## 1ukrea2020002 — EXECUTIVE SUMMARY

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### Program overview and objectives
- Four-year Extended Fund Facility (EFF) arrangement approved March 2015: SDR 12.348 billion (900 percent of quota).
- EFF replaced the 2014 Stand-By Agreement (SBA) as the conflict in the East pushed Ukraine’s balance of payments and adjustment needs beyond the 2014 SBA.
- Broad objectives:
  - Restore financial and economic stability.
  - Lift medium-term growth through deep structural reforms.
- Policy focus:
  - Stabilize foreign exchange market, rebuild official reserves, repair bank balance sheets, and strengthen public finances through expenditure-led adjustment.
  - Undertake a debt operation to improve debt sustainability.
  - Ambitious structural reform agenda: energy sector reform, fiscal policy, anti-corruption, governance, and SOE-reform.

### Program design, conditionality, and modalities
- Rationale for four-year duration: extensive structural reform agenda, protracted BOP needs, aim to get public debt to a sustainable level during the program.
- Conditionality and monitoring:
  - Quantitative performance criteria (QPC): ceilings on the cash deficit of the general government, combined deficits of the general government and Naftogaz, publicly guaranteed debt; QPC on non-accumulation of external debt payment arrears by the general government; floor on the NBU’s net international reserves (NIR) and ceiling on net domestic assets (NDA).
  - Structural conditionality emphasized anti-corruption, governance, and SOE-reform; extensive use of prior actions (PAs).
  - Implementation outcome: only three of the 15 quarterly reviews were completed; the second and third reviews were delayed by 9 and 16 months, respectively. Several delayed structural benchmarks (SBs) were converted into PAs.

### Program financing and access
- Approved access: about US$17.5 billion (the four-year arrangement of SDR 12.348 billion is about US$17.5 billion per the document).
- Projected to cover 44 percent of Ukraine’s financing gap, projected at $40 billion over the program period.
- More than two-thirds of the gap reflected the targeted increase in the NBU’s international reserves.
- Fund resources for budget support were limited to a quarter of the first purchase.
- External pledges: about $7 billion pledged by other official creditors.
- Private sector involvement: debt operation aimed to generate about $15 billion in financing during the program period by reducing Ukraine’s debt service payments.

### Macroeconomic and financial outcomes
- Stabilization and growth:
  - Program helped restore macroeconomic stability and growth through a flexible exchange regime, prudent monetary policy, and strong fiscal consolidation.
  - Growth: GDP growth was 3.3 percent at the time of program cancellation, modestly below the program approval projection of 4.0 percent.
- Inflation and reserves:
  - Inflation initially surpassed projections; at program request 2015 period average inflation was expected at 33.5 percent; subsequent outturn was 48.7 percent.
  - NBU policy rates: increased to 19.5 percent in early February 2015 and later to 30 percent.
  - Hryvnia depreciated by 20 percent in late February 2015.
  - Gross reserves projected to equal US$35.2 billion by end-2018; subsequent realization US$20.8 billion (which includes a US$1.4 billion disbursement under the subsequent SBA).
  - Gross international reserves had been at only 1.5 months of imports of goods and services (or 27 percent of the IMF composite metric for countries with a floating exchange rate); program targeted 113 percent of the metric by end-2018.
- Public debt and debt operation:
  - Debt operation objectives included generating approximately US$15 billion in financing during the program period; reduce the PPG debt-to-GDP ratio below 71 percent of GDP by 2020; limit average gross financing needs to 10 percent of GDP over 2019-2025.
  - Operation outcomes: generated slightly more than the originally targeted amount; debt-to-GDP ratio declined faster than anticipated, reaching 65 percent in 2018.
- Banking sector and supervision:
  - Bank balance sheets repaired and banking sector stability improved; recapitalization needs initially estimated at 9.5 percent of GDP including a buffer of 4 percent of GDP for recapitalization of PrivatBank.
  - PrivatBank regulatory capital shortfall was UAH 146.4 billion (about USD 6 billion or 7 percent of GDP).
  - Between 2014 and 2017, almost 50 percent of all existing banks were resolved.
  - RP (related-party) lending decreased dramatically; by end of the program the number of banks in violation of the prudential requirement fell to 22, from 44 following the 2015–16 diagnostic.
  - NPLs remained high though mostly provisioned by end of the program period.

### Structural reform outcomes and implementation gaps
- Areas of substantial progress:
  - Central bank independence strengthened; NBU transitioned to inflation targeting in December 2016.
  - Cleaning up the banking sector, including nationalization of PrivatBank in December 2016.
  - Significant steps in energy sector reform and pension system changes.
- Areas with insufficient progress:
  - Improvements in competitiveness and business climate fell well short.
  - Anti-corruption and governance reforms lost momentum by the third review (August 2017); anti-corruption court enacted in 2018 but earlier benchmarks unmet.
  - Land reform conditionality on sale of agricultural land was reset and remained unmet; moratorium kept in place.
  - Many structural vulnerabilities remained unaddressed with only three completed reviews.
- Non-bank financial sector and SOBs:
  - Non-bank sector governance and regulation remain weak; sector about 5 percent of financial sector assets.
  - Ministry of Finance approved its delayed reform strategy for SOBs in 2018; Law on SOBs approved July 2018.
- Insolvency and NPL resolution impediments:
  - Weak judicial system, lengthy foreclosures, weak creditor rights, absence of household insolvency frameworks, ineffective out-of-court restructurings.
  - Insolvency law adoption delayed and eventually adopted in October 2018.
- Structural conditionality depth and implementation (Box 4 findings):
  - 50 percent (or 26) of SC measures identified as high depth; limited depth 37 percent.
  - Implementation rate of high-depth SC (excluding prior actions): 16 percent.
  - Implementation of SC with limited and low depth: in the range of 50 to 60 percent.
  - Conclusion: structural reforms agenda was very ambitious relative to Ukraine’s track record.

### Program governance, political economy, and implementation risks
- Program ownership waned as the economy stabilized and vested interests reasserted influence; collapse of the broad coalition government in April 2016 contributed to loss of momentum.
- Political calendar and fragmentation (parliamentary and presidential elections) undermined implementation prospects for politically difficult measures.
- Recommendation from evaluation: parsimonious structural conditionality after the initial phase might have better sustained political support.

### Application of Lending into Official Arrears (LIOA) policy
- Since December 2015, Ukraine had outstanding arrears on a US$3 billion Eurobond held by Russia.
- On December 16, 2015, the Executive Board decided the claim arising from the Eurobond held by Russia's NWF is an official claim for purposes of the Fund’s policy on arrears to bilateral creditors.
- Staff judged LIOA criteria met at the time of the second and third reviews:
  - LIOA1: exceptional BOP pressures and appropriate policies.
  - LIOA2: Ukraine made good faith efforts to reach agreement with Russia; terms offered aligned with program objectives; authorities engaged and welcomed mediation offers.
  - LIOA3: financing despite arrears was not expected to harm the Fund’s ability to mobilize future financing given broad support from other official bilateral creditors.
- The review noted ex-ante uncertainty regarding which claims the Fund considers official for arrears policy purposes.

### Evaluative judgments and overall assessment
- Overall assessment: program broadly appropriate and achieved macro-stabilization, debt sustainability improvements via the debt operation, and restored confidence and financial stability.
- Shortcomings:
  - Structural reform agenda likely overly ambitious given Ukraine’s track-record and fragile program ownership.
  - Persistent BOP vulnerabilities required a successor SBA upon EFF termination.
  - Inflation remained above target; international reserves increased but remained well below targeted levels.
  - With only three completed reviews, many structural vulnerabilities remained and risk of reversals increased.

### Lessons and policy recommendations
- Program design and political economy:
  - Use prior actions judiciously and structural benchmarks parsimoniously; strong PAs can jumpstart reforms but cannot substitute for ownership.
  - Lay groundwork for countries to take advantage of narrow reform windows; frontload difficult reforms when appropriate.
  - Foster genuine and broad ownership of reforms; build communication and outreach to ensure buy-in.
  - Avoid very heavy front-loading of access in long EFFs to help maintain reform incentives.
- Fund policies and procedures:
  - Consider requiring inclusion of a quantified downside scenario in capacity to repay assessments for exceptional access cases.
  - Clarify what constitutes an official claim for arrears policy purposes.
  - Develop a rules-based approach to communicate long delays in completing program reviews under GRA arrangements.
  - Develop further guidance for assessing a program’s prospect for success under EA4.
  - Adopt a standardized presentation to describe the depth and implementation record of structural conditionality since program approval.

