## _cr08384

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### 1. Banking-sector structure, risks, and scenario analysis
- Macroeconomic context and overheating
  - Average growth in excess of 7 percent since 2000; since 2005 real demand growth averaged about 15 percent.
  - By mid 2008:
    - Credit growth exceeded 70 percent.
    - CPI inflation exceeded 30 percent.
    - Wage growth settled in the 30–40 percent range.
    - Imports surged at an annual rate of 50–60 percent.
    - Current account deficit reached 7 percent of GDP by Q2 2008.
  - Terms-of-trade exposure:
    - Steel ~40 percent of exports and 15 percent of GDP.
    - Gas imports ~6 percent of GDP.
  - Terms-of-trade shock realized:
    - Price of steel declined by 65 percent since early July (2008).
    - Ukraine pays $180/tcm for gas imports (or $6.5 billion), versus an expected transit-adjusted European equivalent of $330/tcm in 2009.
  - Growth and sectoral effects:
    - Year-over-year GDP growth positive in September at 5.5 percent.
    - Growth through three quarters estimated at 6.9 percent.
    - Manufacturing contracting sharply: –5 percent in September (2008).

- External financing, market perceptions, and political environment
  - Ukraine effectively shut out of international capital markets; direct credit lines largely rolled over.
  - Sovereign CDS spreads about 2,300 bps; corporate EMBI spreads exceed 4,000 bps for some corporates.
  - Credit rating actions: Fitch and S&P downgraded Ukraine (negative outlook); Moody’s downgraded enterprises and placed the sovereign on negative outlook.
  - October 2008 banking confidence/FX episode:
    - At least $3 billion (4 percent of deposits) withdrawn during first three weeks of October after intervention in the sixth largest bank.
    - NBU injected some 2½ percent of GDP in liquidity since late August.
    - NBU intervention over $4 billion in October from reserves of $38 billion.
    - Hryvnia trading moved from Hrv/$4.55–$5.35 to around Hrv/$5.90.
    - Authorities introduced exchange controls (NBU Resolutions 319, 328 and 336).

- Banking-sector structure and built-up risks
  - Top 10 banks account for a market share of 50 percent; top 10 consist of 5 domestic and 5 foreign banks (including Raiffeisen, BNP Paribas, Unicredit, OTP and Alfa Bank).
  - Foreign banks enjoy cheaper funding due to higher ratings of parent banks.
  - Key metrics:
    - Loan-to-deposit ratio rose to 140 percent.
    - Over 63 percent of retail loans denominated in foreign currency, majority to unhedged borrowers.
    - Sectoral concentration: metal-related industries, trade and consumer business, and construction account for 72 percent of total loans.
    - Large external corporate debt rollover risk: $30 bn in 2009.
    - Mid-2008 bad loans (category 5) stood at 1 percent.
  - Stress scenario:
    - Under a drop in real GDP growth of 9 percentage points, nominal depreciation, high interest rates, and sharp drop in real prices, bad loans estimated to rise to 15 percent by end-2009.
    - Current capital buffers likely to be fully absorbed in such a scenario.
  - Estimated capitalization needs:
    - Required capital injection to return to minimum CAR levels estimated at about Hrv 78 bn, corresponding to over 8 percent of 2008 GDP.
    - Breakdown: Hrv 34 bn for domestic banks and Hrv 44 bn for foreign banks.
    - Equivalent in dollar terms cited elsewhere as at least 8 percent of 2008 GDP ($12 billion), including 4½ percent of 2008 GDP ($6–$9 billion) in recapitalization needs for foreign-owned banks.
  - Specific bank intervention need:
    - Authorities estimate financing need for the sixth largest bank (Prominvest Bank) of about Hrv 8 billion.

### 2. Authorities’ program: objectives, strategy, and policy measures
- Program objectives
  - Restore financial and macroeconomic stability and facilitate confidence.

- Financial-stability measures specified
  - Appropriate liquidity support and expansion of deposit guarantees.
  - Stronger bank resolution framework, including availability of public funds for recapitalization.
  - Stronger framework for resolution of household and enterprise sector debts.

- Macroeconomic policy adjustments supported by the program (MEFP ¶4)
  - Flexible exchange rate policy, supported by base money targets and appropriate intervention strategy.
  - Transition to inflation targeting (as a new nominal anchor).
  - Resetting incomes policy in line with targeted inflation, while protecting the most vulnerable.
  - Maintaining a prudent fiscal stance.
  - Bringing energy sector prices more in line with costs.

- Mitigating measures for output and financial stability risks
  - Fiscal contingency plans.
  - Private sector debt resolution measures.
  - Potential bank recapitalization scheme to support viable banks and shield the real economy from a credit crunch.

### 3. Program design, contingency response, and macro framework
- Program contingency responses (MEFP ¶7)
  - Upside risks (recovery of steel prices and/or resumption of capital inflows): higher reserve accumulation and adjustments to monetary policy.
  - Downside risks (substantial undershoot of commodity prices or longer loss of access to capital markets): rely on flexible exchange rate and funds available for bank recapitalization.
  - Authorities indicated readiness to take additional measures if needed.

- 2009 macroeconomic assumptions and targets (MEFP ¶5–6)
  - Projections assume a global recession, continued deleveraging, and a Ukrainian recession with deteriorating exports and limited external finance.
  - Projected impact on output: a 3 percent decline in 2009.
  - Projected inflation: 17 percent for 2009.
  - Current account: projected to compress to about 2 percent of GDP.
  - Medium-term outlook (assumes global recovery in second half of 2009):
    - Potential growth rate by 2011: 5–6 percent.
    - Inflation could return to 5–7 percent by late 2011.
    - Current account deficits small in 2010 and moderate thereafter.

### 4. Monetary and exchange rate policy (MEFP ¶8–11)
- Flexible exchange rate regime
  - Authorities introduced first steps toward a managed float in March 2009; NBU eliminated reference to a band and aligned official rate with market rates.
  - Interventions at non-market rates to be discontinued; focus on pre-announced regular auctions guided by NIR targets.
  - Importance of avoiding disorderly exchange market developments and eliminating exchange controls as soon as possible (MEFP ¶9).

- Near-term monetary anchor and operations
  - Base money to become near-term anchor until inflation targeting can be implemented (full IT not realistic before 2010).
  - 2009 focus: enhance NBU independence, strengthen NBU financial flexibility, improve public communications.
  - Monetary base targets provide an inflation anchor; base money demand to be revisited during program reviews.

- Monetary policy stance (MEFP ¶10)
  - Policy to shift to a tighter stance as excess liquidity is removed.
  - Current NBU deposit interest rates: 6–10 percent.
  - Refinance rate stands at 15 percent; inflation objective of 17 percent called for an increase in the refinance rate when financial stability considerations permit.
  - Operational measures recommended:
    - Make deposit auctions more regular and focused around one maturity (perhaps two weeks).
    - Restore reserve requirements (i.e., no longer counting cash in vault).
    - Technical assistance requested on monetary operations.

### 5. Financial sector policy and bank resolution (MEFP ¶12–13)
- Near-term confidence measures
  - Maintain wide range of admissible collateral for repo operations; phase out bank shares rapidly from collateral list.
  - NBU monitors daily banks’ liquidity positions and provides liquidity as needed.
  - Bank recapitalization program expected to improve collateral profile and lead to additional NBU refinancing.

- Deposit insurance and supervision
  - Ukrainian scheme covers retail deposits only.
  - Authorities increased deposit insurance coverage from Hrv 50,000 to Hrv 150,000 (about €20,000), with additional resources for the Deposit Insurance Fund.
  - This implies coverage of about 99 percent of individual accounts.
  - MoUs with six home supervisors being concluded for large foreign-owned banks; NBU to monitor parent bank funding and develop joint contingency plans.

- Prominvest Bank and diagnostic/recapitalization strategy
  - Prompt resolution of Prominvest Bank (sixth largest) under temporary administration is key.
  - Options: sale to private investor or merger with a state-owned bank; financing options discussed with EBRD and IFC.
  - Comprehensive bank resolution strategy:
    - Diagnostic study of large and systemically important banks coordinated with reputable audit firms; final TORs to be designed jointly with IMF and World Bank teams.
    - Diagnostic to be completed for systemically important banks by December 15, 2008.
    - Recapitalization of viable banks to commence in Q1 2009: viable banks to inject capital; public recapitalization funds available conditional on acceptable business plans; insolvent/nonviable banks nationalized or liquidated.
    - Legal framework amended to allow temporary administration, purchase and assumption, sale, and reduction of shareholders’ equity to absorb losses.
  - Authorities agreed to adopt international best practices for disclosure of detailed bank-by-bank financial information.

### 6. Fiscal policy, incomes, and energy reforms (MEFP ¶14–15, Attachment I)
- Fiscal targets
  - 2008 deficit: 1 percent of GDP.
  - 2009: balance (zero overall balance).
  - Targets assume limited scope for 2008 adjustment and financing constraints; staff views targets as attainable even with social spending increase of 0.8 percent of GDP.

- Incomes policy
  - Implementing existing plans would have led to:
    - 33 percent increase in the minimum wage.
    - 20–34 percent increases for pensions and other social payments.
  - Authorities’ objective: deliver growth of incomes in line with inflation to protect population while allowing competitiveness gains; avoid higher inflation and depreciation from unsustainable real wage imbalances.

- Energy pricing reform
  - Consumers currently pay 10–40 percent of international gas price; Ukraine among least energy-efficient.
  - Plans:
    - Phase out direct subsidy over three years.
    - Phase out indirect subsidy by mid-2010.
    - Announced a 35 percent price increase for December 1 to signal determination.
    - Reform regulatory framework to reduce political influence, in consultation with World Bank.
  - Projected impacts:
    - Add about 1 point to CPI inflation in 2008, and about 4 percent in 2009.
    - Reduce fiscal subsidy by 0.4 percent of GDP in 2009.

- Social safety nets and expansion options
  - Unemployment insurance covers about 20 million people; minimum benefit about 60 percent of minimum wage.
  - Housing and utility allowances available to those spending over 20 percent of income (15 percent for pensioners).
  - Lifeline gas tariffs cover half the population.
  - Income support to poor households: 200,000 beneficiaries; World Bank considers it well targeted and expandable.

### 7. External financing requirements, SBA request, and exceptional access
- Gross financing requirements and gaps (staff estimates)
  - With debt amortizations totaling some $40 billion (including $13½ in trade credits), gross external financing requirements would be about $64 billion in 2009 and only slightly less in 2010.
  - Key table highlights (Gross external financing requirements, in millions of U.S. dollars):
    - 2006: 26,771; 2007: 40,027; 2008: 54,463; 2009: 63,829; 2010: 62,226.
    - Amortization of private sector debt: 2009: 38,172.
    - Available financing: 2009: 44,769.
    - Implied rollover rate (percent): 2009: 85.
    - Remaining financing gap = net use of fund resources: 2009: 10,077.
    - Gross Reserves (US$ million): 2009: 30,727.
  - In 2009 aggregate debt rollover would be 85 percent, a sharp drop from previous years.

- Stand-By Arrangement (SBA) request and exceptional access
  - Authorities requested a two-year Stand-By Arrangement in the amount of SDR 11 billion (802 percent of quota).
  - Purpose: contribute to covering Ukraine’s balance of payments needs and rebuild gross international reserves to cover at least 75 percent of short-term debt obligations.
  - Staff proposes exceptional access on SBA terms given capital account crisis plus massive terms-of-trade shock and banking sector problems.

- Assessment against exceptional access criteria (Box 4)
  - Criterion 1: exceptional balance of payments pressure in the capital account — met.
  - Criterion 2: sustainable debt position — staff preliminary calculations indicate high probability debt remains sustainable; total external debt about 50 percent of GDP in 2008.
  - Criterion 3: access to private capital markets — reasonable prospects to regain access by mid 2010.
  - Criterion 4: strong policy reform program — authorities commit to strong upfront measures; core elements explained to leaders of main political parties.

### 8. Program phasing, conditionality, and safeguards
- Phasing and purchases (Table of Reviews and Purchases)
  - November 2008 — SDR 3,000 — 218.7 percent of quota (Board approval)
  - First Review 15 February 2009 — SDR 1,250 — 91.1 percent of quota
  - Second Review 15 May 2009 — SDR 2,500 — 182.2 percent of quota
  - Third Review 15 August 2009 — SDR 750 — 54.7 percent of quota
  - Fourth Review 15 November 2009 — SDR 2,000 — 145.8 percent of quota
  - Fifth–Eighth Reviews (2010) — each SDR 375 — 27.3 percent of quota
  - Total — SDR 11,000 — 802 percent of quota

- Prior actions (selected)
  - A1. Implement a flexible exchange rate regime (abolish band; define official rate as preceding day’s market rate).
  - A2. Issue Law or Decree laying out terms of financial support to banks.
  - A3. Legal amendments authorizing NBU to undertake bank resolution processes.
  - A4. Finalize resolution of Prominvest Bank.

- Performance criteria and structural benchmarks (selected)
  - B1. Complete diagnostic study by December 15, 2008 covering NBU’s group 1 banks.
  - B2. Resolve all problem banks by end June 2009.
  - B3. Pass a 2009 Budget consistent with general government deficit target of zero overall balance (end-April 2009).
  - B4. Cancel the foreign exchange transactions tax (end-April 2009).
  - B5. NBU to adopt framework for publication of detailed bank-by-bank financial information (end-January 2009).
  - B6. Strengthen NBU independence (end-June 2009).

- Monitoring and safeguards
  - Quarterly quantitative performance criteria and structural performance criteria/benchmarks.
  - Quantitative criteria include ceiling on base money, ceiling on general government cash deficit, floor for net international reserves.
  - Reserve coverage target: 70–75 percent reserve coverage of short-term debt for 2009.
  - An updated safeguards assessment to be completed by the first review; NBU external auditors to provide documentation as needed.

