trading purposes;
  - any precious metals or metal deposits other than monetary gold and gold deposits held by the NBU;
  - any assets that correspond to claims of commercial banks in foreign currency on the NBU and any reserve assets that are (i) encumbered; or (ii) pledged as collateral; or (iii) frozen;
  - any reserve assets not readily available for intervention in the foreign exchange market.
- Reserve-related liabilities comprise:
  - 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 (notional value of commitments, not market value);
  - all foreign exchange liabilities of the NBU to resident entities not already excluded from reserve assets, excluding foreign exchange liabilities to the general government or related to deposit guarantees.

### NIR adjustment mechanism (summary)
- NIR targets adjusted upward (downward) by the full amount of the cumulative excess (shortfall) in program disbursements relative to the baseline projection (Table B).
- NIR targets adjusted upward (downward) by the full amount of the cumulative shortfall (excess) in Eurobond or private placement debt service from the amounts expected under the baseline.
- 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.
- Symmetric adjuster applied if the NBU converts any non-reserve currency under a central bank swap into a reserve currency through outright sale: adjusted upward by the amount converted; adjusted downward by the amount when the NBU repays the non-reserve currency provided under a swap (principal and interest).
- In case of use (draws) of reserve currency under a central bank swap agreement with maturity over 1 year, symmetric adjuster applied: NIR targets adjusted upward by the amount used with maturity over 1 year and adjusted downward when repaid.
- NIR targets adjusted upward (downward) by the full amount of the cumulative excess (shortfall) from the transfer of unencumbered confiscated foreign exchange assets to international reserves at the NBU or, if not transferred, by the use of confiscated assets held at other accounts to make government FX payments, over (under) baseline amounts.

### Table B — Projections for NIR/NDA adjustment (cumulative flows from January 1, 2020, millions of U.S. dollars at program exchange rate)
- Eurobonds and placements / EU / World Bank / Others / Total
  - End-June 2020: 1,394 / 558 / 1,000 / 0 / 2952
  - End-September 2020: 1,394 / 1,116 / 1,000 / 0 / 3,510
  - End-December 2020: 2,394 / 1,116 / 1,000 / 0 / 4,510
  - End-March 2021: 3,894 / 1,116 / 1,000 / 0 / 6,010
  - End-June 2021: 3,894 / 1,673 / 1,000 / 0 / 6,568

### Net Domestic Assets (NDA) — definition and adjustment
- Definition:
  - NDA of the NBU are the difference between the monetary base (as defined in the TMU) and the NIR of the NBU (as defined above, excluding the conversion of a non-reserve currency to a reserve currency through an outright sale under a central bank swap agreement of exchange of deposits). For computing the NDA target, the NIR is valued at the program exchange rates defined in paragraph 3 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 defined as 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 are 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 consist of deposits at the NBU that are included in broad money and denominated in national currency (NBU liabilities accounts of groups 323 and accounts 3250, 4731, 4732, 4735, and 4739).
- NDA adjustment mechanism:
  - NDA targets adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in program disbursements relative to the baseline projection (Table B) and evaluated at the program exchange rates.
  - NDA targets adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in Eurobond or private placement debt service from baseline expectations.
  - NDA targets adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in net issuance of central government’s domestic foreign exchange debt liabilities over (under) baseline amounts.
  - NDA targets adjusted downward (upward) by the full amount of the cumulative excess (shortfall) from the transfer of confiscated foreign exchange assets to international reserves at the NBU or, if not transferred, by the use of confiscated assets held at other institutions to make budget FX payments, over (under) baseline amounts.

### 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.
- Consultation triggers:
  - Consultation with the IMF Executive Board triggered if observed headline inflation falls outside an outer band of +/-3 percentage points around the mid-point targets for 2020 and 2021. Consultation would focus on (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) reasons for program deviations, taking into account compensating factors; and (iii) proposed remedial actions, if deemed necessary.
  - If observed headline inflation falls outside an inner band range of +/- 1 percentage points around the mid-point targets for 2020 and 2021, the authorities will complete a consultation with IMF staff on reasons for the deviation and the proposed policy response.

*Source: Technical Memorandum of Understanding, June 2, 2020 (Attachment II), and Table 2: Prior Actions and Structural Benchmarks.*

### 13.      The cash deficit of the general government is measured by means of net financing flows

### 1ukrea2020001 - 13.      The cash deficit of the general government is measured by means of net financing flows

### Definition and components of the cash deficit of the general government
- The cash deficit of the general government is measured by means of net financing flows excluding the impact of valuation changes as:
  - total net treasury bill sales (in hryvnias and foreign currency) as measured by the information kept in the NBU registry of treasury bill sales (net treasury bill sales are defined as the cumulative total funds realized from the sales of treasury bills at the primary auction and government securities issued for recapitalization of banks and state-owned enterprises (SOE), less the cumulative total redemption of principal on treasury bills), excluding bonds issued to recapitalize Naftogaz and other SOEs; plus
  - other net domestic banking system credit to general government (as defined above) as measured by the monetary statistics provided by the NBU (this consists of all non-treasury bill financing in either domestic or foreign currency extended to the general government by banks less the change in all government deposits in the banking system) as well as any other financing extended by entities not reflected by the monetary statistics provided by the NBU; plus
  - total receipts from privatization (including the change in the stock of refundable participation deposits and the sale of nonfinancial assets) and the proceeds from uncompensated seizures; plus
  - the difference between disbursements and amortization on any bond issued by the general government or the NBU to nonresidents for purposes of financing the deficit of the general government; plus
  - the difference between disbursements of foreign credits to the general government (including project loans on lent to public enterprises) and the amortization of foreign credits by the general government (including on lent project loans); plus
  - the net sales of SDR allocation in the SDR department; plus
  - the net change in general government deposits in nonresident banks, or other nonresident institutions; plus
  - net proceeds from any promissory note or other financial instruments issued by the general government.

