## 1ukrea2021001 ## Source details **Canonical URL:** [1ukrea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1ukrea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1ukrea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1ukrea2021001.pdf.json) --- ### EXECUTIVE SUMMARY — Program status and corrective actions - After critical setbacks and delays in the 16 months since program approval, authorities have taken corrective actions to address shocks to program objectives. - Early tensions over the National Bank of Ukraine (NBU) independence required a pause; a prior action and new commitments were implemented to protect NBU independence. - Adverse Constitutional Court rulings weakened anti-corruption framework; effectiveness restored through prior actions before the review could proceed. - Authorities recently met seven of nine structural benchmarks set at program request; all prior actions for this review have been met. - Staff supports completion of the first review and monetary policy consultation and the authorities’ requests for: - a waiver of the missed performance criterion, - program extension, - rephasing of access, and - financing assurances review. - Purchase available upon completion of this review: SDR 500 million; bringing total purchases under the SBA to SDR 2,000 million. - Program extension request: from December 8, 2021 to June 30, 2022. ### Macroeconomic performance and outlook - 2020 recession milder than expected: - Economy contracted by 4 percent in 2020 (versus 8 percent contraction projected at program approval). - 2021 recovery stalled then partially rebounded: - GDP contracted by 1.4 percent q/q in Q1 2021 and by 0.8 percent q/q in Q2 2021. - High-frequency indicators suggest growth picked up in Q3 2021. - Staff project output to exceed its pre-pandemic level by end-2021, with annual growth of 3.2 percent. - Risks: downside tilted (Delta variant, low vaccination rates, supply constraints, high gas prices). - Reserve coverage: projected to stay below 100 percent of the ARA metric in 2022 even assuming full disbursements of remaining available amounts under the current SBA; building reserve buffers remains appropriate. ### Inflation and monetary policy (MPCC triggered) - Inflation developments and projections: - Headline inflation: 11 percent in September 2021. - Core inflation: 7.4 percent in September 2021. - Inflation expectations: 6.7 percent in September 2021. - Average 2021 inflation projected at 9½ percent. - Recent NBU actions: - Key policy rate raised by 250 basis points (to 8½ percent). - NBU strengthened forward guidance and described stance as "mildly accommodative". - NBU discontinued long-term refinancing and interest rate swap operations; reduced refinancing maturity from 90 to 30 days. - NBU committed to maintain key policy rate as core instrument and refrain from liquidity-providing operations exceeding 30 days, unless necessary for financial stability. - MPCC mechanics and triggers: - Consultation triggered if observed headline inflation falls outside an outer band of ±3 percentage points around mid-point targets for 2020 and 2021. - Inner band ±1 percentage point triggers IMF staff consultation. - Assessment: - Inflation has risen substantially outside MPCC outer bands despite policy rate hikes. - Risks tilted to the upside (commodity-price surges, de-anchoring of inflation expectations). - Program retains indicative target on NBU net domestic assets to guard against excessive balance sheet expansion. - NBU to allow exchange rate flexibility while aiming to maintain adequate reserve buffers; asymmetry towards FX purchases has weakened monetary transmission. ### Banking sector and financial stability - Asset quality, provisioning, and credit: - Sector NPL ratio: 48.4 percent at end-December 2019 → 37.2 percent at end-June 2021. - Banks’ loan loss provisions: 89 percent of NPLs at end-June 2021. - Bank credit to the economy: around 20 percent of GDP. - Supervisory actions and reforms: - COVID-19 regulatory relief unwound April–July 2021; impact on capital expected small/manageable. - Annual asset quality review expanded to include largest exposures restructured under COVID-19 measures; stress tests and supervisory actions used to address weaknesses. - NBU required four banks (3.1 percent of system deposits) to inject capital by year-end. - NBU to adopt time-bound action plan to improve professional capacity of bank supervision by end-December 2021 (structural benchmark). - Financial safety net: - Amendments to Banking Law and DGF Law enacted (prior actions) to strengthen supervision and DGF asset recovery framework. - By January 2025, banks expected to comply with Basel II Pillar 2 and Basel III capital and liquidity frameworks. - Plans to restore DGF solvency and make state-owned Oschadbank a member of DGF; contingency plans to be endorsed by FSC by end-November. ### Fiscal developments, financing, and public debt - 2021 fiscal performance and composition: - Tax revenues overperformed in first three quarters of 2021; MoF submitted three supplements allocating about 1.3 percent of GDP of additional revenues. - Allocation of additional revenues: more than half to roads; about 20 percent to top-up HUS; rest to military wages and goods/services (mostly medicine). - Despite higher pension spending, general government deficit likely contained to 3.5 to 4 percent of GDP. - Financing challenges in 2021: - Domestic debt placement lower than expected; average rollover rate ~113 percent. - IFI financing linked to reform implementation delayed; partial market borrowing filled small fraction. - Half of recent SDR allocation (SDR 1 billion, or about US$1.4 billion) used on September 17 to repay maturing debt. - 2022 financing prospects: - Gross financing needs in 2022 projected to moderate; expected coverage by domestic debt (> two thirds), IFI disbursements, and market borrowing. - Implied domestic rollover rate of 130 percent considered realistic if supported by non-resident inflows. - Inclusion of Ukraine into the JPM GBI-EM Index starting end‑March 2022 may benefit bond placements. - Debt stock and projections (selected): - Public and publicly-guaranteed debt: 61.0 percent of GDP (end-2021 act., Table excerpts). - Projection: debt-to-GDP declines toward about 43 percent by 2026 under baseline, subject to reform implementation and containment of fiscal risks. - DSA and vulnerabilities: - External public debt service needs and constrained investment inflows elevate downside risks. - Stress tests show vulnerability to shocks in growth, exchange rate, and interest rates; combined macro-fiscal shocks have largest adverse effects. ### External position and reserves (Annex I) - External position assessment: - Staff assesses Ukraine’s external position at end-2020 broadly in line with fundamentals using EBA-lite; external position only moderately weaker than norm. - 2020–2021 external developments: - 2020 current account: surplus of 3.3 percent of GDP. - 2021 current account forecast: roughly balanced; expected to return to deficit as pandemic effects dissipate and Nord Stream 2 reduces transit revenues by some US$1.2 billion per year through 2024. - Ukraine issued US$1.75 billion in 8-year Eurobonds in 2021; net non-resident inflows to domestic UAH bonds ~US$0.5 billion. - Hryvnia appreciated ~7 percent vs US$ since start of the year; NBU net FX purchases nearly US$2 billion. - Reserves: - Gross international reserves (end-period, selected): 2019 — 25.3; 2020 — 29.1; 2021 — 29.7 (billions of U.S. dollars). - Reserves projected to remain below the ARA metric in 2022 even with full SBA disbursements; medium-term baseline projects reserves below ARA and around 70 percent of the Fund’s adequacy metric by 2026 absent stronger inflows. - Balance of payments accounting change: - From June 2020 NBU includes corporate reinvested earnings in the BoP; retroactively applied to 2015 onwards—this makes FDI more procyclical and current account more countercyclical. ### Energy sector: gas, renewables arrears, electricity sector reforms - Gas sector and household protection: - Measures to protect vulnerable households and stabilize DHC and Naftogaz liquidity without widening 2021 deficit (UAH 12 billion HUS top-up; up to UAH 1 billion subsidy for poorest municipalities; UAH 11.4 billion redistribution to local budgets in 2022). - Any remaining Naftogaz liquidity gap during heating season to be covered by transparent direct budget transfer (MEFP ¶4c and ¶31). - Ensure heating tariffs officially enacted to fully reflect gas and non-gas costs; price caps not to be reintroduced (MEFP ¶30b). - Retail market competition to be enhanced: supplier switching simplification; joint data hub by end‑March 2022 (structural benchmark); equal access and unbundling measures (MEFP ¶32a). - Wholesale market: domestic gas release program starting May 2022—UGV to sell at least 40–50 percent of production on local exchanges (MEFP ¶32b). - Renewable energy (RES) arrears: - Guaranteed Buyer obligated to purchase wind and solar at feed-in tariffs above market prices; difference partially covered by transmission tariffs. - Accumulated arrears to RES: about UAH 25 billion in 2020 and another UAH 5 billion expected in 2021. - Ukrenergo borrowed UAH 10 billion from SOBs in January to reduce arrears and plans publicly guaranteed “green” bonds to eliminate stock as of end-2021. - Authorities propose to eliminate arrear accumulation by increasing transmission tariffs; commitment monitored through new quantitative performance criterion (QPC) fixing transmission tariff to eliminate arrear accumulation and service debt issued for past arrears (MEFP ¶33). - Electricity sector and SOE governance: - Objective: eliminate quasi‑fiscal deficits in the electricity sector; Guaranteed Buyer to stop accumulating arrears from 2022 onward (new QPC). - NEURC to set transmission tariff to cover obligations to renewable producers, debt service and related financial expenses. - Energoatom to sell production at market prices while compensating the Guaranteed Buyer for the household difference; Energoatom corporate governance corporatization law expected by end‑December 2021 and IFRS accounts by May 2022 (structural benchmark). - Supervision boards to be fully operational: Ukrenergo by end‑December 2021; Naftogaz by end‑January 2022; Energoatom by end‑May 2022. ### State-owned enterprises (SOEs), state-owned banks (SOBs), privatization and corporate governance - SOE corporate governance: - Adherence to governance framework worsened since program approval due to government interventions (ad‑hoc salary caps, CEO replacements, SPA renegotiations without supervisory boards). - Authorities submitted draft SOE corporate governance law to align framework with OECD guidelines; recommendation to broaden supervisory board powers to appoint/dismiss CEOs. - Supervisory boards to be made operational with transparent selection procedures; SPF to be strengthened for privatization and asset transfers. - SOBs governance and privatization strategy: - Updated strategy: reduce state ownership to below 25 percent of banking sector net assets by 2025. - Actions: - Reverse relaxed eligibility criteria for state representatives on SOB supervisory boards by end-November 2021 (structural benchmark). - Engage international advisor for supervisory board performance assessment; publish key findings in June 2022. - Adopt time-bound succession plans for each SOB supervisory board by end-November 2021 (structural benchmark). - Maintain market-based remuneration for SOB supervisory board members. - IFC convertible loan to UkrGasBank (2020); roadmap for UkrGasBank privatization approved by Cabinet. - Cabinet to endorse by end-January 2022 roadmaps to take PrivatBank and Oschadbank to market (MEFP ¶24; structural benchmark). ### Anti-corruption, rule of law, and institutional safeguards - Restorations and prior actions: - NABU law amended (prior action) strengthening institutional independence and selection integrity; criminal liability for false asset declarations restored (prior action). - HCJ law amended (prior action) to create Ethics Council with decisive role for independent experts; one-off integrity check of existing HCJ members to be completed within six months of Ethics Council establishment (end‑April 2022 structural benchmark). - SAPO amendments planned (end‑March 2022 structural benchmark) to improve selection, autonomy, and accountability. - Enforcement and transparency: - HACC issued 45 decisions in last two years; 80 percent led to convictions for corruption offenses. - Ukraine scored 33 in Transparency International’s 2020 Corruption Perceptions Index. - State Audit Service partial ex-post audit: UAH 44.5 billion covered out of UAH 66.5 billion COVID Fund; findings included weak verification, violations in tenders, over-stated prices; 212 cases referred to law enforcement. - Asset recovery: - High-level working group launched; by end‑February 2022 authorities to adopt and publish an asset recovery strategy and action plan (MEFP ¶26a; structural benchmark). - Prosecutor General’s Office to publish semi-annual report on criminal proceedings outcomes starting end‑December 2021 (MEFP ¶26.c; structural benchmark). ### Program conditionality, monitoring, and requests - Staff supports: - Completion of first review and monetary policy consultation; waiver for non-observance of a performance criterion on ceiling on government guarantees; program extension to June 30, 2022; rephasing of access; financing assurances review. - Disbursement sequencing and access: - Purchase upon first review: SDR 500 million. - Second review (end-December 2021 test date) would unlock additional SDR 500 million. - Last two tranches combined: SDR 1.1 billion subject to third review with end-March 2022 test date. - New monitoring and performance criteria: - Net international reserves floors and indicative targets on net domestic assets for end-December and end-March test dates. - New QPC on arrears to renewable energy producers with ceiling fixed at UAH 0 billion and specific adjustors (UAH/EUR exchange rate threshold 33 UAH/EUR; RES output thresholds 12,600 GWh for 2021 and 3,000 GWh for Q1 2022; sensitivity factors provided). - Retention of ER and multiple currency practices: - Staff supports retention for 12 months; justification: balance of payments reasons and temporary/non-discriminatory nature. ### Debt, DSA highlights, and stress tests - Public and publicly-guaranteed debt (end-2020 table figures): - UAH 2,557.19 billion / USD 94.7 billion / 61.0 percent of GDP. - External debt: UAH 1,525.05 billion / USD 56.5 billion / 36.4 percent of GDP. - Sovereign Eurobonds: USD 24.7 billion / 16.0 percent of GDP. - Contingent liabilities (memo): 10.3 percent of GDP. - DSA baseline and projections (selected): - External debt (percent): 2021 — 65.9; 2022 — 60.1; 2023 — 56.4; 2024 — 52.1; 2025 — 48.3; 2026 — 45.2. - Gross external financing need (billions US$): 2021 — 39.3; 2022 — 37.2; 2023 — 38.9; 2024 — 43.7; 2025 — 41.9; 2026 — 49.1. - Nominal gross public debt (percent of GDP): 2019 — 39.2; 2020 — 50.5; 2021 — 61.0; projected decline to about 43 percent by 2026 under baseline. - Stress-test findings: - Adverse shocks (real depreciation 30 percent, combined shocks) substantially increase external debt ratios; combined shocks and real depreciation produce highest stress-test outcomes. - Debt dynamics sensitive to growth, exchange rate, and interest rate shocks. ### Reporting, transparency, and operational requirements (selected) - NBU reporting to IMF: - Monthly sectoral balance sheets no later than the 25th of following month; weekly daily operational NIR data; daily FX interventions and auction results; daily and monthly banking sector and bank-by-bank data (liquidity, open FX positions, loan balances, deposits, collateral, interest rates). - NBU internal audit assurance reports and annual external auditor management letters to IMF per safeguards policy. - MoF/Treasury reporting: - Daily operational budget execution; monthly consolidated balances; monthly cash deficit reports no later than 15 days after month end; monthly stock of all budgetary arrears; quarterly and semi-annual debt and disbursement reporting. - DGF reporting: - Monthly data on insured deposits, DGF financial position, forecasts of expected receipts and payouts. - STS/SCS reporting: - Monthly VAT refund and tax arrears reporting; quarterly listing of tax exemptions. - Energy and SOE reporting: - Naftogaz and GTSO monthly cash flows and deficits by entity; Ministry of Energy monthly RES output and Guaranteed Buyer arrears. - Anti-corruption reporting: - NACP, NABU, HACC, FIU quarterly public reporting templates on declarations, indictments, convictions, and suspicions of laundering tied to corruption. *Source: IMF staff Executive Summary and selected sections from 1ukrea2021001.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Program status and corrective actions - After a number of critical setbacks and delays in the 16 months since program approval, the authorities have taken important corrective actions to address shocks to program objectives. - Early tensions about the authorities’ commitment to uphold the independence of the National Bank of Ukraine (NBU) required a pause to assess policy continuity and determine corrective actions; a prior action for this review and new commitments provide a way forward to protect this key policy pillar. - Adverse Constitutional Court rulings weakened the anti-corruption framework and required restoring its effectiveness through prior actions before the review could proceed. - In a push to make progress on delayed structural benchmarks, the authorities have recently met seven of the nine structural benchmarks set at the time of the program request. - All prior actions for this review have been met. - Staff supports completion of the first review and monetary policy consultation, and the authorities’ requests for: - a waiver of the missed performance criterion, - program extension, - rephasing of access, and - financing assurances review. - The purchase available upon completion of this review would be equivalent to SDR 500 million, bringing total purchases under the SBA to SDR 2,000 million. *November 8, 2021* ### Macroeconomic performance and outlook - The recession in 2020 was milder than expected: the economy contracted by 4 percent in 2020, significantly overperforming the 8 percent contraction projected at program approval. - The recovery that began in the second half of 2020 stalled in 2021: - GDP contracted by 1.4 percent q/q in Q1 2021 and by 0.8 percent q/q in Q2 2021. - High-frequency indicators suggest growth picked up in Q3 2021, supported by a rebound in agricultural exports and strong domestic consumption. - Staff project output to exceed its pre-pandemic level by end-2021, with an annual growth rate of 3.2 percent. - The growth outlook is highly uncertain with risks tilted to the downside (Delta variant, low vaccination rates, supply constraints, high gas prices). - Reserve coverage is projected to stay below 100 percent of the ARA metric in 2022 even assuming full disbursements of remaining available amounts under the current SBA; building reserve buffers remains appropriate. ### Inflation and monetary policy - Inflation developments: - Headline inflation accelerated to 11 percent in September 2021. - Core inflation was 7.4 percent in September 2021. - Inflation expectations were 6.7 percent in September 2021. - Average 2021 inflation is projected at 9½ percent. - Drivers of inflation include strong consumer demand, higher global commodity prices, and strong wage growth. - The recent spike in gas prices has had limited immediate household inflation impact due to annual fixed price contracts, but is expected to gradually raise food price inflation through input costs. - While lower commodity price inflation and tighter monetary policy are expected to return inflation to the target band by end-2022, inflationary risks are tilted firmly to the upside (further commodity-price surges, de-anchoring of inflation expectations). - Inflation has risen substantially outside of the Monetary Policy Consultation Clause (MPCC) outer bands despite recent policy rate hikes. ### Banking sector and financial stability - Banks remain profitable and well capitalized, but nonperforming loans (NPLs) remain very high: - Sector NPL ratio fell from 48.4 percent at end-December 2019 to 37.2 percent at end-June 2021. - Banks’ loan loss provisions stood at 89 percent of NPLs at end-June 2021. - Bank credit to the economy remains low at around 20 percent of GDP. - Regulatory measures introduced in March 2020 to address COVID-19 credit risk were unwound during April to July 2021; their impact on banks’ capital is expected to be relatively small and manageable. - The annual asset quality review was expanded to include banks’ largest exposures restructured under COVID-19 measures; stress tests and supervisory actions have been used to address weaknesses. - The NBU required four banks (3.1 percent of system deposits) to inject capital by year-end. - To support credit revival, the authorities have committed to prepare an actionable plan to address identified structural obstacles in bank lending. ### Fiscal developments and financing - The nominal 2021 deficit target is on track to be met: - In the first three quarters of 2021, tax revenues have overperformed, allowing the Ministry of Finance to submit three supplements to the 2021 budget which allocate about 1.3 percent of GDP of additional revenues. - Allocation of the additional revenues: more than half to construction and maintenance for roads; about 20 percent to top-up the household utility subsidy (HUS) program; the rest to increase wages for the military and goods and services spending (mostly medicine). - Despite higher than anticipated expenditure on pension benefits, the deficit of the general government would likely be contained to 3.5 to 4 percent of GDP. - Budget financing in 2021 faced challenges: - Domestic debt placement has been lower than expected, with an average rollover rate of about 113 percent. - IFI financing—linked to reform implementation—has been delayed; only a small fraction of the gap was filled with market borrowing. - Half of the recent SDR allocation (SDR 1 billion, or about US$1.4 billion) was used on September 17 to repay maturing debt. - Financing prospects for 2022: - Gross financing needs in 2022 are projected to moderate and are expected to be covered by domestic debt (over two thirds), IFI disbursements, and market borrowing. - The implied rollover rate for domestic debt of 130 percent appears realistic, especially if supported by non-resident inflows. - Bond placements may benefit from the inclusion of Ukraine into the JPM GBI-EM Index starting from end-March 2022. ### Program conditionality, risks, and institutional issues - Policies under the updated Memorandum of Economic and Financial Policies (MEFP) address identified risks, but residual risk remains and will require stronger program ownership. - Specific fiscal and quasi-fiscal risks: - Risks to debt from off-budget spending during the crisis are being contained in the 2022 budget. - Risks from quasi-fiscal activities in the energy sector (gas, electricity) will be addressed through structural conditionality and monitored through new quantitative conditionality. - Corporate governance and state-owned enterprises: - De facto weakening of corporate governance as a risk management framework in key state-owned financial and non-financial enterprises is difficult to mitigate; new program conditionality and commitments will help monitor progress. - National Bank of Ukraine institutional capacity: - A significant erosion of human capital at the NBU has created operational risks; these are being addressed by commitments to bolster the institutional strength of the NBU but cannot be fully mitigated. - Amendments to the NBU Law enacted as a prior action strengthen de jure independence; continuity of policies will require the government and the NBU’s decision-making bodies to uphold good governance principles and the spirit of autonomy. ### Requests and staff position on program extension - The authorities are requesting an extension of the program from December 8, 2021 to June 30, 2022, along with a rephasing of remaining access, to provide more time to achieve program objectives and to maintain a liquidity and confidence backstop amid lingering uncertainty. - Staff supports completion of the first review and the associated requests (waiver, extension, rephasing, financing assurances review). *Source: IMF staff Executive Summary for UKRAINE (1ukrea2021001 - EXECUTIVE SUMMARY).