### 9. Risks, stress tests, and debt sustainability
- Public and external debt sustainability analyses consider shocks:
  - Growth shock, primary balance shock, interest rate shock, real depreciation, contingent liabilities (e.g., one-time real depreciation of 30 percent and 20 percent of GDP shock).
- Program risks highlighted
  - Financing gaps due to debt rollover complications.
  - Global deleveraging and uncertain market access.
  - Depth and duration of capital account pressures.
  - Sensitivity to energy price assumptions: e.g., placing energy prices at $50 per barrel would allow rollover rate as low as 75 percent and gross financing around $40 billion while maintaining same financing gap.

### 10. Staff appraisal and recommendation
- Staff finds Ukrainian economy and banking system hit very hard by sharp decline in steel prices and reversal of capital flows; vulnerabilities include high inflation, high short-term external debt relative to reserves, high bank exposure to foreign funding, balance sheet mismatches, and weak fiscal position.
- Program strategy: two-year program to restore financial and macroeconomic stability via exchange rate flexibility, monetary tightening, banking sector recapitalization/resolution, and prudent fiscal stance.
- Expected outcomes with resolute implementation:
  - Restore growth to estimated potential by mid-2011.
  - Bring inflation back into single digits in late 2010.
  - Keep external deficits manageable; preserve international reserves at safe levels.
- Staff supports the authorities’ request for an arrangement in the amount of SDR 11 billion.

### 11. Selected key statistics and projections (highlights)
- Nominal GDP (billions of hryvnias): 2004: 345; 2005: 441; 2006: 544; 2007: 713; 2008 (Proj.): 993; 2009 (Proj.): 1,112.
- Real GDP (percent change): 2004: 12.1; 2005: 2.7; 2006: 7.3; 2007: 7.6; 2008 (Proj.): 6.0; 2009 (Proj.): -3.0.
- Consumer prices (end of period): 2008 (Proj.): 25.5; 2009 (Proj.): 17.0.
- Unemployment rate (ILO; percent): 2008 (Proj.): 6.0; 2009 (Proj.): 9.5.
- Public debt (percent of GDP, end period): 2008 (Proj.): 10.6; 2009 (Proj.): 17.4.
- Gross reserves (end of period, US$ billion): 2008 (Proj.): 31.4; 2009 (Proj.): 30.7.
- Current account balance (percent of GDP): 2008 (Proj.): -6.2; 2009 (Proj.): -2.0.
- Financial sector indicators (selected):
  - Regulatory capital to risk-weighted assets (percent): Sep-08: 13.6.
  - NPLs to total loans (percent): Sep-08: 14.5.
  - Loans in foreign currency to total loans (percent): Sep-08: 51.2.
  - Foreign currency loans to foreign currency deposits (ratio): Sep-08: 269.2.
- Gross external financing requirement (US$ million): 2009 (Proj.): 63,829 (from table earlier) and gross external financing need (in billions of US$) 2009 (Proj.): 34.4 (Table 11 memorandum items).
- Proposed Fund access indicators:
  - Proposed Arrangement: SDR 11,000 million; Proposed average annual access: 401; Total access in percent of quota: 802; Total access in percent of GDP: 8.7; Total access in percent of Gross international reserves: 52.

### 12. Risks to the Fund and prudential considerations
- Proposed access would far exceed previous arrangements with Ukraine and exceed annual and cumulative limits.
- If fully disbursed, outstanding use of Fund resources would reach over 800 percent of quota and account for:
  - Outstanding use rising from about 5 percent of quota to over 200 percent after first drawing.
  - Ukraine’s outstanding use of Fund resources would be 2.5 percent of GDP after first purchase and 11.5 percent of GDP if fully disbursed.
  - Fund GRA credit outstanding to Ukraine would peak in 2010 at SDR 11,000 million (801.8 percent of quota).
  - Fund credit to Ukraine as percent of gross international reserves: 2009: 48.4; 2010: 49.4.
  - Ukraine's projected debt service to the Fund would peak in 2013 at about SDR 5 billion; debt service to the Fund would be over 70 percent of public external debt service in 2012 and over 80 percent in 2013.
- Prudential and burden-sharing risks
  - Charges on new GRA obligations (~SDR 250 million over next year) exceed Fund’s estimated residual burden-sharing capacity.
  - Proposed arrangement would reduce one-year forward commitment capacity (FCC) by SDR 11 billion (about 9 percent reduction).

### 13. Executive decision and implementation priorities
- Executive Board approved a two-year SBA for SDR 11 billion (about US$16.4 billion) with immediate disbursement SDR 3 billion (about US$4.5 billion) under Emergency Financing Mechanism.
- Implementation priorities:
  - Reinforce financial sector stabilization: pre-emptive bank recapitalization, diagnostic studies, resolve problem banks, strengthen supervision and cross-border cooperation.
  - Monetary tightening as liquidity pressures abate; base money targets as near-term anchor; transition to inflation targeting and strengthen NBU independence.
  - Phase out exchange controls and adopt transparent FX intervention strategy.
  - Fiscal consolidation via expenditure restraint and energy tariff adjustments while protecting vulnerable groups through targeted social safety nets.
  - Coordinate international support (World Bank, EBRD, bilaterals).

*Source: IMF staff report — cr08384 (excerpted content provided).*

### 1. Banking-Sector Structure, Risks, and Scenario Analysis ......................................................8

### 1. Banking-Sector Structure, Risks, and Scenario Analysis

### Macroeconomic context and overheating
- Ukraine’s economy: average growth in excess of 7 percent since 2000; since 2005 real demand growth averaged about 15 percent.
- By mid 2008:
  - Credit growth exceeded 70 percent.
  - CPI inflation exceeded 30 percent.
  - Wage growth settled in the 30–40 percent range.
  - Imports surged at an annual rate of 50–60 percent.
  - Current account deficit reached 7 percent of GDP by Q2 2008.
- Terms-of-trade and shock exposure:
  - Steel represents some 40 percent of exports and 15 percent of GDP.
  - Gas imports account for some 6 percent of GDP.
- Terms-of-trade shock realized:
  - Price of steel declined by 65 percent since early July (2008), to real levels associated with past global recessions.
  - Ukraine pays $180/tcm for gas imports (or $6.5 billion), versus an expected transit-adjusted European equivalent of $330/tcm in 2009.
- Growth and sectoral effects:
  - Year-over-year GDP growth remained positive in September at 5.5 percent.
  - Growth through three quarters estimated at 6.9 percent.
  - Manufacturing contracting sharply: –5 percent in September (2008).

### External financing, market perceptions, and political environment
- Capital flow reversal and market access:
  - Ukraine effectively shut out of international capital markets; direct credit lines largely rolled over.
  - Sovereign CDS spreads about 2,300 bps; corporate EMBI spreads exceed 4,000 bps for some corporates.
  - Credit rating actions: Fitch and S&P downgraded Ukraine (negative outlook); Moody’s downgraded enterprises and placed the sovereign on negative outlook.
- Banking confidence and FX pressure (October 2008 episode):
  - After intervention in the sixth largest bank, at least $3 billion (4 percent of deposits) withdrawn during first three weeks of October.
  - NBU injected some 2½ percent of GDP in liquidity since late August.
  - NBU intervention over $4 billion in October from reserves of $38 billion.
  - Hryvnia trading moved from a weak end of Hrv/$4.55–$5.35 to around Hrv/$5.90.
  - Authorities introduced exchange controls (Box 1 lists 12 measures; source: NBU Resolutions 319, 328 and 336).
- Political instability:
  - Presidential election scheduled for January 2010 and early parliamentary elections scheduled for December 2008 increased concerns about policy continuity and the risk of expansionary pre-election promises.

### Banking-sector structure, built-up risks, and stress scenarios
- Banking-sector structure and ownership:
  - Top 10 banks account for a market share of 50 percent; top 10 consist of 5 domestic and 5 foreign banks (including Raiffeisen, BNP Paribas, Unicredit, OTP and Alfa Bank).
  - Foreign banks enjoy cheaper funding driven by higher ratings of parent banks.
- Key risk metrics and developments:
  - Loan-to-deposit ratio rose to 140 percent.
  - Over 63 percent of retail loans denominated in foreign currency, majority to unhedged borrowers.
  - Sectoral concentration: metal-related industries, trade and consumer business, and construction account for 72 percent of total loans.
  - Large external corporate debt rollover risk: $30 bn in 2009.
  - Mid-2008 bad loans (category 5) stood at 1 percent.
- Scenario analysis and projected deterioration under adverse macro conditions:
  - Under a drop in real GDP growth of 9 percentage points, nominal depreciation, high interest rates, and sharp drop in real prices, bad loans estimated to rise to 15 percent by end-2009.
  - Current capital buffers likely to be fully absorbed in such a scenario.
- Estimated capitalization needs:
  - Required capital injection to return to minimum CAR levels estimated at about Hrv 78 bn, corresponding to over 8 percent of 2008 GDP.
  - Breakdown: Hrv 34 bn for domestic banks and Hrv 44 bn for foreign banks.
  - Equivalent in dollar terms cited elsewhere as at least 8 percent of 2008 GDP ($12 billion), including 4½ percent of 2008 GDP ($6–$9 billion) in recapitalization needs for foreign-owned banks.
- Specific bank intervention need:
  - Authorities estimate financing need for the sixth largest bank (intervened in early October) of about Hrv 8 billion.

### Authorities’ program: objectives, strategy, and policy measures
- Program objectives:
  - Restore financial and macroeconomic stability and facilitate confidence.
- Financial-stability measures specified:
  - Appropriate liquidity support and expansion of deposit guarantees.
  - Stronger bank resolution framework, including availability of public funds for recapitalization.
  - Stronger framework for resolution of household and enterprise sector debts.
- Macroeconomic policy framework adjustments supported by the program (MEFP ¶4):
  - A flexible exchange rate policy, supported by base money targets and an appropriate intervention strategy.
  - Transition to inflation targeting (as a new nominal anchor).
  - Resetting incomes policy in line with targeted inflation, while protecting the most vulnerable.
  - Maintaining a prudent fiscal stance.
  - Bringing energy sector prices more in line with costs.
- Mitigating measures for output and financial stability risks:
  - Fiscal contingency plans.
  - Private sector debt resolution measures.
  - Potential bank recapitalization scheme to support viable banks and shield the real economy from a credit crunch.

*Source: IMF staff report — 1. Banking-Sector Structure, Risks, and Scenario Analysis.*

### 11.      The program is set up to respond flexibly to economic developments (MEFP ¶7).

### 11.      The program is set up to respond flexibly to economic developments (MEFP ¶7)

### Program design and contingency response
- Upside risks (recovery of steel prices and/or resumption of capital inflows) would be met with:
  - higher reserve accumulation; and
  - adjustments to monetary policy (to safeguard inflation objectives).
- Downside risks (substantial undershoot of commodity prices or longer loss of access to capital markets) would be cushioned by:
  - the robust policy framework, especially the flexible exchange rate; and
  - funds available for bank recapitalization.
- Authorities indicated readiness to take additional measures if needed.

### Macroeconomic framework (MEFP ¶5–6)
- 2009 macroeconomic targets are conservative.
- Projections assume:
  - a global recession and continued deleveraging in international credit markets in 2009;
  - a recession in Ukraine with deteriorating exports, limited external finance and a credit crunch.
- Projected impact on output:
  - a 3 percent decline in 2009 (projection calibrated against Ukraine’s experience under similar circumstances).
- Projected inflation:
  - 17 percent for 2009, reflecting currency depreciation and pass-through of imported gas prices.
- Current account:
  - projected to compress to a deficit level of about 2 percent of GDP.
- Medium-term outlook under assumption of a global recovery in the second half of 2009:
  - potential growth rate by 2011: 5–6 percent;
  - inflation could return to 5–7 percent by late 2011, helped by transition to inflation targeting and prudent incomes policies;
  - current account deficits projected to remain small in 2010 and moderate thereafter, allowing reserves to rise.
- Role of Euro 2012 investment: rising investment ahead of Euro 2012 would complement competitiveness improvements from a flexible exchange rate regime.

### Monetary and exchange rate policy (MEFP ¶8–11)
- Program supports implementation of a flexible exchange rate regime.
  - Authorities introduced first steps toward a managed float in March 2009.
  - NBU amended documents to eliminate reference to a band and announced official exchange rate alignment with market rates.
  - Interventions at non-market rates would be discontinued (including for transactions with the government); focus would be on pre-announced regular auctions guided by NIR targets.
- Importance of avoiding disorderly exchange market developments and eliminating exchange controls as soon as possible (MEFP ¶9).
  - Exchange controls could only be a temporary solution and could magnify outflow pressure.
  - By first review, staff will assess whether any exchange controls give rise to exchange restrictions subject to Article VIII, Section 2(a) of the Fund’s Articles and whether temporary approval by the Executive Board is warranted.
- Near-term monetary anchor:
  - Base money will become the near-term anchor until an inflation targeting (IT) regime can be put into place (MEFP ¶11).
  - Full IT implementation not realistic before 2010.
  - 2009 focus: enhance NBU independence (reform Council), strengthen NBU financial flexibility, improve public communications.
  - Monetary base targets provide an inflation anchor; base money demand would be revisited during frequent program reviews.
- Monetary policy stance (MEFP ¶10):
  - Policy will shift to a tighter stance as excess liquidity is removed.
  - Current NBU deposit interest rates: 6–10 percent (noted as low and needing increase).
  - Refinance rate stands at 15 percent; authorities and staff recognized that the inflation objective of 17 percent called for an increase in the refinance rate, to be implemented as soon as financial stability considerations permitted.
  - Operational measures recommended:
    - make deposit auctions more regular and focused around one maturity (perhaps two weeks);
    - restore reserve requirements (i.e., no longer counting cash in vault);
    - technical assistance requested on monetary operations.