*Source: EXECUTIVE SUMMARY and selected sections (1ukrea2020002).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Program overview and objectives
- The 2015 Extended Fund Facility (EFF) arrangement with Ukraine was a four-year EFF amounting to SDR 12.348 billion (900 percent of quota), approved in March 2015.
- The EFF replaced the 2014 Stand-By Agreement (SBA) once it became clear the conflict in the East had pushed Ukraine’s balance of payments and adjustment needs beyond what could be addressed under the 2014 SBA.
- Broad program objectives:
  - Restore financial and economic stability.
  - Lift medium-term growth through deep structural reforms.
- Policy focus:
  - Stabilizing the foreign exchange market, rebuilding official reserves, repairing bank balance sheets, and strengthening public finances through expenditure-led adjustment.
  - A debt operation was envisaged to improve debt sustainability.
  - Ambitious structural reform agenda: continued focus on energy sector reform and fiscal policy, increased emphasis on anti-corruption, governance, and SOE-reform.

### Program design, conditionality, and modalities
- Program length and rationale:
  - Four-year duration motivated by extensive structural reform agenda, protracted BOP needs, and objective to get public debt to a sustainable level during the program period.
- Conditionality and monitoring:
  - Quantitative performance criteria (QPC): ceilings on the cash deficit of the general government, combined deficits of the general government and Naftogaz, publicly guaranteed debt; QPC on non-accumulation of external debt payment arrears by the general government; floor on the NBU’s net international reserves (NIR) and ceiling on net domestic assets (NDA).
  - Structural conditionality built on the unfinished agenda of the 2014 SBA; greater emphasis on anti-corruption, governance, and SOE-reform.
  - Extensive use of prior actions (PAs): the EFF request included seven PAs. The program envisaged 15 quarterly reviews.
  - Implementation outcome: only three of the 15 reviews were completed; the second and third reviews were delayed by 9 and 16 months, respectively. Several delayed structural benchmarks (SBs) were converted into PAs as reform headwinds emerged.

### Program financing and access
- Approved access was about US$17.5 billion (the four-year arrangement of SDR 12.348 billion is about US$17.5 billion per the document).
- Projected to cover 44 percent of Ukraine’s financing gap, which was projected at $40 billion over the program period.
- More than two-thirds of the gap reflected the targeted increase in the NBU’s international reserves.
- Fund resources for budget support were limited to a quarter of the first purchase.
- External pledges: about $7 billion pledged by other official creditors, including the World Bank, the European Union, the U.S., and other bilateral creditors.
- Private sector involvement: a debt operation aimed to generate about $15 billion in financing during the program period by reducing Ukraine’s debt service payments.

### Macroeconomic and financial outcomes
- Stabilization and growth:
  - The program helped restore macroeconomic stability and growth.
  - Adoption of a flexible exchange regime, prudent monetary policy, and strong fiscal consolidation led to a sharp reduction in both the current account and overall fiscal deficits.
  - Confidence was strengthened and financial stability restored.
- Inflation and reserves:
  - Inflation started to decline but remained above the target.
  - International reserves increased but remained well below targeted levels; gross international reserves had been at only 1.5 months of imports of goods and services (or 27 percent of the IMF composite metric for countries with a floating exchange rate).
  - The program targeted 113 percent of the metric by end-2018.
- Public debt and debt operation:
  - The successful completion of the debt operation helped restore the sustainability of public debt.
- Banking sector and supervision:
  - Bank balance sheets were repaired and banking sector stability improved through significant actions under the program.

### Structural reform outcomes and implementation gaps
- Areas of substantial progress:
  - Central bank independence.
  - Cleaning up the banking sector.
  - Significant steps in energy sector reform and the pension system.
- Areas with insufficient progress:
  - Efforts to improve competitiveness and business climate fell well short of expectations.
  - While some inroads were made in strengthening governance and tackling corruption, reform momentum dissipated as the economy stabilized and program ownership waned in the face of resistance from vested interests.
  - With only three reviews completed, the program went irrevocably off track, leaving many structural vulnerabilities unaddressed.
- Risk of reversals:
  - Some recent developments highlighted the risk of reversals in areas where significant progress had been achieved.

### Key evaluative judgments and program assessment
- Overall assessment:
  - The EPE agrees with the overall thrust of policies under the EFF and considers the program for the most part appropriately designed.
  - However, the structural reform agenda was likely overly ambitious given Ukraine’s track-record under earlier Fund arrangements and the fragility of program ownership.
- Successes:
  - Macroeconomic stabilization, debt sustainability improvements via the debt operation, and restoration of confidence and financial stability.
- Shortcomings:
  - Persistent balance of payments vulnerabilities required a successor SBA upon termination of the EFF.
  - Insufficient progress on competitiveness, business climate, and some governance reforms; program ownership declined and structural conditionality implementation weakened.

### Lessons and policy recommendations
- Lessons to build and sustain reform momentum in the face of vested interests and fragmented politics:
  - Use prior actions judiciously and structural benchmarks parsimoniously so as not to undermine efforts to foster genuine program ownership.
  - Lay the groundwork so countries can take advantage of often narrow windows of opportunity for reform.
  - Foster genuine and broad ownership of reforms, even if outcomes are not optimal from a narrow economic perspective.
  - Avoid very heavy front-loading of access to help maintain reform momentum during longer programs.
  - Increase the importance of timely and well-targeted communication and outreach by country authorities, supported by Fund staff, to ensure broad buy-in for Fund-supported programs.
- Lessons to strengthen Fund policies and procedures:
  - Consider requiring the inclusion of a quantified downside scenario in all capacity to repay assessments in requests for Fund-support under exceptional access.
  - Clarify what constitutes an official claim for the purposes of Fund policies in debt restructuring.
  - Develop a rules-based approach to communicate long delays in completing program reviews under GRA arrangements.
  - Develop further guidance for assessing a program’s prospect for success under the fourth exceptional access criterion.
  - Adopt a standardized presentation to describe the depth and the implementation record of structural conditionality since program approval in program documents.

*Source: EXECUTIVE SUMMARY (1ukrea2020002).*

### 10.      Frontloaded phasing of

### 10. Frontloaded phasing of disbursements aimed at achieving a minimum level of reserves necessary to restore confidence and stabilize market expectations

### Frontloaded disbursements and immediate effects
- The frontloading of external disbursements aimed to achieve a minimum level of reserves necessary to restore confidence and stabilize market expectations.
- The frontloading also helped support the critical debt operation and secure financing assurances from other official creditors.
- The first purchase was about a third of overall access, slightly above the median of recent EA cases and the highest among the EFF subgroup.
- About 50 percent of total access was disbursed.

### Program implementation and outturn — summary
- The program broadly succeeded in macro-stabilization but achieved uneven progress on structural vulnerabilities.
- Key program ingredients included: a strong monetary anchor, fiscal adjustment, cleanup and recapitalization of the financial sector, external official financing, and the announced debt operation.
- Program design sought to withstand and adapt to moderate domestic and external economic shocks through strong policies, frontloaded actions, and significant external support.
- The first review under the program was completed broadly on schedule, after which the program experienced progressive delays.

### A. Macroeconomic framework — objectives and outturn
- Objectives:
  - Macroeconomic stabilization through strong adjustment policies and ambitious structural reform to lift Ukraine’s growth.
  - Stabilization expected to take hold in 2015 and become more entrenched by 2016, with growth to potential by 2018.
- Downside risks identified at approval included: renewed fighting in the East, complications in the debt operation (including lower-than-expected creditor participation), and slippages in program implementation due to vested interests.
- Outturn — key indicators:
  - Growth: GDP growth was 3.3 percent at the time of program cancellation, modestly below the projections at approval of the program (4.0 percent).
  - Inflation: After surpassing projections in 2015, inflation declined considerably but stayed above initial program projections following large wage and pension increases and food price shocks in 2017.
  - Reserves: Reserves were partly rebuilt but remained significantly below projections; access under the EFF was rephased twice and only about 50 percent of total access was disbursed.
  - FDI: The targeted increase in foreign direct investment failed to materialize, reflecting only limited progress in structural reforms aimed at improving business climate.
  - Public debt: At approval, public and publicly guaranteed debt-to-GDP was projected to peak at 94 percent in 2015 and decline to 71 percent by end of 2020; the debt ratio declined to 65 percent already by end-2018.