* ### 9. The external position is stronger than projected at program approval (Annex I). ### 9. The external position is stronger than projected at program approval (Annex I). ### External position and current account - Lower import volumes and outbound tourism, and rising commodities prices for key exports (notably metals, minerals, and agricultural products) helped bring about a current account surplus in 2020 (3.3 percent of GDP). - Indications of a strong harvest should buoy the current account again this year. - Ukraine issued US$1.75 billion in 8-year Eurobonds in 2021. - Non-resident purchases of domestic UAH bonds returned, with net inflows of around US$0.5 billion. - Since the beginning of the year, the hryvnia appreciated some 7 percent vis-à-vis the US dollar allowing the NBU to accumulate FX reserves (net FX purchases of nearly US$2 billion). - The current account is expected to return to a deficit as pandemic-related factors dissipate (e.g., a recovery in corporate profitability should translate into higher outflows related to reinvested earnings), and due to the impact from Nord Stream 2 pipeline, which is expected to reduce Ukraine’s gas transit revenues by some US$1.2 billion per year through 2024. ### Box 2 — Incorporating reinvested earnings in the Balance of Payments - In June 2020, the NBU began including corporate reinvested earnings in Ukraine’s balance of payments statistics in line with international standards. - Effect on accounting: profits accruing to non-residents are recorded as an outflow in the primary income balance of the current account, while reinvestment of those earnings is recorded as an FDI inflow under the financial account; the overall balance of payments is unaffected due to offsetting modifications. - The modification was retroactively applied to data from 2015 onwards: - This widens the historical current account deficit for 2016-19 because non-resident investors reinvested earnings that increased both primary income outflows and direct investment inflows. - 2015 differs since many firms realized losses; corporate losses accruing to non-resident investors improved the primary income balance and matched lower reinvested inflows under FDI. - Implications: - Ukraine’s FDI inflows are likely to become more procyclical, in line with corporate profitability. - The current account will become more countercyclical: in boom periods, corporate profits distributed to non-residents tend to lower the primary income balance; the opposite occurs in downturns. - This factor partly contributed to the large current account surplus in 2020. ### Staff assessment and vulnerabilities - Staff’s assessment: Ukraine’s external position at end-2020 is broadly in line with fundamentals and desirable policy settings (assessment anchored on the current account using the EBA-lite methodology and accounting for unusual and temporary pandemic-related impacts). - Quantitative results: the external position is only moderately weaker than the norm. - Elevated downside risks: - Reserves are projected to remain below adequate levels, pending large debt service obligations. - Weak investment inflows heighten vulnerability. - Policy implication: need for a sustained and well-prioritized reform agenda to reduce policy gaps and buttress external sustainability. ### Near-term outlook and risks - Ukraine is amid a Delta variant outbreak with increasing, but still low, vaccination rates — posing a risk to near-term growth via potential tightening of containment measures. - Other risks to growth and macro-financial stability: intensification of the conflict in the eastern part of Ukraine; a tightening in global financial conditions; unfinished structural reforms and risks of reform reversals. - Continued high gas prices: - Pose risks to growth while contributing to a deteriorating inflation outlook. - Highlight limited progress in reducing the degree of subsidization of domestic gas consumption, creating fiscal risks. - Possible difficult policy trade-offs could arise, particularly if inflation expectations destabilize. ### Structural benchmarks and review discussions - First review discussions delayed by slow progress in implementing structural benchmarks (SBs) and several setbacks. - While very few SBs were met on time, most have been completed, including as proposed prior actions for the review; the delayed COVID fund audit is proposed to be reset for end-December 2021. - Examples (status highlights from Text Table): - SB 1 (state-owned banks’ NPL reduction plans; End-June 2020): Met. - SB 2 (heating tariffs review; End-August 2020): Not Met — The Law was signed by the President in August 2021 and tariffs are currently being reviewed. - SBs 4–6 (amendments to Banking Law; DGF amendments; Law on High Council of Justice; deadlines in Oct–Nov 2020): Not Met — Reset as prior actions for this review (with some modifications in scope/timing). - SB 7 (strengthen corporate governance in SOEs; End-September 2020): Not Met — Adopted with a short delay on October 26, 2020. - SB 8 (STS and SCS to operate nationally as two single legal entities; January 1, 2021): Not met — STS and SCS operate as single legal entities, but the SFS has not been liquidated. - SB 9 (compliance audit of COVID-related spending; End-March 2021): Not Met — Reset proposed for end-December 2021; recalibrated to include publication of an audit report. ### Fiscal policy framework and projections - Fiscal policy anchored by the medium-term budget declaration approved by Parliament in June 2021. - After allowing the deficit to widen in 2020, fiscal policy will be geared towards progressive tightening as the economy recovers. - Fiscal stance aims to run primary surpluses to reduce gross financing needs and to rebuild fiscal space, keeping public debt under 60 percent of GDP. - The 2022 draft budget approved in the first reading is consistent with a general government deficit of 3.5 percent of GDP (structural benchmark, end-November 2021). - Capital expenditure kept at about the same level as in the approved 2021 budget; capital spending will need to be increased to improve expenditure mix. - To provide additional fiscal space, the government has prepared a tax package of about 0.5 percent of 2022 GDP. - Proposed tax-measures figures (Proposed Measures — Bil UAH / %GDP): - Increases in rates of existing taxes: 6.9 / 0.1 - Broadening of the tax base for existing taxes: 15.9 / 0.3 - Introduction of new taxes: 0.1 / 0.0 - Other changes in the tax code: 5.1 / 0.1 - TOTAL: 28.0 / 0.5 - Fiscal risk containment priorities: - Limit tax exemptions; monitor tax expenditure associated with the simplified tax regime. - Monitor extra-budgetary institutions (e.g., capital increases in 2021: State Financial Housing Company by UAH 20 billion; Export Credit Agency by UAH 1.8 billion). - Ensure the first pillar of the pension system is rule-based; introduction of a funded second pillar should not translate into a deficit for the pay-as-you-go system and should be introduced only when appropriate preconditions are in place. - Contain issuance of government guarantees and re-establish the ceiling on guarantees embedded in the budget code. - Contain quasi-fiscal liabilities in the energy sector; monitor through structural and quantitative conditionality, including a QPC on the combined cash deficit of the general government and Naftogaz. ### Audit of COVID-related spending - A partial ex-post audit by the State Audit Service covered UAH 44.5 billion out of UAH 66.5 billion spent from the “Fund to Fight Against COVID-19 and its Impact.” - Audit reports identified issues including weak verification processes for benefits eligibility, evidence of violations of tender processes, and over-statement of prices. - Government follow-up: action plans to address PFM issues, referral of 212 cases to law enforcement agencies, commitment to cooperate with potential criminal investigations. - All procurement notices, purchase orders, and information on beneficial owners of bidding companies have been made accessible to the public. ### Tax administration reform (STS and SCS) - Consolidation: STS and SCS were consolidated as single legal entities (SLE), but other organizational changes created setbacks. - Bureau of Economic Security: progress substituting the tax police has been uneven; the Bureau is not yet operational and there is a risk of unchecked flow of old cadre into the new institution. - Large Taxpayers’ Office (LTO) reform: split of a single LTO into five separate LTOs in early 2021 created structural inefficiencies and weakened capacity to administer revenues from the largest taxpayers. - Recommendation: if the LTO cannot be reestablished as a single STS functional unit, build stronger STS HQ oversight over LTO operations (MEFP ¶10b). - Operational focus: shift from organizational changes to operations improvement; newly established Risk Management Unit (RMU) should: - Improve analytical capacity. - Be granted wider access to data (possibly including bank account information). - Broaden focus to tax audit and enforcement. - Introduce systemic tax compliance risk management in STS to better detect highest compliance risks, eliminate “planned” tax audits, and consider a specialized unit for High-Net-Worth taxpayers (MEFP ¶10). _Italic: Source — 1ukrea2021001 - 9. The external position is stronger than projected at program approval (Annex I)._ ### 19. Above-target inflation has triggered the Monetary Policy Consultation Clause ### 19. Above-target inflation has triggered the Monetary Policy Consultation Clause ### Monetary policy: actions, stance, and conditionality - In response to inflationary pressures, the NBU has raised the key policy rate by 250 basis points (to 8½ percent). - The NBU has strengthened forward guidance, communicating readiness to implement more substantial rate hikes if inflation overshoots NBU’s projected trajectory to return to the target in 2022. - Current stance described as "mildly accommodative" with real interest rates held down by high inflation; judged appropriate given uncertain growth outlook and expected unwinding of commodity price inflation in the coming months. - Recommendation/policy conditionality: - NBU should remain vigilant about high inflation becoming entrenched and continue to provide clear forward guidance. - Should disinflation fail to materialize as projected, further tightening would likely be needed as prescribed by NBU’s forward guidance. - The program will continue to include a monetary policy consultation clause to align conditionality with the NBU’s inflation-targeting framework (MEFP ¶12). - Operational normalization: - NBU has discontinued long-term refinancing and interest rate swap operations with banks. - Maturity of refinancing loans via weekly tenders reduced from 90 to 30 days. - Commitment to maintain the key policy rate as core instrument and refrain from liquidity-providing operations exceeding a maturity of 30 days, unless necessary to safeguard financial stability (MEFP ¶12). - Program retains an indicative target on the NBU’s net domestic assets to safeguard against excessive expansion of its balance sheet. - Exchange rate and reserves: - NBU to allow exchange rate flexibility, while aiming to maintain adequate reserve buffers. - Foreign exchange interventions aimed at smoothing disorderly market conditions and at reserve accumulation, with gross reserves projected to remain above 90 percent of the ARA metric by the end of the program period. - Asymmetry towards FX purchases in interventions has weakened transmission of recent policy rate hikes through the exchange rate channel; NBU acknowledged the asymmetry and cited structural factors (shallow secondary markets for domestic government bonds) as a constraint. - Further progress in reducing the NBU’s footprint and allowing more exchange rate flexibility, including reducing the asymmetry, is needed to enhance monetary policy transmission. ### Capital account liberalization - The gradual capital control liberalization envisaged in the February 2019 currency law will be carefully sequenced and conditions-based, without setting specific deadlines for removal of existing restrictions. - Elimination of remaining exchange restrictions and liberalization of CFMs will proceed as conditions permit, in line with conditions outlined in the roadmap previously agreed with the Fund. ### Financial sector and NBU governance - Recent legal amendments to the NBU Law are a welcome step; crucial that authorities observe NBU autonomy and sound governance principles. - Enacted amendments (prior action) strengthen autonomy and governance consistent with 2019 safeguards assessment recommendations: - Measures to mitigate undue interference between decision-making bodies. - Strengthened conflict of interest provisions (ex-ante cooling-off period for transition from the Council to the Board). - Clearer appointment and dismissal criteria for members of decision-making bodies; strengthened legal protections. - These amendments will be complemented by an update of the relevant secondary framework (MEFP ¶11). - Continued need for the government and NBU decision-making bodies to uphold good governance principles and the spirit of autonomy. - Safeguards assessment (2019 update) found broadly robust safeguards framework but recommended further improvements; most recommendations implemented, some remain outstanding (e.g., strengthening governance arrangements in practice, protecting NBU's secured creditor status, and counterparty eligibility criteria in monetary policy refinancing operations) (MEFP ¶18). ### Banking sector reforms, supervision, and financial safety net - Enactment of amendments to the Banking Law and Deposit Guarantee Fund (DGF) Law (prior actions) strengthen bank supervision framework and DGF’s asset recovery framework. - By January 2025, banks expected to comply with the Basel II, Pillar 2 capital framework and the Basel III capital and liquidity framework; preliminary estimates show banks are generally prepared for the new capital requirements. - Actions underway to strengthen financial safety net and financial stability (MEFP ¶18): - Parliament passed in first reading legal amendments restoring DGF’s solvency and making state-owned Oschadbank a member of the DGF. - NBU reviewing its emergency liquidity assistance framework (governance, verification of solvency requirement, collateralization and risk management, conditionality, and monitoring through funding plans). - Contingency plan developed and existing litigation risk plan updated in preparation for potential adverse constitutional rulings; to be endorsed by the Financial Stability Council (FSC) by end-November. - Supervision risks and capacity: - Significant erosion of human capital at the NBU creates operational risk (fit-and-proper assessments, shareholder transparency). - NBU to adopt a time-bound action plan, in consultation with IMF staff, to improve professional capacity of bank supervision by end-December 2021 (MEFP ¶20; structural benchmark). - Recent amendments introduce a new sixth deputy governor position; NBU plans to regroup organizational units for bank and non-bank supervision and commit to collegial decision-making and a function-based, lean organization model (MEFP ¶21). ### Asset recovery - Authorities stepping up efforts to boost asset recovery from former owners and related parties of failed banks; progress to date minimal. - Government-level actions needed to demonstrate commitment to asset recovery: - High-level working group launched to develop a comprehensive approach to pursue commercial and legal avenues to recover assets and hold former owners/managers accountable. - By end-February 2022, authorities will adopt and publish an asset recovery strategy paper and action plan (MEFP ¶26a; structural benchmark); document to enumerate time-bound measures to fix institutional and legal impediments and improve coordination and disclosures. - Starting by end-December 2021, the Prosecutor General’s Office will publish a semi-annual report on outcomes of criminal proceedings against former bank owners, managers and related parties in each resolved bank since the beginning of 2014, with aggregate data on numbers investigated, tried, convicted and amounts of fines and damage recovered (MEFP ¶26.c; structural benchmark). ### Anti-corruption and rule of law - Independent, transparent, and accountable institutions are crucial for sustainability of anti-corruption and rule of law advances. - Key progress addressing risks from adverse Constitutional Court decisions (MEFP ¶28): - Reform law enacted (prior action) strengthening institutional independence of the National Anti-Corruption Bureau of Ukraine (NABU) and enhancing selection process integrity for its head with decisive role for independent experts with international experience. - Criminal liability for public officials violating asset declaration obligations was restored (prior action). - Amendments planned to improve selection processes, institutional autonomy, and accountability for the Specialized Anti-Corruption Prosecutor’s Office (SAPO) (end-March 2022 structural benchmark). - Provisioning of adequate resources to support High Anti-Corruption Court’s (HACC) independence and effectiveness. - Rule of law priorities: - Law on the High Council of Justice (HCJ) amended (prior action) to create an Ethics Council with a critical vote by independent experts with international experience to assess integrity of HCJ candidates and members. - One-off integrity assessment of existing HCJ members to be completed within six months from establishment of the Ethics Council (end-April 2022 structural benchmark). - Permanent inspectorate unit within HCJ to be established for disciplinary investigations of judges. - Anti-corruption enforcement outcomes and risks: - HACC issued 45 decisions in the last two years, 80 percent of which led to convictions for bribery, embezzlement of public funds, abuse of office and other corruption offenses. - These convictions included judges, prosecutors, former members of parliament, heads of state-owned enterprises and local officials. - Ukraine earned a score of 33 in Transparency International’s 2020 Corruption Perceptions Index. - Risks: vested interests continue to undermine anti-corruption infrastructure; attempts to overturn framework through courts and legislative amendments persist; continued vigilance and external support needed. ### Energy sector policies — gas - Structural weaknesses in energy SOEs, slow structural reforms, weak governance, and large spike in gas prices generate significant fiscal risks; PSOs in electricity continue to create quasi-fiscal liabilities. - Authorities committed to transparent measures to protect vulnerable population and support key sector players; measures not expected to widen the 2021 deficit given projected additional revenue overperformance (including gas royalties linked to import prices): - Allocation to the Household Utility Subsidy (HUS) program increased by UAH 12 billion; expected to ensure adequate coverage through end-December 2021 given fixed-price contracts between Naftogaz and main gas suppliers. - Poorest municipalities to receive a subsidy for the heating season of up to UAH 1 billion; further support to municipalities of around UAH 11.4 billion will be provided in the 2022 budget. - Remaining DHC liquidity needs expected to be covered by municipalities from their own budgets. - As contingency, any remaining liquidity gap at Naftogaz during upcoming heating season will be covered by a transparent and direct budget transfer (MEFP ¶4c and ¶31); need for other corrective measures to be assessed at next review. - Measures to prevent quasi-fiscal deficits and foster gas market development: - Ensure all heating tariffs are officially enacted to fully reflect gas and non-gas costs and that price caps on gas supplied to households are not reintroduced (MEFP ¶30b). - Protect short-term liquidity and medium-term viability of the gas transmission system operator (GTSO) and its ability to invest in critical gas transport infrastructure (MEFP ¶31). - Enhance retail market competition: simplify supplier switching for households, launch a joint data hub accessible to all market participants by end-March 2022 (structural benchmark), and develop an action plan for market and anti-monopoly regulation enforcement, including effective unbundling of distributors and suppliers so they cannot have the same beneficial owner (MEFP ¶32a). - Enhance wholesale market competition: implement a domestic gas release program under which, starting in May 2022, the Naftogaz production subsidiary will sell every year at least 40–50 percent of its production on a transparent and competitive basis on local exchanges with equal access for all market participants (MEFP ¶32b). ### Energy sector policies — electricity - Public Service Obligations (PSO) continue to create quasi-fiscal liabilities in the electricity sector; weak governance in large SOEs and slow structural reforms compound fiscal risks. *IMF staff report extract: "Above-target inflation has triggered the Monetary Policy Consultation Clause" (from the IMF country report content provided).* ### 32. The authorities propose to eliminate arrear accumulation to renewable energy ### 32. The authorities propose to eliminate arrear accumulation to renewable energy ### Arrears to renewable energy producers (RES) and transmission tariff measures - Finding: Under the RES PSO, the state-owned Guaranteed Buyer is obliged to purchase wind and solar energy at feed-in tariffs that are significantly above market prices. - Finding: The difference is only partially covered by the transmission tariffs, resulting in accumulation of arrears to RES of about UAH 25 billion in 2020 and another UAH 5 billion are expected in 2021 despite favorable conditions. - Finding: Ukrenergo, the transmission system operator (TSO), borrowed UAH 10 billion from SOBs to finance some arrear reduction in January and is planning on issuing publicly guaranteed “green” bonds to eliminate the stock of arrears as of end-2021. - Policy commitment: The authorities propose to eliminate arrear accumulation to RES by increasing transmission tariffs. - Monitoring: The commitment will be monitored through a new quantitative performance criterion (QPC). - Expectation: The transmission tariff is expected to increase to a level sufficient to fully eliminate arrear accumulation and service the debt issued to finance past accumulated arrears (MEFP ¶33). ### Household PSO reform and Energoatom - Reform: Under the new household PSO model, Energoatom is allowed to sell all its production at market prices but must compensate the Guaranteed Buyer for the difference between market prices and fixed tariffs for electricity consumed by households. - Finding: A large increase in the cap on electricity prices sold to commercial users is expected to considerably increase revenues of Energoatom. - Estimate: Revenues are expected to allow the company to generate net revenues above those needed to cover power generation costs and basic investment needs (estimated at UAH 0.75 per KWh). - Implementation risk: The model is subject to large implementation risks related to payment discipline along the chain of actors and will need to be closely monitored. - Corporate governance steps: Efforts are being stepped up to strengthen Energoatom’s corporate governance: - The Law on corporatization of Energoatom is expected to be enacted by end-December 2021. - Introduction of a supervisory board with a majority of independent members is planned. - Requirement to produce financial accounts according to international standards by May 2022 is set as a new structural benchmark. - Historical note: Under the previous model, Energoatom had to sell electricity consumed by households at UAH 0.10 per KWh to the Guaranteed Buyer. ### Corporate governance of SOEs and state-owned banks - Assessment: Adherence to the corporate governance framework has worsened since program approval due to government interventions in SOEs that were not in line with good corporate governance. - Examples of issues: - Introduction of an ad-hoc salary cap on management and board members causing exits. - Circumvention of the SOE corporate governance framework to replace CEOs (e.g., Naftogaz). - Renegotiation of a sale purchase agreement between MGU and Naftogaz while SOEs lacked supervisory boards. - Policy direction: Authorities submitted a draft SOE corporate governance law to bring framework closer to OECD guidelines. - Recommendation: Broaden powers of supervisory boards of economically important SOEs so they have ultimate authority on CEO appointments and dismissals. - State-owned banks (SOBs) governance measures and remaining weaknesses: - Progress: With IFI support, MoF and majority-independent supervisory boards developed a Memorandum of Understanding and a methodology for assessing supervisory board performance (MEFP ¶22). - Weaknesses: Delays in approving SOB strategies and obstructions to renewing management boards reduce supervisory boards’ effectiveness; parliamentary changes to the Banking Law relaxed eligibility criteria for state representatives in SOB supervisory boards, creating risks of weakened oversight. - Authorities’ agreed actions (MEFP ¶22–23 and ¶25): - Enact, by end-November 2021, legal amendments that reverse the relaxation of eligibility criteria for state representatives in SOB’s supervisory boards (structural benchmark). - Engage an international reputable advisor to conduct an assessment for each SOB supervisory board’s performance in 2021; key findings will be published in June 2022, together with Cabinet’s actions to address findings. - Adopt, by end-November 2021 and in consultation with IFIs, a time-bound succession plan for each SOB supervisory board, consistent with their approved 2021-2024 strategies (structural benchmark). The three-year term of supervisory board members expires in the spring of 2022. - Maintain market-based remuneration for SOB supervisory board members. - Monitor on a quarterly basis, through FSC, implementation of SOBs’ time-bound NPL reduction plans; these will continue to be subject to an annual evaluation under the NBU’s Supervisory Review and Evaluation Process. ### SOE downsizing and privatization strategy - Commitment: Authorities remain committed to downsizing the SOE sector; adopting an overarching state ownership policy would be a key step. - Institutional measures: Continue strengthening the institutional capacity of the State Property Fund (SPF), legal amendments to simplify transfer of assets to the SPF, streamline privatization, and extend the period during which companies can be sold under UK Law. - Banking sector divestment target: Updated strategy envisions reduction in state ownership to below 25 percent of banking sector net assets by 2025. - Recent actions: IFC granted a convertible loan to UkrGasBank in 2020; a roadmap for UkrGasBank’s privatization is approved by Cabinet. - Next step: Cabinet will endorse, by end-January 2022, a roadmap that outlines steps required to take PrivatBank and Oschadbank to the market for their partial or full privatization (MEFP ¶24; structural benchmark). ### Program implications and monitoring (selected figures and timelines) - Program extension request: Authorities are requesting an extension of the program through June 30, 2022 and a rephasing of remaining access. - The second review (end-December 2021 test date) would unlock an additional SDR 500 million. - The last two tranches would be combined totaling SDR 1.1 billion and subject to a third review with an end-March 2022 test date. - New monitoring: Table 7 proposes net international reserves floors and ITs on net domestic assets for end-December and end-March test dates and adds the new QPC on arrears to renewable energy producers. - Reserve coverage: Reserve coverage is projected to stay below 100 percent of the ARA metric in 2022 even assuming full disbursements of remaining available amounts under the current SBA. - Financing and arrears context: - Remaining SDR holdings from the US$2.7 billion SDR allocation are being kept as a financing buffer. - While arrears to Russia remain unresolved, staff considers Fund financing may proceed in line with the policy on arrears to official bilateral creditors. - Debt service projections: Obligations to the Fund will reach 4.8 percent of gross reserves and 0.6 percent of GDP in 2023 compared to 6 percent and 1 percent respectively at the 2018 peak. *Source: IMF country report excerpt (MEFP ¶ references as provided in the source content).