### Financial sector policy (MEFP ¶12–13)
- Near-term confidence restoration measures include:
  - Maintain a wide range of admissible collateral for repo operations to ensure viable banks access liquidity; phase out bank shares rapidly from collateral list.
  - NBU monitors daily banks’ liquidity positions and provides liquidity as needed.
  - Bank recapitalization program expected to improve collateral profile and lead to additional NBU refinancing.
- Deposit insurance:
  - Ukrainian scheme covers retail deposits only.
  - Authorities increased deposit insurance coverage from Hrv 50,000 to Hrv 150,000 (about €20,000), with additional resources for the Deposit Insurance Fund.
  - This implies coverage of about 99 percent of individual accounts.
  - Authorities committed to lift restriction on early withdrawal of term deposits once deposit outflows subside.
- Supervisory cooperation:
  - Strengthening monitoring of banks via enhanced cross-border supervisory cooperation.
  - MoUs with six home supervisors are being concluded, covering most large foreign-owned banks.
  - NBU to regularly monitor parent bank funding to Ukrainian subsidiaries and develop joint contingency plans for debt rollover.
- Prominvest Bank:
  - Prompt resolution of Prominvest Bank (sixth largest), currently under temporary administration, is key to restoring confidence.
  - Options discussed: sale to a private investor or merger with a state-owned bank; financing options being discussed with EBRD and IFC.
- Comprehensive bank resolution strategy (MEFP ¶13):
  - Diagnostic study of large and systemically important banks involving outside experts and reputable audit firms paid by the banks; final TORs to be designed jointly with IMF and World Bank teams.
  - Diagnostic study expected completed for systemically important banks by December 15, 2008.
  - Recapitalization of viable banks to commence in the first quarter of 2009:
    - Viable banks to be asked to inject capital; most large institutions, including foreign banks, expected to raise capital on their own.
    - If needed, banks could apply for public recapitalization funds (available to domestic and foreign banks) conditional on acceptable business plans and conditionality.
    - Insolvent or nonviable banks would not have access to recapitalization funds and would be nationalized (if systemically important) or liquidated.
  - Legal framework amended to facilitate prompt and cost-effective bank resolution: measures allow NBU to place a bank under temporary administration, conduct purchase and assumption sale of part or whole of a bank, and reduce shareholders’ equity to absorb losses.
- Transparency:
  - Authorities agreed to adopt international best practices for disclosure of detailed bank-by-bank financial information.

### Fiscal policy (MEFP ¶14–15)
- Program supports a prudent fiscal stance while accounting for recession-related social expenditures.
- Fiscal targets under the program:
  - 2008 deficit: 1 percent of GDP;
  - 2009: balance.
- Assumptions and constraints:
  - Targets built primarily on inertial considerations in 2008 (limited scope to adjust with two remaining months) and financing considerations (limited treasury bill issuance and some use of government NBU deposits).
  - Staff views fiscal targets as attainable, even accounting for a substantial increase in social spending during the recession (0.8 percent of GDP).
- Potential savings and measures discussed:
  - incomes and energy policy measures;
  - increase in excise duties;
  - removal of VAT privileges for agriculture in line with WTO commitments;
  - reducing coal sector subsidies;
  - reducing untargeted transfer programs;
  - implementation of last year’s nominal budget during the first quarter.
- Contingency and readiness to adjust:
  - Authorities should stand ready to adjust fiscal targets as needed; final decision to await second review when the 2009 budget will likely be considered.
  - Proactive efforts needed to develop financing sources (e.g., develop a primary dealer system for government debt).
  - On a contingent basis, authorities have started identifying possible fiscal stimulus measures (focused on capital spending) if GDP falls more than expected and financing is available.
  - Authorities preparing additional tightening measures in case of tax revenue shortfalls and/or lower-than-projected financing.

*Source: _cr08384 - 11.      The program is set up to respond flexibly to economic developments (MEFP ¶7).*

### 23.      The authorities saw a more balanced incomes policy as key to achieving the

### _cr08384 - 23.      The authorities saw a more balanced incomes policy as key to achieving the

### Incomes policy and fiscal implications
- Implementing existing policy plans would have led to:
  - a 33 percent increase in the minimum wage.
  - 20–34 percent increases for pensions and other social payments.
- Against slow 12 percent nominal GDP growth (due to the terms of trade shock), these increases would:
  - put heavy pressure on corporate margins (where the minimum wage often binds, at least for tax purposes).
  - put pressure on the budget, squeezing capital and current spending.
- Authorities’ stated objective:
  - deliver growth of incomes in line with inflation to protect the population while also allowing for competitiveness gains.
- Risk of inaction:
  - likely result would be higher inflation and depreciation as the economy endogenously eliminated unsustainable real wage imbalances.

### Energy sector pricing reform
- Current situation:
  - Consumers in Ukraine now pay only 10–40 percent of the international price of gas.
  - Ukraine is among the least energy-efficient countries.
- Planned measures:
  - phase out the direct subsidy to consumers over a three year period.
  - phase out the indirect subsidy (through energy transformers who use gas) by mid-2010.
  - announced a 35 percent price increase for December 1 to signal determination.
  - reform the regulatory framework to reduce political influence, in consultation with the World Bank.
- Projected impacts:
  - the policy will add about 1 point to CPI inflation in 2008, and about 4 percent in 2009.
  - it will reduce the fiscal subsidy by 0.4 percent of GDP in 2009.

### Social safety net coverage and options for expansion
- Existing programs and coverage:
  - Unemployment insurance covers about 20 million people and provides monthly cash transfers for up to one year, at a minimum benefit of about 60 percent of the minimum wage.
  - Housing and utility allowances are available to those who spend more than 20 percent of their income (15 percent for pensioners) on utilities.
  - Gas tariffs are already set to provide a “lifeline” to smaller users; half the population falls into this category.
  - Income support to poor households: small program with just 200,000 beneficiaries.
- Program expansion potential:
  - Authorities indicated they would appropriate more funds to unemployment insurance.
  - World Bank considers the income support program as one of the best targeted programs in Ukraine and notes it can be expanded by raising the low eligibility threshold and allocating more funding.
- Table items (as presented):
  - Unemployment insurance: Coverage 200.5 (in millions); Size ...; Income Threshold ...
  - Housing and utility allowance: Coverage 10.4; Size 700; Income Threshold ...
  - Lifeline gas tariffs: Coverage 70.3; Size ...; Income Threshold ...
  - Income support to poor households: Coverage 0.2; Size 0.2; Income Threshold 350 (working-age) / 133 (not working-age).
  - Notes: 1/ Coverage estimates reflect number of individuals for unemployment insurance and households for other programs. 2/ Size estimates are made by staff based on available data for 2007. 3/ Threshold is based on the average income per person in the household.

### Private sector: debt problems, bankruptcy framework, and structural reforms
- Corporate and household debt risks:
  - main risks stem from balance sheet exposure to foreign exchange risk, falling demand, and a potential credit crunch.
  - considered tools: government-facilitated voluntary framework for restructuring debts; review of bankruptcy legislation to reduce delays.
  - legislative changes would need to await resumption of parliamentary activity in the spring.
- Structural reform priorities:
  - recently adapted law on joint stock companies expected to improve the business environment.
  - determination to move forward with land reform to open agricultural sector to additional investment.
  - desire to accelerate privatization of public enterprises despite difficult market conditions.
  - a reformed procurement law could unlock foreign financing (including the next tranche of the World Bank’s Development Policy Loan).
  - staff encouraged progress and additional dialogue with the World Bank.

### Program modalities: gross financing requirements and gaps
- Financing need estimates and assumptions:
  - staff estimates that, at a constant current account deficit and with debt amortizations totaling some $40 billion (including $13½ in trade credits), gross external financing requirements would amount to about $64 billion in 2009 and only slightly less in 2010.
- Table highlights (Ukraine: Gross Financing Requirements and Financing Gaps, 2006-2010; in millions of U.S. dollars):
  - Gross external financing requirements: 26,771 (2006); 40,027 (2007); 54,463 (2008); 63,829 (2009); 62,226 (2010).
  - Current account deficit (assumed constant from 2008): 1,617; 5,272; 11,686; 11,686; 11,686.
  - Amortization of private sector debt: 12,583; 18,953; 28,762; 38,172; 39,415.
  - Amortization of public debt: 1,692; 1,525; 1,198; 1,448; 1,576.
  - Short-term capital outflows: 10,880; 14,277; 12,814; 12,523; 9,550.
  - Available financing: 27,201; 40,455; 50,105; 44,769; 50,727.
  - FDI: 5,740; 9,221; 11,659; 9,204; 10,120.
  - Portfolio flows: 2,822; 4,423; 6,461; 4,141; 1,064.
  - Debt financing: 20,680; 36,241; 38,243; 34,233; 43,621.
  - Implied rollover rate (percent): 145; 177; 128; 85; 106.
  - Reserve accumulation (- denotes increase): -1,999; -8,980; 13,871; 8; -4,077.
  - Current account adjustment (Cumulative) 1/: 0; 0; 8,983; 9,153; ...
  - Remaining financing gap = net use of fund resources: -430; -428; 4,350; 10,077; 2,346.
  - Memorandum items: Gross Reserves (US$ million): 22,256; 32,463; 31,445; 30,727; 34,804.
  - Gross Reserves (in percent of ST debt): 109; 108; 87; 97; 78.
  - Sources: Ukrainian authorities; and Fund staff estimates and projections.
  - Note: 1/ This is an underestimation of the actual current account adjustment since the assumption that the deficit would stay at its 2008 level already implies full adjustment to the large terms-of-trade shocks that Ukraine faces.
- Rollover and financing environment:
  - In 2009 as a whole, aggregate debt rollover would be 85 percent, a sharp drop from the net financing of previous years.
  - Expected available external financing amounts to under $45 billion, versus close to $50 billion in 2007–08 (abstracting from reserve movements).
  - Looking towards 2010, provided global financial conditions improve, rollover problems should ease, although only limited amounts of net new financing are likely, at least in the first half of the year.
- Adjustment and other IFI support:
  - Current account position is expected to adjust sharply under the program scenario, closing about $9 billion of the financing gap in 2009.
  - World Bank support up to $1.5 billion per year under a Country Assistance Strategy.
  - EBRD also has extensive operations in Ukraine.

### Stand-By Arrangement request and exceptional access
- Authorities are requesting a two-year Stand-By Arrangement in the amount of SDR 11 billion (802 percent of quota).
- Purpose and use of Fund financing:
  - contribute to covering Ukraine’s balance of payments needs.
  - following expected initial reserves losses associated with tactical interventions, financing will be utilized to build Ukraine’s gross international reserves back to a level sufficient to cover at least 75 percent of short-term debt obligations.
- Exceptional access considerations:
  - arrangement is subject to exceptional access policy.
  - staff proposes exceptional access provided on SBA terms (two-year arrangement with exceptional access under credit tranche terms) rather than SRF, given:
    - Ukraine is experiencing both a capital account crisis and a massive terms of trade shock requiring large current account adjustment, as well as substantial banking sector problems.
    - SRF is geared toward large short-term financing needs from sudden loss of confidence, but in Ukraine effects may not be short lived and market access uncertainties are large.
  - Table 12 (not reproduced here) compares this access with other recent exceptional access requests.

### Box 4: Assessment against Exceptional Access Criteria
- Staff assesses that Ukraine meets the criteria for exceptional access:
  - Criterion 1—exceptional balance of payments pressure in the capital account:
    - Ukraine is experiencing both a current and a capital account crisis.
    - current account under tremendous pressure due to adverse terms-of-trade developments.
    - capital account undermined by external financing shortfalls, exacerbated by a banking crisis and related deposit run.
  - Criterion 2—sustainable debt position:
    - Preliminary staff calculations indicate a high probability that debt will remain sustainable.
    - Total external debt about 50 percent of GDP in 2008, will initially rise due to valuation effects, but thereafter projected to show very favorable dynamics as the current account adjusts and access to debt financing remains curtailed.
    - Stress tests show external debt would remain sustainable under a variety of shocks, although higher under substantial further shocks to the current account.
    - Ukraine’s low public debt—less than 10 percent of GDP—allows the government to absorb considerable foreign and domestic liabilities without threatening fiscal sustainability (Tables 10–11, Figures 5–6).
  - Criterion 3—access to private capital markets:
    - Ukraine has reasonable prospects to regain access to private capital markets by mid 2010.
    - program would restore the banking sector to health, end currency overvaluation, restore competitiveness and unlock investment opportunities to encourage FDI.
  - Criterion 4—strong policy reform program:
    - authorities would take strong and difficult policy measures, many upfront and tailored to Ukraine’s problems.
    - upfront package would demonstrate capability to deliver despite political instability.
    - core elements of the program have been explained to leaders of main political parties, who have committed to support them.

### Risks, stress tests, and debt sustainability (summarized)
- Public debt sustainability analyses (Figure 5) and external debt sustainability analyses (Figure 6) present bound tests under various shocks:
  - shocks considered include growth shock, primary balance shock, interest rate shock, real depreciation and contingent liabilities shocks (e.g., one-time real depreciation of 30 percent and 20 percent of GDP shock to contingent liabilities associated with lost savings in USSR's Savings Bank).
  - baseline and scenario projections and historical averages are shown in figures and text boxes (specific figure values and charts are included in the source).
- Program risks noted:
  - financing gaps due to debt rollover complications.
  - global deleveraging and uncertain market access.
  - potential depth and duration of capital account pressures.
  - sensitivity to energy price assumptions (staff note: placing energy prices at $50 per barrel of oil would allow for an aggregate rollover rate as low as 75 percent, or gross financing around $40 billion, while maintaining the same financing gap).