### B. Exchange rate and monetary policy — strategy and outcomes
- Program priorities and strategy:
  - First priority: stabilize the exchange market.
  - Monetary policy geared towards bringing inflation back to single digits.
  - Maintain exchange rate flexibility, gradually remove exchange restrictions and capital controls.
  - Strengthen NBU governance, autonomy, and effectiveness (building on safeguards assessment of 2014 SBA).
  - Continue efforts toward future adoption of an inflation targeting framework by strengthening the NBU’s technical and operational capacity.
- Outturn — monetary and FX developments:
  - Policy rates: NBU increased its main policy rate to 19.5 percent in early February 2015 and later hiked it to 30 percent.
  - Exchange rate: Hryvnia depreciated by 20 percent in late February 2015.
  - Inflation expectations and outturns:
    - At program request, 2015 period average inflation was expected to rise to 33.5 percent.
    - Subsequent outturn was 48.7 percent.
    - The February 2015 depreciation of 20 percent would have been expected to drive inflation up by some 6 percentage points given an exchange rate pass-through estimated at about 30 percent; inflation overshot its projection by almost double (15.2 percentage points).
  - Reserves:
    - Gross reserves were projected to equal US$35.2 billion by end-2018.
    - Subsequent realization was US$20.8 billion (which includes a US$1.4 billion disbursement under the subsequent SBA).
    - About 60 percent of the shortfall was due to lower purchases from the IMF owing to delays in program implementation; the remainder was mainly other lower foreign exchange inflows, including FDI.
  - Capital controls and FX interventions:
    - Authorities imposed new and tightened existing capital flow measures to prevent exchange rate overshooting.
    - Phasing out was guided by a conditions-based roadmap characterized by gradualism.
    - Foreign exchange interventions aimed at smoothing hryvnia volatility and accumulating FX reserves.
- Institutional improvements at the NBU:
  - Governance, effectiveness, autonomy, and transparency of the NBU saw impressive improvements, supported by technical assistance.
  - Legal amendments optimized the size, composition, roles and responsibilities of the NBU Council and NBU Board.
  - Personal autonomy of decision-making members was strengthened, including guaranteed terms and specified grounds for dismissal.
  - Financial autonomy strengthened by legislation ensuring NBU profits are distributed only after auditing and after general reserves are replenished.
  - NBU enhanced transparency and won the Central Banking Journal’s “Transparency Award”.
- Transition to inflation targeting:
  - The NBU transitioned to an inflation targeting regime in December 2016.
  - At the NBU’s request, the program included an indicative target on inflation from the second review onwards.
  - The transition involved policy dilemmas given low international reserves, but overall did not significantly complicate program implementation.

### C. Financial sector policies — objectives and outturn
- Objectives:
  - Restore confidence in the financial system.
  - Strengthen regulatory and supervisory framework and clean-up the banking system through recapitalization, restructuring, and resolution.
  - Phased-in recapitalization required full recognition of losses while allowing some regulatory forbearance.
  - Tackle related-party (RP) lending and enhance asset recovery and resolution of bad loans through legal amendments and an out-of-court system for debt restructuring.
- Outturn — banking sector reforms and results:
  - Significant progress in reforming the banking sector supported by well-designed conditionality and technical assistance.
  - Regulatory and supervisory framework was significantly improved.
  - Insolvent banks were resolved and remaining banks strengthened capitalization.
  - In December 2016 the authorities nationalized PrivatBank to avoid systemic risk; the operation was prepared and executed to avoid panic and payment system disruption.
  - NPLs remained high and resolution was difficult, though mostly provisioned by end of the program period.
  - Steps taken to improve governance of State Owned Banks (SOBs), but the process remained ongoing.
  - Some key program conditionality was not met, including improvement of the insolvency regime and enforcement of payment discipline.
- Specific figures and measures:
  - Recapitalization needs were initially estimated at 9.5 percent of GDP, including a buffer of 4 percent of GDP for recapitalization of PrivatBank.
  - PrivatBank regulatory capital shortfall was UAH 146.4 billion (about USD 6 billion or 7 percent of GDP).
  - Measures to tackle RP lending included: criminalizing excessive RP lending, unlimited liability of controlling shareholders for RP loans with presumption of economic relationship, tougher NBU regulations for RP identification, establishment of a special monitoring unit within the NBU, and adoption of unwinding plans after audits.
  - Between 2014 and 2017, almost 50 percent of all existing banks were resolved.
  - Capitalization and profitability of the remaining banks improved; recapitalization proceeded broadly in line with program steps, with some regulatory forbearance and deferred deadlines because of complexity.

*Source: Ukraine—2015 EFF program documentation and IMF staff estimates.*

### introduction of new regulations. RP loans decreased dramatically and by the end of the program the

### 1ukrea2020002 - introduction of new regulations. RP loans decreased dramatically and by the end of the program the

### Banking sector: progress, setbacks, and governance
- RP loans decreased dramatically and by the end of the program the number of banks in violation of the prudential requirement fell to 22, from 44 following the 2015–16 diagnostic.
- Weaknesses that impeded resolution of RP lending and high NPLs:
  - Strong vested interests, weaknesses in the judicial system, and political gridlock.
  - Weaknesses include lengthy foreclosures and inefficient court processes, weak protection of creditors’ rights, and absence of household insolvency and restructuring regimes.
  - Ineffectiveness of out-of-court debt restructurings introduced in 2016.
- Recovery of assets from failed banks was minimal.
- The adoption of the Insolvency law was delayed (a missed structural benchmark under the program) and was eventually adopted in October 2018.
- Example of fragility: the Nationalization of PrivatBank (December 2016) was ruled illegal by a lower court; this ruling will take effect if affirmed by the court of appeals.

### Non-bank financial sector and state-owned banks (SOBs)
- Guidelines for corporate governance for the banks came into force at the beginning of 2018.
- Ministry of Finance approved its delayed reform strategy for SOBs in 2018; the first step was approval of the Law on SOBs in July 2018.
- Non-bank financial sector governance and regulation remain weak; the sector is about 5 percent of financial sector assets.
- The “Split Law” (transfer of regulatory/supervisory powers from NFSC to NBU and NSSMC) was drafted in 2015, passed first reading in July 2016, but was not adopted within the program period.
- Both the law on SOBs corporate governance and the “split law” were MEFP commitments under the EFF and were converted respectively into a prior action and structural benchmark under the 2018 SBA.

### Non-performing loans (NPLs) and insolvency environment
- The NBU carried out an asset quality review (AQR) in 2016 which revealed much greater impaired loans than reported; methodological change to capture loans more than 90 days past due and loans with low probability of repayment led to a sharp increase in the NPL ratio.
- Doing Business—Resolving Insolvency (2019 Rank) indicators underscore weak insolvency procedures relative to peers.
- Structural impediments to NPL resolution: weak judicial processes, weak creditor rights, lack of household insolvency and restructuring frameworks.

### Fiscal policy objectives and program design
- Program aim: restore fiscal sustainability through expenditure-led adjustment, front-loaded reduction of energy subsidies, and debt restructuring.
- Key fiscal anchor: primary balance of the combined general government (GG) and Naftogaz, projected to improve from a deficit of 6.9 percent of GDP in 2014 to a surplus of 1.6 percent of GDP in 2017 and 2018.
- Over the program period, adjustment corresponded to 7.7 percent of GDP in the combined overall balance of the GG and Naftogaz (decline in the overall deficit from 10.3 to 2.6 percent of GDP).
- Naftogaz was projected to contribute to more than half of the adjustment and reach a balance by 2017.

### Fiscal consolidation measures and targets
- Structural savings targeted a 5.3 percent of GDP contraction in current expenditures through pension reform and reductions in public wages and subsidies.
- Tax reform goals: rebalance from non-tax income to tax receipts; strengthen tax administration to fight corruption and improve business climate.
- Program conditionality included QPCs on ceilings on the GG cash deficit and combined GG-Naftogaz deficits, and on publicly guaranteed debt. Prior actions included energy price hikes; structural benchmarks included revenue administration and pension system reforms.

### Fiscal outturns and public debt dynamics
- The combined GG-Naftogaz overall fiscal deficit declined to around 2 percent of GDP in 2015, mainly from energy price hikes, exchange rate depreciation, and lower gas import bill, supported by one-off measures.
- Subsequently, the overall fiscal deficit remained around 1½ percent until the cancellation of the program.
- By 2018 the GG overall fiscal deficit had declined to 2.5 percent of GDP, in line with the target set at the time of the EFF request.
- Public and publicly-guaranteed debt: originally projected to peak at 94 percent of GDP in 2015 and decline to 83 percent by end of program; actual outcome by end-2018 was around 65 percent of GDP.
- Projected and estimated fiscal flows (selected rows from program table):
  - Revenues: 41.7 42.8 40.3 40.7 40.8 40.6
  - Tax revenues: 36.6 36.9 36.4 36.9 36.9 35.9
  - Non-tax revenues: 5.1 5.9 3.9 3.9 3.8 4.7
  - Expenditures: 46.3 47.1 43.9 43.8 43.4 43.1
  - Current: 45.2 43.4 41.3 40.5 39.9 38.8
  - Capital: 1.3 2.5 2.5 3.0 3.0 4.0
  - Overall balance: -4.6 -4.2 -3.7 -3.1 -2.6 -2.5
  - Naftogaz balance: -5.7 -3.1 -0.3 0.0 0.0 0.0
  - Combined balance (GG + Naftogaz): -10.3 -7.4 -3.9 -3.1 -2.6 -2.5
  - Combined Primary bal. (GG+Naftogaz): -6.9 -2.0 1.2 1.6 1.6 1.3

### Structural fiscal reform progress and slippage
- Early structural progress:
  - Tax reform packages in 2015 and 2016 simplified the tax system and reduced the labor tax wedge.
  - The 2016 package slashed labor taxes, reduced exemptions, and rebalanced toward indirect taxes.
  - Social protection improved targeting via means-testing and elimination of redundant compensation programs.
- Weakening of fiscal discipline toward end of program:
  - Doubling of the minimum wage in 2016.
  - Backtracking on automatic adjustment mechanism for energy prices in 2017.
  - Expansionary supplementary budget in 2017.
- Pension reform: major delays but some parametric changes and reforms of special occupational pensions and early retirement options improved sustainability; further parametric reforms still needed.
- Revenue administration reforms and other fiscal-structural measures stalled due to political resistance and less binding financing constraints.