- Notes and definitions:
  - From here on, treasury bills are defined as all treasury securities (including long-term instruments or treasury bonds).
  - Bonds issued to recapitalize Naftogaz are excluded from general government treasury bill financing unless they are used by Naftogaz as collateral for a loan or as an outright sale to obtain financing; in that case they are included in Naftogaz cash deficit financing.

### Treatment of foreign currency flows and deposits
- All flows to/from the budget in foreign currency (including from the issuance of foreign currency denominated domestic financial instruments) are accounted in hryvnias at the official exchange rate established as of the date of the transaction.
- Financing changes resulting from exchange rate valuation of foreign currency deposits are excluded from the deficit.
- Government deposits in the banking system exclude VAT accounts used for electronic administration and escrow accounts of taxpayers used for customs clearance.

### Adjustment mechanism for the cash deficit ceiling (general government)
- The ceiling on the cash deficit of the general government is subject to an automatic adjustor based on deviations of external project loans (disbursements from bilateral and multilateral creditors to the consolidated general government for specific project expenditure) from program projections (Table C). Specifically, if the cumulative proceeds from external project financing (in hryvnia evaluated at actual exchange rates):
  - exceed program projections, the ceiling on the consolidated general government deficit will be adjusted upward by 100 percent of the excess in external project financing; and
  - fall short of program projections, the ceiling on the consolidated general government deficit will be adjusted downward by 100 percent of the shortfall in external project financing.
- The ceiling on the cash deficit of the general government is subject to an automatic downward (upward) adjustment by 100 percent of the amount of the budget support grants received in excess (in short fall) of the program amounts (Table C).

- Table C (Cumulative flows from January 1, 2020 and January 1, 2021, in millions of hryvnia)
  - External project financing (Technical assumption for the adjustor purpose)
    - End-June 2020: 14,300
    - End-September 2020: 18,900
    - End-December 2020: 22,700
    - End-March 2020: 6,000
    - End-June 2020: 12,000
  - Budget support grant (Technical assumption for the adjustor purpose)
    - End-June 2020: 812
    - End-September 2020: 1,135
    - End-December 2020: 2,217
    - End-March 2020: 804
    - End-June 2020: 804

- Additional adjustors and rules:
  - The ceilings on the cash deficit of the general government are subject to an automatic adjustor corresponding to the full amount of government bonds issued for the purposes of banks recapitalization and DGF financing, up to a cumulative maximum UAH 15 billion from January 1, 2020. The amount included in the targets is zero.
  - The ceiling on the cash deficit of the general government will be adjusted downward by the full amount of any increase in the stock of budgetary arrears on social payments accrued since the start of the fiscal (calendar) year. Budgetary arrears on social payments comprise all arrears of the consolidated budget on wages, pensions, and social benefits owed by the Pension Fund, the Unemployment Fund and the Fund for Social Insurance of Ukraine, and the central or local governments. Budgetary arrears are defined as payments not made 30 days after they are due. Wages comprise all forms of remuneration for work performed for standard and overtime work. This definition excludes unpaid pensions to individuals who resided or continue to reside in the territories that are temporarily outside the government control.
  - The ceiling on the cash deficit of the general government will be adjusted downward by the full amount of any increase in the stock of VAT refund arrears as defined in section F.
  - The ceiling on the cash deficit of the general government is subject to an automatic downward adjustment corresponding to the full amount of profits transferred by the NBU in excess of the amount accounted for in the 2020 supplementary budget (Law 553-IX of April 13, 2020).
  - The ceiling on the cash deficit of the general government will be adjusted upwards by the full amount of any operation involving GDP warrants (state derivatives) issued during restructuring in 2015-16, including exchange or buy-back.

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

### Inclusion of Naftogaz in the deficit ceiling (Performance Criterion)
- Definition:
  - The cash deficit of the general government and Naftogaz is the cash deficit of the general government as defined above plus the cash deficit of Naftogaz.
  - Naftogaz is defined as the national joint stock company “Naftogaz of Ukraine” and its subsidiaries (collectively, the “Naftogaz Group”).

- The cash deficit of Naftogaz is measured from below the line as:
  - net domestic banking system credit to the company (this consists of all financing in either domestic or foreign currency extended to the company by banks less the change in company deposits in the banking system); plus
  - the difference between disbursements of private foreign loans to Naftogaz (including private placements) and the amortization of private foreign loans (including private placements); plus
  - the difference between disbursements of official foreign credits to Naftogaz (including project loans) and the amortization of official foreign credits (including project loans); plus
  - the disbursements of trade credits to import gas; plus
  - the difference between disbursements and amortization on any bonds issued by Naftogaz; plus
  - the net change in deposits of Naftogaz in nonresident banks, or other nonresident institutions; plus
  - net proceeds from any promissory note or other financial instruments issued by Naftogaz; plus
  - net receipts from sale of financial assets (including recapitalization or other form of treasury securities issued to Naftogaz, irrespective of their issuance date); plus
  - any other forms of financing of the company not identified above.