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### 33.      Staff believes that the program would leave Ukraine in a position to discharge its

### _cr08384 - 33.      Staff believes that the program would leave Ukraine in a position to discharge its

### Program solvency and repayment capacity
- Fund credit outstanding would peak in 2010 at 47 percent of Ukraine’s gross reserves.
- Peak payments would be in 2012–13, at 9 and 16 percent of reserves, respectively.
- Authorities’ past record: they have almost completely repaid past loans taken under programs originating around Ukraine’s last crisis (1998).
- Staff believes the program would leave Ukraine in a position to discharge its obligations to the Fund in a timely manner.

### Downside risks to the program
- Exchange rate risk
  - The exchange rate may overshoot; there are no guarantees it will not depreciate beyond its estimated equilibrium level in a short period of time.
  - Exchange rate overshooting would pose risks for households and banks.
  - The upfront banking recapitalization provides a cushion for this risk.
- External economic and financial developments
  - Highly uncertain; worse-than-expected world economy outcomes or international financial market developments could affect the program through multiple channels.
  - A greater slowdown of trading partner growth and/or a significant further decline in steel prices would further deteriorate the current account outlook.
  - A further deepening, or exceptionally long duration, of deleveraging in financial markets could reduce prospects for a return to market access.
- External debt outlook risks
  - DSA analysis indicates a high likelihood for debt to remain sustainable even under various shocks, but adverse current account developments, exchange rate overshooting, or possible shortfalls in FDI could negatively affect external debt outlook.
  - There may be adverse consequences on access to markets and costs for such access given the likelihood of some private sector defaults.
- Political risks
  - Ukraine’s turbulent politics pose risks, including possible early parliamentary elections in December and presidential elections slated for January 2010.
  - Mission team explained core program elements to leaders of main opposition parties, who committed to support policies underlying the program.

### Upside risks and sensitivity to commodity and financing developments
- Commodity prices
  - Baseline assumptions on oil and gas import prices are substantially higher than many market estimates under a global recession scenario.
  - Conversely, if there is no global recession, steel prices are likely to be higher than assumed.
  - These considerations suggest a reasonable chance of a better-than-projected current account position in 2009.
- External financing
  - Financing could resume faster than expected; in that case the program would call for some further reserve build up.
  - Faster-than-expected growth recovery would inform decisions about the fiscal stance.

### Program monitoring, access, and phasing
- Program duration and review frequency
  - The program will cover two years and be subject to quarterly reviews.
  - The arrangement is frontloaded with an initial disbursement of SDR 3 billion.
  - In line with emergency financing mechanism procedures, staff intends to inform the Executive Board on initial policy responses and market reaction within one to two months of approval.
- Table of Reviews and Purchases (as presented)
  - November 2008 — 3,000 (In millions of SDRs) — 218.7 (In percent of quota) — Board approval of arrangement
  - First Review 15 February 2009 — 1,250 — 91.1 — Observance of end-December performance criteria and completion of the first review
  - Second Review 15 May 2009 — 2,500 — 182.2 — Observance of end-March performance criteria and completion of the second review
  - Third Review 15 August 2009 — 750 — 54.7 — Observance of end-June performance criteria and completion of the third review
  - Fourth Review 15 November 2009 — 2,000 — 145.8 — Observance of end-September performance criteria and completion of the fourth review
  - Fifth Review 15 February 2010 — 375 — 27.3 — Observance of end-December performance criteria and completion of the fifth review
  - Sixth Review 15 May 2010 — 375 — 27.3 — Observance of end-March performance criteria and completion of the sixth review
  - Seventh Review 15 August 2010 — 375 — 27.3 — Observance of end-June performance criteria and completion of the seventh review
  - Eighth Review 15 October 2010 — 375 — 27.3 — Observance of end-September performance criteria and completion of the eighth review
  - Total — 11,000 (In millions of SDRs) — 802 (In percent of quota)
- Prior actions supporting arrangement
  - Clarify the flexible exchange rate regime.
  - Resolve the sixth largest bank which has been intervened (Prominvest Bank).
  - Legal amendments to allow allocation of funding for the bank recapitalization scheme and prompt and cost-effective resolution of problem banks.

### Conditionality, performance criteria, and safeguards
- Monitoring instruments
  - Quarterly quantitative performance criteria and structural performance criteria and benchmarks.
  - Examples of structural benchmarks and performance criteria:
    - Diagnostic of large and systemically important banks by December 15, 2008 (first review).
    - Passage of a program-consistent budget by end April (second review).
    - Resolution of all problem banks by end June 2009 (third review).
  - Quantitative performance criteria include:
    - A ceiling on base money (with leeway to accommodate liquidity management in the banking system).
    - A ceiling on the budget deficit of the general government with adjusters for non-project financing and the cost of the bank recapitalization.
    - A floor for net international reserves.
  - Reserve coverage target: 70–75 percent reserve coverage of short-term debt is the target for 2009, and this will rise slowly thereafter (allowing some leeway for tactical interventions).
- Safeguards
  - An updated safeguards assessment will need to be completed by the first review of the proposed arrangement.
  - Authorities need to provide a range of documentation including some confidential information and to work with a separate FIN mission.

### Rationale for structural conditionality (high-level)
- Monetary and exchange rate policies
  - Large terms-of-trade shock from falling steel prices and expected increases in gas import prices requires more exchange rate flexibility.
  - Prior action: implementing actions in support of a flexible exchange rate regime (A1).
  - Benchmarks: abolish the foreign exchange tax (benchmark for the second review, B4); strengthen NBU independence and reform the NBU council (benchmark for the third review, B6).
- Banking sector measures
  - Prior actions: issue a Law or Decree laying out terms of financial support to banks (A2); decisive immediate resolution of Prominvest Bank (A4); legal amendments authorizing the NBU to undertake bank resolution (A3).
  - Performance criteria: completion of diagnostic study by December 15, 2008 covering NBU’s group 1 banks (B1); resolve all problem banks by end June 2009 so viable banks meet regulatory minimum capital and nonviable banks are liquidated (B2).
- Fiscal policies
  - Passing a program-consistent 2009 Budget consistent with a general government deficit target of a zero overall balance is a performance criterion for the second review (B3).

### Staff appraisal: main findings and policy recommendations
- Macroeconomic and financial damage
  - Ukrainian economy and banking system hit very hard by sharp decline in steel prices and reversal of capital flows.
  - Existing vulnerabilities: high inflation, high short-term external debt relative to reserves, high exposure of banks to foreign funding, balance sheet mismatches, weak underlying fiscal position.
- Program strategy and objectives
  - Two-year program aims to restore financial and macroeconomic stability through a multi-sector strategy covering exchange rate, monetary, banking sector, and fiscal policies.
  - Expected outcomes with resolute implementation:
    - Restore growth to Ukraine’s estimated potential rate by mid-2011.
    - Bring inflation back into single digits in late 2010.
    - Keep external deficits manageable.
    - Preserve international reserves at safe levels.
- Exchange rate and monetary policy
  - Continued implementation of a flexible exchange rate regime to cushion terms-of-trade shock.
  - Measures adopted in late October 2008 (including unification of official and market exchange rates) to be complemented by a transparent intervention strategy grounded in appropriate reserve targets.
  - Accelerate progress towards a new nominal anchor for monetary policy—inflation targeting—with near-term focus on enhancing National Bank of Ukraine (NBU) independence.
  - Monetary policy tightening needed going forward; liquidity provision strategy to continue initially, but refinancing against banks’ own equity should be rapidly phased out.
  - As liquidity pressures abate, higher interest rates and restoration of full reserve requirements will be necessary to guard against inflation and currency depreciation.
- Banking sector stabilization
  - Actions to date (resolution of Prominvest Bank, increase in deposit insurance, new resources for Deposit Insurance Fund) provide a sound basis to restore confidence.
  - Program envisages enhancing NBU high frequency monitoring, stepping up targeted on-site inspections, and improving cross-border supervisory cooperation.
  - Pre-emptive recapitalization program preceded by diagnostic phase led by reputable auditors; legal changes allow allocation of public funds and facilitate prompt bank resolution (purchase and assumption, sale, reduction of existing shareholders' equity to absorb losses).
- Fiscal stance and social protection
  - Tight fiscal stance needed due to financing constraints:
    - For 2008, market access curtailment and need to preserve government deposits place a limit of about 1 percent of GDP on the deficit that can be run.
    - For 2009, uncertainties about available finance call for a balanced budget.
  - Fiscal adjustment should be achieved by cuts in planned wage and transfer increases and reductions in subsidies.
  - Protecting the most vulnerable: keep incomes growth in line with targeted inflation, phase in tariff increases while preserving a lifeline tariff, increase budget allocations for unemployment insurance and targeted income support.
- Private sector involvement and structural reform
  - Proactive strategy to involve private sector in resolving corporate and household debt problems (voluntary debt rescheduling frameworks, amended bankruptcy framework).
  - Encourage private resources into Ukraine; reinvigorate structural reform agenda focusing on establishing a functioning agricultural land market and reviving privatization.
- Access and exposure assessment
  - Exceptional level of access proposed: 802 percent of quota addresses balance of payments financing needs while keeping Fund exposure manageable.
  - In absence of Fund financing, capital account shortfalls would drive reserves to low levels, making rollover of external debts difficult.
  - Proposed level of access would leave external debt sustainable; resumption of market access considered very likely by 2010.
  - Through prior actions the authorities have shown ability to deliver on commitments.
  - Fund’s exposure to Ukraine would remain under 50 percent of reserves.

*Source: IMF staff calculations and staff appraisal as presented in the document.*

### 50.      In view of Ukraine’s balance of payments financing needs and the strong policies

### _cr08384 - 50. In view of Ukraine’s balance of payments financing needs and the strong policies proposed by the authorities, the staff supports the authorities’ request for an arrangement in the amount of SDR 11 billion.

### Staff recommendation
- The staff supports the authorities’ request for an arrangement in the amount of SDR 11 billion.

### Selected economic and social indicators (highlights from Table 1)
- Nominal GDP (billions of hryvnias): 2004: 345; 2005: 441; 2006: 544; 2007: 713; 2008 (Proj.): 993; 2009 (Proj.): 1,112
- Real GDP (percent change): 2004: 12.1; 2005: 2.7; 2006: 7.3; 2007: 7.6; 2008 (Proj.): 6.0; 2009 (Proj.): -3.0
- Contributions to GDP (percent points): Domestic demand 2004–2009: 9.1; 13.2; 13.1; 16.1; 14.4; -14.3 ; Net exports 2004–2009: 3.0; -10.5; -5.8; -8.5; -8.3; 11.3
- Unemployment rate (ILO; percent): 2004: 8.6; 2005: 7.2; 2006: 6.8; 2007: 6.4; 2008 (Proj.): 6.0; 2009 (Proj.): 9.5
- Consumer prices (period average): 2004: 9.0; 2005: 13.5; 2006: 9.1; 2007: 12.8; 2008 (Proj.): 25.6; 2009 (Proj.): 21.0
- Consumer prices (end of period): 2004: 12.3; 2005: 10.3; 2006: 11.6; 2007: 16.6; 2008 (Proj.): 25.5; 2009 (Proj.): 17.0
- Nominal monthly wages (average, percent change): 2004: 27.5; 2005: 36.7; 2006: 29.2; 2007: 29.7; 2008 (Proj.): 37.1; 2009 (Proj.): 10.5
- Real monthly wages (average, percent change): 2004: 16.9; 2005: 20.4; 2006: 18.4; 2007: 15.0; 2008 (Proj.): 9.1; 2009 (Proj.): -8.7
- Public debt (percent of GDP, end period): 2004: 25.5; 2005: 18.7; 2006: 15.7; 2007: 13.0; 2008 (Proj.): 10.6; 2009 (Proj.): 17.4
  - Of which external debt (foreign currency denominated): 2004: 19.2; 2005: 14.1; 2006: 12.5; 2007: 10.2; 2008 (Proj.): 7.4; 2009 (Proj.): 10.0
- Gross reserves (end of period, billions of U.S. dollars): 2004: 9.5; 2005: 19.4; 2006: 22.3; 2007: 32.5; 2008 (Proj.): 31.4; 2009 (Proj.): 30.7
  - In months of next year's imports of goods and services: 2004: 2.6; 2005: 4.4; 2006: 3.7; 2007: 4.0; 2008 (Proj.): 5.1; 2009 (Proj.): 4.5
- Current account balance (percent of GDP): 2004: 10.6; 2005: 2.9; 2006: -1.5; 2007: -3.7; 2008 (Proj.): -6.2; 2009 (Proj.): -2.0
- Net imports of energy (billions of U.S. dollars): 2004: 6.0; 2005: 6.1; 2006: 8.1; 2007: 11.5; 2008 (Proj.): 17.2; 2009 (Proj.): 16.0
- Exchange rate regime noted: de facto peg; later described as managed float in notes.

### Key program policy assumptions (from Table notes)
- Policies assumed include:
  - (i) increased exchange rate flexibility as from 2008;
  - (ii) convergence of natural gas import prices to Western European levels (adjusted for transit) by 2010;
  - (iii) full pass-through of rising energy import prices in 2009;
  - (iv) public-financed recapitalization of banks for a total amount of Hrv 54 bln (10 bln by end-2008 and 44 bln in the first half of 2009).