* ### 50. In view of the authorities’ recent performance under the program and their ### 1ukrea2021001 - 50. ### Program approvals, waivers, and staff support - Staff supports the authorities’ request for: - completion of the first review and monetary policy consultation; - waiver for non-observance of a performance criterion; - extension of the program; - the rephasing of access; and - a financing assurances review. - Rationale for extension and rephasing: - "The extension allows for more time to deliver on the objectives of the program, particularly on macroeconomic stability in the context of the uncertain outlook, while the proposed backloading provides strong incentives to push forward with reform, notably on the rule of law—the top impediment to investment in Ukraine." - Waiver supported: - Waiver for non-observance of the performance criterion on the ceiling on government guarantees, because corrective action — "a reintroduction of a binding cap in the 2021 budget" — has been taken. - Retention of restrictions supported for 12 months: - Staff supports the authorities’ request for approval, for a period of 12 months, of the retention of the exchange restriction and multiple currency practices. - Justification: the exchange restriction is maintained "for balance of payments reasons, necessary, non-discriminatory, and temporary"; multiple currency practices are "imposed for non-balance of payments reasons, do not materially impede balance of payments adjustment or harm the interests of other Fund members, and are also non-discriminatory." ### Real sector developments and outlook - Recovery dynamics: - "After a sharp rebound in the second half of 2020, the economic recovery stalled in 2021..." - "...but is expected to pick up on the back of strong consumer demand and a recovery in agriculture." - Risks and impediments: - "The outlook is uncertain amid renewed COVID-19 outbreaks and energy price shocks...holding back private investment." - Rule of law identified as "the top impediment to investment in Ukraine." - Labor and wages: - "Wage growth has resumed with the aid of a large minimum wage hike...while unemployment remains high." ### Fiscal sector developments - Fiscal trajectory: - "The fiscal deficit is expected to be lower than what originally projected and decline further in 2022." - Financing: "It is expected to be financed primarily by domestic sources." - Composition and consolidation: - "Current spending is projected to decline as a share of GDP." - "Among current expenditure, the social component will remain broadly stable...with larger savings materializing from compression in the wage bill." - "Fiscal consolidation will keep the debt to GDP ratio below the 60 percent threshold." - Selected fiscal numbers (from summary tables and figures): - Total approved Stand-By Arrangement availability (Table 8b): June 9, 2020 — 1,500 (Millions of SDR) = 74.6 percent of quota; Total 3,600 = 178.9 percent of quota. - Quota (memorandum item): 2,011.8 (SDR). ### External sector developments - Market access and exchange rate: - "Market access has been retained despite setbacks...with little depreciation pressure on the hryvnia." - Trade, remittances, and reserves: - "Export growth has outpaced imports...while remittances remain stable." - "Mild capital outflows from the banking sector were more than offset by large inflows to the public sector...and reserves remained stable in recent months around US$28.6 billion, covering four months of imports." - Balance of payments headline (Table 3, selected projections): - Current account balance (percent of GDP): 2021 — 0.0; 2022 — -2.7; 2023 — -3.1; 2024 — -3.4; 2025 — -3.7; 2026 — -3.9. - Gross international reserves (end of period, billions of U.S. dollars): 2019 — 25.3; 2020 — 29.1; 2021 — 29.7; 2022 — 28.7; 2023 — 29.1; 2024 — 28.5; 2025 — 28.9; 2026 — 28.1. - Months of next year's imports of goods and services: 2019 — 4.8; 2020 — 4.4; 2021 — 4.0; 2022 — 3.6; 2023 — 3.3; 2024 — 3.0; 2025 — 2.8; 2026 — 2.5. ### Monetary and financial sector developments - Monetary policy stance and transmission: - "NBU hiked policy rates in response to the rise in inflation...but the growth of monetary aggregates remains strong." - "The transmission of monetary tightening to credit markets has been weak...amid a recovery in bank lending." - Suspension of long-term refinancing operations contributed to stronger transmission in interbank and deposit rates. - Banking sector soundness and liquidity: - "Financial stress has been lower than during past crisis episodes." - "Banks’ sovereign exposure has increased substantially...supporting bank profitability and capital ratios." - "NPLs are on a downward trajectory as banks implement their NPL reduction strategies." - "Bank liquidity is high, but the liability structure has shifted towards deposits...and FX risks are non-trivial but decreasing." - Selected monetary aggregates and banking indicators: - Broad money (period growth, Table 5, memorandum): 2019 — 12.6 percent; 2020 — 28.6 percent; 2021 (act.) — 11.0 percent; projections for 2022–2026: 18.4, 13.2, 12.2, 11.7, 11.8 (percent change, end of period). - Base money (memorandum): 2019 — 9.6 percent; 2020 — 24.8 percent; 2021 — 15.6 percent; projections for 2022–2026: 9.1, 5.5, 5.3, 5.2, 5.1 (percent change, end of period). - Credit to nongovernment (end of period, percent change): 2019 — -9.8; 2020 — -7.3; 2021 (act.) — -3.1; projections 2022–2026: -12.4, 4.5, 15.6, 14.5, 16.4, 16.2, 16.3 (as shown in program tables). ### Key macroeconomic projections (selected) - Nominal GDP (billions of Ukrainian hryvnias, Table 1): - 2019 — 3,977; 2020 — 3,908; 2021 (act.) — 4,192; projections: 2022 — 5,213; 2023 — 5,867; 2024 — 6,487; 2025 — 7,111; 2026 — 7,789; 2027 (mem.) — 8,505. - Real GDP (percent change, Table 1): - 2019 — 3.2; 2020 — -8.2; 2021 (act.) — -4.0; 2022 (prog.) — 1.1; 2023–2026 (proj.) — 3.2, 3.6, 3.4, 3.8, 4.0, 4.0 (as presented). - Inflation and labor: - Consumer prices (period average, Table 1): 2019 — 7.9; 2020 — 4.5; 2021 (act.) — 2.7; projections 2022–2026: 7.2, 9.5, 7.5, 5.5, 3.0, 5.0 (as presented). - Unemployment rate (ILO definition; percent, Table 1): 2019 — 8.5; 2020 — 12.6; 2021 (act.) — 9.2; projections 2022–2026: 12.0, 9.4, 8.7, 8.2, 7.8, 7.5, 7.2. - Public finances (percent of GDP, Table 2b summary): - Revenue (percent of GDP): 2019 — 39.4; 2020 — 39.7; 2021 (act.) — 40.0; projections 2022–2026: 37.0, 35.4, 34.7, 34.5, 34.3, 34.3. - Expenditure (percent of GDP): 2019 — 41.3; 2020 — 47.4; 2021 (act.) — 46.0; projections 2022–2026: 40.4, 39.0, 38.9, 37.8, 36.7, 35.8. - General government overall balance (percent of GDP): 2019 — -2.0; 2020 — -7.7; 2021 (act.) — -6.0; projections 2022–2026: -3.4, -3.5, -2.4, -2.4, -2.4, -2.4. - Public and publicly-guaranteed debt (percent of GDP): 2019 — 50.5; 2020 — 65.4; 2021 (act.) — 61.0; projections 2022–2026: 62.7, 50.3, 49.6, 46.8, 44.6, 43.2, 42.3. ### Financing and liquidity assessments - Gross external financing requirements and sources (Table 4, selected): - Total financing requirements (billions of U.S. dollars): 2019 — 41.7; 2020 — 31.5; 2021 (act.) — 39.3; projections 2022–2026: 37.2, 38.9, 43.7, 41.6, 48.6. - Total financing sources (billions of U.S. dollars): 2019 — 44.2; 2020 — 31.3; 2021 (act.) — 38.3; projections 2022–2026: 35.8, 42.1, 45.7, 44.7, 48.4. - Total financing needs (net, billions of U.S. dollars): 2019 — 0.8; 2020 — 2.3; 2021 (act.) — 1.4; projections 2022–2026: 0.5, -2.8, -2.6, -2.7, -0.5. - Gross international reserves (memorandum): consistent with Table 3 and Figure captions — "around US$28.6 billion" and explicit series in tables (see above). *Source: IMF staff report material (sections, figures, and tables) provided in the content unit.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall assessment - Staff assess Ukraine’s external position to be broadly in line with fundamentals and desirable policy settings. - The current account as assessed by the EBA-lite methodology is only moderately weaker than the norm. - Downside risks: reserves projected to remain below adequate levels in the medium term, large external public debt service needs, constrained investment inflows (related to ongoing tensions with Russia and the unfinished structural reform agenda). - Policy implication: large policy gaps and downside risks underline the importance of continued and well-prioritized reform agenda. ### Current account: recent developments and near-term outlook - 2020 current account swung into a surplus of 3.3 percent of GDP; 2021 forecast anticipates a roughly balanced position. - Drivers of the 2020 swing: - Compression of import volumes following the sharp contraction in domestic economic activity; import levels returned to pre-pandemic levels in early 2021. - Travel balance deficit reduced from 4.5 percent of GDP in 2019 to 2.8 percent in 2020; through July 2021 travel debits were still about one-third lower than the year before the pandemic. - Benefit from oil prices some US$20 lower per barrel in 2020 than envisioned in 2019, though energy prices accelerated by mid-2021. - Strong export performance: pickup in prices for metals, minerals, and agricultural goods; agricultural export values expected to boom in late 2021 (wheat prices expected to be more than 50 percent higher than pre-pandemic levels). - Exports of telecommunication, computer, and information services grew by almost half to around US$6 billion annually over the last two years. - Medium-term expectation: current account expected to return to prior deficit position, consistent with high domestic investment needs and reduced gas transit revenues once Nord Stream 2 is operational. - Historical transit: average just over US$2.5 billion per year over last five years. - 2021 transit fees expected to be around 40 percent less than recent years. - Forecast transit revenues once Nord Stream 2 operational: around US$1.2 billion per year. - Current Gazprom–Naftogaz contract expires in 2024. ### External shocks and trade tensions - Russia intensified ban on Ukrainian imports on June 28, 2021 (mostly affecting agricultural sector and food products) for one year; impact thought to be limited. - Build-up of Russian troops on the border in April 2021 caused temporary outflows from domestic bond market but no major economic disturbances. - Completion of Nord Stream 2 could increase energy security vulnerabilities for Ukraine. ### Capital and financial accounts: flows and policy measures - EMBIG-spread exceeded 1,000 basis points in March 2020 but borrowing costs normalized to 2019 levels thereafter. - Eurobond issuances: - April 2021: US$1.25 billion 8-year Eurobonds at a yield of 6.876 percent. - July 2021: additional US$0.5 billion at a yield of 6.3 percent. - Portfolio and FDI flows: - Year-to-date domestic bond market net inflows equal to US$0.5 billion (2021). - 2020 net outflows from domestic bond market of just over US$1 billion. - 2019 record non-resident inflows into domestic bond market netted to US$4.4 billion. - FDI recorded a net outflow in 2020 of about US$0.1 billion (mostly distribution of corporate losses); expected to reverse in 2021 with inflow of around US$6 billion thanks to high export prices boosting corporate profits and reinvested earnings. - Medium-term projections: - Non-resident inflows in domestic bond market expected to fall to zero on a net basis. - Inclusion of Ukraine’s local government bond issues in J.P. Morgan’s GBI-EM Index effective March 31, 2022 expected to buoy recovery of non-resident inflows during second half of 2022. - Continued access to international bond markets and gradually increasing FDI expected to finance current account deficit; any shortfall expected to be covered by official financing. - Risk mitigation: non-resident investors primarily invested in longer-term bonds and secondary market is relatively illiquid. - Tax amnesty bill approved in June 2021 may lead to some inflows earlier transferred abroad starting this year and through part of 2022; incentives weak so flows likely modest. ### Capital account liberalization and restrictions - “Law on Currency and Currency Transactions” effective February 7, 2019 aims to liberalize currency control regime; NBU has continued liberalizations as conditions allowed. - 2021 liberalizations: - January: legal entities allowed to sell FX on forward terms without restrictions on type of transactions. - February: annual e-limit on investments and deposits abroad by individuals doubled up to EUR 200,000. - July: NBU allowed purchase of FX for legal entities and individuals without presenting an underlying ground within the daily EUR 100,000 limit. - Remaining exchange restriction (ER) and capital flow measures (CFMs) mostly concern limits on capital outflows, including limits on banks’ long open positions and a ban on FX purchases on forward terms. - Policy counsel: further capital account liberalization should proceed with due consideration for reserve accumulation objectives and macroeconomic and financial stability. ### FX intervention and reserve levels - Reserves evolution: - From 2014 low of US$7.5 billion to accumulated some US$20 billion in international reserve assets. - At end-2020, FX reserves corresponded to 93 percent of short-term external debt, 4.4 months of prospective 2021 imports, or 98 percent the Fund’s adequacy metric. - August 2021 SDR allocation added US$2.7 billion to international reserves; about half used to address debt maturing that was issued at concessional rates; remainder intended to be retained as buffer. - NBU intervention tilt: net purchases responding to inward flows into local bond market. - Medium-term projection: reserves projected to remain below the ARA metric; under baseline reserve coverage would fall to around 70 percent of the Fund’s adequacy metric by 2026. - Risks to reserves: external public debt service burden, current account deficit, the US$3 billion Eurobond currently in default (court case pending), larger-than-envisioned loss in gas transit revenues, warrant payments linked to past real GDP growth that add uncertainty to debt service projections. - Warrant payments feature: - Payouts linked to past real GDP growth with a two-year delay. - Payouts drop if real growth is lower than 3 percent—below which no warrant payouts are due. ### Foreign assets, liabilities, and NIIP trajectory - NIIP developments: - NIIP was -42 percent of GDP in 2015 and improved to -11.7 percent at end-2020. - Improvement driven by lower current account deficits and reduced financial inflows into the country (notably lower net FDI). - End-2020 gross assets: reserve assets US$29 billion and private sector holdings of FX US$107 billion. - Debt liabilities composition: about 60 percent denominated in US dollars; euro about 15 percent; less than 5 percent denominated in hryvnia. - Vulnerability: NIIP exposed to hryvnia depreciation given low share of hryvnia-denominated debt. - Staff projection: NIIP to fall to about -23 percent of GDP by 2026, mostly driven by increased borrowing from non-residents to finance development and refinancing needs. - Table 1 core statistics at end-2020: NIIP -11.7 percent of GDP; gross assets 96.4 (billion U.S. dollar); debt assets 6.4; gross liabilities 108.1; debt liabilities 78.8. (As presented in the source table.) ### Real exchange rate and competitiveness - COVID shock impact: modest on real exchange rate. - Nominal depreciation from UAH 25 to UAH 28 per USD in early pandemic months largely offset by higher domestic inflation. - Sustained real appreciation since 2015 driven by inflation outpacing trading partners and unit labor cost (ULC)-based REER increases. - Drivers of reduced competitiveness (ULC measure): - Broad wage increases, including minimum wage quadrupling since late 2015. - Negative labor supply shocks from continued labor migration. - Outlook: increased productivity improvements should lead to modest-yet-sustained real appreciation in line with the Balassa-Samuelson effect. ### Model-based assessments and gaps - Multiple approaches indicate limited misalignment: - Current account (CA) EBA-lite: CA-Actual 0.0; Adjusted CA -3.3; CA Norm -2.9; CA Gap -0.4 (percent of GDP). - REER model: REER Gap 1.3 (percent). - External sustainability (ES) model: ES model gap 4.5 and 7.1 (percent) in reported columns. - Overall conclusion: external position broadly in line with fundamentals and desirable policies, though moderately weaker per EBA-lite and other approaches; downside risks elevated. - Identified policy gaps: - Relatively loose cyclically adjusted fiscal balance. - Relative weaknesses in public health expenditure. - Relatively stronger change in reserves (but judged appropriate given reserves remain below adequate levels). ### Policy implications and vulnerabilities - Key vulnerabilities: large external public debt service needs, ongoing tensions with Russia, unfinished structural reform agenda constraining FDI and investment inflows. - Reserve adequacy concern: projected reserves remain below ARA metric under baseline; achieving ARA-recommended level would require accelerated reform-implementation and stronger non-resident inflows (local bond market and FDI). - Importance of continued and well-prioritized fiscal adjustment and structural reform to reduce external vulnerabilities and facilitate reserve rebuild. _Source: Annex I. External Sector Assessment (content unit: 1ukrea2021001)._ ### 2. In addition, there are several other debt-creating flows: ### 2. In addition, there are several other debt-creating flows: ### Debt-creating flows and fiscal contingent liabilities - Banking system support: fiscal costs to the recognition of contingent liabilities for 2021-22 are expected around 0.9 percent of GDP each year. - Government guaranteed debt: totaled around 7.0 percent of GDP at end 2020; projected to remain contained under the Fund-supported program and expected to gradually decline with increased privatization and corporatization of state-owned enterprises. - Privatization proceeds under the baseline: assumed to be modest at around 0.1 percent of GDP over the projection horizon. ### Baseline official financing assumptions - Expected pending disbursements in 2021: - EUR 600 million from the European Union under its Macro-Financial Assistance program. - US$700 million in budget support from the World Bank. - IMF lending under the program: budget support lent on SBA terms. - The DSA makes no assumptions on official budget financing beyond 2021, except ongoing discussions concerning such support in 2022. - No additional bond issuance in late 2021 nor additional non-resident local bond market inflows are assumed in the macro framework. - April 2021 issuance: US$1.25 billion 8-year Eurobond at 6.875 percent; topped up in July with another US$0.5 billion. - Ukraine drew on half of its latest SDR allocation, pushing the next Eurobond issuance out to early 2022. - Following significant net outflows last year (some US$1.2 billion), the framework assumes no new non-resident inflows into Ukraine’s local bond market beyond net inflows of around US$0.5 billion realized over the first three-quarters of the year. ### Public sector DSA coverage and composition - Coverage includes: - (i) central government direct debt; - (ii) domestic and external government-guaranteed debt (loans and bonds) extended to state-owned enterprises (SOEs); - (iii) debt of local governments; and - (iv) Ukraine’s liabilities to the IMF not included in central government direct debt. - Excludes: non-guaranteed domestic and external liabilities of SOEs. - Annex II. Table 1 (Public and Publicly Guaranteed Debt, end-2020) key figures: - Public and publicly guaranteed debt: UAH 2,557.19 billion / USD 94.7 billion / 61.0 percent of GDP / 100.0 percent of total. - Domestic debt: UAH 1,032.03 billion / USD 38.2 billion / 24.6 percent of GDP / 40.4 percent of total. - Direct debt in UAH: UAH 862.93 billion / USD 32.0 billion / 20.6 percent of GDP / 33.7 percent of total. - Direct debt in FX: UAH 137.8 billion / USD 5.1 billion / 3.3 percent of GDP / 5.4 percent of total. - External debt: UAH 1,525.05 billion / USD 56.5 billion / 36.4 percent of GDP / 59.6 percent of total. - Multilateral (includes IMF, WB, EBRD, EIB): USD 21.7 billion / 22.9 percent of total / 14.0 percent of GDP. - IMF budget support (of multilateral): USD 18.1 billion shown in table notation (see source table for classification). - Sovereign Eurobonds: USD 24.7 billion / 26.2 percent of total / 16.0 percent of GDP. - External guaranteed debt: USD 2.47 billion / 9.2 percent of total / 6.2 percent of GDP. - Contingent liabilities (memo): 10.3 percent of GDP; of which public guarantees 10.3 percent of GDP. - About 60 percent of total public and publicly guaranteed debt (about 36 percent of GDP) is externally held. - Sovereign Eurobonds account for the largest share of the debt stock, closely followed by multilateral support. - Domestic debt: mostly held by residents and denominated in hryvnia. - State guaranteed external debt: account for about nine-tenths of guarantees issued. ### Debt projections and fiscal trajectory (baseline) - Under baseline