- Foreign currency treatment for Naftogaz:
  - For the purposes of measuring the deficit of Naftogaz, all flows in foreign currency will be accounted in hryvnias at the official exchange rate as of the date of the transaction. When there are arrears outstanding as of the test date, the official exchange rate on the test date will apply to their valuation.

- Adjustment mechanism specific to Naftogaz:
  - All the adjustors as specified in section D for the Cash Deficit of the general government also apply to the general government component of this ceiling on the cash deficit of the general government and Naftogaz.
  - The ceiling on the cash deficit of the general government and Naftogaz will be adjusted upward by the amount Naftogaz’s investment expenditure in excess of UAH 15 billion, but by no more than UAH 25 billion (corresponding to a total investment expenditure of UAH 40 billion).

### Ceiling on VAT refund arrears and overpaid Corporate Profit Tax (Indicative targets)
- VAT refund arrears:
  - The ceiling on the stock of active VAT refund arrears is set to UAH 0 billion.
  - The stock of active VAT refund arrears is defined as those claims that have not been settled (through a cash refund, netting out against obligations of taxpayers, payment with a government bond (VAT bond) or an official decision to reject the claim) within a specified time period after the VAT refund claim has been submitted to the State Tax Service (STS). This time period is 74 days, allowing for verification of the validity and payment processing of claims.

- Overpaid Corporate Profit Tax:
  - The ceiling on the change of overpaid Corporate Profit Tax is set at 0 million UAH.
  - Overpaid Corporate Profit Tax is defined as the amounts of corporate profit tax which have been remitted to the respective budget in excess of the amount which was due for that date.
  - The change in overpaid corporate profit tax is measured cumulatively from January 1, 2020.

### Ceiling on state budget primary spending and consolidated social funds (Indicative target)
- Definition:
  - The ceiling on the state budget primary and social funds is defined as current cash expenditure of the state government of Ukraine net of interest payments on domestic and external debt and net of transfers from the state budget to the pension fund, plus total expenditures of the pension fund, unemployment fund and social insurance fund of Ukraine, plus payments of any past expenditure arrears.
  - The ceiling is based on the definition as reported in the monthly treasury report (Kv_1ek) adjusted for Ukravtodor debt repayment and on information provided by the aforementioned extra budgetary funds.

- Adjustor:
  - The ceiling on state budget current primary expenditure is subject to an automatic downward adjustor on the accumulation of new budgetary arrears on wages and social benefits owed by the state budget and social funds. Budgetary arrears are defined as payments not made 30 days after they are due.

### Ceiling on accumulation of new external debt payment arrears (Continuous Performance Criterion)
- Definition:
  - For purposes of the PC on the non-accumulation of new external payment arrears, arrears are defined as external debt obligations of the government that have not been paid when due in accordance with the relevant contractual terms (taking into account any contractual grace periods).
  - This PC excludes arrears on external financial obligations of the government subject to rescheduling.

### Ceiling on publicly guaranteed debt (Performance Criterion)
- Definition:
  - The ceiling on publicly guaranteed debt applies to the amount of guarantees issued by the central (state) government. The official exchange rate will apply to all non-UAH denominated debt.
  - This ceiling excludes guarantees issued by the Ministry of Finance for NBU borrowings from IMF.

- Adjustor:
  - The ceiling on publicly guaranteed debt is subject to an automatic upward adjustor for guarantees signed for selected projects financed by the EIB and the EBRD, namely:
    - (i) loan to UGV to purchase equipment for gas extraction;
    - (ii) loans to UkrPoshta to improve network of post offices;
    - (iii) working capital loan to UkrEnergo;
    - (iv) loan to Ukrainian Railways;
    - (v) loans to Ukrenergo to modernize the electricity grid and substations.
  - The adjustor will be capped at 21 bil UAH.

### Other continuous performance criteria
- During the period of the Stand-By Arrangement, Ukraine will not:
  - (i) impose or intensify restrictions on the making of payments and transfers for current international transactions;
  - (ii) introduce or modify multiple currency practices;
  - (iii) conclude bilateral payments agreements that are inconsistent with Article VIII; and
  - (iv) impose or intensify import restrictions for balance of payments reasons.

### Official exchange rate determination
- The NBU will set the official UAH/USD rate daily based on a weighted average of the exchange rates from the day’s interbank market deals, excluding outliers.
- To calculate the official exchange rate, information on all deals concluded and provided to the NBU by trade information systems until 3:30 pm on the day will be considered regardless of the settlement date. Specifically, tod, tom and spot (T+2) deals will be included.
- Outliers are transactions for which the exchange rate deviates from the arithmetic mean for all transactions by more than 2 percent and the rate or volume deviates from the arithmetic mean for all remaining transactions by more than 2 standard deviations.
- Back-up mechanism:
  - If by noon the number of transactions to be taken into account for the calculation is less than or equal to 10 percent of the average daily value for the previous month, the rate will be calculated as the arithmetic mean of all quotations for purchases or sales of US$1 million submitted by banks from noon to 1pm.
- The 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
- Gas wholesale pricing:
  - As of January 1, 2020 the wholesale price of gas supplied by Naftogaz under special obligations will correspond to import-parity levels and will be determined for each month as the average of the day-ahead spot prices of natural gas at the TTF hub for the period of the 1st to the 22nd day of the month, plus the cost of transportation and entry into Ukraine.
  - Naftogaz will post the wholesale price within a few business days of the 22nd of each month.
- Heating tariffs:
  - By end-August 2020, all heating tariffs under the jurisdiction of both NEURC and local authorities are reviewed and officially enacted to fully reflect gas and non-gas costs (including capex).