### Selected vulnerability indicators (highlights from Table 2)
- Latest observation dates cited: 24-Oct-08 for several series.
- Short-term (ST) interest rate (in percent, overnight interbank rate): 24-Oct-08: 15.0
- EMBI secondary market spread (bps, end of period): 24-Oct-08: 2,250
- Foreign currency debt rating (Moody's): B1 on 24-Oct-08
- Exchange rate NC/US$ (end of period): 24-Oct-08: 5.9
- Stock market index (PFTS): 24-Oct-08: 230.9
- Broad money to gross reserves (percent): 24-Oct-08: 224.6
- Gross international reserves (GIR) in US$ billion (Proj): 31.5
- GIR in percent of ST debt at remaining maturity (RM) (Proj): 79.4
- GIR in percent of ST debt at RM and banks' FX deposits (Proj): 57.3
- Total gross external debt (ED) in percent of GDP (Proj): 54.3
  - ST external debt (original maturity, in percent of total ED) (Proj): 29.6
  - ED of domestic private sector (in percent of total ED) (Proj): 80.9
  - ED to foreign official sector (in percent of total ED) (Proj): 6.0
- Domestically issued public debt held by non-residents (in percent of GDP) (Proj): 0.3
- Total gross external debt in percent of exports of GNFS (Proj): 121.4
- Gross external financing requirement (in US$ billion) (Proj): 26.4
- Public sector overall balance (percent of GDP) (Proj): -2.0
- Debt-stabilizing primary balance (percent of GDP) (Proj): -3.0
- Gross PS financing requirement (in percent of GDP) (Proj): 3.1
- Public sector gross debt (PSGD, in percent of GDP) (Proj): 52.9
  - Exposed to rollover risk (in percent of total PSGD) (Proj): 52.9
  - Exposed to exchange rate risk (in percent of total PSGD) (Proj): 69.3
- Public sector net debt (in percent of GDP) (Proj): 9.2

### Medium-term balance of payments (highlights from Table 3)
- Current account balance (US$ million): 2006: -1,617; 2007: -5,272; 2008: -11,686; 2009 (Proj): -2,703; 2010 (Proj): -2,534; 2011 (Proj): -4,352; 2012 (Proj): -4,564; 2013 (Proj): -6,969
- Merchandise trade balance (US$ million): 2006: -5,194; 2007: -10,572; 2008: -17,779; 2009 (Proj): -8,725; 2010 (Proj): -7,829; 2011 (Proj): -8,584; 2012 (Proj): -9,609; 2013 (Proj): -11,017
  - Exports (US$ million): 2006: 38,949; 2007: 49,840; 2008: 66,490; 2009 (Proj): 54,202; 2010 (Proj): 61,591; 2011 (Proj): 68,138; 2012 (Proj): 75,001; 2013 (Proj): 81,985
  - Imports (US$ million): 2006: -44,143; 2007: -60,412; 2008: -84,269; 2009 (Proj): -62,926; 2010 (Proj): -69,420; 2011 (Proj): -76,722; 2012 (Proj): -84,610; 2013 (Proj): -93,002
- Services (net) receipts (US$ million): 2006: 2,126; 2007: 2,420; 2008: 3,475; 2009 (Proj): 5,419; 2010 (Proj): 5,843; 2011 (Proj): 5,326; 2012 (Proj): 6,556; 2013 (Proj): 4,933
- Current transfers (net, US$ million): 2006: 3,173; 2007: 3,539; 2008: 3,928; 2009 (Proj): 4,209; 2010 (Proj): 4,590; 2011 (Proj): 4,998; 2012 (Proj): 5,432; 2013 (Proj): 5,896
- Financial and capital account (US$ million): 2006: 4,088; 2007: 15,130; 2008: 7,193; 2009 (Proj): -8,092; 2010 (Proj): 4,265; 2011 (Proj): 9,391; 2012 (Proj): 14,103; 2013 (Proj): 18,020
- Direct investment and capital transfers (net, US$ million): 2006: 5,740; 2007: 9,221; 2008: 11,659; 2009 (Proj): 9,204; 2010 (Proj): 10,120; 2011 (Proj): 11,089; 2012 (Proj): 12,573; 2013 (Proj): 13,777
- Short-term capital (net, US$ million): 2006: -10,880; 2007: -14,277; 2008: -12,814; 2009 (Proj): -12,523; 2010 (Proj): -9,550; 2011 (Proj): -7,594; 2012 (Proj): -6,633; 2013 (Proj): -5,793
- Gross official reserves (change, US$ million): 2006: -1,999; 2007: -8,980; 2008: 801; 2009 (Proj): 387; 2010 (Proj): 18; 2011 (Proj): -4,077; 2012 (Proj): -5,087; 2013 (Proj): -5,432
- Net use of IMF resources (US$ million): 2006: -430; 2007: -4,284; 2008: 355; 2009 (Proj): 10,077; 2010 (Proj): 2,346; 2011 (Proj): 0; 2012 (Proj): -4,106; 2013 (Proj): -7,869
- Memorandum items (selected):
  - Total external debt (US$ million): 2006: 53,638; 2007: 81,939; 2008: 102,218; 2009 (Proj): 106,171; 2010 (Proj): 111,566; 2011 (Proj): 117,067; 2012 (Proj): 120,470; 2013 (Proj): 121,922
  - Total external debt (percent of GDP): 2006: 49.7; 2007: 57.8; 2008: 74.3; 2009 (Proj): 78.2; 2010 (Proj): 74.6; 2011 (Proj): 71.3; 2012 (Proj): 62.4; 2013 (Proj): 52.1
  - Current account (percent of GDP): 2006: -1.5; 2007: -3.7; 2008 (Proj): -6.2; 2009 (Proj): -2.0; 2010 (Proj): -1.7; 2011 (Proj): -2.6; 2012 (Proj): -2.4; 2013 (Proj): -3.3
  - Debt service ratio (in percent of exports of goods and services): 2006: 5.1; 2007: 3.9; 2008: 2.8; 2009 (Proj): 4.2; 2010 (Proj): 4.4; 2011 (Proj): 3.7; 2012 (Proj): 7.1; 2013 (Proj): 10.1

### Monetary accounts and banking sector (highlights from Tables 4–6)
- Monetary survey (end-period broad money, millions of Hrv): 2004 Dec: 125,705; 2005 Dec: 194,071; 2006 Dec: 261,063; 2007 Dec: 396,156; 2008 Dec: 543,527; 2009 (Proj): 594,352; 2010 (Proj): 700,106
- Base money (percent change, eop): 2004: 34.1; 2005: 53.9; 2006: 17.5; 2007: 46.0; 2008 (Proj): 33.0; 2009 (Proj): 10.9
- Credit to the economy (percent change, eop): 2004: 30.2; 2005: 61.8; 2006: 70.6; 2007: 74.0; 2008 (Proj): 40.9; 2009 (Proj.): -9.8
- Foreign currency loans to total loans (percent): 2004: 42.1; 2005: 43.2; 2006: 49.4; 2007: 49.8; 2008 (Proj): 57.5; 2009 (Proj): 60.0; 2010 (Proj): 53.5; 2010 note shows fluctuations.
- Foreign currency deposits to total deposits (percent): 2004: 36.4; 2005: 34.3; 2006: 38.0; 2007: 32.1; 2008 (Proj): 41.1; 2009 (Proj): 41.7; 2010 (Proj): 43.1

Financial soundness indicators (banking sector, selected)
- Number of banks: Dec-06: 170; Sep-08: 181
- Regulatory capital to risk-weighted assets (percent): Dec-06: 14.2; Mar-08: 13.3; Jun-08: 13.4; Sep-08: 13.6
- NPLs to total loans (percent, NPLs = substandard, doubtful, loss): Dec-06: 17.8; Mar-07: 17.6; Jun-07: 16.5; Sep-07: 14.8; Dec-07: 13.2; Mar-08: 13.1; Jun-08: 13.6; Sep-08: 14.5
- Specific provisions to NPLs (percent): Dec-06: 23.1; Mar-07: 20.8; Jun-07: 23.7; Sep-07: 25.9; Dec-07: 26.3; Mar-08: 26.7; Jun-08: 26.3; Sep-08: 26.0
- Loans in foreign currency to total loans (percent): Dec-06: 49.4; Sep-08: 51.2
- Deposits in foreign currency to total deposits (percent): Dec-06: 38.1; Sep-08: 31.8
- Foreign currency loans to foreign currency deposits (ratio): Dec-06: 173.3; Sep-08: 269.2
- Return on assets (after tax; end-of-period): Dec-06: 1.6; Dec-07: 1.5; Mar-08: 1.4; Jun-08: 1.3
- Return on equity (after tax; end-of-period): Dec-06: 13.5; Dec-07: 12.7; Mar-08: 11.3; Jun-08: 11.6

### General government finances (highlights from Table 6)
- General government revenue (millions of Hrv): 2007: 301,618; 2008 (State Budget): 424,931; 2008 (Staff's Proj.): 469,048; 2009 (Staff's Proj.): 469,048
- General government expenditure (millions of Hrv): 2007: 315,852; 2008 (State Budget): 444,861; 2008 (Staff's Proj.): 519,498; 2009 (Staff's Proj.): 519,498
- Augmented balance, including banks recap. costs (percent of GDP): 2007: -4.4; 2008 (State): -2.0; 2008 (Staff's Proj.): -2.0; 2009 (Staff's Proj.): -4.5
- Cost of banks recapitalization (Hrv millions): upfront cost: 10,000 in 2008; 44,000 in 2009 (staff projection)
- Overall cash balance (excludes upfront recap. cost) (Hrv millions): 2007: -14,233; 2008 (State Budget): -9,930; 2008 (Staff's Proj.): -9,530; 2009 (Staff's Proj.): -6,450
- Financing (Hrv millions): 2007: 13,450; 2008 (State Budget): 19,930; 2008 (Staff's Proj.): 19,530; 2009 (Staff's Proj.): 50,450
- Privatization receipts (millions of Hrv): 2007: 4,209; 2008 (State Budget): 2,086; 2008 (Staff's Proj.): 1,986; 2009 (Staff's Proj.): 1,412
- Fiscal projection assumptions restate: public-financed recapitalization of banks totaling Hrv 54 bln (10 bln by end-2008 and 44 bln in first half of 2009).

### Medium-term macroeconomic framework (highlights from Table 7)
- Nominal GDP (billions of hryvnias): 2004: 345; 2005: 441; 2006: 544; 2007: 713; 2008 (Proj.): 993; 2009 (Proj.): 1,112; 2010 (Proj.): 1,309; 2011 (Proj.): 1,478; 2012 (Proj.): 1,682; 2013 (Proj.): 1,909
- Real GDP growth (percent change): 2004: 12.1; 2005: 2.7; 2006: 7.3; 2007: 7.6; 2008 (Proj.): 6.0; 2009 (Proj.): -3.0; 2010 (Proj.): 3.3; 2011 (Proj.): 5.5; 2012 (Proj.): 6.8; 2013 (Proj.): 6.4
- Output gap (percent of potential): 2004: 3.3; 2005: -0.6; 2006: -0.3; 2007: 1.4; 2008 (Proj.): 2.4; 2009 (Proj.): -5.6; 2010 (Proj.): -7.3; 2011 (Proj.): -6.8; 2012 (Proj.): -5.1; 2013 (Proj.): -3.7
- Consumer prices (end of period, percent change): 2004: 12.3; 2005: 10.3; 2006: 11.6; 2007: 16.6; 2008 (Proj.): 25.5; 2009 (Proj.): 17.0; 2010 (Proj.): 8.0; 2011 (Proj.): 5.4; 2012 (Proj.): 4.7; 2013 (Proj.): 5.0
- Core inflation (end of period): 2004: 12.0; 2005: 13.8; 2006: 7.2; 2007: 13.4; 2008 (Proj.): 22.0; 2009 (Proj.): 13.1; 2010 (Proj.): 7.0; 2011 (Proj.): 5.5; 2012 (Proj.): 5.0; 2013 (Proj.): 5.0
- Public debt (percent of GDP; end of period): 2004: 25.5; 2005: 18.7; 2006: 15.7; 2007: 12.5; 2008 (Proj.): 10.6; 2009 (Proj.): 17.4; 2010 (Proj.): 17.4; 2011 (Proj.): 17.3; 2012 (Proj.): 16.7; 2013 (Proj.): 16.4
- Current account balance (percent of GDP): 2004: 10.6; 2005: 2.9; 2006: -1.5; 2007: -3.7; 2008 (Proj.): -6.2; 2009 (Proj.): -2.0; 2010 (Proj.): -1.7; 2011 (Proj.): -2.6; 2012 (Proj.): -2.4; 2013 (Proj.): -3.3
- Gross official reserves (end of period, US$ billion): 2004: 9.5; 2005: 19.4; 2006: 22.3; 2007: 32.5; 2008 (Proj.): 31.4; 2009 (Proj.): 34.8; 2010 (Proj.): 39.9; 2011 (Proj.): 45.3; 2012 (Proj.): 48.5; 2013 (Proj.): 48.5
- In months of imports of goods and services (end period): 2004: 2.6; 2005: 4.4; 2006: 3.7; 2007: 4.0; 2008 (Proj.): 5.1; 2009 (Proj.): 4.5; 2010 (Proj.): 4.6; 2011 (Proj.): 4.8; 2012 (Proj.): 5.0; 2013 (Proj.): 4.9

### Moving to inflation targeting: Progress report (Table 8)
- Institutional framework
  - Key achievement: Published a draft Green paper, soliciting public input on options for NBU mandate and independence.
  - Further steps needed: Finalize the Green paper and translate into an Action Plan for 2008-09; adopt further amendments to the NBU Act to provide a clear mandate to achieve price stability and allow greater NBU independence.
- Exchange rate flexibility
  - Key achievement: Gradually allow greater exchange rate flexibility, within a narrow but, over time, widening exchange rate corridor.
- Monetary policy instruments
  - Key achievement: Introduced more active use of deposit facility, focused around two week CDs.
  - Further steps needed: Identify key policy rate; actively steer the policy rate within a gradually narrowing interest rate corridor; apply monetary instruments in a consistent, transparent, and market-oriented manner.
- Capacity to model and forecast
  - Key achievements: Regular preparation of a macroeconomic survey assessing short term outlook; developed an exclusion-based core inflation indicator and began publishing from January 2008; refined quarterly projection model and quarterly business outlook survey.
  - Further steps needed: Integrate macroeconomic survey into monetary policy decision making; develop full range of core inflation indicators.
- Communication of monetary policies
  - Key achievements: Introduced more frequent public discussion of monetary policy; outreach to financial sector and academia on IT.
  - Further steps needed: Issue an Inflation Report; further modernize the NBU website; conduct press conferences and issue press releases on inflation targeting.
- Financial market development
  - Key achievements: Foreign exchange turnover tax reduced to 0.5 percent in 2008 budget; prepared concept note and draft legislation on foreign exchange market liberalization.
  - Further steps needed: Abolish the foreign exchange turnover tax; develop benchmarks for government securities; simplify procedures for working in the foreign exchange market.
- Banking sector stability
  - Key achievements: Gradually implement more risk-based supervision.
  - Further steps needed: Further tighten banking supervision, regulation, and legislation.
- Note: Steps identified in the NBU’s 2006 Action Plan and Fund recommendations.