projections, debt-to-GDP ratio declines to about 43 percent of GDP by 2026. - Drivers of reduction: real GDP growth and realization of primary surpluses as projected; importance of containing contingent risks including potential fiscal risks related to the energy sector. - Policy slippages would compromise the debt trajectory. ### Vulnerabilities and risk assessment - Vulnerabilities signaled as significant, particularly in terms of financing needs. - 2021: debt falling due contributes to significant financing pressures. - External currency composition: over 60 percent of Ukraine’s debt is denominated in foreign currency, increasing vulnerability to depreciation. - External Sector Assessment does not point to an overvalued currency; risk of sharp depreciation seems contained. - Almost half of external debt is owed to official creditors, implying greater stability and more favorable borrowing conditions. - Fan chart outcomes: - Debt unlikely to return to pre-2015 levels (nearly 100 percent of GDP projected then). - Assuming symmetric shocks, debt will most likely remain below 80 percent of GDP. - Under an adverse scenario (no positive primary balances and real exchange rate only depreciates), debt is most likely to stay below 100 percent of GDP over the projection. - Caution warranted due to low debt-to-GDP ratios at which debt proved unsustainable in the past and COVID-19 effects. - Stress test findings: - Debt dynamics vulnerable to shocks to growth rate, exchange rate, and real interest rates. - Growth and exchange rate shocks have recently materialized with adverse impacts on debt ratios. - A real interest rate shock could cause explosive increases in public gross financing needs. - The combined macro-fiscal shock would have the most significant adverse impact on near-term debt sustainability. ### External Sector DSA highlights - Baseline: external debt would drop to about 45 percentage points of GDP by 2023. - Gross external debt declined to about 80 percent (after peaking at 130 percent of GDP in 2015). - Medium-term sustainability considers an expected weakening of the deficit in the balance of goods and services due to: - Lower gas transit fees linked to the Nord Stream 2 pipeline. - Gradual unwinding of pandemic-era commodity price volatility. - Imports expected to remain relatively stable. - Recovery of sizable remittance inflows supports downward external debt path. - Downside risks: - Worsening financial conditions for emerging markets and/or faster-than-expected normalization in interest rates in advanced economies could widen the current account deficit. - FDI flows projected to continue mainly as debt-to-equity operations; deeper structural reforms could spur additional non-debt creating inflows. - Historical scenario (main macro variables at their 10-year historical average) would undermine the downward debt path. - External debt dynamics highly vulnerable to an exchange rate shock. ### Selected time-series and projection figures (from Annex II tables and figures) - Nominal gross public debt (percent of GDP): 2019: 39.2; 2020: 50.5; 2021: 61.0; 2022: 52.0; 2023: 50.5; 2024: 47.9; 2025: 45.6; 2026: 44.1; projection to 43.1 by 2026 shown elsewhere. - Public gross financing needs (percent of GDP): 2019: 9.4; 2020: 12.2; 2021: 15.0; 2022: 13.9; 2023: 14.5; 2024: 12.0; 2025: 10.3; 2026: 10.2/10.5 shown in different table placements. - Real GDP growth (baseline projections): 2021: 3.2; 2022: 3.6; 2023: 3.4; 2024: 3.8; 2025: 4.0; 2026: 4.0. - Inflation (GDP deflator, in percent): 2021: 20.6; 2022: 8.7; 2023: 6.9; 2024: 5.6; 2025: 5.3; 2026: 5.0. - Effective interest rate (in percent): 2019: 9.1; 2020: 10.3; 2021: 8.9; 2022: 7.7; 2023: 7.2; 2024: 6.8. - Identified debt-creating flows (cumulative change in gross public sector debt): 2019–2026 cumulative shown as -18.0 in table context; identified debt-creating flows series include 2.4 (2019), -8.8 (2020), 10.4-6.5 (2021), 0.0-1.6 (2022), -1.7 (2023), -1.6-1.3 (2024), -12.8 (cumulative). - Contingent liabilities memo: Contingent liabilities 10.3 percent of GDP (o/w public guarantees 10.3 percent of GDP). - Annex II. Figure 3 baseline composition and scenario tables present numerous scenario-specific parameter values including: - Historical scenario real GDP growth assumed at 3.2/11.0/11.0/... in table formatting (see Annex II figures for full tabulation). - Constant Primary Balance scenario: Primary Balance set at -0.2 percent of GDP for projection years shown. *Source: 1ukrea2021001 (IMF staff).* ### Annex II. Figure 5. Ukraine Public DSA - Stress Tests ### 1ukrea2021001 - Annex II. Figure 5. Ukraine Public DSA - Stress Tests ### Macro-Fiscal Stress Tests — summary findings - Presented stress-test themes: Baseline, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock (figures plotted for 2021–2026). - Gross Nominal Public Debt shown in multiple metrics: - Gross Nominal Public Debt (in percent of GDP) plotted for 2021–2026. - Gross Nominal Public Debt (in percent of Revenue) plotted for 2021–2026. - Public Gross Financing Needs (in percent of GDP) plotted for 2021–2026. - Additional plotting for extended ranges includes Gross Nominal Public Debt (in percent of GDP) and (in percent of Revenue) across 2021–2026 and Public Gross Financing Needs (in percent of GDP) across 2021–2026. ### External Debt Sustainability: Bound Tests — key scenario markers (Annex II. Figure 6) - Source note: IMF staff estimates. Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario presented. Ten-year historical average also shown. - Historical and baseline markers shown (examples from figure boxes): - Historical: 70 - Baseline: 45 - Individual shocks and average projections shown in figure boxes: - Interest-rate shock: i-rate shock 47; Baseline 45 - Growth shock: Growth shock 51; Baseline 45 - Noninterest Current Account shock: CA shock 56; Baseline 45 - Combined shock (permanent 1/4 standard deviation shocks): Combined shock 57; Baseline 45 - Real depreciation shock (one-time real depreciation of 30 percent in 2021): Combined/Real Depreciation Shock 91; Baseline 45; 30% depreciation noted - Average/box numeric comparisons (presented in figure): - Baseline: 3.2 / Scenario: 1.7 / Historical: 2.8 - Baseline: 3.7 / Scenario: 1.6 / Historical: -0.3 - Baseline: 11.2 / Scenario: 12.2 / Historical: 6.8 ### External Debt Sustainability Framework — Annex II. Table 3 (selected rows and projections, 2016–26) - Baseline: external debt (percent) - 2016: 120.1 - 2017: 104.1 - 2018: 87.5 - 2019: 78.9 - 2020: 79.0 - 2021: 65.9 - 2022: 60.1 - 2023: 56.4 - 2024: 52.1 - 2025: 48.3 - 2026: 45.2 - Change in external debt - 2016: -1.9 - 2017: -10.6 - 2018: -16.0 - 2019: -16.7 - 2020: -8.5 - 2021: 0.1 - 2022: -13.2 - 2023: -5.8 - 2024: -3.7 - 2025: -4.4 - 2026: -3.8 - Identified external debt-creating flows (4+8+9) - 2016: -6.6 - 2017: -21.3 - 2018: -15.1 - 2019: -13.8 - 2020: -4.0 - 2021: -4.9 - 2022: -1.6 - 2023: -1.1 - 2024: -0.8 - 2025: -0.3 - 2026: -0.1 - Current account deficit, excluding interest payments (percent of GDP) - 2016: -4.3 - 2017: -3.8 - 2018: -3.2 - 2019: -4.6 - 2020: -8.9 - 2021: -9.3 - 2022: -3.7 - 2023: -2.7 - 2024: -1.9 - 2025: -1.1 - 2026: -0.5 - Deficit in balance of goods and services (percent of GDP) - 2016: 7.0 - 2017: 7.7 - 2018: 8.6 - 2019: 8.2 - 2020: 1.6 - 2021: 0.4 - 2022: 4.8 - 2023: 5.4 - 2024: 5.5 - 2025: 5.8 - 2026: 5.9 - Exports (percent of GDP) — reported sequence (as presented) - 49.2 48.0 45.2 41.2 39.1 37.0 33.4 32.8 32.3 32.0 31.6 - Imports (percent of GDP) — reported sequence (as presented) - 56.2 55.6 53.8 49.4 40.7 37.4 38.2 38.1 37.8 37.8 37.5 - Net non-debt creating capital inflows (negative) - 2016: -4.1 - 2017: -3.4 - 2018: -3.4 - 2019: -3.4 - 2020: 0.0 - 2021: -2.9 - 2022: -2.2 - 2023: -2.3 - 2024: -2.3 - 2025: -2.3 - 2026: -2.4 - Automatic debt dynamics (percent) - 2016: 1.8 - 2017: -14.1 - 2018: -8.5 - 2019: -5.7 - 2020: 4.9 - 2021: 7.3 - 2022: 4.4 - 2023: 3.9 - 2024: 3.4 - 2025: 3.0 - 2026: 2.8 - Contribution from nominal interest rate: - 2016: 5.8 - 2017: 6.0 - 2018: 6.5 - 2019: 7.4 - 2020: 5.6 - 2021: 9.4 - 2022: 6.4 - 2023: 5.7 - 2024: 5.3 - 2025: 4.9 - 2026: 4.6 - Contribution from real GDP growth: - 2016: -3.1 - 2017: -2.4 - 2018: -3.1 - 2019: -2.4 - 2020: 3.2 - 2021: -2.0 - 2022: -2.1 - 2023: -1.9 - 2024: -2.0 - 2025: -1.9 - 2026: -1.8 - Contribution from price and exchange rate changes: - 2016: -0.9 - 2017: -17.8 - 2018: -11.8 - 2019: -10.7 - 2020: -3.8 - 2021: ... (ellipsis in source) - Residual, including change in gross foreign assets (2-3) - 2016: -3.9 - 2017: 5.4 - 2018: -1.6 - 2019: 5.3 - 2020: 4.1 - 2021: -8.3 - 2022: -4.2 - 2023: -2.6 - 2024: -3.5 - 2025: -3.4 - 2026: -3.1 - External debt-to-exports ratio (percent) - 2016: 243.8 - 2017: 217.0 - 2018: 193.7 - 2019: 191.6 - 2020: 202.2 - 2021: 177.9 - 2022: 179.9 - 2023: 172.3 - 2024: 161.3 - 2025: 151.2 - 2026: 142.8 - Gross external financing need (billions of U.S. dollars) - 2016: 24.6 - 2017: 30.3 - 2018: 31.7 - 2019: 41.7 - 2020: 31.5 - 2021: 39.3 - 2022: 37.2 - 2023: 38.9 - 2024: 43.7 - 2025: 41.9 - 2026: 49.1 - Gross external financing need (percent of GDP) - 2016: 26.3 - 2017: 27.0 - 2018: 24.2 - 2019: 27.1 - 2020: 20.3 - 2021: 20.6 - 2022: 17.4 - 2023: 16.7 - 2024: 17.2 - 2025: 15.1 - 2026: 16.2 - Scenario with key variables at their historical averages (examples shown) - 10-Year Actual Average Historical: 82.3, 81.5, 80.1, 77.1, 73.7, 70.2 (context: table presents scenario comparison) ### Key macroeconomic assumptions underlying baseline (selected) - Real GDP growth (percent) - 2016: 2.4 - 2017: 2.4 - 2018: 3.5 - 2019: 3.2 - 2020: -4.0 - 2021: -0.3 - 2022: 4.9 - 2023: 3.2 - 2024: 3.6 - 2025: 3.4 - 2026: 3.8 - GDP deflator in U.S. dollars (change in percent) - 2016: 0.7 - 2017: 17.4 - 2018: 12.8 - 2019: 14.0 - 2020: 5.1 - 2021: 2.8 - 2022: 14.5 - 2023: 19.1 - 2024: 8.3 - 2025: 5.1 - 2026: 5.3 - Nominal external interest rate (percent) - 2016: 4.6 - 2017: 6.0 - 2018: 7.3 - 2019: 9.9 - 2020: 7.1 - 2021: 6.8 - 2022: 1.8 - 2023: 14.6 - 2024: 11.0 - 2025: 10.4 - 2026: 10.3 - (table also lists repeated 10.3 and 10.4 entries) - Growth of exports of goods and services (U.S. dollar terms, percent) - 2016: -4.0 - 2017: 17.0 - 2018: 9.9 - 2019: 7.3 - 2020: -4.3 - 2021: 0.0 - 2022: 16.6 - 2023: 30.5 - 2024: -1.9 - 2025: 7.1 - 2026: 8.0 - Growth of imports of goods and services (U.S. dollar terms, percent) - 2016: 4.7 - 2017: 18.9 - 2018: 12.8 - 2019: 8.0 - 2020: -16.9 - 2021: 0.5 - 2022: 20.6 - 2023: 26.7 - 2024: 10.9 - 2025: 9.2 - 2026: 8.6 - Current account balance, excluding interest payments (percent of GDP) - 2016: 4.3 - 2017: 3.8 - 2018: 3.2 - 2019: 4.6 - 2020: 8.9 - 2021: 2.8 - 2022: 4.0 - 2023: 9.3 - 2024: 3.7 - 2025: 2.7 - 2026: 1.9 - (additional entries include 1.1 and 0.5 in table) - Net non-debt creating capital inflows (percent of GDP) - 2016: 4.1 - 2017: 3.4 - 2018: 3.4 - 2019: 3.4 - 2020: 0.0 - 2021: 2.6 - 2022: 1.9 - 2023: 2.9 - 2024: 2.2 - 2025: 2.3 - 2026: 2.3 - 10-year projection: 2.4 ### Program and policy commitments (from Appendix I and MEFP excerpts) - Vaccination target: at least 17 million people by end-2021; as of mid-October fully vaccinated about 6.3 million people. - Performance and reviews sought: - Request completion of first review and disbursement in the amount of SDR 500 million based on end-December 2020 performance criteria. - Request extension of the program to June 30, 2022 and rephasing of remaining purchases: - Second review on or after March 4, 2022, based on end-December 2021 performance criteria. - Third review on or after June 3, 2022, based on end-March 2022 performance criteria. - Request completion of the financing assurances review and approval of retention, for a period of 12 months, of the exchange restriction and multiple currency practices inconsistent with Article VIII Sections 2(a) and 3. - Fiscal program and commitments: - 2021 general government deficit will not exceed UAH 237 billion (IMF definition), corresponding to state budget deficit of UAH 246.6 billion. - Third deficit-neutral supplementary budget for 2021 of about 0.8 percent of GDP planned (allocation increases to wage bill for military and healthcare workers; maintenance and capital expenditure on roads; Household Utility Subsidy program (HUS)). - Used about half of the recent general SDR allocation; intend to retain the remainder as a buffer. - Structural benchmarks and reform commitments (selected) - Reset structural benchmark: complete the audit of the remaining portion of COVID-related funds (mostly UAH 13.3 billion by the state road fund) by end-December 2021 (structural benchmark, reset from end-March 2021). - Propose end-April 2022 structural benchmark on completion of the one-time integrity check of existing High Council of Justice (HCJ) members. - Elevate to a structural benchmark the adoption of a comprehensive asset recovery strategy. - New structural benchmarks to ensure proper renewal of supervisory boards in state-owned banks and corporate governance in a key energy company. - Commit to eliminate the stock of arrears to producers of renewable energy and prevent future debt accumulation (monitored through a new performance criterion). - Ensure sufficient appropriation for the Household Utility Subsidies (HUS) program and provide transparent budget support, as needed, to ensure security of gas supply during the 2021–22 heating season. - Monetary and institutional commitments - Enacted amendments to strengthen autonomy and governance of the National Bank of Ukraine (NBU); put in place a plan to address staff turnover and retain capacity in bank supervision. - Commit to uphold good governance practices and consult IMF in advance on adoption of additional measures or revisions to MEFP policies. - Audit and transparency actions on COVID-related spending - Partial ex-post audit by State Audit Service completed covering UAH 44.5 billion out of UAH 66.5 billion spent; effective completion rate of the audit would stand at 85 percent (note: footnote indicates audit of social insurance spending stopped at about 72 percent due to low violations). - Referred 212 cases to law enforcement agencies; publish procurement notices and make purchase orders and beneficial owner information electronically accessible on ProZorro internet site. *Source: IMF staff estimates and Annexes/Appendices of the IMF document "1ukrea2021001" (figures, tables, and Letter of Intent material reproduced in the source PDF).* ### 4. In response to the recent extraordinary increases in gas prices, we will implement ### 4. In response to the recent extraordinary increases in gas prices, we will implement ### Measures to protect vulnerable households and stabilize energy sector liquidity - Implement transparent measures to protect the vulnerable population, strengthen the financial position of municipality-owned District Heating Companies (DHCs), and provide temporary and exceptional liquidity support to state-owned Naftogaz. - Expect to execute the following set of actions without widening the 2021 deficit in light of the projected additional revenue overperformance, including from gas royalties which are linked to gas import prices. - Specific actions: - Introduce amendments to the 2021 budget increasing allocation to the HUS by UAH 12 billion. This should be sufficient to ensure adequate coverage through end-December 2021, noting pressure on gas prices facing households is also contained by the fixed-price contracts concluded by Naftogaz in April/May of this year. - Provide a subsidy for the 2021–22 heating season for the poorest municipalities of up to UAH 1 billion and provide further support to municipalities in the 2022 budget by redistributing to local budgets a part of PIT in the amount of UAH 11.4 billion (4 percent of PIT revenues). The remaining DHC liquidity need will be covered by municipalities from their own budgets. - Note: Refers to municipalities below the 90 percent threshold of the tax capacity index. - The MGU/GTSO has pre-paid to Ukrtransgas UAH 27 billion as part of a new agreement replacing the original sale purchase agreement (SPA) by fixed annual payments over the period 2020–24. Suspend further execution of the emergency order until a proper assessment can be completed by the newly appointed supervisory board of MGU. Any remaining liquidity gap at Naftogaz during the upcoming heating season would be covered by a transparent and direct budget transfer, recognizing the company’s role in energy security and the subsidy element implicit in current gas supply contracts. Such support is expected to be budget neutral in light of the royalty revenue overperformance. Naftogaz’s liquidity situation is expected to improve in 2022 as prices move closer to market terms once the current fixed price sale contracts expire in April, aided by structural measures described in ¶30 and ¶32. ### 2022 budget targets, priorities, and fiscal consolidation - Approve a 2022 budget that targets a general government deficit of 3.5 percent of GDP (structural benchmark, end-November 2021), continuing gradual fiscal consolidation, and prioritizing healthcare, education and defense and security spending. - Healthcare: - In line with Presidential decree #261/2021 dd. 18.06.2021, funding for the guaranteed healthcare package has been increased substantially to allow for an increase in wages of doctors and secondary medical staff of about 30 percent on average. Changes will be reflected in a CMU resolution which will increase the tariffs and capitation rate accordingly. - Education: - Education sector will receive sufficient funding to meet the 7.3 percent of GDP target stipulated in the law on education. - Wages of teachers will be increased by about 8 percent; stipends for students will be increased by about 50 percent. - Defense and security: - Ensure the defense and security budget will be above the floor of 5 percent of GDP, with additional funding partly allocated to the support of veterans. - To make space for priorities: - Limit the increase in the minimum wage and the wage bill of other public sector workers to inflation plus two percent, and further strengthen targeting of social programs. ### Tax package and fiscal measures for 2022 - Prepare a tax package of about 0.5 percent of 2022 GDP to provide additional fiscal space for priority expenditures. - Measures are roughly equally distributed between increases in rates on existing taxes and base broadening measures. - Intend to legislate the amendments to the tax code by end-November 2021. - Plan to allocate additional revenues to capital expenditure, and to augment the HUS program allocation when fixed-price gas supply contracts are renegotiated in the spring. ### Management of government guarantees and fiscal risk - Scale down the temporary expansion of government guarantees. - So far in 2021, issued UAH 38.9 billion in government guarantees. - Plans for the remainder of the year, including issuance of guarantees for green bonds, are consistent with remaining within the established ceiling. - Will no longer suspend, including in the 2022 budget, Article 18.1 of the budget code, which prescribes the ceiling for public guarantees to be set at 3 percent of the planned revenue of the general fund of the state budget. - In consultation with the IMF, analyze ways to improve the management of guarantees to ensure consistency with the medium-term fiscal framework and debt sustainability. ### Medium-term budget plan and policy priorities (2022–24) - Fiscal policy anchored in medium-term budget plan approved by Parliament in June 2021. - After widening the deficit in 2020, progressively tighten fiscal policy to return to primary budget surpluses to (i) reduce gross financing needs and (ii) rebuild fiscal space while keeping debt under 60 percent of GDP. - Policy priorities include: - Tax policy reforms to ensure stability, increase efficiency, enhance tax administration, and minimize abuse. - Proposed changes to the tax code aim at improving tax administration, limiting scope for abuses (especially for excises, and PIT on sales of real estate), closing some tax loopholes associated with real estate transactions, and improving valuation of tax base (for corporate income tax and royalties). - Introduced indexation of rates on excises, royalties, and land fees to CPI and PPI, and increased rates on environmental taxes. - Introduced a minimal tax liability on agricultural land to avoid tax evasion in the agricultural sector. - Will align tax legislation with EU legislation and have implemented standards to prevent BEPS and the automatic exchange of tax information according to international standards. - After careful technical assessment, will not move forward with substituting the current Corporate Profit Tax (CPT) for a Distributed Profit Tax (DPT) or an Exit Capital Tax (ECT). - Will refrain from widening eligibility criteria for the simplified tax regime or introducing new groups of taxpayers benefiting from it; started steps to prevent tax avoidance and abuse of this regime. - Will abstain from introducing new or expanding existing tax preferences except for potential small scale support mechanisms designed to provide limited and targeted incentives. - Will continue to inform the public of the cost of tax exemptions and broaden analysis to include tax expenditure associated with the simplified tax regime. - Social protection: - Continue to protect the poor and vulnerable by ensuring social programs are appropriately funded. - Appropriation in the 2022 budget for the HUS program is sufficient to ensure coverage for the same number of participants as this year if tariffs remain unchanged; after renegotiation of tariffs in the spring, will ensure a supplementary budget identifies resources to top up the program in a timely manner and by the required amount. - Social assistance improvements (with World Bank assistance): - (i) consolidate selected existing assistance programs into the guaranteed minimum income (GMI) scheme, while increasing the size of the program; - (ii) combine the GMI program with active labor market policies; - (iii) improve the management information system, including through the digital platform Diya, to enhance verification of beneficiaries and improve targeting. - Further steps to ensure sustainability of social funds, streamline administration, and strengthen incentives for recipients of housing and utility subsidies to introduce energy efficient measures. - Pension policy: - Continue implementing pension reform measures introduced in 2017 to provide better pensions while ensuring financial stability of the pension system. - Refrain from: (i) introducing new special pensions or privileges; (ii) providing further discretionary benefit increases; and (iii) adopting changes that would lead to lowering the effective retirement age. - Ensure any proposed legal amendments that increase pension expenditures are accompanied by a medium-term fiscal impact analysis and clear identification of commensurate resources in PFU budget amendments. - Simplify and streamline the system of old age pension guarantees and adopt amendments to the Law on Compulsory Pension Insurance specifying the date of the annual pension indexation. - Continue collaboration with development partners to establish well-regulated and fully funded obligatory pension saving schemes when necessary preconditions are in place. Identify appropriate funding resources for the second pillar, and ensure resources reallocated from the first to the second pillar will be replaced by other revenue sources. ### Public financial management reforms - Strengthen fiscal framework to facilitate sustainable fiscal adjustment and improve credibility and predictability of fiscal policies. - Enhance the medium-term budget framework (MTBF), embedded into the Budget Code as of 2021, to reinforce fiscal discipline and improve monitoring of commitments. - With IMF technical assistance, actions include: - Clarify mechanisms for adjusting expenditure ceilings. - Review arrangements which limit multi-annual commitments. - Improve methodology to produce forward baseline estimates and fiscal impact assessments, including capacity building within the Ministry of Finance (MoF) and key spending units. - Expand coverage and strengthen quantitative analysis of spending reviews based on 2019–20 pilot projects; conduct review of social funds, including the Pension Fund. - Improve assessment of fiscal risks by developing necessary tools within the MoF and expanding the financial model to include major SOEs; amend Cabinet resolution 7 dd.11.01.2018 on the methodology to assess fiscal risks to improve submission of information from SOEs. - Operationalize the Debt Management Office to improve capacity to manage public debt, optimize debt structure, and reduce financing cost. Strategies, operations, and results will be