### Reporting requirements (selected NBU obligations)
- Monthly and annual sectoral balance sheets:
  - The NBU will provide to the IMF monthly sectoral balance sheets for the NBU and other depository corporations (banks) according to the standardized reporting forms (SRFs), no later than the 25th day of the following month (except for SRFs for the end of the reporting year, which should be provided no later than the 41st day after the reporting year).
- Reserves and flows:
  - The NBU will provide to the IMF, on a weekly basis, daily operational data on the stock of net and gross international reserves, at both actual and program exchange rates.
  - Monthly, no later than the 20th of the following month, the NBU will provide balance data on the stock of net and gross international reserves and flows affecting net international reserves, and no later than the 25th of the following month, the NBU will provide data on the currency composition of reserve assets and liabilities.
- Daily foreign exchange and interventions:
  - The NBU will provide to the IMF daily information on total foreign exchange sales (including total from nonresidents and sales by clients in the interbank market, as well as any obligatory sales, if any) and approved foreign exchange demand in the interbank market, including Naftogaz foreign exchange purchases.
  - The NBU will provide the IMF daily information on official foreign exchange interventions and intervention quotations and the results of any foreign exchange auctions.
- Analytical and holdings data:
  - The NBU will 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.”
  - The NBU will continue to provide on its web site the daily holdings of domestic government securities as well as information on primary auctions and secondary market sales. The NBU will provide to the IMF information on daily holdings of government securities broken down by type of holders at primary market prices at the rate fixed on the day of auction; information on domestic government securities sales, from the beginning of the year at the official rate as of the date of placement, as well as the domestic government securities in circulation, by principal debt outstanding at the official exchange rate as of the date of placement; reports on each government securities auction; and monthly report on government securities holdings, in the format agreed with the IMF staff, i.e., broken down by currencies and by holders—non-resident investors, resident non-bank, and resident banks, the latter further broken down by bank group (State Participation, Foreign Banking, and Private Capital).
- Secondary market transactions:
  - The NBU will provide information on daily transactions (volumes and yields) on the secondary market treasury bills (including over-the-counter transactions and with a breakout for any NBU transactions).
- Financial statements and operations:
  - The NBU will provide to the IMF its financial statements (income and expenses as well as balances on the general reserves) for the current and, if available, projections for the following year, as approved by the NBU’s Board. The IMF is to be notified immediately of any update.
  - The NBU will continue to provide to the IMF daily and monthly data on the NBU financing operations (including swaps or refinancing) of the banks of Ukraine, and on the operations of mopping up (absorption) of the liquidity from the banking system (including through the CDs issuance) in the formats and timeliness agreed with the IMF staff.
  - The NBU will provide, on a weekly basis, bank-by-bank information on the outstanding amount and weighted-average interest rates of loans from the NBU, reported by type of lending.
  - On a monthly basis, the NBU will provide information on the collateral that has been pledged to the NBU for loans (by bank and loan type as well as by collateral type, haircut and currency). The weekly and monthly reporting of NBU loans and collateral will separately identify which banks are under temporary administration or liquidation.

*Italic: IMF staff summary as provided in the source content.*

### 38.      The NBU will provide to the IMF, on a monthly basis but not later than 30 days after the

### 1ukrea2020001 - NBU and other authorities: reporting requirements to the IMF

### Banking sector and financial soundness indicators
- Monthly: NBU will provide the IMF the report on the banking sector indicators in the format agreed with the IMF staff, no later than 30 days after the expiration of the reporting month.
- Monthly: NBU will provide core and expanded FSIs, as defined in the IMF Compilation Guide, for the aggregate as well as individual banks in State Participation Group, Foreign Banking Group and Private Capital Group.

### Depository corporations, monetary and bank balance-sheet data
- Daily and monthly: NBU will provide the IMF with the depository corporations surveys, including additional information needed to monitor monetary policy and banking sector developments.
  - Timing: not later than on the 25th day after the termination of the report month (except report data as of the end of the report year, which should be submitted not later than the 41st day after the report year).
  - Content highlights: net domestic assets (including NBU loans and liabilities with banks); detailed information on banking sector loans to general government broken down by indebtedness of the central (state) government and local budgets and the DGF; balances of government funds held at the NBU (including Single Treasury Account account 3240 A and Treasury foreign currency account 3513 A) and DGF.
- Monthly: projections for external payments falling due in the next 12 months.
- Quarterly: data on actual settlement of external obligations (principal and interest, public and private sectors), within 80 days following the end of the quarter.
- Quarterly: stock of short- and long-term external debt for public and private sectors; stock of external arrears reported on a continuous basis.
- Quarterly (electronic): detailed balance of payments data within 80 days after the end of the quarter.

### Foreign exchange, cross-border flows and FX positions
- Daily: data on foreign exchange export proceeds and foreign exchange sales; import transactions for goods and services; amounts of foreign exchange transferred from abroad to benefit of physical persons to be paid in cash without opening an account; foreign exchange wires from Ukraine abroad for current foreign exchange nontrade transactions based on orders of physical persons; sales and purchases of foreign exchange cash by individuals (incl. through banks, exchange offices, and Ukrposta).
- Weekly: volumes of noncash foreign exchange purchases on behalf of banks’ clients and banks broken down by reasons.
- Monthly: data on certain transfers of non-cash FX from Ukraine to the benefit of non-residents.
- Monthly: aggregated data on the number and amounts of e-limits granted to legal entities and physical individuals and on the transfer and purpose of foreign exchange outside Ukraine within the e-limits.