### Structural reforms (highlights from Table 9)
- Business climate (main achievements since 2000)
  - Leveled playing field by eliminating tax preferences (2004-05).
  - Reviewed over 9,000 business regulations and repealed and amended nearly 5,000 (2005-06).
  - Adopted Joint Stock Company Law (2008).
- Key outstanding reforms
  - Abolish anachronistic Economic Code and improve the market-oriented Civil Code.
  - Amend legislation on protection from unfair competition.
  - Adopt International Accounting Standards (IAS) for large corporates.
  - Lift the moratorium for the resale of agricultural land; remove current restrictions in Land Code on non-agricultural land ownership; establish registries for real estate and agricultural land property rights.
  - Implement reform of the court system to ensure independence and impartiality.
  - Re-launch transparent privatization program.
- Trade policy (achievement noted)
  - Received market economy status from the EU and the United States (2006).
  - Slashed average import tariffs from 7.7 to (table truncated in source).

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

### 5.1 percent (2005).

### _cr08384 - 5.1 percent (2005).

### WTO accession and EU trade negotiations
- Completed the main steps leading to WTO accession (2007-08).
- Progress in the negotiations of a EU-Ukraine trade agreement.

### Energy sector reforms and objectives
- Eliminated the culture of non-payment in the energy sector (2000-2002).
- Adopted legislation to mutually offset and restructure debts in the energy sector (2005).
- Adopted cash payments for gas transits through Ukraine, rather than payments in kind (2005).
- Implement strategy to make Naftogaz internationally competitive.
- Implement Ukraine’s coal mine restructuring plan.
- Enhance independence of National Electricity Regulatory Commission.
- Stimulate energy savings by allowing prices to reflect costs.

### Fiscal-structural reforms and governance
- Adopted a budget code establishing a solid legal framework for budget management and many of the budget execution and reporting functions (2001).
- Implement comprehensive reform for State Tax Administration.
- Bring the State Tax Administration and Customs under the control of the Ministry of Finance.* 
- Implement a medium-term budget framework.
- Bring public procurement legislation in line with EU legislation.
- Set up a monitoring and oversight system for financial risks in state-owned enterprises.
- Reform the system of unfunded social mandates and replace it with a targeted social protection system.
- Reduce tax rates over time, but subject to expansion of the tax base and/or reductions in government spending.
- 1/ Measures include those listed in the Ukraine-EU Action Plan, and World Bank, OECD, and Fund recommendations.
- * denotes measures which are not part of the government programme.

### Public sector debt sustainability (Table 10 highlights, 2003-2013; in percent of GDP unless otherwise indicated)
- Baseline: Public sector debt 1/: 2003: 30.6; 2004: 25.5; 2005: 18.7; 2006: 15.7; 2007: 13.0; 2008: 10.6; 2009: 17.4; 2010: 17.4; 2011: 17.3; 2012: 16.7; 2013: 16.4.
- o/w foreign-currency denominated: 2003: 21.6; 2004: 19.2; 2005: 14.1; 2006: 12.5; 2007: 10.2; 2008: 7.4; 2009: 10.0; 2010: 9.4; 2011: 9.0; 2012: 8.5; 2013: 8.2.
- Change in public sector debt (line 2): 2003: -5.1; 2004: -5.1; 2005: -6.9; 2006: -2.9; 2007: -2.7; 2008: -2.4; 2009: 6.8; 2010: 0.0; 2011: -0.1; 2012: -0.6; 2013: -0.3.
- Identified debt-creating flows (line 3): 2003: -5.7; 2004: -5.6; 2005: -9.0; 2006: -2.3; 2007: -2.5; 2008: -0.9; 2009: 7.2; 2010: -1.1; 2011: -0.5; 2012: -0.5; 2013: -0.4.
- Primary deficit (line 4): 2003: -0.1; 2004: 3.5; 2005: 1.5; 2006: 0.7; 2007: 1.5; 2008: 1.4; 2009: 3.0; 2010: 0.2; 2011: 0.2; 2012: 0.3; 2013: 0.4.
- Revenue and grants (line 5): 2003: 38.0; 2004: 37.1; 2005: 41.8; 2006: 43.7; 2007: 42.3; 2008: 42.8; 2009: 42.2; 2010: 41.5; 2011: 41.3; 2012: 41.3; 2013: 41.2.
- Primary (noninterest) expenditure (line 6): 2003: 37.9; 2004: 40.6; 2005: 43.3; 2006: 44.5; 2007: 43.8; 2008: 44.2; 2009: 45.2; 2010: 41.7; 2011: 41.5; 2012: 41.6; 2013: 41.6.
- Automatic debt dynamics (line 7): 2003: -4.6; 2004: -6.0; 2005: -5.6; 2006: -2.7; 2007: -3.3; 2008: -3.1; 2009: 0.4; 2010: -0.8; 2011: -0.1; 2012: -0.3; 2013: -0.3.
- Privatization receipts (negative) (line 13): 2003: -1.1; 2004: -3.1; 2005: -5.0; 2006: -0.4; 2007: -0.6; 2008: -0.2; 2009: -0.1; 2010: -0.5; 2011: -0.5; 2012: -0.5; 2013: -0.6.
- Other (specify, e.g. bank recapitalization) (line 15): 2008: 1.0; 2009: 4.0.
- Residual, including asset changes (line 16): 2003: 0.6; 2004: 0.6; 2005: 2.1; 2006: -0.6; 2007: -0.3; 2008: -1.5; 2009: -0.5; 2010: 1.1; 2011: 0.4; 2012: -0.1; 2013: 0.2.
- Public sector debt-to-revenue ratio 1/: 2003: 80.6; 2004: 68.8; 2005: 44.6; 2006: 36.0; 2007: 30.8; 2008: 24.9; 2009: 41.3; 2010: 42.0; 2011: 41.9; 2012: 40.4; 2013: 39.9.
- Gross financing need 6/ (in percent of GDP): 2003: 3.6; 2004: 6.8; 2005: 5.5; 2006: 3.1; 2007: 2.9; 2008: 2.6; 2009: 6.6; 2010: 3.6; 2011: 4.1; 2012: 4.0; 2013: 4.0.
- Gross financing need 6/ (in billions of U.S. dollars): 2003: 1.8; 2004: 4.4; 2005: 4.7; 2006: 3.3; 2007: 4.0; 2008: 5.0; 2009: 8.9; 2010: 5.3; 2011: 6.7; 2012: 7.5; 2013: 8.5.
- Scenario with key variables at their historical averages 7/: 10.6; 12.4; 11.3; 9.8; 8.1; 6.8; -1.5.
- Scenario with no policy change (constant primary balance) in 2008-2013: 10.6; 14.5; 15.8; 17.2; 17.7; 18.4; -0.9.

Key macroeconomic and fiscal assumptions underlying baseline (selected)
- Real GDP growth (in percent): 2003: 9.6; 2004: 12.1; 2005: 2.7; 2006: 7.1; 2007: 7.6; 2008: 6.0; 2009: -3.0; 2010: 3.3; 2011: 5.5; 2012: 6.8; 2013: 6.4.
- Average nominal interest rate on public debt (in percent) 8/: 2003: 3.3; 2004: 3.9; 2005: 3.8; 2006: 4.2; 2007: 4.3; 2008: 6.4; 2009: 16.0; 2010: 12.5; 2011: 12.1; 2012: 11.6; 2013: 11.4.
- Average real interest rate (nominal rate minus change in GDP deflator, in percent): 2003: -4.7; 2004: -11.2; 2005: -20.8; 2006: -9.5; 2007: -18.9; 2008: -25.0; 2009: 0.5; 2010: -1.5; 2011: 5.0; 2012: 5.1; 2013: 4.7.
- Inflation rate (GDP deflator, in percent): 2003: 8.0; 2004: 15.2; 2005: 24.6; 2006: 14.9; 2007: 21.8; 2008: 31.4; 2009: 15.5; 2010: 14.0; 2011: 7.1; 2012: 6.5; 2013: 6.7.
- Growth of real primary spending (deflated by GDP deflator, in percent): 2003: 21.4; 2004: 20.2; 2005: 9.6; 2006: 9.9; 2007: 5.9; 2008: 7.0; 2009: -0.9; 2010: -4.7; 2011: 5.0; 2012: 7.1; 2013: 6.3.

Notes and methodological footnotes are retained in original form in the source (footnotes 1/–9/).

### External debt sustainability (Table 11 highlights, 2003-2013; in percent of GDP unless otherwise indicated)
- Baseline: External debt (line 1): 2003: 46.7; 2004: 46.3; 2005: 45.1; 2006: 49.7; 2007: 57.8; 2008: 54.3; 2009: 78.2; 2010: 74.6; 2011: 71.3; 2012: 64.6; 2013: 57.7.
- Change in external debt (line 2): 2003: -5.4; 2004: -0.3; 2005: -1.2; 2006: 4.6; 2007: 8.2; 2008: -3.6; 2009: 24.0; 2010: -3.7; 2011: -3.3; 2012: -6.7; 2013: -6.9.
- Identified external debt-creating flows (line 3): 2003: -14.9; 2004: -27.1; 2005: -26.3; 2006: -16.3; 2007: -18.6; 2008: -2.4; 2009: -2.8; 2010: -8.1; 2011: -9.5; 2012: -10.6; 2013: -9.1.
- Current account deficit, excluding interest payments (line 4): 2003: -7.2; 2004: -11.9; 2005: -4.6; 2006: -0.8; 2007: 2.2; 2008: 2.7; 2009: -4.5; 2010: -5.1; 2011: -4.5; 2012: -4.8; 2013: -3.4.
- Deficit in balance of goods and services (line 5): 2003: -2.6; 2004: -7.7; 2005: -0.8; 2006: 2.8; 2007: 5.8; 2008: 7.6; 2009: 2.4; 2010: 1.3; 2011: 2.0; 2012: 1.6; 2013: 2.9.
- Exports (line 6): 2003: 57.8; 2004: 63.6; 2005: 51.5; 2006: 46.5; 2007: 45.2; 2008: 44.7; 2009: 52.5; 2010: 53.3; 2011: 52.7; 2012: 51.3; 2013: 48.4.
- Imports (line 7): 2003: 55.2; 2004: 56.0; 2005: 50.7; 2006: 49.4; 2007: 50.9; 2008: 52.3; 2009: 55.0; 2010: 54.6; 2011: 54.7; 2012: 53.0; 2013: 51.3.
- Net non-debt creating capital inflows (negative) (line 8): 2003: -1.0; 2004: -5.8; 2005: -11.9; 2006: -8.6; 2007: -10.6; 2008: -6.1; 2009: -7.1; 2010: -7.4; 2011: -8.4; 2012: -8.8; 2013: -8.7.
- Automatic debt dynamics (line 9): 2003: -6.7; 2004: -9.3; 2005: -9.8; 2006: -6.8; 2007: -10.3; 2008: 0.9; 2009: 8.7; 2010: 4.5; 2011: 3.5; 2012: 3.0; 2013: 3.1.
- External debt-to-exports ratio (in percent): 2003: 80.8; 2004: 72.8; 2005: 87.5; 2006: 106.8; 2007: 128.0; 2008: 121.4; 2009: 149.0; 2010: 140.0; 2011: 135.2; 2012: 125.8; 2013: 119.2.
- Gross external financing need (in billions of US dollars) 4/: 2003: 7.3; 2004: 4.0; 2005: 9.5; 2006: 14.3; 2007: 22.0; 2008: 35.4; 2009: 34.4; 2010: 33.4; 2011: 34.8; 2012: 38.8; 2013: 45.0.
- Gross external financing need (in percent of GDP): 2003: 14.6; 2004: 6.2; 2005: 11.0; 2006: 13.2; 2007: 15.5; 2008: 18.8; 2009: 25.3; 2010: 22.3; 2011: 21.2; 2012: 20.8; 2013: 21.3.
- Scenario with key variables at their historical averages 5/: 54.3; 46.8; 40.5; 34.3; 27.9; 20.7; -5.3.