published yearly in the debt management strategy. ### Revenue administration improvements - Establish the State Tax Service (STS) and State Customs Service (SCS) as new legal entities responsible for tax and customs collection. - From January 1, 2021, STS; from July 1, 2021, SCS have been operating nationally as single legal entities with functionally organized headquarters and field offices. Regional and other legal entities of the STS and SCS have ceased to exist. - Complete liquidation of the State Fiscal Service (SFS) and transfer of its assets to the STS and SCS by end-December 2021, when Ukraine’s Bureau for Economic Security is staffed and fully operational. - Build systemic tax compliance risk management in the STS: - Define strategic tax compliance improvement objectives based on analysis of compliance risks and estimation of their potential impact to tax revenue. - Put in place strong governance arrangements to align all functional units of the STS to the STS Compliance Strategy. - Adopt formal process of annual compliance improvements plans (CIP) with defined and measurable objectives and regular reporting to STS senior management. The CIP for 2022 will be prepared by December 1, 2021. - Focus on taxpayer segments that carry highest risks to tax revenue; strengthen management of large taxpayers from large taxpayer offices (LTOs) under coordination of the head of the STS. - Establish by December 1, 2021 a specialized STS unit to analyze tax behavior of High-Net-Worth Individual taxpayers to minimize tax compliance risks from this group. - Consolidate investigative authority of economic crimes into Ukraine’s Bureau for Economic Security, which will become operational by end-December 2021. The Bureau will take over responsibilities for investigating economic, financial, and tax fraud and crimes that currently reside with national police, state secret service, and tax police, except those under the jurisdiction of NABU. Law sets out clear rules for management selection, internal decision-making, and oversight to ensure operational independence and proper oversight and accountability. ### Monetary and exchange rate policies - Reaffirm commitment to an institutionally strong and independent National Bank of Ukraine (NBU). - Enacted amendments to the NBU Law (prior action) in line with recommendations of the 2019 safeguards assessment to strengthen autonomy and governance of the NBU, including measures to: better describe the role of the NBU Council and its relationship with the Management Board; reduce number of Council and audit committee meetings; introduce an ex ante cooling-off period for Council members to become Management Board members and clarify applicability of ex post cooling-off period; clearly formulate tenure of NBU deputy governors and improve appointment/dismissal criteria; strengthen conflict of interest rules; and improve legal protections for NBU officials. - Update secondary framework (e.g., NBU Council's Rules of Procedure) to align with new amendments by end-2021. - Avoid actions that may imply political interference with the NBU’s independence (policy decisions, term limits and legal protection of managers and staff, and the NBU’s capital and profit distribution rules). - Monetary and exchange rate policy stance: - Remain consistent with commitment to meet the program’s international reserve and inflation objectives. - Steering inflation back to the NBU’s target of 5 percent with a tolerance band of ±1 percentage point, letting the exchange rate adjust in line with economic fundamentals and purchasing foreign exchange to meet program’s reserve targets. - NBU stands ready to adjust the policy rate to reach its inflation target over a policy horizon of 9–18 months. - Gradual capital control liberalization envisaged in the February 2019 currency law will be carefully sequenced and conditions-based, without setting specific deadlines for removal of existing restrictions. - Banking system reported as highly liquid with free liquidity at about 30 percent of client liabilities. - NBU has normalized operational design of monetary policy by phasing out emergency COVID-19 measures: as of October 1, 2021, discontinued long-term refinancing and interest rate swap operations with banks, reduced maturity of refinancing loans offered through weekly tenders from 90 to 30 days, and raised maturity of its certificates of deposits back to pre-crisis length of 14 days. - NBU will maintain the key policy rate as its core instrument and refrain from continuing long-term refinancing operations or conducting liquidity-providing operations exceeding a maturity of 30 days, unless necessary to safeguard financial stability. - Monetary policy consultation clause (MPCC) was triggered by unexpectedly high inflation in March and June 2021. - A separate letter outlines underlying reasons for the inflation deviation and policy response (Attachment II). - Confident that combination of policy interest rate hikes and unwinding of temporary supply-side factors will bring inflation within the NBU’s target range by end-2022. *Source: 1ukrea2021001 - 4. In response to the recent extraordinary increases in gas prices, we will implement* ### 14. We will take further steps to strengthen the effectiveness of monetary policy and ### 14. We will take further steps to strengthen the effectiveness of monetary policy and ### Monetary policy and financial markets - Strengthen the regulatory framework for financial markets and continue to work with stakeholders to enhance the efficiency and robustness of money and capital markets to support effective monetary policy transmission. ### Financial sector policy priorities (C. Financial Sector Policies) - Priorities: - (i) further strengthening bank capital requirements; - (ii) reducing legacy non-performing loans (NPLs) and recovering assets from resolved banks; - (iii) implementing the reform strategy for state-owned banks (SOBs); - (iv) improving the Deposit Guarantee Fund’s (DGF) financial position and the NBU Emergency Liquidity Assistance (ELA) framework; - (v) developing the regulatory framework for the non-bank financial sector and financial markets. ### Banking sector resilience and diagnostics - Banks entered the crisis well capitalized and liquid due to progress since 2014. - Regulatory measures introduced in 2020 for COVID-19 credit risk were unwound between April and July 2021, except measures directed at municipalities. - Liquidity support measures (long-term refinancing operations and interest rate swaps) were suspended in October 2021. - Asset quality reviews by external auditors and stress tests of the 30 largest banks (accounting for 93 percent of system assets) showed the system as a whole to be profitable and adequately capitalized at end-2020. - Supervisory actions: - NBU instructed four banks in August 2021 to take measures and/or raise additional capital to cover capital needs found under the baseline scenario by end-December 2021. - These four banks and sixteen additional banks were instructed to submit action plans to further improve capital adequacy by injecting capital and/or reducing risk by end-June 2022 under the adverse scenario. - Supervisory measures will be taken against banks that fail to implement their action plans. ### Regulatory and legal reforms enacted - Amendments to the Banking Law and DGF Law (both prior actions) to strengthen bank supervision and the DGF’s asset recovery framework. - Banking Law amendments: - Align corporate governance with Basel’s Guidelines for Corporate Governance for banks (including the collective suitability of supervisory boards). - Improve shareholder and licensing requirements, improve capital structure, and grant the NBU powers to calibrate bank-specific capital and liquidity requirements. - Following a three-year transitional period, regulatory framework will comply with the Basel II, pillar 2 capital framework and the Basel III capital and liquidity framework. - Time-bound implementation schedule to ensure full compliance by January 2025. - DGF Law amendments: - Improved bank liquidation mechanisms and strengthened DGF’s asset recovery powers, including powers to set aside suspicious transactions concluded before insolvency and to claim damages from former bank owners and related parties, including interim measures (asset seizures) under certain circumstances. ### Strengthening the financial safety net and safeguards recommendations - DGF solvency and membership: - Legal amendments submitted to Parliament to restore DGF’s solvency and make state-owned Oschadbank a member of the DGF. - Plan adopted by the Financial Stability Council in August 2020 converts into contingent liabilities remaining liabilities related to MoF’s back-up funding in 2015–18 to facilitate DGF payouts; contingent liabilities to be settled with (i) DGF’s recovered claims from failed banks and (ii) funds that exceed the DGF’s target size as approved by the DGF Administrative Council. - Law gradually raises insured deposit coverage limit from UAH 200,000 to UAH 600,000 to reach its 2014 value in real terms. - Law establishes a process for determining DGF’s target size and explicitly requires any funding from the NBU to the DGF to be at NBU’s discretion, short-term, address urgent situations, and when systemic stability aspects are at stake. - Aim to adopt the law by mid-November 2021 and restore DGF’s solvency by end-December 2021. - ELA operational framework review: - With IMF technical assistance, review governance, verification of solvency requirement, collateralization and risk management conditionality, and monitoring through implementation of funding plans. - Strengthen counterparty eligibility criteria (solvency criteria) in NBU’s monetary policy refinancing operations (a 2019 safeguard assessment recommendation). - Develop changes to the ELA policy and operational framework by end-May 2022. - Following bilateral technical assistance from an ESBC member, review NBU’s emergency liquidity support operational process and assess legal framework concerning NBU’s secured creditor status in bank resolution and liquidation; prepare amendments to strengthen this status as appropriate. - Contingency planning: - Prepared contingency plan for risks from constitutional challenges against the DGF Law and the Bank Resolution Law (Law No. 590 of 2020) and updated existing contingency plan to mitigate adverse court rulings against past resolution decisions. - Plans to be operationally feasible, safeguard financial stability, minimize fiscal costs, and minimize moral hazard risks. - Financial Stability Council to adopt the plans by end-November 2021 and continue regular review and updates as needed. ### Recovery plans, capital and liquidity requirements, and supervisory capacity - Recovery plans and SREP: - All banks submitted recovery plans; NBU completed first round of comments. - Recovery plans to be part of NBU’s annual Supervisory and Review Evaluation Process in 2022. - Key regulatory measures and timelines: - Net Stable Funding Ratio (NSFR) implemented in April 2021, initially set at 80 percent to be gradually raised to 100 percent in April 2022. - Risk weights for unsecured consumer loans raised in July 2021. - Capital requirements for operational risk set to take effect in January 2022. - In 2022, NBU will endorse requirements for ICAAP and ILAAP; based on the Banking Law these requirements take effect in August 2024. - Schedule for activating the new capital conservation buffer and the systemic importance buffer to be introduced by March 2022. - Preliminary estimates show banks generally prepared for new capital requirements and that the additional burden on capital ratios will not be significant. - Supervisory strengthening: - Self-assessment of NBU supervisory approach against Basel Core Principles conducted earlier in the year. - Plan to address regulatory gaps to be prepared and adopted by end-2021. - Organizational change: establish a new expert unit to provide technical support to compliance-based supervisors. - Time-bound action plan to improve professional capacity of bank supervision (structural benchmark for end-December 2021) to include professional profiles and a multi-year training program for new hires. ### NBU governance and organizational reforms - Maintain collegial Board decision-making and function-based structure while adapting to expanded mandate for NBFI supervision. - June 2021 amendment to NBU Law introduced a new sixth deputy governor position. - Develop plan for regrouping NBU organizational units and organizational reform of supervision. - Identify effective and balanced division of responsibilities among Board members to preserve collegial model and avoid conflicts. - Identify cross-sectoral activities and consider new senior staff committees to enhance information-sharing and decision-making. - Ensure reforms enhance internal information-sharing, retain key staff, ensure business continuity, and minimize reputational risk. ### Corporate governance and oversight of state-owned banks (SOBs) - Oversight and accountability measures: - Operationalized MoF oversight unit for shareholding management per IMF technical assistance; commit to fill vacant staff positions quickly with high-caliber professionals. - Each SOB adopted a Code of Ethics establishing a balanced disciplinary process for misconducts, complaints, and conflicts, including supervisory board members. - New Memorandum of Understanding (MoU) between MoF and majority-independent supervisory boards of each SOB to be signed by end-October 2021 to ensure commercial independence and shareholder accountability. - Methodology developed with IFIs for supervisory board performance assessment by an internationally reputable advisor, considering external obstacles and proposing measures to improve corporate governance and board efficiency. - First performance assessment for each bank to be conducted in 2022 (based on 2021 performance) and will inform the Cabinet’s performance assessment in line with Article 7 of the Banking Law. - MOF to publish the assessment’s key findings, together with Cabinet’s actions to address findings, in June 2022. - Addressing recent risks to oversight: - Changes to Banking Law relaxed eligibility criteria for state representatives in SOB supervisory boards; to mitigate risk, jointly prepared legal amendments by MoF and NBU to reverse this relaxation to be enacted by end-November 2021 (structural benchmark). - Supervisory board terms and selection: - Ukrgasbank supervisory board members’ term expires April 2022; commit to select new members through a competitive and transparent process. - Three remaining SOBs: majority-independent supervisory board members’ three-year term expires June 2022; initiate selection process by end-February 2022 in line with Article 7 of the Banking Law. - By end-November 2021, adopt a time-bound succession plan for SOB supervisory boards to support implementation of approved 2021-2024 strategies (structural benchmark). - Succession plan to revise resolutions and procedures (including Cabinet Resolutions No. 159 and 267 of 2019) to: (i) strengthen qualification criteria for international recruitment firms, including rotation and leadership and endorsement by a reputable foreign partner; (ii) ensure shortlisting procedures are consistent with banks’ approved strategies and collective suitability; (iii) elaborate Nomination Committee selection process from shortlisted candidates; (iv) provide transparent process for reappointing independent supervisory board members. - Offer market-based remuneration to attract qualified Ukrainian and international professionals. ### State ownership reduction and privatization strategy - Principles and targets: - Updated Strategy approved by Cabinet in August 2020 envisions reducing state ownership from current 50.4 percent in net assets (total assets net of loan loss provisions) to below 25 percent by 2025. - Recent steps and commitments: - IFC granted a loan to UkrGasBank in 2020 convertible into equity. - Commitment to facilitate privatization of UkrGasBank as per approved strategy. - EBRD conducted due diligence of Oschadbank in June 2021; Cabinet approved Oschadbank’s strategy for 2021–24; MoF and Oschadbank to enter formal negotiations with EBRD on cooperation terms in line with approved strategy. - Privatization road maps: - Privatbank and Oschadbank to develop and adopt road maps by end-year 2021, in cooperation with MoF, that: (i) outline steps to take these banks to the market for partial or full privatization and attract reputable international investors; (ii) identify legal amendments that might be required to execute divestment options. - Cabinet to endorse these road maps by end-January 2022 (structural benchmark). - Strengthen professional capacity of MoF shareholder management unit and ensure SOBs remain adequately capitalized and meet capital requirements. - Any additional decisions affecting state ownership (including acquisition of corporate rights by government bodies and state-owned enterprises) to be undertaken only if consistent with government’s overall strategy to reduce state ownership and control, ringfencing banking services in a separate legal entity subject to international best practices and stringent licensing safeguards. ### NPL reduction and lending obstacles - Progress on NPLs in SOBs: - SOBs prepared time-bound NPL reduction plans endorsed by the Financial Stability Council in June 2020. - Using the legal and regulatory framework for managing problem assets adopted in 2018-2020, combined NPL ratio fell from 65 percent at end-December 2019 to 52 percent at end-August 2021, driven by write-offs of fully provisioned NPLs. - Implementation to be subject to quarterly monitoring by the FSC and NBU and annual evaluation under NBU’s SREP and part of banks’ annual Key Performance Indicators. - Lending obstacles: - NBU and respective ministries, together with the banking community, will review recommendations from a working group identifying obstacles to bank lending and prepare an actionable plan by end-January 2022. ### Asset recovery from former owners of failed banks - Strengthen asset recovery efforts to reduce costs to taxpayers and hold former owners accountable: - Legal amendments recently adopted strengthen DGF’s asset recovery framework (recovery of claims and damages) (MEFP ¶[18a]). - Additional amendment in Parliament to strengthen DGF’s ability to seek damages in criminal proceedings. - DGF to pursue legal actions abroad, engage reputable legal and forensic experts, coordinate with law enforcement, and ensure DGF solvency to enable resource commitment. - Comprehensive approach and commitments: - Launch high-level working group chaired by the Prime Minister with NBU Governor as Deputy Chair, convening relevant ministries and PGO and NABU upon consent, to prepare a comprehensive asset recovery strategy paper and action plan to be adopted and published by the Cabinet of Ministers (structural benchmark for end-February 2022). - Strategy to set asset recovery as a policy goal; take stock of status; identify impediments; define strategy; propose credible and time-bound policy actions to strengthen legal framework, increase institutional and operational capacity, and establish coordination mechanisms. - Ensure proposed actions do not create moral hazard or interfere with operational autonomy of agencies and PrivatBank’s asset recovery efforts. - Strategy to enumerate measures to end state “business-as-usual” with former bank owners until debts to the DGF are satisfied, e.g., prohibiting former bank owners, related parties, and entities they control with legally ascertained debts to the DGF from participating in public procurement and privatization processes. - Ensure continuous cooperation: - NBU and DGF to continue coordinating with PGO and NABU by exchanging information and documentation (e.g., forensic audit reports) as permitted by law and without prejudice to prosecutorial and investigative autonomy. - Public reporting and transparency: - CMU publishes semi-annual reports summarizing progress in asset recovery and litigation efforts related to SOBs. - DGF to continue reporting for liquidated banks, publish list of all borrowers, managers, and former bank shareholders of resolved banks that are yet to honor debts to failed institutions as ruled by court decisions, and disclose semi-annually the amount of damage it claims from former owners and related parties in each failed bank. - DGF will increase accessibility of reports with easily understandable and comparable information. - Prosecutor General's Office to publish a semi-annual report on outcomes of criminal proceedings against former bank owners, managers, and related parties in each resolved bank since the beginning of 2014, with aggregate data on number of persons investigated, tried, and convicted as well as amount of fines and damage recovered (structural benchmark for end-December 2021). *Source: 1ukrea2021001 - 14. We will take further steps to strengthen the effectiveness of monetary policy and* ### 27. We will strengthen the legal, regulatory, and supervisory framework for NBFIs and ### 27. We will strengthen the legal, regulatory, and supervisory framework for NBFIs and financial markets ### NBFI legal and supervisory reform - The NBU has adopted new rules on shareholder transparency requiring all NBFIs (apart from credit unions) to disclose their owners and those with non-transparent ownership structures to change their ownership structure by October 17, 2021. - Supervisory actions will be taken against NBFIs that do not meet this requirement. - With support from IFIs, new legislation has been prepared on: - Financial Services and Financial Companies (#5065) - Insurance (#5315) - Credit Unions (#5125) - A draft law amending the Law on the National Securities and Stock Market Commission (NSSMC) aims to: - Enhance NSSMC’s independence and institutional capacity - Strengthen its cross-border and domestic cooperation mandate - Expand its enforcement powers - The NSSMC amendment will be designed to meet the objectives outlined in ¶22 of the September 1, 2016 MEFP and to allow Ukraine to become a signatory of IOSCO’s multilateral MoU. - Coordination with relevant IFI staff will ensure alignment with international best practices and aim for these four draft laws to be enacted by Parliament by end-December 2021. - The centralized credit registry will be expanded to non-bank credit institutions and the threshold for submitting information will be lowered for both banks and non-banks. ### D. Structural Policies — Anticorruption and rule of law - Commitment: continue support for independence, effectiveness, and adequate resourcing of anti-corruption institutions: NABU, SAPO, HACC, and NACP. - Objective: robust implementation of asset declaration and AML/CFT frameworks to advance accountability of corrupt public officials and avoid backtracking on anti-corruption progress. Subsection a. NABU Operations - Actions taken (prior action): amended the NABU law to: - Protect NABU’s independence as a central executive authority with special status under the Cabinet of Ministers (including resolving conflicts of laws in favor of NABU’s independence and enhancing external audit by independent experts with international experience). - Enhance the selection process for the new NABU head by giving a decisive role to independent experts with international experience, requiring at least two votes of independent experts in the six-member Selection Commission for majority and split decisions. - Confirm the current NABU head’s status to prevent legal challenges and provide a smooth transition until a new head is selected. - Preserve NABU’s exclusive authority to investigate acts of corruption involving significant amounts or committed by high-level officials; empower use of a wide range of investigative techniques in line with international AML/CFT standards. - Implement law allowing NABU to intercept communications by providing adequate resources, equipment, and technological solutions to enable NABU to independently intercept communications of landlines and mobile devices by end-December 2021. - Maintain adequate financial and human resources and competitive staff remuneration for NABU. - By end-March 2022: further legal amendments to allow NABU access to competent, independent, and speedy forensic examinations by experts in criminal proceedings in relation to corruption cases under NABU’s jurisdiction. - Ensure NABU has primary jurisdiction over corruption cases within its investigative remit vis-à-vis other law enforcement agencies, including the State Bureau of Economic Security. - NABU and SAPO will publish quarterly statistics on corruption cases being investigated and prosecuted and pending cases before the HACC (in line