### Energy sector policies: objectives and outcomes
- Program overarching goal: restore Naftogaz financial health; eliminate Naftogaz’s deficit by 2017 and reach cost recovery based on international gas prices.
- Measures included: increases in gas and heating tariffs (prior action), improve collection of receivables, unbundling of Naftogaz, transparency in tariff setting, strengthen social assistance.
- Outturn:
  - Naftogaz's deficit was reduced dramatically; tariffs reached cost recovery one year ahead of schedule (2016) due to phased tariff increases, fall in international gas prices, and contraction in gas imports.
  - Authorities adopted a formula linking tariffs to international prices; initially committed to quarterly adjustments (structural benchmark for second review), switched to semi-annual frequency (new prior action for third review), and then failed to apply it in 2017 when gas prices increased—contributing to the program going off track.
- Social protection/subsidy program:
  - Expanded rapidly; by end 2015 it covered about half of the households.
  - Mounting fiscal costs forced supplementary budgets in 2016 and 2017.
  - Generosity was tightened through reductions in consumption norms, but decisive overhaul measures were not completed during the EFF. Measures not implemented included: (i) revising the subsidy calculation formula; (ii) modifying eligibility criteria to improve targeting; and (iii) establishing a centralized database of recipients.
- Sector restructuring and competition:
  - Naftogaz’s financial viability and governance improved, including a new Supervisory Board with independent members in 2016.
  - Unbundling efforts stalled after adoption of action plan; Naftogaz continued to dominate wholesale market with monopoly in domestic gas production and control of gas transportation network.
  - Retail market remained uncompetitive, with tariffs below cost recovery in places and opaque regional gas supply companies acting as intermediaries.
  - Lack of proper metering and a comprehensive database of consumers increases opportunities for fraud due to tariff differentials between firms and households.
  - Electricity market reform and district heating remain works in progress.

*Source: IMF staff report excerpt (content unit: 1ukrea2020002).*

### 38.      Ukraine’s economic performance has been held back by long-standing structural

### 1ukrea2020002 - 38. Ukraine’s economic performance has been held back by long-standing structural

### Structural obstacles to growth
- Endemic corruption, a stifling regulatory burden, weak investor protection and contract enforcement, and lack of technical upgrading of companies have:
  - weakened the business climate,
  - deterred investment, and
  - held back productivity and eroded competitiveness.
- Result: Ukraine’s economic performance has lagged well behind that of other transition economies despite its well-educated labor force.

### Program governance and reform strategy
- The program built on progress under the previous SBA and benefited from close cooperation with other stakeholders, including the European Commission, World Bank, EBRD, and bilateral creditors.
- A 2014 diagnostic study (with Fund staff assistance) on corruption, the business climate, and the judiciary informed the design and sequencing of EFF conditionality, building on legal reforms from the 2014 SBA.
- Fund staff engaged closely with Civil Society Organizations / Non-Governmental Organizations (CSOs/NGOs) in assessing proposed reform measures and monitoring implementation and impact.

### Main areas of structural governance reforms (program coverage)
- Anti-corruption:
  - Priority on rapid implementation to deliver tangible results and counter vested interests.
  - Benchmarks: institution building, operationalization, and implementation.
  - Focus: establishment, resourcing, and external oversight of the National Anti-corruption Bureau (NAB); asset declarations of high-level officials.
- AML/CFT:
  - Strengthening implementation to prevent misuse of the financial sector to launder proceeds of corruption.
  - Measures included customer due diligence, Politically Exposed Persons, FIU guidance, and inter-agency cooperation among NBU, NAB, and FIU.
- Judiciary:
  - Reforms aimed at independence, integrity, and efficiency of legal enforcement.
  - Main measures: changes in court fees, orders of payments and garnishment; supplementary measures including High Council of Justice reforms (focus on backlog of disciplinary cases).
- Business climate and SOE reforms:
  - Deregulation, review of existing norms, requirement to conduct regulatory impact analyses.
  - SOE reforms to enhance financial viability and efficiency and reduce fiscal risks.
  - Structural benchmark on sale of agricultural land (land reform) added during the second review.

### Outturn: implementation highlights and shortfalls
- Early progress:
  - Front-loaded program benchmarks on anti-corruption and AML/CFT were generally met.
  - Establishment of NAB; legal amendments on customer due diligence and Politically Exposed Persons; FIU guidance; inter-agency cooperation; asset declarations for high-level officials introduced.
  - New Specialized Anti-Corruption Prosecutor’s Office (autonomous unit in Prosecutor General’s Office) established.
  - Some AML/CFT reforms benefitted from Fund technical assistance.
- Loss of momentum:
  - Anti-corruption and AML/CFT reforms lost momentum and largely stalled by the third review in August 2017.
  - Stalled reforms: establishment of an anti-corruption court (eventually passed in 2018); parliamentary approval of detailed NAB-related legislation including investigative techniques (unmet benchmark).
  - Implementation results of some measures were underwhelming (e.g., administrative verification of asset declarations by NAPC needs improvement; pending court cases without final decisions).
- Judiciary reforms:
  - Only one of two measures implemented: changes in court fees enacted in law.
  - Payment orders and garnishment of bank accounts remained pending (legislation regarding garnishment in alimony cases adopted).
- SOE reforms:
  - Early conditionality broadly met, but several structural benchmarks had to be reset.
  - SOE reform strategy developed; amendments to privatization law prepared (with major shortcomings); legislation to reduce number of companies banned from privatization remained stuck in parliament.
  - By EFF cancellation, a new privatization law enacted and preparations started for sale of six large SOEs in line with international best practices.
  - Governance of large SOEs improved somewhat with appointment of majority-independent supervisory boards; work pending to clarify and strengthen boards’ powers with parliamentary approval of law on SOE governance.
- Land reform:
  - Conditionality on sale of agricultural land was reset and remained unmet; existing moratorium kept in place.
  - World Bank provided technical assistance on land reform, which was outside the Fund’s core expertise.
  - Economic and political vested interests prevented implementation during the EFF.

### Program design and strategy: assessment and lessons
- Macroeconomic framework:
  - Broadly appropriate and contributed to macro-stabilization amid high uncertainties (conflict in the East, envisaged debt operation).
  - Growth projections calibrated close to bottom quartile of historical post-crisis recovery episodes in emerging market currency crises.
  - Despite higher-than-projected inflation and a more severe first-year downturn, the program largely avoided growth optimism pitfalls.
  - Robust macro framework plus decisive authority measures achieved successful macro-stabilization broadly in line with program objectives.
- Political economy considerations:
  - A narrow window for transformative structural reform closed as political economy dynamics led to loss of reform momentum.
  - Initial strong ownership and broad international and civil society support faded as the economy stabilized and vested interests reasserted influence.
  - Collapse of the broad coalition government in April 2016 and slippages in quarterly program reviews contributed to loss of momentum.
  - Approaching parliamentary and presidential elections further undermined implementation prospects for politically difficult measures.
  - Retrospective: a more parsimonious structural conditionality after the initial phase, focused on a very limited set of critical reforms, might have helped sustain political support longer into the program. An earlier recognition that sufficient political support no longer existed would have allowed a timelier “reset” in Fund engagement.
- Choice of instrument (EFF vs SBA):
  - EFF advantages: protracted balance of payments needs and heavy structural reform focus argued in favor of an EFF rather than an SBA; enabled a four-year arrangement for reforms and restoring debt sustainability.
  - Challenge: long duration implied additional challenges because the four-year horizon extended close to the next electoral period, complicating maintenance of strong program ownership.
  - A shorter EFF could have been argued for, but would have entailed larger macro adjustment and/or a more extensive debt operation, which were not regarded feasible at program design.
- Level and phasing of exceptional access:
  - Some view that somewhat lower access might have sufficed; less frontloading could have helped retain incentives for structural reform implementation.
  - With much lower-than-planned official disbursements, reserves reached less than two-thirds of the program target.
  - Despite the shortfall, successful debt restructuring and other developments stabilized the situation and restored market access earlier than expected as borrowing costs declined.
  - Frontloading was appropriate given very low reserves and need to restore confidence; nonetheless, less frontloaded access might have helped retain reform momentum further into the program.
- Debt operation design and implementation:
  - Debt restructuring was a key element of financing strategy and was generally well-designed and implemented.
  - Objectives of the pre-emptive debt operation:
    - generate approximately US$15 billion in financing during the program period;
    - reduce the PPG debt-to -GDP ratio below 71 percent of GDP by 2020;
    - limit average gross financing needs to 10 percent of GDP over the years 2019-2025.
  - Operation outcomes:
    - Generated slightly more than the originally targeted amount of financing.
    - Limited gross financing needs below the targeted level.
    - Debt-to-GDP ratio declined faster than anticipated, reaching 65 percent in 2018.
  - Factors contributing to faster-than-projected debt decline:
    - faster than projected appreciation of Ukraine’s REER;
    - fiscal overperformance early in the program;
    - lower than programmed official disbursements.
  - Caveat: earlier clarity on the official nature of a Russian-held Eurobond claim would have been helpful; lack of clarity led to market speculation. The claim was publicly recognized by the Fund as an official claim only after the bondholder restructuring had been negotiated.