Key macro assumptions underlying baseline (selected)
- Real GDP growth (in percent): 2003: 9.6; 2004: 12.1; 2005: 2.6; 2006: 7.3; 2007: 7.6; 2008: 6.0; 2009: -3.0; 2010: 3.3; 2011: 5.5; 2012: 6.8; 2013: 6.4.
- GDP deflator in US dollars (change in percent): 2003: 7.9; 2004: 15.5; 2005: 29.4; 2006: 16.9; 2007: 21.9; 2008: 25.4; 2009: -25.7; 2010: 6.7; 2011: 4.1; 2012: 6.4; 2013: 6.4.
- Nominal external interest rate (in percent): 2003: 3.1; 2004: 3.5; 2005: 4.6; 2006: 6.5; 2007: 3.9; 2008: 8.1; 2009: 8.6; 2010: 9.6; 2011: 10.6; 2012: 11.5; 2013: 11.8.
- Growth of exports (US dollar terms, in percent): 2003: 24.0; 2004: 42.6; 2005: 7.5; 2006: 13.2; 2007: 27.4; 2008: 31.5; 2009: -15.3; 2010: 11.8; 2011: 8.6; 2012: 10.6; 2013: 6.8.
- Growth of imports (US dollar terms, in percent): 2003: 28.7; 2004: 31.3; 2005: 20.4; 2006: 22.0; 2007: 35.4; 2008: 36.5; 2009: -24.3; 2010: 9.5; 2011: 10.0; 2012: 10.0; 2013: 9.7.
- Current account balance, excluding interest payments: 2003: 7.2; 2004: 11.9; 2005: 4.6; 2006: 0.8; 2007: -2.2; 2008: -2.7; 2009: 4.5; 2010: 5.1; 2011: 4.5; 2012: 4.8; 2013: 3.4.
- Net non-debt creating capital inflows: 2003: 1.0; 2004: 5.8; 2005: 11.9; 2006: 8.6; 2007: 10.6; 2008: 6.1; 2009: 7.1; 2010: 7.4; 2011: 8.4; 2012: 8.8; 2013: 8.7.

Notes and methodological footnotes are retained in original form in the source.

### Proposed Fund access and indicators of Fund credit (Tables 12–13 highlights)
- Proposed Arrangement (Table 12): Proposed access in millions of SDRs: 11,000; Proposed average annual access: 401.
- Total access in percent of actual quota: 802.
- Total access in percent of Gross domestic product: 8.7.
- Total access in percent of Gross international reserves: 52.
- Total access in percent of Exports of goods and nonfactor services: 19.
- Total access in percent of Imports of goods and nonfactor services: 17.
- Table 13: Existing and prospective Fund credit 1/ 2/ (in millions of SDRs): 2006: 552; 2007: 273; 2008: 3,057; 2009: 9,500; 2010: 11,000; 2011: 11,000; 2012: 8,313; 2013: 3,281.
- Existing and prospective Fund credit (in percent of exports of goods and services): 2006: 216; 2007: 212; 2008: 220; 2009: 145.
- Existing and prospective Fund credit (in percent of public sector external debt): 2006: 63; 2007: 25; 2008: 50; 2009: 54; 2010: 52; 2011: 42; 2012: 20.
- Repurchases and charges due from existing and prospective drawings (in millions of SDRs): 2006: 315; 2007: 304; 2008: 239; 2009: 315; 2010: 501; 2011: 552; 2012: 3,200; 2013: 5,338.

(Additional rows and percent ratios are presented in the source tables; data sources cited in the source include Ukrainian authorities and staff estimates.)

### Excerpt from Attachment I — Kyiv letter and Memorandum of Economic and Financial Policies (MEFP): program request and objectives
- The Government of Ukraine requests approval of a Stand-By Arrangement (SBA) in an amount equivalent to SDR 11,000 million (800 percent of our quota) for the period November 2008 through October 2010.
- The government states the program policies aim to promote sustainable and equitable long-term growth, lower inflation and continued external viability.
- Program monitoring: reviews first in January 2009, and quarterly thereafter; monitored through prior actions, quantitative performance criteria and indicative targets, and structural performance criteria and structural benchmarks.
- Background (paragraphs 51–53) key points:
  - Growth averaged over 7 percent since 2000, with overheating by late 2007: high inflation, rapid nominal wage and asset growth, and a burgeoning current account deficit.
  - Capital inflows included both foreign direct investment and significant debt inflows, often short-term into corporate sector and banking system, creating largely unhedged exposures.
  - In early 2008 the National Bank accelerated transition to a flexible exchange rate (beginning in March 2008, wider band) and took steps from late 2007 to eliminate incentives for banks to fund themselves abroad with short-term debt.
  - Global financial turmoil and plunge in commodity prices undermined confidence; problems in large steel sector and in the banking system emerged; temporary measures included providing liquidity to the banking system and placing temporary restrictions on early withdrawal of term deposits.
  - Residual financing gap for the program period, after planned strong policy measures and prospective financing, is about $16½ billion.
- Program objectives (paragraph 54) — core aims to restore confidence in macroeconomic and financial stability:
  - Financial sector measures: (i) appropriate liquidity support and expansion of deposit guarantees; (ii) a stronger bank resolution framework, including availability of public funds; (iii) a stronger framework for resolution of household and enterprise sector debts.
  - Macroeconomic policy adaptation: (i) a flexible exchange rate policy, supported by base money targets and an appropriate intervention strategy; (ii) planned transition to inflation targeting; (iii) bringing incomes policy in line with targeted inflation, while protecting the most vulnerable; (iv) maintain a prudent fiscal stance; (v) bringing energy sector prices more in line with costs.

*Source: _cr08384 - 5.1 percent (2005).*

### 55.      For 2009 our macroeconomic objectives are set conservatively, reflecting the fact

### _cr08384 - 55.      For 2009 our macroeconomic objectives are set conservatively, reflecting the fact

### Macroeconomic objectives for 2009
- Objective to limit inflation to at most 17 percent in 2009; target shared by all government agencies and the National Bank.
- Target kept under review during preparation of the 2009 budget with hope to achieve a better result.
- Continued high inflation reflects, among other things, intention to bring gas prices paid by consumers more in line with costs.
- Expected current account deficit to compress to 1-2 percent of GDP, particularly due to slowdown in credit-sensitive imports like machinery.
- International reserves expected to remain around present levels.

### Medium-term outlook (2009–2011)
- Recovery expected to start sometime in the second half of 2009.
- Return to estimated potential growth rate of 5-6 percent by mid-2010, driven by rising investment ahead of Euro 2012 and improved competitiveness from a flexible exchange rate regime.
- Inflation expected to return to single digits by late-2010 and be anchored around 5-7 percent from 2011.
- Current account deficits expected to remain small and readily financeable, with reserves rising and at safe levels.
- Full macroeconomic and policy program for 2010 to be discussed during the fourth review in October 2009.

### Policy flexibility and contingency plans
- Prepared to respond flexibly to economic developments depending on depth and duration of international deleveraging and global slowdown.
- If balance of payments outcomes are better than projected:
  - Allow build-up of foreign exchange reserves.
  - Adjust monetary policy to safeguard inflation objective.
  - If overperformance is large and persistent, prepared to make repayments of Fund resources ahead of schedule or refrain from drawing scheduled disbursements.
- If developments are less favorable:
  - Rely on buffers in policy framework, including a flexible exchange rate and amounts available for bank recapitalization.
  - Stand ready to take additional measures as necessary.

### Monetary and exchange rate policy (2009)
- Implement a flexible exchange rate regime to provide a buffer against external shocks and greater scope to control inflation.
- Revise Monetary Policy Guidelines for 2009 to:
  - (i) abolish the exchange rate band;
  - (ii) base the official rate on the preceding day’s market exchange rate (with intra-day adjustments if necessary to keep it within 2 percent of the market rate);
  - (iii) commit to a transparent intervention strategy via pre-announced regular auctions and guided by net international reserve targets (quantitative performance criterion), with separate provisions for NBU’s role as agent for government foreign exchange needs.
- Interim actions prior to revised guidelines:
  - NBU Council to take and publicize a decision eliminating the exchange rate band (prior action).
  - NBU Board to change the definition of the official rate as described in (ii) above (prior action).
- Foreign exchange market operations and controls:
  - Any foreign exchange operations with government and private agents to be carried out at the market exchange rate.
  - Will not tolerate abrupt and disorderly movements but expect exchange rate to fluctuate.
  - Measures to improve market operation include cancellation of the foreign exchange transactions tax (structural benchmark for the second review).
  - Eliminated restriction on advance payments; will discuss removal of remaining exchange restrictions with IMF staff and request IMF Board approval at first review following agreement on timetable.
- Monetary policy goal: reduce CPI inflation to 17 percent by end-2009.
  - Use targets on the level of base money (quantitative performance criterion).
  - Target base money growth to be about 11 percent in 2009, given expectation nominal growth of the economy will amount to about 12 percent and money demand will decline slightly.
  - As financial market stresses abate, withdraw liquidity via restoring previous reserve requirement rules and raising interest rates on deposits at the NBU to bring them closer to the refinance rate.
  - Continue deposit auctions at regular intervals.
  - Enhance NBU balance sheet quality by reviewing acceptable collateral and rapidly phasing out bank shares from this list.
  - During program reviews, assess base money demand and adjust targets if money demand deviates markedly; use indicators such as dollarization of deposits, velocity, and currency movements.

### Medium-term monetary strategy (inflation targeting and NBU reforms)
- Goal to re-anchor monetary policy with an inflation targeting regime.
- Enhance NBU’s regularly published Monetary Review to cover inflation developments and prospects (in line with international practice on Inflation Reports).
- Reform internal NBU decision-making to refocus on inflation forecasts and risks.
- Strengthen NBU independence by:
  - Reforming the NBU council into a narrower technical body in line with best practice.
  - Prolonging the term of the governor.
  - Providing more financial flexibility to the NBU: securitize government debt to the NBU, centralize all liquidity operations in the NBU, and bring profit transfer arrangements into line with best international practice (structural benchmark).
- Implement a primary dealer system to develop the government securities market.
- Enhance NBU communications with the public regarding policy objectives and actions during transition toward IT.

### Financial sector policy (near-term and resolution strategy)
- Key near-term priorities to restore stability and confidence:
  - (i) stabilize banking system through flexible provision of liquidity by the National Bank;
  - (ii) enhance daily monitoring of banks’ liquidity condition;
  - (iii) ensure bank solvency through strengthened on- and off-site supervision.
- Near-term measures:
  - NBU to implement safeguards in provision of liquidity support with strengthened monitoring and supervision to avoid support evolving into solvency support; NBU stands ready to refinance bank recapitalization bonds while ensuring no effect on overall system-wide liquidity.
  - Government to enact proposal to raise deposit insurance to Hrv 150,000 from Hrv 50,000 (covers both Hryvnia and foreign exchange deposits).
  - As deposit outflows subside, remove administrative restrictions on early withdrawals of term deposits.
  - Establish high-frequency bank-by-bank monitoring of assets and liability maturity profiles (deposits, liquid assets, interbank transactions, foreign credit lines, debt rollovers); initiate special on-site inspections and restructuring plans for deteriorating banks.
  - NBU banking supervision to initiate close contacts with home supervisors of foreign banks to share information and assess parent bank funding to Ukrainian subsidiaries and make joint contingency plans for debt rollover risks.
  - Promptly finalize resolution of the Prominvestbank (prior action).
  - NBU to enhance disclosure of detailed bank-by-bank financial information (monthly and quarterly detailed balance sheets and income statements) to meet international best practices (structural benchmark).
  - Address May 2008 FSAP Update recommendations related to consolidated supervision, licensing of cross-bank equity holdings, and transparency of bank investments in non-banks.
- Comprehensive bank resolution strategy:
  - Conduct diagnostic study and targeted examination of banking sector, starting with large and systemically important banks (comprising 60 percent of the banking system assets). Scope includes asset quality, liquidity, off-balance sheet items, risk management and capital position. Diagnostic coordinated by NBU with reputable audit firms (structural performance criterion).
  - Upon completion, resolve problem banks so viable banks meet regulatory minimum capital and nonviable banks are liquidated (structural performance criterion).
  - Provide financial support to viable banks in the form of recapitalization to cushion the real economy; terms to be laid out in a Law or Decree (prior action) and details in an NBU regulation.
  - Make necessary legal amendments to facilitate bank resolution (prior action), allowing NBU to undertake purchase and assumption, sale of part or whole of a bank, and reduction in value of existing shareholders' equity to absorb losses.

### Fiscal policy (2008–2009) and incomes policy
- Fiscal stance:
  - Intend to keep the general deficit at low levels in 2008 and 2009; achievement monitored by a quantitative performance criterion.
  - In 2008, deficit would not exceed 1 percent of GDP, reflecting committed expenditures and projected loss of tax revenues from sharp slowdown in the last quarter.
  - For 2009, targeting a general government budget with a zero overall balance (including an adjuster to allow for potential bank recapitalization operations).
  - Until parliament resumes, last year’s budget will apply (constant expenditures in nominal terms).
- Factors supporting fiscal targets:
  - Starting position described as sound with close-to-balanced budget to-date in 2008.
  - Moderating public sector wage growth and gradual pass-through of imported gas price increases to consumers will generate savings.
  - Will identify and legislate any additional fiscal measures needed; may provide additional fiscal stimulus if financing through privatization or other sources becomes available.
  - Implement primary dealer system to facilitate development of government securities market.
- Incomes policy adjustments:
  - Limit increases in both minimum and average public wage and pensions and other social transfers in line with projected inflation in 2009 (average and end-period basis).
  - Specific measures:
    - (i) in December 2008-January 2009, the wage level for the first grade public sector employees will remain constant;
    - (ii) postpone for two years the planned equalization of the minimum wage with the much higher minimum subsistence level;
    - (iii) revise backward-looking indexation arrangements for various social transfers and refocus increases on forward-looking inflation measures.