with the template detailed in the TMU). Subsection b. False Asset Declaration - Restored criminal liability for public officials regarding asset declaration obligations (prior action). - June 2021 law (consistent with December 2020 Venice Commission Opinion) created three corruption offenses: - (i) non-submission of asset declaration - (ii) ordinary false declaration (assets below the threshold amount of US$170,000) - (iii) aggravated false declaration (assets valued above the threshold amount) - Aggravated false declaration punishable by imprisonment for up to two years. - Together with revised illicit enrichment offense, new offenses aim to contribute to an effective and dissuasive asset declaration system. Subsection c. SAPO - Ensure autonomy of SAPO. - Complete selection process and appoint a new SAPO head by end-November 2021. - End-March 2022 structural benchmark: amend SAPO law to: - Improve selection procedures giving decisive role to independent experts with international experience - Strengthen capacity to regulate organizational activities, including rationalizing powers of SAPO head and deputies - Establish mechanisms for accountability of SAPO leadership based on external audit findings and recommendations by independent experts with international experience (to be conducted in conjunction with NABU audit) Subsection d. Anticorruption court (HACC) - Support independence and adequate provisioning of HACC. - HACC performance: in the past two years, more than 80 percent of HACC’s decisions have led to convictions for corruption against judges, prosecutors, former members of parliament, heads of SOEs, and local officials. - Commit to full operationalization through adequate financial resources (staffing, security, IT, competitive remuneration) and a permanent, dedicated, suitable facility. - By end-December 2021: HACC will be provided title to use and manage permanent offices appropriate for its needs. - HACC will publish reports on number and types of corruption cases, decisions on convictions or acquittals, and penalties imposed (in line with the template detailed in the TMU). Subsection e. E-declaration - Ensure PEPs are subject to comprehensive and published asset declaration requirements. - October 2020 Constitutional Court decision abolished NACP verification powers; December 2020 amendments restored NACP powers with a separate regime for judiciary declarations. - Continue to work with the judicial branch to finalize verification procedures for judiciary declarations. - Ensure and facilitate NABU’s automatic and unrestricted electronic access to the NACP database of asset declarations. - Prioritize verification of asset declarations of PEPs based on risk. Subsection f. AML implementation - Mobilize AML/CFT framework to tackle high-level corruption. - Issued guidance to banks on new definition of PEPs to implement December 2019 amendments. - Use proportionate and dissuasive sanctions under new AML/CFT framework for breaches. - By end-March 2022: improve beneficial ownership information in the Unified State Register of Legal Entities, Entrepreneurs and Public Associations with: - Mechanisms to sanction legal entities for non-compliance - Open and public access to its information - Requirement that financial institutions report any discrepancies - State Financial Monitoring Service of Ukraine (FIU) will continue publishing quarterly statistics on information disseminated to NABU (in line with the template detailed in ¶100 of the TMU). - Ensure voluntary tax declaration program fully complies with AML and anti-corruption legislation and that risks of abuse and money laundering are mitigated. - NBU will publish after the voluntary tax declaration program a thematic inspection report of AML/CFT compliance by banks that facilitated tax declarations through special accounts (including random sampling of beneficiaries). - NBU will continue at least four quarterly inspections of banks at higher risk of laundering of proceeds of corruption, focused on customer due diligence and PEPs (including identification of PEPs, verification of source of wealth, and beneficial ownership information). ### 29. Rule of law — judiciary independence, integrity, and accountability - Commitment: ensure judicial selection and disciplinary mechanisms are managed by persons with high competence, trustworthiness, and integrity consistent with European judicial standards and Venice Commission opinions. - Strengthen administrative procedures to give a sufficiently superior level of judicial consideration to cases challenging decisions of national state agencies and provide safeguards against undue influence. Subsection a. High Council of Justice (HCJ) - Amended the HCJ Law to enhance selection process and ensure members have impeccable reputation and integrity (prior action). - July 2021 amendments: - Create an Ethics Council to pre-screen HCJ candidates, assess integrity, and perform a one-off integrity check of existing HCJ members. - First composition of the six-member Ethics Council will have three independent experts with international judicial experience and be given a decisive vote (at least two of these three independent experts required in majority decisions and split votes). - Procedures and criteria for pre-selection, including a call for applications, have been outlined. - Ethics Council will forward pre-screened candidates to appointing authorities and publish recommendations for dismissal of existing HCJ members if negatively assessed; affected HCJ member will be temporarily suspended pending appointing authority decision. - Establish Ethics Council by end-October 2021. - One-off integrity check of existing HCJ members to be completed within six months from establishment of Ethics Council (end-April 2022 structural benchmark). Subsection b. HCJ Disciplinary Inspectorate Service - Created a permanent inspectorate unit in the HCJ to investigate disciplinary cases against judges and submit recommendations to the HCJ. - Unit composed of permanent staff subject to competitive selection to ensure consistency, continuity, and evenhandedness. Subsection c. Review of Exemplary Administrative Cases - Amend procedural codes to transfer judicial review of exemplary administrative cases against national state agencies to: - Supreme Court as court of first instance - Grand Chamber of the Supreme Court as appellate court - Criteria for transfer to be finalized by end-December 2021 (in consultation with stakeholders and agreement with IMF staff). Criteria to include: - Cases of national importance - Cases above a pre-determined threshold amount - Cases having significant impact or damage to the country - Decisions, acts, or omissions of specific national state agencies (Cabinet of Ministers, Ministries, NBU, Anti-Monopoly Committee, HCJ, NABU, NACP, HACC) ### Energy Sector Reforms (¶30–32) Subsection 30. Avoiding quasi-fiscal deficits in the gas sector - Commitment: set tariffs above cost recovery while protecting vulnerable households. - Protecting vulnerable households: - Continue providing utility subsidies to defray gas and heating tariffs for low-income and vulnerable households. - Ensure adequate budget allocation for the HUS in accordance with gas price forecasts and strive to ensure coverage of all qualifying households prior to the heating season by better informing the public and eliminating rigidities in registration (see ¶4a and ¶8b). - Preventing quasi-fiscal deficits: - Committed not to reintroduce any price cap on gas supplied to households and to ensure wholesale prices are determined on a transparent and efficient market. - Ensure all heating tariffs under local authority jurisdiction are reviewed and officially enacted to fully reflect gas and non-gas costs (including capex) by end-October 2021. - Any deviation from cost recovery caused by surge in gas prices will be covered by an explicit and transparent subsidy from the state or respective local budget. - To support efforts: - (i) make fully operational the supervisory board of Naftogaz by the end of January 2022 - (ii) ensure an independent audit by an internationally reputable firm by April 2022, focusing on the extent to which Naftogaz activities and fixed price contracts represent subsidization of gas prices for households and DHCs - Before restructuring the debt of DHCs and DSOs, implement and assess measures to address underlying causes of debt accumulation (ensure cost-reflective heating tariffs, sufficient working capital in DHCs, and measures improving payment discipline — see ¶30c). - Enforcing payment discipline: - Develop adequate instruments for DHCs to enforce collection from households (including higher fines and simplified legal enforcement). - Refrain from measures that undermine payment discipline. Subsection 31. Protecting financial strength of MGU/GTSO - Commit to make fully operational the supervisory board of MGU, including ensuring all appointed members have contractual agreements. - Provide supervisory board with necessary information to assess whether the renegotiated agreement replacing the original SPA: - Is in the company’s best interests - Does not jeopardize short-term liquidity position and medium-term viability - Fosters capacity to invest, including in response to structural shifts in the transportation network - Based on the supervisory board’s assessment, committed to amending the relevant CMU resolution governing payment terms. Subsection 32. Measures to support energy market development, competition, and consumer choice - Enhancing competition in the retail market: - Simplify supplier switching for household consumers so it cannot be hampered by disputes with previous supplier or claims of outstanding payments. - Ensure household consumers can authorize sharing historic consumption data; DSOs required to provide access to historic consumption data to any supplier chosen by the household consumer free of charge. - Ensure all by-laws for launching a joint data hub for household consumers will be approved by December 2021. - Data hub to be accessible to all market participants by end-March 2022 (structural benchmark). - Create a working group (NEURC, Ministry of Energy, AMCU and key stakeholders) to develop and promulgate by end-March 2022 a joint action plan to ensure development and enforcement of market and anti-monopoly regulations, including effective unbundling of DSOs and suppliers in all regions so they cannot have the same beneficial owner. Regulator responsible for verifying effectiveness of unbundling. - Adopt legislation to ensure: - (i) AMCU’s financial and operational independence - (ii) transparent, competitive, and politically insulated appointment of its Chairman and commissioners with a clear exhaustive list of dismissal reasons - (iii) strengthened powers to conduct physical searches, confiscate documents, and obtain and share information with law enforcement and other government bodies - (iv) its decisions will have the status of enforcement documents requiring no court process to enforce - AMCU will publish information on initiation and results of its investigations. - Enhancing competition in the wholesale market: - Ensure wholesale prices are determined on a transparent and efficient market. - Implement a domestic gas release program under which, starting in May 2022, UGV will sell every year at least 40–50 percent of its production on a transparent and competitive basis on local exchanges with equal access for all market participants. - This share is expected to increase toward 100 percent by 2024 as fixed price contracts expire. - Develop an action plan to improve financial stability and institutional capacity of the demand side (including DHCs) to enable sourcing gas through an exchange. - Speed up progress toward full implementation of the EU Regulation on wholesale Energy Market Integrity and Transparency (REMIT) as envisaged under the Association Agreement between Ukraine and the EU. - Develop an action plan to improve transparency and ensure commercial attractiveness of exchange gas trading in Ukraine. *Source: 1ukrea2021001 - Extracted content from the provided IMF chapter/section.* ### 33. We are committed to addressing the large imbalances in the electricity sector. In order ### 33. We are committed to addressing the large imbalances in the electricity sector. In order ### Electricity sector: elimination of quasi‑fiscal deficits and payment discipline - Objective: eliminate quasi‑fiscal deficits in the electricity sector. - Guaranteed Buyer (state‑owned) - Will no longer accumulate arrears to renewable energy producers from 2022 onwards (a new quantitative performance criterion – see TMU). - Regulator (NEURC) will set the Transmission System Operator (TSO) transmission tariff at a level sufficient to cover—in addition to material and labor expenses, capital expenditures, dividend payments, and profit tax—all obligations to renewable producers (including 100 percent of the value of estimated output of electricity volume produced for the relevant year) as well as financial expenses in relation to debt service and principal payment of existing and planned borrowing. - Allowed borrowing to repay arrears: financing in form of loans or issuance of bonds until December 31, 2021 to repay all arrears accumulated in 2020 and 2021 in the limits permitted by the ceiling on issuance of publicly guaranteed debt. - Energoatom - Will maintain revenues that can at least cover power generation costs and basic investment needs after paying the compensation described in the CMU resolution #859 on Public Service Obligations (PSO) for households. - Will rescind resolutions that allowed Energoatom and other producers to sell large volumes of electricity significantly below market prices to other entities. - Payment discipline will be closely monitored between the Universal Service Providers, oblenergos, the Guaranteed Buyer, and Energoatom and Ukrhydroenergo. - Governance strengthening measures: - Enact the Law on corporatization of Energoatom by end‑December 2021, including a requirement to produce financial accounts according to international standards. - Establish a supervisory board with a majority of independent members selected through a transparent and robust procedure by end‑May 2022 (a structural benchmark). ### SOE corporate governance and privatization - Corporate governance commitments - Ensure SOEs operate at arm’s length of the government and safeguard progress in strengthening corporate governance, including by maintaining majority‑independent supervisory boards. - Make fully operational the supervisory boards of: - Ukrenergo by end‑December 2021, - Naftogaz by the end of January 2022, - Energoatom by end‑May 2022, - all based on transparent and competitive selection procedures. - Adopt an SOE corporate governance law to align the SOE framework with OECD Guidelines on Corporate Governance of SOEs, including by strengthening accountability and broadening supervisory board powers to have the ultimate authority to appoint and dismiss CEOs. - Adopt an overarching accounting policy in line with IFRS to be implemented by SOEs and adopt an overarching state ownership policy. - Downsizing and privatization of SOEs - Enact legislation simplifying the transfer of assets to the State Property Fund (SPF), streamlining the privatization process, and extending the period during which companies can be sold under UK Law by at least three years. - Strengthen institutional capacity of the SPF. - SPF target: launch tenders for the sale of at least 3 large SOEs by end‑December 2021, including United Mining and Chemical Company, First Kyiv Machine‑Building Plant, 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). ### Inflation developments, drivers, and monetary policy response - Inflation breaches and levels - Inflation exceeded the MPCC outer band in March 2021 at 8.5 percent yoy, rose to 10.2 percent yoy in July, and further to 11 percent yoy in September 2021. - Core inflation sped up to 7.4 percent yoy in September 2021. - Key contributors to higher inflation - High global and domestic food prices: - Rising world food prices and lower yields in many food‑producing countries transmitted into domestic prices. - High export prices drove domestic sunflower oil prices higher; sunflower oil contributed almost 1 pp to annual CPI growth in September 2021. - Rising production costs—largely due to surging feed and energy costs—contributed to growth in food prices; rising raw food prices affected processed foods. - Growth in global energy prices: - Natural gas prices for Ukrainian households grew rapidly, peaking in June at 175.3 percent yoy and decelerating to 68.6 percent yoy in September 2021. - Electricity became more expensive after the preferential electricity price for households was canceled at the start of 2021. - Robust consumer demand: - Private consumption recovered strongly after Q2 2020; household consumption expenditures rose 1.6 percent for the whole year with growth picking up to an estimated 10.5 percent yoy in H1 2021. - Retail trade turnover rose by 12.2 percent yoy over January–September 2021 and sales of cars reached record high levels in the first nine months of 2021. - Real wages: 7.4 percent in 2020 and 11.9 percent yoy January–August 2021. - Monetary policy response by the National Bank of Ukraine (NBU) - The NBU started a tightening cycle in March 2021 and raised the key policy rate four times—in March, April, July and September—by a tally of 250 bps, up to 8.5 percent. - The ex‑ante real key policy rate turned positive and was gradually approaching its neutral level. - The gap between the key policy rate and the neutral rate narrowed from -4 pp in Q1 2021 to less than -1.0 pp in Q4 2021. - Projection: the real key policy rate is projected to approach its neutral level and become restrictive in 2022. *Source: Excerpt from IMF staff and Ukrainian authorities’ text in 1ukrea2021001.* ### 4. The gradual key policy rate increases by the NBU in the current year have not yet been ### 4. The gradual key policy rate increases by the NBU in the current year have not yet been fully transmitted to the banks’ interest rates on loans and deposits. ### Monetary transmission: observed effects and impediments - Interest rates on loans to nonfinancial corporations responded most noticeably. - Weighted average interest rate on loans with maturity of up to one year (the share of these loans accounts for about 80 percent) rose from 7.8 percent in March 2021 to 8.6 percent in September 2021. - Interest rates on household loans respond more slowly because these rates are significantly higher, with risk premium as a main component and driver of their dynamics. - Interest rates on deposits have just started to react to tighter monetary policy. - Sluggishness of monetary transmission is attributed to: - Structural liquidity surplus fueled by long-term refinancing and FX interventions coupled with substantial inflows of deposits to the banking system. - Sluggish response of state-owned banks (SOBs) that have significant market power in the deposit market. - SOBs hold about 50 percent of all deposits and act as price-setters in the market of deposits for both individuals and legal entities. - SOBs are liquidity rich, which reduces their incentives to compete for additional deposit resources. - SOBs absorbed significant portion (30 percent) of long-term refinancing. - Expectation: termination of the anti-crisis monetary instruments that came into effect starting from Q4 is expected to enhance monetary transmission. ### NBU operational and policy measures (additional tightening) - From July 1, 2021, the NBU started to gradually phase out its emergency monetary measures implemented in response to the coronavirus crisis. - The NBU fully discontinued long-term refinancing and interest rate swaps by Q4 2021. - Operational design changes: - Interest rate on refinancing loans set at the level of the key policy rate +1 pp for fixed rate tenders (previously the key policy rate was applied). - From October 1, the maturity of refinancing loans was reduced to 30 days from 90 days. - The maturity of certificates of deposit returned from 7 days to its pre-crisis level of 14 days. ### Expected effects on transmission and inflation - These measures are expected to strengthen monetary transmission via expectations, FX and interest rate channels and enhance the effect of the monetary policy on inflation over the monetary policy relevant horizon. - Tighter monetary policy will help to calm inflation expectations and bring back a steady disinflation trend toward the 5 percent target, which is projected to be achieved in 2022. - The NBU’s forward guidance: - According to the baseline forecast the key policy rate will be maintained at a level no lower than 8.5 percent until Q3 2022. - The NBU signaled readiness to continue deploying monetary tools to return inflation to the target 5 percent if additional inflationary risks materialize, including a possible key rate hike, if needed, in December. ### Inflation outlook and drivers - Several inflationary forces are assessed as transitory; NBU October 2021 forecast expects some forces to fade out through the end of the year. - Expectation that commodity prices will correct on global markets; global prices for some foods have already started descending. - A record harvest of early grain crops and high yields of other crops will spur exports and underpin appreciation pressure on the hryvnia, helping reduce raw food inflation. - Recent inflation dynamics: - Headline and core inflation showed signs of stabilization; seasonally adjusted data suggest the peak might have been already passed in the middle of the year. - Annual inflation expected to hover in the range of 10–11percent in the coming months before descending below 10 percent by the end of 2021. - Core inflation stayed flat at 7.2–7.4 percent for four months in a row from June to September 2021. - Inflation expectations: - Inflation expectations moderately deteriorated over the last months due to high actual inflation. - Hikes in key policy rate caused the ex-ante real interest rate to turn positive and start approaching towards its neutral level. ### Demand, supply, and policy interactions - Near-term: - Consumer demand will support the underlying inflation trend as higher wages bolster demand and push up production costs. - Businesses may pass on higher costs through increased prices, especially in the services sector. - Medium-term disinflationary forces: - Tighter monetary policy as recent policy rate hikes are fully transmitted. - Discontinuation of anti-crisis monetary instruments making banks more interested in attracting deposits and raising deposit rates. - Exchange rate channel contributing to disinflation due to appreciation of UAH this year. - Underutilization of production capacity and gradual fiscal consolidation. - Draft budget for 2022 envisages moderate increase in the minimum wage, which will not put any significant pressure on prices. ### Risks and trade-offs - Challenging trade-off: ensure disinflation while avoiding a recession. - NBU revised downward its economic growth forecast for 2021 from 3.8 percent to 3.1 percent. - Unfavorable energy market conditions and global logistic problems will limit industrial output and curb economic recovery next year. - Balance of risks for baseline scenario of inflation and the key policy rate assessed as having shifted upwards, especially in the medium term. - Higher morbidity due to low vaccination coverage could lead to stricter lockdown, more significant slowdown in economic activity, and possibly greater supply constraints than demand-side weakness—potentially increasing inflationary pressures. - Risks include a more protracted global price surge (persistent high energy prices and supply chain disruptions), sharp deterioration in terms of trade, capital outflows from emerging markets, and escalation of the military conflict with Russia; these factors could cause global stagflation. ### Policy stance and contingency - The NBU is carefully monitoring inflationary pressures and risks and stands ready to apply monetary instruments to bring inflation back to the 5 percent target if further build-up of inflationary pressures occurs. - According to the October 2021 forecast: - The NBU expects to maintain its key policy rate no lower than 8.5 percent until Q3 2022 and start a cycle of key policy rate cuts later in 2022, provided inflation expectations stabilize and the disinflation trend steadies. - The NBU signaled readiness to deploy additional monetary tightening, including a possible key rate hike in December, if pro-inflationary risks materialize. *Source: IMF staff summary of section titled "4. The gradual key policy rate increases by the NBU in the current year have not yet been fully transmitted to the banks’ interest rates on loans and deposits."