### Foreign assets/liabilities and bank aggregated breakdowns
- Daily: data on foreign assets and liabilities of the overall banking system (excl. the NBU); banks’ open foreign exchange positions by main groups of banks; deposits aggregated for the banking system (excl. the NBU) broken down by households and legal entities, maturity, and by national and foreign currency; loans aggregated broken down by households and legal entities and by national and foreign currency.
  - Daily: deposits and credits aggregated for the overall banking system (excl. the NBU) without deposits and credits of banks in liquidation starting from the beginning of 2014, broken down by households and legal entities, and by national and foreign currency.
- Weekly: foreign assets and foreign liabilities (broken down by domestic and foreign currency) for individual banks in State Participation Group, Foreign Banking Group and Private Capital Group.
- Monthly: foreign assets broken down by type (cash and deposits, government securities, nongovernment securities, loans, other); foreign liabilities by type, holder (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, rollover rates will be provided.

### Bank-by-bank liquidity, capital, and flow indicators
- Daily: bank-by-bank data for the largest 35 banks on liquidity ratio and amounts of cash and cash equivalents, available funds in NBU accounts (excl. reserve requirements), correspondent accounts with well-known international banks (excl. encumbered accounts), and deposits from customers.
- Daily: 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 — reported by domestic and foreign currency.
  - Deposits: reported by households and legal entities and by maturity (current accounts, saving accounts, and time deposits).
  - Aggregate: deposits and credits excluding banks in liquidation since 2014.
- Monthly: bank-by-bank liquidity coverage ratio in all currencies and in foreign currency.
- Daily: aggregated data on main currency flows, including government foreign receipts and payments by currencies and interbank market operations by currencies; daily information on exchange market transactions including the exchange rate.
- NBU will provide information on reserve requirements.

### Interest rates and interbank rates
- Monthly: 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; by non-financial corporations and households; and by maturity—demand and time accounts).
- Weekly: average interest rate on interbank borrowings (by domestic and foreign currency; and by maturity—overnight, 1–7 days, and over one week).

### Capital adequacy, risk-weighted assets, and exposure metrics
- Bi-weekly: in an agreed format, data for the entire banking sector and aggregated and bank-by-bank for State Participation Group, Foreign Banking Group and Private Capital Group banks:
  - Risk weighted assets and other risk exposures (for ratio H2 and H3 calculation), including 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 and core capital (H3).
  - 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.

### Loan portfolio, collateral, provisions, and large/related exposures
- Monthly (agreed format): data for entire banking sector and bank-by-bank for State Participation Group, Foreign Banking Group and Private Capital Group banks:
  - Amount of loans and claims (households and legal entities in domestic and foreign currency; banks in domestic and foreign currency; maturity; borrower classification categories).
  - Collateral for loans and claims (by type of collateral; by borrower type and currency; by borrower classification categories).
  - Provisions on loans and claims (by borrower and currency and classification).
  - Large exposures (loans >= 10 percent of equity), refinanced loans, restructured loans (by households, legal entities, banks).
  - Average interest rate on loans to customers (by non-financial corporations and households); accrued interest on loans (by domestic and foreign currency).
  - Securities and debt financial instruments, with government securities reported separately (by domestic and foreign currency).

- Monthly: bank-by-bank for State Participation Group, Foreign Banking Group and Private Capital Group banks:
  - Deposits of related parties (by domestic and foreign currencies, and households and legal entities).
  - Deposits of related parties pledged as (cash cover) collateral.
  - Other liabilities to related parties.
  - 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, by borrower type and currency, and by borrower classification).
  - Provisions on loans and claims on related parties (by borrower and currency, and by borrower classification).

### Aggregated and regional loan/deposit reporting, income statements
- Monthly: aggregate and bank-by-bank and by region data on loans and provisions (by households and legal entities, domestic and foreign currencies, and by debtor classification categories); deposits (by households and legal entities, and domestic and foreign currencies); due from banks (by domestic and foreign currencies).
- Monthly: cumulative income statements for entire banking sector and bank-by-bank by bank groups (State Participation, Foreign Banking, Private Capital) 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.

### Regulatory capital increases and supervisory actions
- Bi-weekly: bank-by-bank reporting of the amount by which regulatory capital for State Participation Group, Foreign Banking Group and identified Private Capital Group banks has been increased, disclosing the instrument or transaction by which regulatory capital was increased (e.g., capital injection, conversion of subordinated debt to equity, etc.).
- Monthly: NBU will inform the IMF of any regulatory and supervisory measures against banks violating NBU regulations on capital adequacy, liquidity ratio norm, large exposures, and related or connected lending, and decisions on declaring a bank as problem or insolvent.

### Contingency, liquidity stress and expected outflows
- Upon request: NBU will provide banks’ net expected outflow of cash for a 30-day period.

### NBU assurance, audits, and accounting changes
- Communication: NBU will communicate electronically to the IMF staff any changes in accounting and valuation principles applicable to 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 commercial banks.
- Internal Audit: NBU Internal Audit Department will 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.
- External audit: NBU will provide the IMF with a copy of the annual management letter from the external auditor within six weeks of completion of each audit; this will remain in effect for the duration of the arrangement and for as long as credit remains outstanding.