### Key statistics and dates preserved from the source
- US$15 billion (target financing from pre-emptive debt operation)
- below 71 percent of GDP (target PPG debt-to-GDP ratio by 2020)
- 10 percent of GDP (limit on average gross financing needs over 2019-2025)
- 65 percent (debt-to-GDP ratio reached in 2018)
- about 61 percent (PPG debt-to-GDP ratio as of end-2018 based on most recent data from the authorities)
- four-year EFF arrangement (program length)
- 2014 (diagnostic study undertaken)
- August 2017 (third review timing when momentum lost)
- April 2016 (collapse of broad coalition government)
- 2018 (anti-corruption court passed into law)
- 2015 (program approval year referenced in comparisons)
- 2019 (reference to related SBA in staff documents and program cancellation timing)

*Italic: Excerpted and summarized from the provided IMF document content.*

### 47.      The breadth and complexity of the program implied additional coordination

### 47.      The breadth and complexity of the program implied additional coordination

### Coordination challenges
- The program covered several reform areas where the Fund has only limited expertise (e.g., land reform), requiring close coordination with multiple institutions, including the European Commission, EBRD, EIB, USAID, and the World Bank.
- Cooperation was generally described as very good, but quality varied over time and was highly dependent on personal relationships.

### Monetary and exchange rate policies
- Reforms to the NBU’s monetary and exchange rate policies delivered important and lasting improvements.
- Early adoption of inflation targeting (in December of 2016) involved challenges:
  - Driven by a sharp exchange rate depreciation, inflation initially overshot program projections by a wide margin.
  - Subsequently, monetary policy, aided by capital flow measures, managed to bring inflation under control, albeit not all the way to the single digits level envisaged in the program design.
  - The NBU continued to set monetary policy on a forward-looking basis to contain inflation.
- Exchange rate policy progress was lasting: the hryvnia has continued to float since program inception, with FX interventions only to reduce volatility and accumulate FX reserves.
- Suggested program design improvements:
  - Consider earlier introduction of an Indicative Target on inflation.
  - Introduce a Monetary Policy Consultation Clause.
- Footnote observations:
  - High exchange rate pass-through in Ukraine complicates anchoring inflation expectations when reserves are insufficient (BIS, 2019).
  - In 2016, some other elements desirable for inflation targeting may not have been in place, e.g., transformation in the still weak banking system and high dollarization.

### Capital controls
- Tightening of capital controls appears to have reduced pressures on the exchange rate, contributing to keeping inflation under control and enabling the NBU to limit FX interventions.
- Capital controls also helped stabilize the financial sector.
- Transition toward capital account liberalization was cautious, which was warranted given the limited stock of FX reserves.
- With hindsight, somewhat faster relaxation might have been possible, but erring on the side of caution was judged prudent given lingering crisis effects.

### Financial sector reforms
- Factors contributing to progress in the banking sector:
  - Strong leadership and reform-minded management within the NBU, supported by internal reorganization, ensured strong ownership for reforms.
  - Reforms were reinforced by changes in the legal and regulatory framework, including the NBU law.
  - Program conditionality was well designed and supported by capacity building from international partners, including the IMF.
  - Rules allowed some flexibility (e.g., regulatory forbearance for losses).
- Constraints and slower progress:
  - When Parliamentary action was required (supervision of the non-banking sector, governance of SOBs, strengthening insolvency procedures), progress was often slower and vested interests were able to undermine reform progress.
- Footnote: The revision of the NBU law was a structural benchmark at program approval and then a prior action for the first review.

### Fiscal adjustment and revenue mobilization
- The size and pace of fiscal adjustment were broadly appropriate; the elimination of Naftogaz’s deficit was part of a sizable adjustment given large near-term financing needs.
- Some ambiguity about the program’s main fiscal anchor early in the program was evident in program documents.
- The fiscal reform agenda was comprehensive and paced for complex reforms and public support.
- Recommendation/assessment:
  - Higher priority could have been given earlier to macro-critical revenue administration reforms to capitalize on reform momentum and help overcome vested-interest resistance.
  - Such revenue administration reforms were critical to place Ukraine on a sustainable and growth-friendly fiscal path and could have supported broader governance and transparency reforms.

### Energy sector reforms
- Energy reforms were generally well-designed but difficult to implement and in some aspects incomplete.
- Achievements and shortcomings:
  - Revision of tariffs to eliminate Naftogaz’s deficit was accomplished, albeit with delays and setbacks (e.g., failure to apply formula-based adjustment in 2017).
  - Governance in Naftogaz improved, but the company remains a monopolist in wholesale supply for households when gas for households is below import parity and tariffs are below cost recovery; barriers to entry in retail remain high.
  - Independence of the energy regulator remains weak and its authority was recently questioned by a ruling from the Constitutional Court.
  - Subsidy reform was generally successful in shielding the most vulnerable from tariff increases, but scaling back the program proved difficult and efforts were piecemeal rather than integrated into a monetization/guaranteed minimum income strategy.

### Governance and anti-corruption
- The program used a multi-pronged approach to reform governance and reduce corruption, emphasizing institution building and operationalizing institutions created in the 2014 SBA context (e.g., anti-corruption bureau and anti-corruption courts).
- Complementary measures reduced opportunities for corruption in procurement, financial, and energy sectors.
- Close cooperation with international organizations and civil society aided design and monitoring of reforms.
- Remaining challenges include operationalizing the anti-corruption court, implementing investigative techniques, and SOE governance reforms.
- Assessment of impact:
  - It is difficult to assess significant and lasting improvement in governance within the program period; governance reforms take time and their impact is hard to measure.
  - Some non-IMF indicators (Worldwide Governance Indicators sub-components) showed marginal, but not statistically significant, improvement over the program period.

### Ambition of the structural reform agenda
- The program’s structural reform agenda was very ambitious and deep, covering non-traditional Fund areas, notably governance.
- The strategy aimed to exploit a window of opportunity for deep transformational reforms and achieved notable results in several areas.
- In hindsight, a somewhat more parsimonious structural agenda after initial stages might have better maintained reform momentum and aligned with lessons from earlier EPEs on fragile program ownership.
- The extensive agenda helped mobilize financing and political support from the international community.
- Program design note:
  - While the request acknowledged depth and ambition of structural reforms, no overall systematic assessment of the depth of structural conditionality was conducted at program design.

### Consistency with Fund policies — Exceptional Access (EA)
- Exceptional Access criteria and assessments:
  - Criterion 1 (EA1): Exceptional balance of payments pressures and critically low official reserves at program request; capital controls in place—EA1 met throughout the program.
  - Criterion 2 (EA2): Forward-looking assessment of public debt sustainability, contingent on the debt operation and full implementation of program policies; the debt operation was completed in August 2015 and public debt has been on a declining trajectory—EA2 assessed as met.
  - Criterion 3 (EA3): Prospects of regaining market access conditional on successful program implementation; Ukraine issued its first Eurobond in July of 2016 and accessed markets multiple times—EA3 assessed as met throughout the program.
  - Criterion 4 (EA4): Program provided a reasonably strong prospect of success initially, premised on a decisive break from the past and strengthened institutional/technical capacity with external support. Subsequent reviews increased emphasis on implementation risks (fragmented parliament, pressures for populist policies, vested interests), but EA4 continued to be considered met although tensions grew, especially by the third review.

### Lending into Official Arrears (LIOA)
- Background:
  - Since December 2015, Ukraine has had outstanding arrears on a Eurobond held by Russia.
  - On December 16, 2015, the Executive Board decided the claim arising from the US$3 billion Eurobond held by Russia's National Wealth Fund (NWF) is an official claim for purposes of the Fund’s policy on arrears to bilateral creditors.
  - Ukrainian authorities announced a moratorium on this bond before its due date, resulting in non-observance of the continuous performance criterion on non-accumulation of external payment arrears.
  - Discussions on restructuring did not result in agreement; the bond remains in arrears and the dispute is pending before the court.
- LIOA criteria:
  - Criterion 1 (LIOA1): Prompt financial support from the Fund is essential and the member is pursuing appropriate policies.
  - Criterion 2 (LIOA2): Debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the Fund-supported program (absence of agreement due to creditor unwillingness).
  - Criterion 3 (LIOA3): Providing financing despite arrears would not unduly harm the Fund's ability to mobilize official financing in future cases.