* ### 10. Net domestic assets (NDA) of the NBU are defined as the difference between the monetary ### 10. Net domestic assets (NDA) of the NBU are defined as the difference between the monetary ### Net Domestic Assets (NDA) — definition and valuation - NDA of the NBU are defined as the difference between the monetary base (as defined below) 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 the purpose of computing the NDA target, the NIR is valued at the program exchange rates defined in paragraph 3 and expressed in hryvnia. ### Monetary base — composition - The NBU’s 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 is 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 defined as 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 32343 and accounts 3250, 4731, 4732, 4735, and 4739). - Note: definitions may be modified to include any other accounts identified or created in the future in connection with national currency issue and banks' deposits at the NBU. ### NDA adjustment mechanism - NDA targets will be 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 will be adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in Eurobond or private placement debt service from the amounts expected under the baseline (see Table 1 of the MEFP). - NDA targets will be adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in net issuance (gross issuance minus debt service) of central government’s domestic foreign exchange debt liabilities over (under) the amounts expected under the baseline (see Table 1 of the MEFP). - NDA targets will be 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 to international reserves at the NBU, by the use of confiscated assets held at other institutions (or other non-international reserves assets) to make budget FX payments, over (under) the amounts expected under the baseline (see Table 1 of the MEFP). ### Monetary Policy Consultation Clause (MPCC) — definition and triggers - Headline inflation is defined as the year-on-year rate of change of the Consumer Price Index as measured by Ukraine’s State Statistics Service. - Consultation with the IMF Executive Board will be triggered if the observed headline inflation falls outside an outer band of ±3 percentage points around the mid-point targets for 2020 and 2021. - The consultation would focus on (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) the reasons for program deviations, taking into account compensating factors; and (iii) proposed remedial actions, if deemed necessary. - If the 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 the reasons for the deviation and the proposed policy response. ### Ceiling on Cash Deficit of the General Government — definition - The cash deficit of the general government is measured by means of net financing flows excluding the impact of valuation changes as the sum of: - total net treasury bill sales (in hryvnias and foreign currency) as measured by the NBU registry of treasury bill sales, defined as cumulative total funds realized from sales of treasury bills at primary auction and government securities issued for recapitalization of banks and SOEs, less cumulative total redemption of principal on treasury bills; excluding bonds issued to recapitalize Naftogaz and other SOEs; - other net domestic banking system credit to general government (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) and any other financing extended by entities not reflected by monetary statistics provided by the NBU; - total receipts from privatization (including change in stock of refundable participation deposits and sale of nonfinancial assets) and proceeds from uncompensated seizures; - 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; - the difference between disbursements of foreign credits to the general government (including on-lent project loans to public enterprises) and amortization of those foreign credits; - the net sales of SDR allocation in the SDR department; - the net change in general government deposits in nonresident banks or other nonresident institutions; - net proceeds from any promissory note or other financial instruments issued by the general government. - All flows to/from the budget in foreign currency will be 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. ### Cash deficit — adjustors and automatic mechanisms - Automatic adjustor for external project loans (cumulative proceeds, in hryvnia evaluated at actual exchange rates): - If cumulative proceeds exceed program projections, the ceiling will be adjusted upward by 100 percent of the excess. - If cumulative proceeds fall short of program projections, the ceiling will be adjusted downward by 100 percent of the shortfall. - Ceiling is subject to automatic downward (upward) adjustment by 100 percent of the amount of budget support grants received in excess (in shortfall) of program amounts. - Table C. Ukraine: External Financing of General Government Projects and Budget—Adjustment (Cumulative flows from January 1, 2020 and January 1, 2021, in millions of hryvnia) - End-December 2021: External project financing 17,000; Budget support grant 1,254 - End-March 2022: External project financing 6,400; Budget support grant 402 - Ceilings are subject to an automatic adjustor corresponding to the full amount of government bonds issued for banks recapitalization and DGF financing, up to: - a cumulative maximum UAH 8.5 billion from January 1, 2021, and - a cumulative maximum of UAH 17 billion from January 1, 2022. - The amount included in the targets is zero; indicative cumulative amounts for bank recapitalization/DGF financing are presented in Table 1 of the MEFP. - Ceiling 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. - Definition excludes unpaid pensions to individuals who resided or continue to reside in territories temporarily outside government control. - Ceiling will be adjusted downward by the full amount of any increase in the stock of VAT refund arrears as defined in section F. - Ceiling is subject to an automatic downward adjustment corresponding to the full amount of profits transferred by the NBU in excess of UAH 13.6 billion. - Ceiling 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 of monitoring fiscal performance, including the adjustors, can be revisited in agreement with IMF staff. ### Ceiling on Cash Deficit of the General Government and Naftogaz — definition and adjustors - The cash deficit of the general government and Naftogaz equals 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 the sum of: - net domestic banking system credit to the company (all financing in either domestic or foreign currency extended to the company by banks less the change in company deposits in the banking system); - difference between disbursements of private foreign loans to Naftogaz (including private placements) and amortization of those loans; - difference between disbursements of official foreign credits to Naftogaz (including project loans) and amortization of those credits; - disbursements of trade credits to import gas; - difference between disbursements and amortization on any bonds issued by Naftogaz; - net change in deposits of Naftogaz in nonresident banks or other nonresident institutions; - net proceeds from any promissory note or other financial instruments issued by Naftogaz; - net receipts from sale of financial assets (including recapitalization or other form of treasury securities issued to Naftogaz, irrespective of issuance date); - any other forms of financing of the company not identified above. - All foreign currency flows for Naftogaz are accounted in hryvnias at the official exchange rate as of the date of the transaction; when arrears outstanding as of the test date exist, the official exchange rate on the test date applies to their valuation. - Adjustors: - All adjustors specified in section D for the general government cash deficit also apply to the general government component of this ceiling. - The ceiling will be adjusted upward by the amount Naftogaz’s investment expenditure exceeds 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) - Ceiling on the stock of active VAT refund arrears is set to UAH 0 billion. - Stock of active VAT refund arrears is defined as claims not settled (through cash refund, netting, VAT bond, or official rejection) within 74 days after the VAT refund claim has been submitted to the State Tax Service (STS). - Ceiling on the change of overpaid Corporate Profit Tax is set at 0 million UAH. - Overpaid Corporate Profit Tax is amounts remitted in excess of what was due for that date. - Change measured cumulatively from January 1, 2021. ### Ceiling on State Budget Primary Spending and Consolidated Spending of Social Funds (Indicative Target) - Ceiling 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 monthly treasury report (Kv_1ek) adjusted for Ukravtodor debt repayment and on information provided by the extra budgetary funds. - Ceiling 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 defined as payments not made 30 days after they are due). ### Ceiling on Accumulation of New External Debt Payments Arrears (Continuous PC) - Arrears are defined as external debt obligations of the government that have not been paid when due in accordance with contractual terms (taking into account contractual grace periods). - This PC excludes arrears on external financial obligations of the government subject to rescheduling. ### Ceiling on Publicly Guaranteed Debt (Performance Criterion) - Applies to amount of guarantees issued by the central (state) government once officially enacted following the respective decision of the Ministry of Finance, with IMF staff notification. - Official exchange rate applies to all non-UAH denominated debt. - Excludes guarantees issued by the Ministry of Finance for NBU borrowings from IMF. - Automatic upward adjustor for guarantees signed for selected projects financed by the EIB and the EBRD (specified project list); adjustor capped at UAH 21 billion. ### Ceiling on the stock of arrears of the “Guaranteed Buyer” to the Renewable Energy Sector (Performance Criterion) - Defined as the stock of the state-owned Guaranteed buyer’s overdue trade accounts payable to electricity producers from the Renewable Energy Sector (RES) as a whole. - Ceiling is fixed at UAH 0 billion. - Adjustment mechanisms: - Adjust upward by the difference in percent, if positive, between the actual average UAH/EUR exchange rate over the reference period and a predetermined threshold, multiplied by a sensitivity factor of 51.4 for yearly data and 12.85 for quarterly data. - Predetermined threshold: 33 UAH per EUR. - Adjust by the difference in percent, if positive, between the actual output volume of RES in GWh over the reference period and a predetermined threshold, multiplied by a sensitivity factor of 24.8 for yearly data and 6.2 for quarterly data. - Predetermined thresholds: 12,600 GWh for 2021 (test date: end-December 2021) and 3,000 GWh for the first quarter of 2022 (test date: end-March 2022). ### Other Continuous Performance Criteria - During the Stand-By Arrangement, Ukraine will not: - impose or intensify restrictions on the making of payments and transfers for current international transactions; - introduce or modify multiple currency practices; - conclude bilateral payments agreements that are inconsistent with Article VIII; - impose or intensify import restrictions for balance of payments reasons. ### Official Exchange Rate — determination and publication - 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 the number of transactions to be taken into account for the calculation is by noon 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. *Source: 1ukrea2021001 - 10. Net domestic assets (NDA) of the NBU are defined as the difference between the monetary* ### 31. By end-October 2021, all heating tariffs under the jurisdiction of local authorities are ### 1ukrea2021001 - 31. By end-October 2021, all heating tariffs under the jurisdiction of local authorities are ### Heating tariffs review (paragraph 31) - By end-October 2021, all heating tariffs under the jurisdiction of local authorities are reviewed and officially enacted to fully reflect gas and non-gas costs (including capex). ### IV. REPORTING REQUIREMENTS — A. National Bank of Ukraine (paragraphs 32–64) - 32. 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). - 33. The NBU will provide to the IMF, on a weekly basis, daily operational data the stock of net and gross international reserves, at both actual and program exchange rates. In addition, it will provide the full breakdown of NBU accounts included in net international reserves (defined in Table A above) any additional information that is needed for the IMF staff to monitor developments in net and gross international reserves. On a monthly basis, no later than 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. - 34. 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 in the breakdown agreed with the IMF staff. In this context, it will also provide the results of any foreign exchange auctions. On a quarterly basis, the NBU will provide to the IMF information on the indicators of FX interventions approved by the NBU Board. The IMF is to be notified immediately of any updates to the FX interventions methodology documentation and any decisions that define these parameters. - 35. The NBU will provide the IMF daily information on balances held in the analytical accounts 2900 “Accounts payable per transactions for the foreign exchange, banking and precious metals purchase and sale on behalf of banks’ clients.” - 36. 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). - 37. 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). - 38. The NBU will provide to the IMF its financial statements (income and expenses, balances on the general reserves and the calculations of the profit distribution to the budget) for the current and, if available, projections for the following two years, as approved by the NBU’s Board. The IMF is to be notified immediately of any update. - 39. 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. It will also 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). On a monthly basis, the NBU will also provide bank-by-bank information on NBU refinancing, broken down by operations (with indications of their settlement and maturity dates), and collateral pools, broken down by asset types and securities (with their values before and after haircuts). The weekly and monthly reporting of NBU loans and collateral will separately identify which banks are under temporary administration or liquidation. - 40. The NBU will provide to the IMF, on a monthly basis but not later than 30 days after the expiration of the reporting month, the report on the banking sector indicators in the format agreed with the IMF staff. The NBU will also 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. - 41. On a daily basis and on a monthly basis, 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), the NBU will provide the IMF with the depository corporations surveys, including any additional information that is needed for the IMF staff to monitor monetary policy and developments in the banking sector, in particular: net domestic assets, including NBU loans and liabilities with banks and detailed information on loans of the banking sector provided to the general government, with detailed breakdown of this information by indebtedness of the central (state) government and local budgets and the DGF, including in national and foreign currency, by loan and by security, as well as the information on the balances of the funds of the government held at the NBU, in particular, the balances of the Single Treasury Account denominated in the national currency (account 3240 A) and the funds of the Treasury denominated in foreign currency (account 3513 A) and DGF. - 42. The NBU will provide to the IMF, on a monthly basis, projections for external payments falling due in the next 12 months. The data on actual settlement of external obligations, reflecting separately principal and interest payments as well as actual outturns for both the public and private sectors, shall be provided on a quarterly basis, within 80 days following the end of the quarter. - 43. The NBU will provide to the IMF, on a quarterly basis, the stock of short- and long-term external debt for both public and private sectors. Information on the stock of external arrears will be reported on a continuous basis. - 44. The NBU will provide to the IMF, on a daily basis, data on foreign exchange export proceeds and foreign exchange sales; data on import transactions for goods and services; data on amounts of foreign exchange transferred from abroad to the benefit of physical persons—residents and nonresidents—to be paid in cash without opening an account; data on foreign exchange wires from Ukraine abroad for current foreign exchange nontrade transactions on the basis of the orders of physical persons; data on sales and purchases of foreign exchange cash by individuals (incl. through banks, exchange offices, and UkrPoshta). The NBU will provide to the IMF weekly data on the volumes of noncash foreign exchange purchases on behalf of banks’ clients and banks broken down by reasons, and on a monthly basis data on certain transfers of non-cash FX from Ukraine to the benefit of non-residents. The NBU on a monthly basis will provide to the IMF 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. - 45. The NBU will provide to the IMF, on a daily basis, data on foreign assets and liabilities of the overall banking system (excl. the NBU); data on banks’ open foreign exchange positions by main groups of banks; data on deposits on the aggregated basis for the overall banking system (excl. the NBU) broken down by households and legal entities, maturity, as well as by national and foreign currency; data on loans on the aggregated basis for the overall banking system (excl. the NBU) broken down by households and legal entities as well as by national and foreign currency. In addition, the NBU will provide to the IMF, on a daily basis, data on deposits and credits on the aggregated basis for the overall banking system (excl. the NBU) without deposits and credits of banks in liquidation starting from the beginning of 2014 and broken down by households and legal entities, as well as by national and foreign currency. On a weekly basis, the NBU will provide the IMF data on foreign assets and foreign liabilities (broken down by domestic and foreign currency) for the individual banks in State Participation Group, Foreign Banking Group and Private Capital Group. On a monthly basis, foreign assets will be broken down by type (i.e., cash and deposits, government securities, nongovernment securities, loans, other) and foreign liabilities by type, holder (i.e., banks, other financial institutions, nonfinancial corporate, and individuals) and remaining maturity (less than one month, one to three months, three to 12 months and over 12 months). For foreign credit lines from banks and for securities, the rollover rates will also be provided. - 46. The NBU will provide, on a daily basis, bank-by-bank data for the largest 35 banks on the liquidity ratio and amounts of cash and cash equivalents, available funds in NBU accounts (excl. reserve requirements), correspondent accounts with well-known international banks (excl. encumbered accounts), and deposits from customers. The NBU will also provide, on a daily basis, bank-by-bank data for State Participation Group, Foreign Banking Group, and Private Capital Group banks, total assets and liabilities; loans and claims (by households, legal entities, and banks); and foreign exchange net open position. The data will be reported by domestic and foreign currency. The deposits data will be reported by households and legal entities and by maturity (current accounts, saving accounts, and time deposits). In addition, for the aggregate of the banking sector as well as groups of banks, the NBU will provide data on deposits and credits excluding those banks in liquidation since 2014. The NBU will provide, on a monthly basis, bank-by-bank data on liquidity coverage ratio in all currencies and in foreign currency. - 47. The NBU will provide to the IMF on a daily basis aggregated data on main currency flows, including government foreign receipts and payments by currencies as well as interbank market operations by currencies. The NBU will continue to provide daily information on exchange market transactions including the exchange rate. - 48. The NBU will provide the IMF with information on reserve requirements. - 49. The NBU will provide the IMF, on a monthly basis, bank-by-bank for State Participation Group, Foreign Banking Group and Private Capital Group banks the average interest rate on deposits to customers (by domestic and foreign currency, and non-financial corporations and households, and by maturity—demand and time accounts); and on a weekly basis, the average interest rate on interbank borrowings (by domestic and foreign currency, and by maturity—overnight, 1–7 days, and over one week). - 50. The NBU will provide the IMF, on a two weekly basis, in an agreed format, data for the entire banking sector, and on an aggregated and bank-by-bank basis 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 for the excess of long-term asset to funding and foreign exchange open position; total regulatory (Tier 1 and Tier 2) and core (Tier 1) capital; capital adequacy ratio for total regulatory (H2) capital 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; and 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. - 51. The NBU will provide the IMF, on a monthly basis, in an agreed format, data for the entire banking sector and on a bank-by-bank basis for State Participation Group, Foreign Banking Group and Private Capital Group banks the amount of loans and claims (by households in domestic and foreign currency, legal entities in domestic and foreign currency, banks in domestic and foreign currency, maturity, and by borrower classification categories); collateral for loans and claims (by type of collateral, legal entities in domestic and foreign currency, households in domestic and foreign currency, banks in domestic and foreign currency, and by borrower classification categories; provisions on loans and claims (by households in domestic and foreign currency, legal entities in domestic and foreign currency, banks in domestic and foreign currency, and by borrower classification categories); large exposures (loans equal to or greater than 10 percent of equity), refinanced loans, and restructured loans (by households, legal entities, and banks); the average interest rate on 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). - 52. The NBU will provide the IMF, on a monthly basis, in an agreed format, bank-by-bank for the State Participation Group, Foreign Banking Group and Private Capital Group banks the amount of deposits of related parties (by domestic and foreign currencies, and households and legal entities); deposits of related parties pledged as (cash cover) collateral (by domestic and foreign currencies, and households and legal entities); other liabilities to related parties (by domestic and foreign currencies); related-party loans (by households, legal entities, and banks); counterparty names and amounts of the largest 20 loans to related parties; collateral for loans and claims on related parties (by type of collateral, legal entities, households, and banks in domestic and foreign currencies, as well as by borrower classification categories); provisions on loans and claims on related parties (by households, legal entities, and banks in domestic and foreign currencies, as well as by borrower classification categories). - 53. The NBU will provide to the IMF, on a monthly basis, aggregate and bank-by-bank and by region data on loans and provisions (by households and legal entities, domestic and foreign currencies, and by debtor classification categories); deposits (by households and legal entities, and domestic and foreign currencies); due from banks (by domestic and foreign currencies). - 54. NBU will report to the IMF, on a monthly basis, data for each of the banks in the State Participation Group, showing nonperforming loans (NPLs) compared with their timebound plans for reducing NPLs, including migration from NPLs to performing loans (PLs); migration from PLs to NPLs; the form of NPL repayments (cash, loan sales, collateral sales, etc.); write-offs; and other factors (e.g., exchange differences and revaluations). - 55. The NBU will report to the IMF, on a monthly basis, data for the entire banking sector as well as on a bank-by-bank basis by bank groups for State Participation Group, Foreign Banking Group and Private Capital Group banks on cumulative income statements, including total revenues; interest revenues (from loans to households, loans to legal entities, interbank loans, placements with the NBU, securities); revenues from fees and commissions; total expenses; interest expenses (on deposits to legal entities, deposits to households, interbank borrowing, borrowing from NBU, securities issued); fees and commissions paid; salaries and other staff compensation; other operational expenses; net earnings before loan loss provisions; loan loss provisions; net earnings after loan loss provisions; taxes paid; net earnings. - 56. Upon request, the NBU will provide to the IMF banks’ net expected outflow of cash for a 30-day period. - 57. The NBU will report to the IMF on a bi-weekly basis and bank-by-bank the amount by which the State Participation Group, Foreign Banking Group and identified Private Capital Group banks' regulatory capital has been increased. The report will disclose the instrument or transactions by which the regulatory capital has been increased (e.g., capital injection, conversion of subordinated debt to equity, etc.) - 58. The NBU will, once a month, inform the IMF any regulatory and supervisory measures against banks violating the NBU regulations on capital adequacy, liquidity ratio norm, large exposures, and related or connected lending, as well as about decisions on declaring a bank as problem or insolvent. - 59. The NBU will continue to provide detailed quarterly balance of payments data in electronic format within 80 days after the end of the quarter. - 60. The NBU will inform IMF staff if the Treasury does not pay interest or principal on domestic government bonds due to the NBU, deposit money banks, or nonbank entities and individuals. In such case, the NBU will provide information on outstanding interest and principal payments. - 61. The NBU will inform IMF staff of any changes to reserve requirements for other depository corporations. - 62. The NBU will communicate (electronically) to the IMF staff any changes in the accounting and valuation principles applicable to the balance sheet data and will notify the staff before introducing any changes to the Charts of Accounts and reporting forms of both the NBU and the commercial banks. - 63. The NBU Internal Audit Department will continue to provide an assurance report to the Fund, no later than six weeks after each test date, confirming that (i) the monetary data are in accordance with program definitions and have been verified and reconciled to accounting records; and (ii) that there have been no changes to the chart of accounts or valuation methods that would impact the data reporting. - 64. The NBU will continue to provide the IMF with a copy of the annual management letter from the external auditor within six weeks of completion of each audit. As required under the Fund's safeguard policy, this will remain in effect for the duration of the arrangement and for as long as credit remains outstanding. *IMF staff summary of paragraphs 31–64 of the source content.