### Government securities, guarantees, and NBU-held papers
- Monthly: NBU will provide to the IMF data on the monthly coupons and principal to be paid (in hryvnia and foreign currency, separately) until end-2021 on the outstanding stock of government securities held by NBU and the public (broken down by resident banks, resident non-bank; and non-resident investors).
  - Resident banks will be further broken down by bank group (State Participation, Foreign Banking, and Private Capital).
- Annually: information on hryvnia-denominated securities that are indexed (i.e., to inflation; USD), broken down by the type of the owner.
- Monthly: data on credit to nongovernment units guaranteed by the NBU, no later than 25 days after end of month.
- Notification: 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, and in such case will provide information on outstanding interest and principal payments.
- Notification: NBU will inform IMF staff of any changes to reserve requirements for other depository corporations.

### Deposit Guarantee Fund (DGF) reporting
- Monthly: DGF will provide data on the total number and volume of household deposits broken down in groups by deposit size; bank-by-bank for the largest 35 banks and aggregate for remaining banks.
- Monthly: DGF will report bank-by-bank for all banks the amount of insured deposits and total household deposits, by domestic and foreign currency (agreed format).
- Monthly: DGF will report bank-by-bank the total insured deposits and remaining insured deposits to be paid by the DGF for banks under liquidation and under provisional administration, by domestic and foreign currency (agreed format).
- Monthly: DGF will report its financial position including cash balance, bond holdings, credit lines, and loans (agreed format).
- Monthly: DGF will report financing arrangements, including contracted financing from MoF (agreed format).
- Monthly: DGF will report a one-year forecast of expected receipts from MoF, NBU and other entities; expected payouts to insured depositors in banks in liquidation; and expected asset recoveries (agreed format).

### Ministry of Finance and Treasury reporting
- Monthly: Ministry of Finance will provide 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.
- Treasury (daily/10-day/monthly): continue to provide reports on daily operational budget execution indicators; daily inflow of borrowed funds (by currency of issuance) to the state budget; expenditures related to debt service (interest payments and principals) including government foreign exchange deposits, in agreed format; 10-day and monthly data on execution of state, local, and consolidated budgets on the revenue side and data on revenues from social security contributions, including by oblast breakdown; monthly data on funds deposited with the Single Treasury Account and on account #3712 “accounts of other clients of the Treasury of Ukraine”; inflow to the State budget from placing Treasury or any other liabilities to households in foreign and domestic currency and their redemption.
- Monthly and quarterly (electronic): Ministry of Finance will provide monthly and quarterly treasury reports, no later than 25 and 35 days after the end of the period respectively; final fiscal accounts at the end of each fiscal year no later than March of the following year. Reports include expenditure data by programs and key spending units, and by standard functional and economic classifications; quarterly reports include standard information on budget expenses to cover called government guarantees.
- Quarterly: Ministry of Finance will report quarterly data on the public wage bill (excluding SOEs) in line with the template agreed with IMF staff, including the wage component of National Health Service (NHS) appropriation and higher education. It will also provide monthly reports on borrowing (disbursements, interests, and amortization) of UrkAvtoDor and monthly information on municipal borrowing and amortization of debt in formats agreed with IMF staff.
- Monthly: no later than 15 days after the end of the month, Ministry of Finance will report 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.

*Source: 1ukrea2020001*

### 75.      The Ministry of Finance will provide data on the stock of all budgetary arrears on a monthly

### 75. The Ministry of Finance will provide data on the stock of all budgetary arrears on a monthly

### Reporting requirements for budgetary arrears and accounts
- 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 accrued by social funds, 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.

### External and domestic debt, guarantees, and arrears reporting
- 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, including external and domestic credit to key budgetary spending units as well as nongovernment units that is guaranteed by the government (amount of sovereign guarantees extended by executive resolutions and actually effectuated; total amount of outstanding guarantees and list of their recipients).
- Quarterly (electronic form), no later than 25 days after the end of the quarter, the Ministry of Finance will provide:
  - (a) data on the outstanding stock of domestic and external debt of the state and local budgets (including general and special funds);
  - (b) the monthly forecasts of planned and actual external debt disbursement, amortization, and interest payments (including general and special funds), broken down in detail by creditor categories and currency as agreed with Fund staff.
  - The Ministry will also report the accumulation of any budgetary arrears on external and domestic debt service.
- Semi-annually (electronic form), no later than 25 days after the end of Q2 and Q4, the Ministry of Finance will provide disaggregated bond-by-bond (in casu loan-by-loan) data regarding the debt stock, associated payments, and disbursements.
- Monthly, no later than 25 days after the end of the month, the Ministry of Finance will provide data on external and domestic credit to key budgetary spending units as well as nongovernment units that is guaranteed by the government (amount of sovereign guarantees extended by executive resolutions and actually effectuated; total amount of outstanding guarantees and list of their recipients).

### Extra-budgetary funds, Pension Fund, and recapitalization costs
- 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 data on the breakdown of revenues and expenditure by main categories are expected for this Fund),
  - the Fund for Social Insurance,
  - Employment Fund (detailed data on the breakdown of revenues and expenditure by main categories are expected for this Fund),
  - and 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.
- Annual reporting: 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.
- The Ministry of Finance will provide, no later than 15 days after the end of each month, monthly data on the budgetary costs associated with the recapitalization of banks and SOEs. This cost includes:
  - the upfront impact on the cash deficit of the general government of the recapitalization of banks and SOEs as well as the costs associated with the payment of interests, including the respective changes as a result of supplementary budgets.

### COVID-19 Fund and other performance reporting
- The Ministry of Finance will provide monthly performance report for the budget program “Fund to Fight Against COVID-19 and its Impact” in line with the requirements set by the Cabinet of Minister’s resolution #302 (dated April 22 2020) and this program’s final ex-post audit, including for its procurement.
- Quarterly performance reports for the Fund for Entrepreneurship Development will also be provided by the Ministry of Finance.