*Source: 1ukrea2020002 - 47.      The breadth and complexity of the program implied additional coordination*

### 58.      At the time of the relevant reviews (i.e., the second and third reviews), staff assessed

### 1ukrea2020002 - 58.      At the time of the relevant reviews (i.e., the second and third reviews), staff assessed

### Application of LIOA (Lending into Official Arrears) policy (paragraphs 58–59)
- Staff judged the LIOA criteria were met at the time of the second and third reviews.
- Key assessments supporting LIOA application:
  - In line with EA1, balance of payment pressures were "exceptionally large" and Ukraine was judged to pursue appropriate policies (LIOA1).
  - Ukraine was judged to have made good faith efforts to reach agreement with Russia (LIOA2):
    - Terms offered to Russia were in line with financing and debt objectives of the program and did not imply a contribution disproportionate relative to other official bilateral creditors.
    - Ukrainian authorities were judged to have shown readiness to take negotiations forward, exchanged relevant information with the creditor on a timely basis, and welcomed Germany’s offer to act as an intermediary.
  - Provision of financing despite the arrears was not expected to harm the Fund’s ability to mobilize future financing (LIOA3) because:
    - The dispute was exceptional in nature and efforts to resolve it were evident.
    - Most of Ukraine’s official bilateral creditors, representing the vast majority of required financing contributions from such creditors, were supportive and provided new financing.
- The policy was applied appropriately in this precedent-setting case:
  - Balance of payment pressures remained large throughout and continued to date.
  - Ukrainian authorities continued good faith efforts vis-à-vis the creditor.
  - No evidence that lending into official bilateral arrears hampered the Fund’s ability to provide financing in subsequent programs.
- The case highlighted ex-ante uncertainty regarding which claims the Fund considers official for arrears policy purposes.

### Financing assurances and capacity to repay (paragraphs 60–61)
- Financing assurances:
  - Remained firm but at a reduced level over 2015–17 due to delays with program implementation.
  - Program request underscored significant international financial assistance, including new multilateral and official bilateral financing and a debt operation.
  - Financing from the debt restructuring was consistent with program targets.
  - A re-phasing of disbursements in the context of the second and third reviews reflected the authorities’ lower reform ambition following achievements in macro stabilization and a somewhat better external environment.
- Capacity to repay:
  - Ukraine’s capacity to repay the Fund was assessed as adequate, but staff emphasized exceptionally high risks to repayment capacity.
  - The program request explicitly linked adequate capacity to repay to the planned debt operation, which would help contain financing needs when the first large repayments to the Fund become due.
  - Other factors affecting capacity to repay: implementation of envisaged policies and reforms; containment of the conflict in the East.
  - The staff report would have benefited from inclusion of a downside scenario.
- Risk indicators relative to comparator cases (as noted in the source):
  - Under the program’s baseline scenario, peak Fund exposure relative to GDP and reserves was projected to exceed or to be equal to the corresponding medians in other exceptional access (EA) cases since the GFC.

### Program outcomes and structural reform record (paragraphs 62–63)
- Overall assessment of the 2015 EFF:
  - Broadly achieved targeted macroeconomic stabilization, but did not fully restore balance of payments sustainability.
  - Achievements:
    - Restored macroeconomic stability and growth following the 2014–15 crisis.
    - Avoided growth optimism; adopted flexible exchange regime, prudent monetary policy, and strong fiscal consolidation leading to sharp reduction in current account and overall fiscal deficits.
    - Successful completion of the debt operation helped restore sustainability of public debt.
    - Confidence strengthened, financial stability restored, economic growth resumed.
  - Shortcomings:
    - Inflation declined but remained above target.
    - International reserves increased but remained well below targeted levels due to lower than programmed official disbursements (delays in program implementation) and lower than projected private inflows.
    - Successor SBA was needed upon termination of the EFF.
    - Structural reform record uneven: significant progress in central bank independence, cleaning up the banking sector, energy sector reform, pension reform, and some governance/corruption measures — but efforts to improve competitiveness and business climate fell well short.
    - Reform momentum dissipated as economy stabilized and program ownership waned; with only three reviews completed the program went irrevocably off track, leaving many structural vulnerabilities unaddressed.
    - Risk of reversals in areas with significant progress.

### Lessons on building and sustaining reform momentum (selected recommendations)
- Use prior actions (PAs) judiciously and structural benchmarks (SBs) parsimoniously:
  - Strong PAs can demonstrate commitment and jumpstart reforms but are not a substitute for ownership.
  - Extensive use of PAs after program approval may undermine program ownership.
  - Parsimonious use of SBs after initial program stages may help sustain political support for reforms that carry short-term political costs and long-term benefits.
- Lay groundwork for taking advantage of narrow windows of opportunity:
  - Provide policy advice and capacity building even when near-term implementation prospects appear unfavorable to be ready when unity or crisis provides reform windows.
  - Frontload difficult structural reforms in early stages of a new program when appropriate.
- Foster genuine and broad ownership:
  - Strong policymaking team within the executive branch is critical.
  - Build broader ownership after acute crisis subsides; allow legislative bodies meaningful time to exercise their role while recognizing associated risks.
  - Consider semiannual reviews (possibly with quarterly staff visits) for programs with deep structural reforms, particularly after immediate macro stabilization objectives are achieved.
- Avoid very heavy front-loading of access in EFFs:
  - Some frontloading can be crucial to restore confidence, but very heavy front-loading may undermine reform momentum over long programs with significant structural agendas.
- Enhance communication and outreach:
  - Timely, well-targeted communication and outreach to key opinion leaders and broader populations can support ownership and dispel misconceptions.
  - Concerted outreach by staff and authorities, with attention to social media, is important.

### Possible lessons related to Fund policies and procedures (selected recommendations)
- Require a quantified downside scenario in capacity to repay assessments for exceptional access cases:
  - Supplement assessments for EA cases could be strengthened by an explicitly quantified downside scenario to strengthen risk assessments and support EA criterion on debt sustainability with high probability.
- Clarify boundaries between classes of claims for arrears policy purposes:
  - Greater ex-ante clarity on how determinations of private, official bilateral, or multilateral claims are made could avoid complications in future debt restructuring cases.
- Develop a rules-based approach to communicate long delays in completing program reviews under GRA arrangements:
  - Current communications on delays are ad hoc; consider a standardized public statement if a scheduled review delay exceeds 12 months (implies 15 months without a completed review under a quarterly schedule and 18 months under a semiannual schedule).
  - Objectives: (i) improve incentives for timely corrective actions; (ii) increase openness and clarity of communications; (iii) ensure evenhanded treatment of members; (iv) reduce unproductive attempts to restart defunct arrangements.
  - Mitigate risk of adverse market reactions by a sufficiently long trigger period and predictable rules-based approach.
- Develop further guidance for assessing a program’s prospect for success under EA4 (“reasonably strong prospects for success”):
  - More guidance could increase rigor, evenhandedness, and realism in EA4 assessments.
  - Guidance could include systematic assessment of depth and implementation of structural conditionality, past track record, electoral process, political context, institutional capacity.
- Adopt a standardized presentation to describe depth and implementation record of structural conditionality (SC):
  - Depth categories (from 2018 Review of Conditionality methodology): high, limited (medium), low.
    - High depth implies legislative/permanent measures with lasting change (e.g., civil service reform, privatization).
    - Limited depth implies one-off measures with immediate but not lasting effects (e.g., changes to controlled prices).
    - Low or no depth implies intermediate steps that would not by themselves bring meaningful economic change (e.g., preparation/announcement of plans).
  - Standardized presentations could promote parsimony in SC, increase transparency on progress, and provide comparators across Fund programs.
  - Systematic assessment of depth and implementation, together with authorities’ track record and capacity, could add objectivity to EA4 assessments.

*Excerpt from IMF staff report and EPE findings on Ukraine 2015 EFF as provided in the source content.*

### Box 1. Key Findings of Ukraine’s Prior Ex Post Evaluations/Assessments

### Box 1. Key Findings of Ukraine’s Prior Ex Post Evaluations/Assessments

### Overall summary
- Previous evaluations found broad success in achieving short-term macro stabilization but limited progress in structural reforms.
- Common pattern: halting progress in structural reform and difficulties addressing weak program ownership and strong vested interests.
- Ukraine’s previous programs supported by exceptional access deviated from program path quickly after completing one or two reviews.
- Evaluations identified program design approaches (varying emphasis on appropriate program length and scope) to help gain more traction in structural reforms.

### 2014 SBA Ex-Post Evaluation
- The program served as an anchor for economic policies in an uncertain economic and political environment.
- Early progress included maintaining flexible exchange rate, raising energy tariffs, banking sector reform, and Naftogaz restructuring.
- The EPE noted that tackling economic structures that give rise to vulnerabilities would not be possible with a short-term program aimed only at stabilizing the economy.
- Emphasized the need for careful prioritization of the structural reform agenda.
- Suggested development of realistic adverse scenarios and contingency plans.
- Recommended new staff guidance on:
  - integrating risks to the outlook into a bottom line assessment regarding the probability of debt sustainability (the second EA criterion); and
  - assessing a program’s prospects of success (the fourth EA criterion).