* ### 65. Monthly, the NBU will provide to the IMF data on the monthly coupons and principal to be ### 1ukrea2021001 - 65. Monthly, the NBU will provide to the IMF data on the monthly coupons and principal to be ### A. National Bank of Ukraine (NBU) - Monthly provision to the IMF of 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. - Data on resident banks to be further broken down by bank group: - State Participation, Foreign Banking, and Private Capital. - Annual provision of information on hryvnia-denominated securities that are indexed (i.e., to inflation; USD), broken down by the type of the owner. ### B. Deposit Guarantee Fund (DGF) - Monthly data on the total number and volume of household deposits broken down in groups by deposit size; reported bank-by-bank for the largest 35 banks and on aggregate for the remaining banks. - Monthly, bank-by-bank reporting for all banks in the banking system of: - amount of insured deposits and total household deposits; reported by domestic and foreign currency in an agreed format. - Monthly, bank-by-bank reporting of total insured deposits and remaining insured deposits to be paid by the DGF for banks under liquidation and under provisional administration; reported by domestic and foreign currency in an agreed format. - Monthly reporting of the financial position of the DGF, including: - cash balance, bond holdings, credit lines, and loans; reported according to an agreed format. - Monthly reporting of the financing arrangements of the DGF, including contracted financing from MoF; reported according to an agreed format. - Monthly one-year forecast of: - amount and type of financial resources expected to be received from MoF, NBU and other entities; - amount that DGF expects to pay out to insured depositors in banks in liquidation; - amount of asset recoveries expected by DGF; reported according to an agreed format. ### C. Ministry of Finance (MoF) and Treasury reporting - 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 to provide daily operational budget execution indicators, daily inflow of borrowed funds (by currency of issuance) to the state budget and expenditures related to debt service (interest payments and principals) including data on government foreign exchange deposits, in a format agreed with IMF staff, on a 10-day and monthly basis. - Monthly and quarterly treasury reports in electronic form no later than: - 25 days after the end of the month (monthly); - 35 days after the end of the quarter (quarterly). - Final fiscal accounts at the end of each fiscal year to be provided no later than March of the following year; reports to include expenditure data by programs and key spending units, and standard functional and economic classifications. Quarterly reports to include budget expenses to cover called government guarantees. - Quarterly reporting on the public wage bill (excluding SOEs) in line with the IMF-agreed template, including: - wage component of National Health Service (NHS) appropriation and wage component of higher education. - Monthly reports on borrowing (disbursements, interests, and amortization) of UrkAvtoDor in agreed format; monthly information on municipal borrowing and amortization of debt in format agreed with IMF staff. - Monthly reporting, no later than 15 days after the end of the month, of 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. - Monthly provision of the stock of all budgetary arrears 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. - Treasury to report monthly data on accounts payable for state and local budgets (economic classification of expenditures). - Pension Fund to provide monthly reports on net unpaid pensions to individuals who resided or continue to reside in territories temporarily outside government control. - Monthly information, no later than 25 days after the end of each month, on 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 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 submission, no later than 25 days after the end of the quarter, of: - (a) outstanding stock of domestic and external debt of the state and local budgets (including general and special funds); - (b) monthly forecasts of planned and actual external debt disbursement, amortization, and interest payments (including general and special funds), broken down by creditor categories and currency as agreed with Fund staff. - Reporting of accumulation of any budgetary arrears on external and domestic debt service. - Semi-annual electronic provision, no later than 25 days after the end of Q2 and Q4, of disaggregated bond-by-bond (loan-by-loan) data regarding debt stock, associated payments, and disbursements. - Monthly data on external and domestic credit to key budgetary spending units and nongovernment units guaranteed by the government, no later than 25 days after the end of the month. - Quarterly reporting (no later than 50 days after the end of each quarter; monthly for the Pension Fund) on: - approved budgets and operational data (daily for the Pension Fund only) on revenue, expenditures, arrears, and balance sheets of the Pension Fund, Fund for Social Insurance, Employment Fund, and any other extra budgetary funds managed at the state level; - detailed breakdowns of revenues and expenditures by main categories for these funds. - Within-year amendments to the budgets of these funds to be reported within a week after their approval. - Annual financial statements including final fiscal accounts of those funds at the end of each fiscal year, no later than April of the following year. - Monthly, no later than 15 days after the end of each month, data on budgetary costs associated with the recapitalization of banks and SOEs, including: - upfront impact on the cash deficit of the general government of recapitalization; - costs associated with the payment of interests, including respective changes as a result of supplementary budgets. - Quarterly performance reports for the State Financial Housing Company and for the Fund for Entrepreneurship Development. ### D. State Tax Service (STS) and State Customs Service (SCS) - STS to 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 format (table columns preserved): - 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. - STS and SCS to provide quarterly, no later than two months after the end of the quarter, a listing of all tax exemptions granted specifying beneficiary, exemption provided, duration, and estimated subsequent revenue loss for the current fiscal year. Revenues foregone include losses from simplified tax regime by groups of beneficiaries. - STS 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 ¶11 (unsettled VAT refund claims submitted to the STS more than 74 days before the end of period). - STS to 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. - STS to provide quarterly information, no later than 25 days after the end of each quarter, on the number of tax appeals and associated disputed amounts, and the number of internally resolved appeals indicating outcomes (in favor of controlling body, in favor of taxpayer, partial satisfaction). ### E. Ministry of Economy, NEURC, GTSO, Naftogaz, Ministry of Development of Communities and Territories - Naftogaz and GTSO to provide IMF staff monthly, no later than the 25th of the following month, electronic information (agreed format) on cash flows and deficit of Naftogaz Group and GTSO and separately for each entity, 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 main revenue, expenditure and financing items. - Naftogaz to provide monthly updated information on the company’s financial liabilities, with a schedule of loan-by-loan interest and principal payments. - Ministry of Development of Communities and Territories to provide quarterly information with breakdown by district heating companies regarding levels of tariffs for: - heat energy for households, centralized heating services and centralized hot water supply to households. - National Commission for State Energy and Public Utilities Regulation to provide aggregated quarterly information on the number of residential gas consumers who have changed their supplier of gas. - NJSC Naftogaz to report weekly data on Naftogaz daily market purchases and sales of foreign exchange. - Ministry of Economy, Trade and Agriculture to provide quarterly, no later than 80 days after the end of each quarter, consolidated information from 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. - Report to include number of all SOEs (a) making profits, (b) making loss or (c) balanced with aggregated financial results for each group. ### F. Ministry of Energy - Monthly provision to IMF staff of actual volume of electricity output of RES and the stock of arrears from the Guaranteed Buyer to RES as defined in section I. J. ### G. State Statistics Service (SSS) - In case of any revisions of gross domestic product, SSS to provide revised quarterly data on GDP (nominal, real, deflator) and their components (economic activities, expenditure, income) no later than 10 days after any revisions have been made. ### H. Ministry of Social Policy - Monthly collection and submission to IMF staff of data on HUS and privileges for energy consumption in an agreed excel format showing for each program: - (a) number of households which applied for HUS; - (b) number of approvals extended to such HUS applications; - (c) number of household-recipients of HUS and privileges in the reporting month; - (d) total value of transfers; - (e) total value of outstanding HUS debt; - (f) number of refusals extended to such applications; - (g) income per capita of participants, both for HUS and privileges; - (h) number of household members; - (i) main reason for refusal for HUS applications (e.g. lack of residency information). - Data to be presented overall, by region and for rural/urban areas. ### I. National Agency for Prevention of Corruption (NAPC) - Quarterly publication on a public website, no later than the end of the month following the quarter, of data on action taken regarding asset declarations of high-level officials in the specified tabular formats: - Table 1. Number of Full Verifications of Asset declarations by the NAPC (Article 50 Law on Prevention of Corruption) with categories including Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others. - Table 2. Reports sent by the NAPC to NABU with categories and counts for absence of declaration and false declaration. ### J. National Anti-Corruption Bureau (NABU) - Quarterly publication on a public website, no later than the end of the month following the quarter, of data on the number of persons indicted in the format: - Table 3. Number of Persons Indicted by Penal Code Article and by categories: Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others (listing articles such as 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). ### K. High Anti-Corruption Court (HACC) - Quarterly publication on a public website, no later than the end of the month following the quarter, of data in specified tabular formats: - Table 4. Number of Persons Convicted and Acquittals—First Instance by Penal Code Article and categories (Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others). For fines, total value in UAH. For jail, total months (and suspended jail). - Table 5. Penalties Imposed on Persons Convicted - First Instance by Penal Code Article and categories, listing Fine and Jail columns. For fines, total value in UAH. For jail, total months (and suspended jail). - Table 6. Number of Persons Convicted and Acquittals—Final Decision by Penal Code Article and categories. For fines, total value in UAH. For jail, total months (and suspended jail). - Table 7. Number of Persons Convicted—Final Decision by Penal Code Article and categories with Fine and Jail columns. For fines, total value in UAH. For jail, total months (and suspended jail). *Source: Excerpt from the IMF document 1ukrea2021001.* ### 101. The State Financial Monitoring Service of Ukraine will continue to publish on a website freely ### 1ukrea2021001 - 101. The State Financial Monitoring Service of Ukraine will continue to publish on a website freely ### FIU reporting commitment - The 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 following format: - Table 8. Reports Sent by the FIU to NABU - Members of Parliament, Members of the Government, Judges, Prosecutors, Category A Civil Servants, SOE Managers, Others, Number of reports disseminated, Aggregated value of suspected money laundering ### Statement by Vladyslav Rashkovan, Alternate Executive Director for Ukraine (November 22, 2021) - Authorities’ overall position: - Thanked staff for constructive engagement, in-depth report, and technical assistance. - Reaffirmed commitment to policies and objectives of the economic program supported by the IMF under the current Stand-by Arrangement (SBA). - Requested completion of the first review, an extension of the program to June 30, 2022 and a rephasing of remaining purchases. ### COVID-19 status - Epidemiological figures: - As of November 17, 2021, about 3.26 million cases of COVID infections were registered in Ukraine, with more than 78 thousand deaths. - Vaccination progress: - Vaccinations started at the end of February 2021. - More than 12.44 million people have received the first dose of the vaccine. - 9.07 million people have received two doses of the vaccine (about 21.5 percent of the total population). - The speed of vaccination reached 1.6 million inoculations last week (relative to the statement date). - Public health response: - First strict lockdown in the second half of March 2020; several periods of relatively tight quarantine restrictions in November 2020, January, March-April and October-November 2021 across various regions. ### Economic developments during the pandemic - Pre-crisis fundamentals and 2020 outcome: - Real GDP was growing at a steady pace of around 3-4 percent per year prior to the crisis. - Inflation was close to the 5 percent target prior to the crisis. - 2020 real GDP decline: 4 percent (whole year). - 2020 current account: surplus of 3.3 percent of GDP (compared to a deficit of 2.7 percent of GDP in 2019). - 2021 performance and drivers: - Flash estimate: real GDP grew by 2.4 percent yoy in Q3’2021. - Expected real GDP growth at about 3-4 percent in 2021-2022 (supported by record-high grain harvest: 81mln tons this year, according to NBU forecast). - Wages (over January-September 2021): rose by 21.5 percent yoy in nominal terms and 11.3 percent yoy in real terms. - Investments returned to growth in annual terms in H1’2021. - Current account and external sector: - January – September 2021: current account returned to a deficit, driven by increase in reinvested earnings and record-high amounts of dividend repatriation. - International reserves and financing: - After sizable external debt repayments in Q3’2021, international reserves slightly declined by end-September year-to-date. - SDR allocation in August mitigated the decrease. - International reserves grew to USD 29.7 billion by end October, which corresponds to 92 percent of the IMF ARA metrics. - NBU continued FX purchases in the first half of November leading to further accumulation of reserves. - Future gross financing needs and elevated budget financing constraints in 2022 are still high. - Inclusion of Ukraine into the JPM GBI-EM Index starting from end-March 2022 may benefit the government’s debt strategy. ### Authorities’ policy response - Fiscal policy and budgetary measures: - Fiscal response focused on social support and economic recovery, reorienting expenditures towards healthcare, unemployment support, social support to vulnerable households and affected business, and scaling up public investment in roads. - MTBF: In July 2021, the government approved the Medium-term Budgetary Framework (MTBF) for three years until 2024. - Parliament approved the 2022 budget in the first reading with a deficit of 3.5 percent of GDP, consistent with MTBF targets and SBA objectives. - Ministry of Finance prepared a tax package of about 0.5 percent of 2022 GDP to provide additional fiscal space. - Authorities plan to implement additional transparent measures to protect vulnerable households without widening the 2021-2022 deficit. - Temporary and exceptional liquidity support to state-owned Naftogaz to address impact of extraordinary increases in gas prices. - Monetary policy and NBU actions: - NBU eased monetary policy in 2020, reducing the key rate by 750 basis points since the end of 2019. - Despite easing, inflation stood at 5 percent at the end of 2020. - Since tightening in March 2021, the NBU raised the key rate four times—in March, April, July, and September—by a tally of 250 bps, up to 8.5 percent. - From July 1, 2021, the NBU started to gradually phase out emergency monetary measures. - Inflation rose to 10.9 percent in October 2021, driven by higher global energy and food prices and robust consumer demand; natural gas prices peaked in June at 175.3 percent yoy. - Authorities implemented measures to protect vulnerable households from extraordinary increases in gas prices. - Financial sector measures and resilience: - Capital buffers temporarily deactivated at the start of the crisis; banks were recommended to refrain from paying dividends. - NBU ensured favorable regulatory conditions for loan restructurings; no substantial increase in NPLs accounted in banks’ balance sheets in 2021. - 2021 bank stress tests showed sector resilience; banks submitted recovery plans; NBU completed first round of comments. - Plans to integrate recovery plans into NBU’s Supervisory and Review Evaluation Process in 2022. - State-owned banks, privatization, and governance: - Principles of State Banking Sector Strategic Reforms aim to reduce state ownership from 50.4 percent in net assets to below 25 percent by 2025. - IFC granted a loan to Ukrgasbank in 2020. - EBRD conducted due diligence of Oschadbank in June 2021; authorities plan formal negotiations with EBRD regarding pre-privatization engagement. - Authorities advancing corporate governance reform for banks under state control and reducing legacy NPLs. - Deposit guarantee and asset recovery: - Legal amendments submitted to Parliament to restore the DGF’s solvency and make the state-owned Oschadbank a member of the DGF. - High-level working group chaired by the Prime Minister to boost asset recovery from former owners and related parties of failed banks. - Recently adopted legal amendments should strengthen the DGF’s toolkit for asset recovery. - Structural reforms and SOE/land market reforms: - Market of agricultural lands for individuals opened on July 1, 2021. - Legislation established for land turnover, data interoperability, public access to national spatial data infrastructure, and a digital hub for small & medium farmers to access credit and state support. - State Property Fund of Ukraine (SPFU) changed privatization process toward classic M&A routine procedures; standardized process, minimized post-privatization conditions, introduced virtual data rooms. - In 2021, SPFU organized about 2,000 online privatization auctions, primarily for small-size state enterprises. - Authorities will ensure SOEs operate at arm’s length by strengthening corporate governance framework, including maintaining majority-independent supervisory boards. - Anti-corruption and judicial reforms: - Authorities committed to good governance and rooting out high-level corruption, leveraging anti-corruption infrastructure built under previous IMF-supported programs. - On November 10, 2021 the Ethics Council of Higher Commission of Justice (HCJ) started operating. - The first composition of the six-member Ethics Council will have three independent experts with international judicial experience who will be given a decisive vote. - The Ethics Council will perform a one-off integrity check of existing HCJ members by end-April 2022 and will be engaged in assessing potential HCJ candidates’ integrity. ### Future policy outlook and risks - Monetary policy prospects: - NBU to monitor inflationary pressures and financial stability risks and continue implementing its inflation targeting roadmap by enhancing decision-making process, monetary instruments and communication. - NBU plans to adopt a roadmap to address regulatory gaps identified in a self-assessment against relevant Basel Core Principles. - Authorities fully committed to an institutionally strong and independent NBU. - Fiscal and structural priorities: - Continue strengthening fiscal framework to facilitate sustainable fiscal adjustment and improve predictability of fiscal policies. - Commitment to scale up priority capital expenditures within fiscal constraints. - Address large imbalances in the electricity sector via a new QPC aimed at reducing accumulated arrears to renewable energy investors. - Banking sector ownership targets: - Reduce state ownership in banking sector from 50.4 percent in net assets to below 25 percent by 2025. ### Concluding remarks - Assessment of policy effectiveness and requests: - Fiscal and monetary measures cushioned the economic effect of the pandemic; output contracted less than expected at the time of the program request. - High economic uncertainty, new waves of the pandemic and weak economic recovery amid growing macrofinancial and geopolitical risks call for support from official partners. - Authorities consider policies adequate to achieve macroeconomic and financial objectives of the current program and are ready to take additional measures if appropriate. - Authorities request completion of the first review, extension of the program to June 30, 2022 and rephasing of remaining purchases. *Source: 1ukrea2021001 - 101.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1ukrea2021001.pdf_