### Tax Service (STS) and State Customs Service reporting
- STS 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 (arrears written off during month); Collections of outstanding debt at beginning of month; New Arrears (tax liabilities becoming overdue during month); Ending Stock; Total Principal Interest Penalties).
- The STS and State Customs Service (SCS) will continue to provide on a quarterly basis, no later than two months after the end of the quarter, a listing of all tax exemptions granted, specifying the beneficiary, the exemption provided, the duration, and the estimated subsequent revenue loss for the current fiscal year. Revenues foregone include losses from the simplified tax regime by groups of beneficiaries.
- The STS will continue to 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;
  - (vii) stock of VAT refund arrears according to the definition in paragraph 11 (unsettled VAT refund claims submitted to the STS more than 74 days before the end of period).
- The STS 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 STS will provide on a quarterly basis but no later than 25 days after the end of each quarter information on the number of tax appeals and the associated disputed amounts received by the STS in each reporting period, and the number of internally resolved appeals indicating the number of appeals resolved in favor of the controlling body, in favor of taxpayer and partial satisfaction.

### Energy sector, Naftogaz, TSO, NEURC, and SOEs reporting
- Naftogaz and TSO: For each month, no later than the 25th of the following month, Naftogaz and TSO will provide IMF staff with electronic information (in an agreed format) on the cash flows and deficit of Naftogaz Group and TSO and separately for each of the entities, including:
  - volumes and prices of gas purchases and sales (purchase of domestic and imported gas, sales to households, heating utilities, budget institutions, and industries), and the main revenue, expenditure and financing items.
  - On a monthly basis, Naftogaz will provide updated information on the company’s financial liabilities, with a schedule of loan-by-loan interest and principal payments.
- The National Commission for State Energy and Public Utilities Regulation will provide information with a breakdown by its licensees regarding levels of tariffs for:
  - heat energy for the households, centralized heating services and centralized hot water supply to the households in the event of their changes with the definition of average tariff levels (net of VAT and VAT included).
- The National Commission for State Energy and Public Utilities Regulation will provide the aggregated quarterly information on the number of residential gas consumers who have changed their supplier of gas.
- NJSC Naftogaz will report on a weekly basis data on Naftogaz daily market purchases and sales of foreign exchange.
- The Ministry of Development of Economy, Trade and Agriculture will provide on a quarterly basis, but no later than 80 days after the end of each quarter consolidated information from the financial statements of 50 largest SOEs (excluding Naftogaz), including:
  - (a) gross profit/losses;
  - (b) net financial results;
  - (c) subsidies received from the budget;
  - (d) guarantees granted from the budget;
  - (e) stock of debt, broken down by domestic and foreign;
  - (f) taxes and dividends paid;
  - (g) wage arrears;
  - (h) other payment arrears.
  - The report will also include information on the number of all SOE (a) making profits, (b) making loss or (c) balanced with aggregated financial results for each of these groups.

### Statistics, social policy, and anti‑corruption reporting
- State Statistics Service:
  - 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.
- Ministry of Social Policy:
  - The Ministry of Social Policy will collect and submit to IMF staff on a monthly basis data on HUS and privileges for energy consumption in an agreed excel format showing, for each program:
    - (a) the number of households which applied for HUS;
    - (b) number of approvals extended to such HUS applications;
    - (c) number of households-recipients of HUS and privileges in the reporting month;
    - (d) total value of transfers;
    - (e) 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 are to be presented by overall, by region and for rural/urban areas.
- National Agency for Prevention of Corruption (NAPC):
  - NAPC will publish on a website freely available to the public quarterly data, no later than at the end of the month following the quarter, on action taken regarding the asset declaration of high-level officials in the specified tabular format (Number of Full Verifications of Asset declarations by the NAPC (Article 50 Law on Prevention of Corruption); Reports sent by the NAPC to NABU; Number of reports for absence of declaration; Number of reports for false declaration).
- National Anti-Corruption Bureau (NABU):
  - 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 the number of persons indicted in the specified format by Penal Code Article and category of official (e.g., Art. 191; Art. 206-2; Art. 209; Art. 210; Art. 211; Art. 354; Art. 364; Art. 368; Art. 368-5; Art. 369; Art. 369-2; Art. 410).
- High Anti-Corruption Court (HACC):
  - HACC 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 the number of persons convicted by a first instance court decision and the number of persons convicted pursuant to a final court decision in the specified formats (including convictions, acquittals, and penalties by Penal Code Article and category of official).
  - For fines, total value in UAH. For jail, total months (and suspended jail).
- Financial Intelligence Unit (State Financial Monitoring Service of Ukraine):
  - Will continue to publish on a website freely available to the public quarterly data, no later than at the end of the month following the quarter, information on reports sent to NABU in relation to suspicions of laundering of the proceeds of corruption in the specified tabular format (Number of reports disseminated; Aggregated value of suspected money laundering).