### 2010 SBA Ex-Post Evaluation
- The program helped restore market access and made some headway in eliminating preferential energy tariffs, strengthening central bank independence and pension reform.
- Failed to make progress in exchange rate flexibility, energy price adjustment, and bank and NPL resolution.
- Prior actions were responsible for the majority of progress under the program.
- Suggested that smaller and shorter arrangements focusing on the most critical issues may have better odds of success where reform implementation track record is poor.
- Also suggested automatic termination of GRA programs if no review was completed within a short grace period.

### 2008 SBA Ex-Post Evaluation
- The program helped prevent a financial meltdown amidst the global crisis by supporting an exchange rate adjustment and cushioning a sharper demand shock.
- Absence of sustained reform drive left large vulnerabilities in place.
- On ownership: prior actions facilitated progress in some but not all areas; less front-loaded access could have helped maintain policy incentives.
- Noted that a shorter program horizon would have better:
  - reflected political realities;
  - made more explicit the program’s crisis management-focus; and
  - helped to front-load the program design in line with financing.

### 2005 Ex-Post Assessment of Longer-Term Program Engagement
- Fund-supported programs were successful in redirecting monetary and fiscal policies toward macroeconomic stability objectives.
- Noted a lack of reform-oriented political consensus hindering sustained reforms toward a market-oriented macroeconomic framework.
- For future engagements underscored the need for:
  - strong program ownership and political support; and
  - streamlined structural measures focused on critical institutional bottlenecks.
- Suggested addressing Ukraine’s medium-term challenges with program horizons longer than one year, and with prior actions serving a key role in building a track-record.

*Source: Box 1. Key Findings of Ukraine’s Prior Ex Post Evaluations/Assessments.*

### Box 4. Ukraine 2015 EFF Structural Conditionality: Depth and Implementation

### Box 4. Ukraine 2015 EFF Structural Conditionality: Depth and Implementation

### Methodology
- The 2018 Review of Conditionality (2018 RoC) taxonomy classifies the depth of Structural Conditionality (SC) into three categories:
  - High depth: legislative changes or permanent measures bringing lasting changes (example: implementing civil service reform or privatization).
  - Limited (medium) depth: one-off measures with immediate but not lasting effects (example: changes to controlled prices).
  - Low (or no) depth: intermediate/preparatory steps not by themselves bringing meaningful economic change (example: preparation/announcement of plans).
- Shortcoming noted: adoption of legislation alone will not bring permanent change unless the new legislation is implemented and applied appropriately.
- The same methodology was applied to assess SC under Ukraine’s 2015 EFF.

### Overall findings on depth and implementation
- 50 percent (or 26) of the SC measures of the 2015 EFF were identified as high depth.
- The share of SC of limited depth was 37 percent.
- The share of high structural depth SC in Ukraine’s EFF was twice as high as the political transformation cases and post-GFC cases identified by the RoC as the groups with the highest share of high depth of SC.
- Shares of low depth SC in Ukraine’s program were much lower than in comparable Fund programs on average.
- Implementation rates:
  - Implementation rate of high depth of SC (excluding prior actions) was 16 percent.
  - Implementation of SC with limited and low depth was in the range of 50 to 60 percent.
- The 2018 RoC found higher structural depth tends to be associated with lower implementation rates; this association may reflect selection bias (Fund asks for high depth SC where ownership is low or the situation is particularly challenging).
- Conclusion: Given the breadth of SC (areas covered and numbers) and Ukraine’s weak track-record in SC under previous Fund-supported programs, the structural reforms agenda under the 2015 EFF was very ambitious.

### Key sectoral conditionality and implementation outcomes (selected highlights)
- NBU and Banking Sector
  - High-depth measures included parliamentary passage of Laws 2742 and 2743 to strengthen governance and autonomy framework of the NBU and ensure judicial appeals by related-party borrowers do not halt bank unwinding (Program Request Mar. 2015; labeled High PA).
  - Parliament to approve amendments to introduce unlimited liability of bank owners for insider lending losses (Program Request).
  - Resolution of all large banks not meeting minimum capital requirements (1st/2nd/3rd Review items).
  - Selection of international firms for restructuring/independent loan review of PrivatBank’s impaired loans (specified in ¶8iv).
- Energy and Utility Subsidies (Tariffs)
  - Energy regulator to raise household heating prices to UAH 625/gcal effective April 1, 2015 (MEFP ¶28) — High SB.
  - Energy regulator to raise household gas prices to UAH 3600/tcm (Tier 1) and UAH 7187/tcm (Tier 2) effective April 1, 2015 (MEFP ¶28).
  - Adoption/publication of Cabinet decisions to unify and increase retail gas tariffs consistent with 100 percent cost recovery based on import parity effective May 1, 2016.
  - Adoption/publication of decisions to increase retail heating tariffs to 100 percent of level consistent with gas priced at full import parity effective July 1, 2016.
  - Revision of Public Service Obligations (CMU Resolution 758) to introduce interim mechanisms to adjust gas and heating tariffs on a semi-annual or quarterly basis if tariffs deviate from full cost-recovery by 10 percent (various SB/PA items).
  - Reduction of consumption norms effective May 1, 2017: gas for individual heating from 5.5 to 5.0 per m^2; electricity for individual heating from 65 to 51 kwh per m^2; centralized heating from 0.0548 to 0.0431 Gcal per m^2.
- Naftogaz and Utility Subsidies
  - Parliamentary approval of legislative amendments to improve Naftogaz collections, including lifting moratoria (Law 2711-IV/2005 and Law 2864-III/2001) and disconnecting noncompliant customers (MEFP ¶28).
  - Parliamentary passage of Law 2956 lifting the 2001 moratorium on enforcement proceedings for companies with at least 25 percent state ownership that are debtors to Naftogaz (July MEFP ¶25).
  - Reform utility-related social assistance: (i) reduce scope of energy privilege programs to cover only households exempt from income testing per Law 76-VIII/2014; (ii) converge associated benefits to levels in the HUS program; (iii) revise benefit formula of expanded HUS in consultation with IMF staff; overall fiscal envelope for energy-related social assistance (privileges and HUS) set at UAH 43 billion (July MEFP ¶24).
  - Revise HUS parameters to limit outlays to UAH 47 billion in 2017 and introduce adjustments and capacity-based distribution tariffs effective May 1, 2017.
  - Adopt CMU resolution to monetize utility subsidies at the level of utility companies; establish centralized MoF database of social assistance recipients.
- Fiscal Policy and Budget
  - Parliament to approve a 2015 supplementary state budget law and package of tax and expenditure legislation consistent with program deficit ceiling of UAH 78 billion for the general government (MEFP ¶23).
  - Parliamentary approval of the 2016 budget in line with program commitments and of a new tax code (except measures due after July 1, 2016).
  - Parliamentary approval of the 2017 budget and supporting legislation consistent with the program target of 3.1 percent of GDP (¶18).
  - Government to hire financial and legal advisors to facilitate consultations with holders of public sector debt to improve medium-term debt sustainability (MEFP ¶26).
- Revenue Administration
  - Government to prepare a revenue administration reform plan to overhaul the State Fiscal Service, including governance/institutional reforms and removal of underperforming officials (¶25).
  - State Fiscal Service to implement new arrangements under the reform plan and transfer taxpayers meeting large taxpayer criteria to the LTO (¶22).
  - Adopt legislation to merge customs and tax administration into a single legal entity (¶27a).
  - Parliamentary approval of legislation to establish a new civil service responsible for investigation of financial offences under the MoF to replace the tax police and consolidate responsibilities (¶20e).
- Pensions Reform
  - Parliamentary passage of pension reform legislation to revise pay-as-you-go parameters, abolish special pensions, and lay conditions for a complementary funded system (July MEFP ¶24).
  - Adopt Cabinet decree reducing lists 1 and 2 of occupations eligible for early retirement by at least 40 percent in terms of eligible persons (¶29a).
  - Parliamentary approval of legislation to: (i) gradually adjust statutory retirement age and reduce scope for early retirement; (ii) tighten eligibility for minimum pension; (iii) consolidate pension legislation; (iv) expand base for social security contributions; (v) ensure equitable tax treatment of pensions; (vi) better link benefits to contributions; separate categorical supplements from labor pensions and shift financing to state budget starting 2017 (¶29a).
- State-Owned Enterprises (SOEs)
  - Ministry of Economy and Ministry of Finance to prepare a statement of fiscal risks from SOEs (¶36).
  - Government to adopt a broad-based SOE reform strategy (prepared in consultation with IMF and World Bank staff) to improve budgetary oversight, develop ownership policy, strengthen corporate governance, prioritize restructuring targets, and examine asset management options (¶36).
  - Adoption of privatization action plan and triage of SOEs for privatize/remain under state management/liquidate, and transfer to SPFU those in privatization plan for 2016 (¶39c).
  - Agreement on detailed restructuring action plans for five SOEs with largest fiscal risks (July MEFP ¶30).
- Anti-Corruption / AML
  - Establishment and operationalization of the National Anti-Corruption Bureau (NABU), including measures to ensure robust external oversight, investigative powers, access to information, and hiring of high-integrity staff (MEFP ¶32; July MEFP ¶29).
  - Establish specialized anticorruption prosecution function in charge of overseeing NABU investigations, enabling timely access to relevant information from other public institutions (July MEFP ¶29).
  - Parliamentary approval of legislation to ensure NABU has a wide range of investigative techniques and protection of registration of pre-court cases/investigative judges' rulings from leakage (¶36a).
  - Parliamentary approval of legislation to establish an anticorruption court (¶26c).
  - Enforce filing of asset declarations for 2015 by high-level officials, report non-filers to NABU, and make declarations publicly available (¶26a).
  - Strengthen AML framework implementation: regulatory amendments for domestic PEPs; FIU to develop system to assist financial institutions in identifying domestic PEPs; arrangements to facilitate cooperation between NBU, FIU and NAB (¶32).

### Quantitative and program context (selected numeric highlights)
- Share of SC measures by depth:
  - High depth: 50 percent (or 26 measures).
  - Limited depth: 37 percent.
- Implementation rates:
  - High-depth SC (excluding prior actions): 16 percent.
  - Limited and low depth SC: in the range of 50 to 60 percent.
- Program deficit ceiling referenced: UAH 78 billion (general government, 2015 supplementary budget).
- Fiscal envelope for all energy-related social assistance programs: UAH 43 billion.
- Target for household utility subsidy outlays in 2017: UAH 47 billion.
- Specific tariff levels and consumption norms:
  - Household heating: UAH 625/gcal (effective April 1, 2015).
  - Household gas Tier 1: UAH 3600/tcm; Tier 2: UAH 7187/tcm (effective April 1, 2015).
  - Consumption norms effective May 1, 2017: gas for individual heating 5.0 per m^2 (from 5.5); electricity 51 kwh per m^2 (from 65); centralized heating 0.0431 Gcal per m^2 (from 0.0548).
- Pension program target for 2017: program target of 3.1 percent of GDP (budget and supporting legislation to be consistent with this target).

*Box 4. Ukraine 2015 EFF Structural Conditionality: Depth and Implementation.*

### References

### References

### Academic articles and books
- Asonuma, Tamon and Christoph Trebesch (2016), “Sovereign Debt Restructurings: Preemptive or Post-Default”, Journal of the European Economic Association, 14 (1), pp. 175-214.
- Burstein, Ariel and Gita Gopinath (2014), “International Prices and Exchange Rates”, Handbook of International Economics, Volume 4, pp. 391-451.
- Ismail, Kareem, Roberto A. Perrelli, and Jessie Yang (2019), “Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments,” IMF Working Paper (forthcoming). Washington, DC: International Monetary Fund.
- Kupfer, Matthew, (2019), “What a $2.8 Million Scheme to Rip Off the State Says about Corruption in Ukraine,” Ukraine Alert, Atlantic Council, https://www.atlanticcouncil.org/blogs/ukrainealert/what-a-2-83-million-scheme-to -rip-off-the-state-says-about-corruption-in-ukraine

### Central bank and financial stability publications
- BIS, (2019), “Monetary policy frameworks in EMEs: inflation targeting, the exchange rate and financial stability,” Annual Economic Report, https://www.bis.org/publ/arpdf/ar2019e2.htm
- Central Banking staff (2019), “Transparency: National Bank of Ukraine,” Central Banking, https://www.centralbanking.com/awards/3948671/transparency-national-bank-of-ukraine
- National Bank of Ukraine, 2018, “Financial Stability Report” https://bank.gov.ua/doccatalog/document?id=73266505

### IMF policy papers, press releases, and country reports
- International Monetary Fund, 2002, “Guidelines on Conditionality,” IMF Policy Paper, http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.htm
- International Monetary Fund, 2005 “Ukraine : 2005 Article IV Consultation and Ex Post Assessment of Longer-Term Program Engagement: Staff Reports; Staff Supplement; and Public Information Notice on the Executive Board Discussion” IMF Country Report No. 05/415, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/pubs/ft/scr/2005/_cr05415.ashx
- International Monetary Fund, 2009, “Selected Decisions and Selected Documents of the IMF, Thirty- Ninth Issue -- The Acting Chair’s Summing Up—GRA Lending Toolkit and Conditionality—Reform Proposals, Executive Board Meeting 09/29 March 24, 2009,” https://www.imf.org/external/selecteddecisions/description.aspx?decision=ebm%2F09%2F29
- International Monetary Fund, 2011, “Ukraine : Ex Post Evaluation of Exceptional Access Under the 2008 Stand-By Arrangement” IMF Country Report No. 11/325, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/pubs/ft/scr/2011/_cr11325.ashx
- International Monetary Fund, 2013, “Ukraine : Ex Post Evaluation of Exceptional Access Under the 2010 Stand-By Arrangement,” IMF Country Report No. 14/146, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/pubs/ft/scr/2014/_cr14146.ashx
- International Monetary Fund, 2014, “Conditionality in Evolving Monetary Policy Regimes,” IMF Policy Paper, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/np/pp/eng/2014/_030514b.ashx
- International Monetary Fund, 2015, “Ukraine : Request for Extended Arrangement Under the Extended Fund Facility and Cancellation of Stand-By Arrangement,” IMF Country Report No. 15/69, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/pubs/ft/scr/2015/_cr1569.ashx
- International Monetary Fund, 2015, “The Fund's Lending Framework and Sovereign Debt-Further Considerations,” IMF Policy Paper, https://www.imf.org/~/media/Websites/IMF/imported- full-text-pdf/external/np/pp/eng/2015/_040915.ashx
- International Monetary Fund, 2015, “Reforming the Fund's Policy on Non-Toleration of Arrears to Official Creditors,” IMF Policy Paper, https://www.imf.org/~/media/Websites/IMF/imported- full -text-pdf/external/np/pp/eng/2015/_101515.ashx
- International Monetary Fund, 2015, “Status of Ukraine's Eurobond Held By the Russian Federation,” IMF Country Report No. 15/344, https://www.imf.org/~/media/Websites/IMF/imported-full- text-pdf/external/pubs/ft/scr/2015/_cr15344.ashx
- International Monetary Fund, 2016, Selected Decisions and Selected Documents of the IMF, Thirty- Ninth Issue -- Access Policy and Limits in the Credit Tranches and Under the Extended Fund Facility and on Overall Access to the Fund’s General Resources, and Exceptional Access Policy—Review and Modification,” https://www.imf.org/external/selecteddecisions/description.aspx?decision=14064-(08%2F18)
- International Monetary Fund, 2016, “Press Release: Statement by the Managing Director on Ukraine,” IMF Press Release No. 16/52, https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr1652
- International Monetary Fund, 2016, “Ukraine : Second Review Under the Extended Fund Facility and Requests for Waivers of Non-Observance of Performance Criteria, Rephasing of Access and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Ukraine,” IMF Country Report no. 16/319, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/pubs/ft/scr/2016/_cr16319.ashx
- International Monetary Fund, 2016, “Ukraine : Ex Post Evaluation of Exceptional Access Under the 2014 Stand-By Arrangement,” IMF Country Report No. 16/320, https://www.imf.org/~/media/Websites/IMF/imported-full-text- pdf/external/pubs/ft/scr/2016/_cr16320.ashx
- International Monetary Fund, 2017, “Ukraine : Selected Issues,” IMF Country Report No. 17/84, https://www.imf.org/~/media/Files/Publications/CR/2017/cr1784.ashx
- International Monetary Fund, 2017, “The Role of the Fund in Governance Issues - Review of the Guidance Note - Preliminary Considerations,” IMF Policy Paper, https://www.imf.org/~/media/Files/Publications/PP/2017/pp080217-the-role-of-the-fund- in -governance-issues-review-of-the-guidance-note.ashx
- International Monetary Fund, 2017, “IMF Statement on the Efforts to Fight Corruption in Ukraine,” IMF Press Release No. 17/473, https://www.imf.org/en/News/Articles/2017/12/07/pr17473- ukraine-imf-statement-on-the-efforts-to -fight-corruption
- International Monetary Fund, 2018, “Review of 1997 Guidance Note on Governance - A Proposed Framework for Enhanced Fund Engagement,” IMF Policy Paper, https://www.imf.org/~/media/Files/Publications/PP/2018/pp030918govpaper.ashx
- International Monetary Fund, 2018, “Ukraine : Request for Stand-By Arrangement and Cancellation of Arrangement Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for Ukraine,” IMF Country Report No. 19/3, https://www.imf.org/~/media/Files/Publications/CR/2019/cr1903.ashx
- International Monetary Fund, 2019, “2018 Review of Program Design and Conditionality,” IMF Policy Paper, https://www.imf.org/~/media/Files/Publications/PP/2019/PPEA2019012.ashx

*Source: 1ukrea2020002 - References*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ukrea2020002.pdf_