### Selected macroeconomic and COVID-19 related data and developments (authorities' statement by Vladyslav Rashkovan, June 9, 2020)
- Pre-COVID-19 macroeconomic performance and policy:
  - GDP growth increased from just over 2 percent in 2016 up to 3.2 percent in 2019.
  - Inflation was 4.1 percent by end-2019 and 2.1 percent by April 2020.
  - International reserves recovered from less than US$6 billion in 2015 to over US$25 billion by end-2019.
  - Public debt was reduced from its peak of 85 percent of GDP in 2014 to 50 percent of GDP by end 2019.
  - In January 2020 Ukraine raised US$1.4 billion by issuing a euro-denominated 10-year Eurobond (priced at a 4.375 percent initial yield).
- COVID-19 spread and containment:
  - First registered COVID-19 case on March 3, 2020.
  - As of June 4, there are little more than 25.4 thousand verified cases of COVID-19, and 747 deaths in Ukraine.
  - Early containment measures enacted March 12; initial lockdown lasted for two months; first relaxations introduced May 11; ban on municipal public transportation lifted May 22.
  - Ukraine planned to restart domestic flights and reopen cafes and restaurants in a normal regime from June 5; international flights scheduled to restart from June 15.
- Economic impact and outlook:
  - Q1 2020 GDP fell 1.5 percent yoy (first decline since 2015).
  - GDP decline accelerated to 5.0 percent yoy in January-April 2020 according to recent estimations of the Ministry of Economy.
  - The 2020 budget is hit hard with sharp declines in revenues across direct taxes, VAT, customs duties, excises, CIT, and PIT; public debt is expected to rise.
- Policy response:
  - Fiscal and monetary policies focused on crisis containment, healthcare spending, protecting employment and supporting affected business.
  - On April 13, 2020, the Parliament approved the supplementary budget, which also created a UAH (text truncates in source).

*Source: 1ukrea2020001 - 75. The Ministry of Finance will provide data on the stock of all budgetary arrears on a monthly*

### 64.7  billion  COVID-19  budget  fund  to  promptly  allocate  spending  on  healthcare  and  social

### 64.7  billion  COVID-19  budget  fund  to  promptly  allocate  spending  on  healthcare  and  social

### Fiscal response and social protection
- A 64.7  billion COVID-19 budget fund to promptly allocate spending on healthcare and social assistance.
- Fiscal stimulus expanded the budget deficit from 2.2 percent to slightly less than 8 percent of GDP in 2020.
- Main fiscal measures:
  - One-off pension top-ups to 10 million pensioners in April.
  - Partial salary compensation to quarantine-hit businesses maintaining labor force.
  - Simplified access to unemployment benefits.
  - Increased salaries to healthcare workers dealing with COVID-19.
  - Exempted individual entrepreneurs from payroll taxes for 3 months.
  - Cancelled land taxes, real estate taxes and state property rents for 1 month.
  - Abolished fines on businesses for missed tax payments (except VAT, excises and royalties).
  - Canceled tax inspections and other government checks for businesses.
  - Abolished fines for delayed utility payments.
- Authorities commit to safeguard medium-term fiscal sustainability while operating under difficult circumstances.
- Any public procurement under expedited COVID-19 procedures will remain fully transparent and will include information on beneficial owners of participating bidding companies.

### Monetary policy and financial sector support (NBU actions)
- The NBU eased monetary policy, reducing the key rate by 550 basis points since the end of 2019, while aiming to keep inflation within the target band over the policy horizon.
- The NBU provided substantial liquidity to alleviate sharp tightening of financial conditions associated with the COVID-19 pandemic.
- Measures to ensure financial system liquidity and bank functioning:
  - Introduced medium-term refinancing instruments of up to 5 years.
  - Lengthened standard short-term refinancing facility to 3 months from 2 weeks.
  - Added government-guaranteed corporate bonds and municipal bond to collateral for refinancing.
  - Delayed introduction of new capital buffers.
  - Suspended on-site bank inspections and postponed stress tests.
  - Cut the reserve requirement for funding raised in foreign currency.
- The NBU will continue implementing its inflation targeting roadmap by enhancing decision-making process, monetary instruments, financial market developments, and communications.
- The NBU mandate will be enhanced to supervised non-banking institutions from July 1, 2020.
- Ukrainian authorities are fully committed to maintaining and protecting the independence of the central bank.

### Governance, anti-corruption, and financial accountability
- Despite the pandemic, authorities are committed to build on recent gains in tackling high-level corruption and to deliver concrete results.
- Efforts leverage increasing efficiency of anticorruption institutions (some built as part of the 2015 EFF arrangement and recent SBA program).
- Commitments include:
  - Maintain the independence and integrity of anticorruption institutions.
  - Ensure high-level corruption cases are effectively and credibly investigated, prosecuted, and adjudicated.
  - Step up efforts to recover assets from failed banks and hold former owners accountable.

### SBA request, program objectives, and policy focus
- Authorities request a new 18-month SBA with access at SDR 3.6 billion (about US$5 billion, 179 percent of quota).
- Program aims:
  - Provide balance of payments and budgetary support.
  - Consolidate achievements to date and bolster confidence.
  - Catalyze support from other official lenders.
  - Help Ukraine regain access to international capital markets when they re-open.
  - Move forward on a critical subset of macro-critical measures to reduce key vulnerabilities.
  - Ensure Ukraine is well-poised to return to growth and resume broader reform efforts when the crisis ends.
- The SBA envisages a streamlined set of critical policy actions (some already delivered as prior actions) focusing on fiscal, financial, and energy sector policies to safeguard sustainability and reduce vulnerabilities, as well as on governance.
- Authorities remain strongly committed to full and timely implementation of the policies under the Fund-supported program.
- Authorities express gratitude for cooperation and support from the Fund, other IFIs, and the international community.

*1ukrea2020001 - 64.7  billion  COVID-19  budget  fund  to  promptly  allocate  spending  on  healthcare  and  social*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ukrea2020001.pdf_