### Naftogaz and energy pricing/tariff policy
- Naftogaz to publish audited 2007 accounts as soon as feasible with aim to eliminate the technical default on its eurobond.
- Unify the price of domestic and imported gas by end-2011; gradual phasing starts on December 1, 2008.
- Price subsidies for imported natural gas consumed by communal heating entities to be reduced through quarterly tariff adjustments and eliminated by July 1, 2010.
- Plan to put in place a stronger regulatory framework to depoliticize tariff setting; changes to be undertaken in consultation with the World Bank.

### Social safety nets
- Assist vulnerable groups through programs including unemployment insurance; an income support scheme; housing and utilities subsidies; and lifeline utility tariffs.
- Housing and utilities subsidies and lifeline tariffs targeted to assist those affected by rising energy prices.
- Continue reviewing effectiveness of these programs in consultation with the World Bank to ensure targeting.

### Private sector support and structural reforms
- Facilitate resolution of corporate sector debts by:
  - Conducting in-depth analysis of different projections and scenarios for risk of extensive private sector default.
  - Facilitating establishment of a voluntary framework for restructuring debts.
  - Reviewing bankruptcy legislation to streamline process and eliminate delays while preserving due process.
  - Enhancing monitoring of external debt developments to respond early to emerging peaks in external debt service.
- Near-term structural measures deemed crucial to expand external private financing:
  - (i) creation of a functioning market in agricultural land;
  - (ii) agreeing on a list of companies to be privatized, transparently, in 2009.
- These issues also discussed in context of World-Bank supported program.

### Safeguards assessment and program monitoring
- Importance of completing an updated safeguards assessment of the NBU by the first review of the standby arrangement.
- Authorize NBU’s external auditors to provide IMF staff with all necessary information, including management letters for 2005-07, and to hold discussions directly with Fund staff.
- Commit to receiving a safeguards mission and to provide requested information without delay, including information related to correspondent banks and foreign reserve placements.

*Attachment I, VIII. POLICIES FOR 2009 — excerpt provided in source content.*

### 72.      The pr

### _cr08384 - 72.      The pr

### Monitoring, reviews, and program coverage
- The program will be monitored through:
  - regular reviews,
  - prior actions,
  - quantitative performance criteria and indicative targets,
  - structural performance criteria and structural benchmarks.
- The phasing of purchases and the review schedule are set out in Table 1.
- Quantitative targets for end-December 2008, end-March 2009, end-June 2009, end-September 2009 and end-December 2009, and continuous performance criteria, are set out in Table 2.
- Prior actions, structural performance criteria and structural benchmarks are set out in Table 3.
- Understandings regarding quantitative performance criteria and structural measures are specified in the TMU attached to the memorandum.
- The government will consult with the Fund on adoption of new measures and revisions to the policies contained in the memorandum and will provide information requested for monitoring progress during program implementation.

### Access and phasing under the proposed Stand-By Arrangement (Table 1)
- Total: 11,000 SDRs, 802 percent of quota.
- Scheduled purchases and conditions:
  - November 2008: 3,000 SDRs, 218.7 percent of quota — Condition: Board approval of arrangement
  - 15 February 2009: 1,250 SDRs, 91.1 percent of quota — Condition: Observance of end-December performance criteria and completion of the first review
  - 15 May 2009: 2,500 SDRs, 182.2 percent of quota — Condition: Observance of end-March performance criteria and completion of the second review
  - 15 August 2009: 750 SDRs, 54.7 percent of quota — Condition: Observance of end-June performance criteria and completion of the third review
  - 15 November 2009: 2,000 SDRs, 145.8 percent of quota — Condition: Observance of end-September performance criteria and completion of the fourth review
  - 15 February 2010: 375 SDRs, 27.3 percent of quota — Condition: Observance of end-December performance criteria and completion of the fifth review
  - 15 May 2010: 375 SDRs, 27.3 percent of quota — Condition: Observance of end-March performance criteria and completion of the sixth review
  - 15 August 2010: 375 SDRs, 27.3 percent of quota — Condition: Observance of end-June performance criteria and completion of the seventh review
  - 15 October 2010: 375 SDRs, 27.3 percent of quota — Condition: Observance of end-September performance criteria and completion of the eighth review
- Note: Quantitative and structural performance criteria for remaining scheduled purchases in 2010 are expected to be established at the time of the third review.

### Quantitative and continuous performance criteria (Table 2)
I. Performance criteria (end-of-period; in millions of hryvnia, unless otherwise indicated)
- Ceiling on the cash deficit of the general government (- implies a surplus) 2/ 3/ 4/:
  - 2008 Dec Prog.: -4,994
  - 2009 End-Sept. (stock): 9,930
  - 2009 End-Dec Prog.: 0
  - 2009 End-Mar Prog.: -2,000
  - 2009 End-June Prog.: -5,000
  - 2009 End-Sept Prog.: 0
- Floor on net international reserves of the NBU (in millions of U.S. dollars):
  - 2008 stock: 37,530
  - 2008 Dec Prog.: 26,700
  - 2009 End-Mar: 21,800
  - 2009 End-June: 18,700
  - 2009 End-Sept: 16,600
  - 2009 End-Dec: 14,900
- Ceiling on base money:
  - 2008 stock: 170,835
  - 2008 Dec Prog.: 190,000
  - 2009 End-Mar Prog.: 192,000
  - 2009 End-June Prog.: 197,500
  - 2009 End-Sept Prog.: 203,000
  - 2009 End-Dec Prog.: 211,000

II. Continuous performance criteria
- Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current international transactions
- Prohibition on the introduction or modification of multiple currency practices
- Prohibition on the conclusion of bilateral payments agreements that are inconsistent with Article VIII
- Prohibition on the imposition or intensification of import restrictions for balance of payments reasons

III. Adjusters
- Project financing (values shown): 2/ 
  - 2008 stock: 284
  - 2008 Dec Prog.: 1,468
  - 2009 End-Mar Prog.: 1,045
  - 2009 End-June Prog.: 2,091
  - 2009 End-Sept Prog.: 3,136
  - 2009 End-Dec Prog.: 4,182
- Cost of bank recapitalizations: 3/ 0 0 0 0 0 0

- Sources noted in the table: Ukrainian authorities; and Fund staff estimates and projections.
- Notes:
  - Definitions are specified in the Technical Memorandum of Understanding (TMU). Targets for 2010 will be set at the time of the third review.
  - The ceiling on the cash deficit of the general government will be adjusted downward by the amount that project financing falls short of the projections shown in Section II above. The quarterly ceilings are set taking into account the seasonality of the deficit.
  - The floor on the cash balance of the general government will be adjusted downward by 100 percent of the fiscal cost of banks recapitalizations. This cost includes the upfront cost for the budget implied by the recapitalization as well as associated subsequent interest payments.
  - Data are cumulative flows from January 1 of the corresponding year.

### Prior actions, performance criteria, and structural benchmarks (Table 3)
Prior Actions (A)
- A1. Implement a flexible exchange rate regime. NBU Council to take and publicize a decision to abolish the exchange rate band, and NBU Board to define the official rate as the preceding day’s market exchange rate (with intra-day adjustments if necessary to keep it within 2 percent of the market rate) (MEFP ¶8).
- A2. Issue a Law or a Decree laying out the terms of financial support to banks (MEFP ¶13).
- A3. Make the necessary legal amendments authorizing the NBU to undertake the necessary bank resolution process, including (i) purchase and assumption, (ii) sales of part or whole bank, and (iii) reduction in the value of the existing shareholders’ equity and voting rights to absorb the losses incurred in the resolution process (MEFP ¶13).
- A4. Finalize the resolution of the Prominvest Bank (MEFP ¶12).

Performance Criteria (B)
- B1. Complete a diagnostic study by December 15, 2008 covering NBU’s group 1 banks, coordinated by NBU and with participation of several reputable audit firms (MEFP ¶13). — Mid-December 2008
- B2. Resolve all problem banks by end June 2009, so that viable banks meet the regulatory minimum capital and nonviable banks are liquidated (MEFP ¶13). — End-June 2009
- B3. Pass a 2009 Budget consistent with our general government deficit target of a zero overall balance. Consistency will be monitored through the target for the state budget deficit and the budgets for the social funds (MEFP ¶14). — End-April 2009

Structural Benchmarks (B)
- B4. Cancel the foreign exchange transactions tax (MEFP ¶9). — End-April 2009
- B5. NBU to adopt framework for publication, on monthly and quarterly basis, of detailed bank-by-bank financial information in line with international best practices, to include among other items, detailed balance sheets and income statements, information on bank capitalization and asset quality, with separate information for domestic and foreign currency assets and liabilities (MEFP ¶12). — End-January 2009
- B6. Strengthen NBU independence: reform the NBU council, transforming it into a narrower technical body in line with best practice; prolong the term of the governor; and provide more financial flexibility to the NBU (securitize government debt to the NBU, centralize all liquidity operations in the NBU, and bring profit transfer arrangements into line with best international practice) (MEFP ¶11). — End-June 2009

### Technical Memorandum of Understanding — key definitions and measurement rules (Attachment II)
I. Quantitative targets — definitions

A. Floor on Net International Reserves (NIR) of the NBU
- NIR defined as: difference between usable gross international reserve assets and reserve-related liabilities to nonresidents, evaluated at program exchange rates.
- Usable gross international reserve assets: all reserve assets of the NBU (Table A, item 1) to the extent readily available for intervention and held in first-rank international banks or as securities issued by G-7 countries.
- Exclusions from usable reserves include, inter alia:
  - any assets denominated in foreign currencies held at, or which are claims on, domestic institutions;
  - any precious metals or metal deposits, other than monetary gold, held by the NBU;
  - any assets that correspond to claims of commercial banks in foreign currency on the NBU and any reserve assets that are: (i) encumbered; or (ii) pledged as collateral (in so far as not already included in foreign liabilities, or excluded from reserve assets); or (iii) frozen;
  - any reserve assets that are not readily available for intervention because of lack of quality or lack of liquidity that limits marketability at the book price.
- Reserve-related liabilities comprise:
  - all short-term liabilities of the NBU vis-à-vis non-residents with an original maturity of one year or less;
  - the stock of IMF credit outstanding;
  - the nominal value of all derivative positions of the NBU and government, implying the sale of foreign currency or other reserve assets against domestic currency.
- Table A lists components of NIR mapped to NBU balance sheet accounts (items and account numbers as provided).
- Program exchange rates (used to evaluate reserve levels) are the official exchange rates determined by the NBU as of September 30, 2008:
  - Swiss Franc: 0.9056 dollar
  - Euro: 1.4349 dollars
  - Pound Sterling: 1.8029 dollars
  - Japanese yen: 106.1346 per dollar
  - Accounting exchange rate for the SDR: 1.56407 per dollar
  - Official gold holdings valued at 833.95 dollars per troy ounce
- These program exchange rates are kept fixed over the program period.

B. Ceiling on Monetary Base of the NBU (Base Money)
- Monetary base comprises:
  - domestic currency outside banks and banks' reserves, including cash in vault of commercial banks, and funds of customers at the NBU.
- Currency outside banks defined by NBU account combinations (accounts and arithmetic expression provided).
- Banks’ reserves defined as cash in vault at deposit money banks (DMB accounts specified) plus DMB correspondent account deposits at the NBU in hryvnia (NBU liabilities accounts 3200, 3203, 3204, and 3206) plus funds of customers at the NBU in hryvnia (NBU liabilities accounts 3230, 3232, 3233, 3234, 4731, 4732, 4735, 4736, 4738, 4739, and 4750), plus accrued interest on time deposits of DMBs in national currency (NBU accounts 3208L), plus accrued interest on client’s current accounts in national currency (NBU liability account 3238).

C. Ceiling on Cash Deficit of the General Government
- General government comprises central government, all local governments, and all extrabudgetary funds, including the Pension, Employment, Social Insurance for Temporary Disability, State Material Reserve, Leasing, Occupational Accident and Sickness Insurance, and State Property funds.
- Consolidated budget comprises: (i) the state budget; (ii) all local government budgets; and (iii), if not already included in (i), the budgets of the extrabudgetary funds listed above, and any other extrabudgetary funds included in the monetary statistics compiled by the NBU.
- Cash deficit of the general government measured from below the line as the sum of:
  - total net treasury bill sales as measured by the NBU registry of treasury bill sales (net treasury bill sales defined as cumulative total funds from primary auction sales less cumulative total redemption of principal);
  - other net domestic banking system credit to government as measured by monetary statistics provided by the NBU (all non-treasury-bill financing in either domestic or foreign currency extended to the government less change in all government deposits in the banking system);
  - total receipts from privatization received by the SPF and local governments;
  - difference between disbursements and amortization on any bond issued by the government or the NBU to nonresidents for purposes of financing the general government deficit;
  - difference between disbursements of official foreign credits to the general government (including project loans on-lent to public enterprises) and amortization of official foreign credits by the general government (including of on-lent project loans, and excluding offset-based amortization with Russia);
  - net change in government deposits in nonresident banks or other nonresident institutions;
  - net proceeds from any promissory note or other financial instruments issued by the general government.
- For measuring the deficit, all flows to/from the budget in foreign currency will be converted into hryvnia at the official exchange rate prevailing at close of business on the date of the transaction.

Adjustment mechanism for the cash deficit ceiling
- The ceiling on the cash deficit of the general government is subject to an automatic adjuster based on deviations of external project financing (disbursements from bilateral and multilateral creditors to the state budget for specific project expenditure) from program projections (Table 2).
  - If cumulative proceeds from external project financing (in hryvnia evaluated at actual exchange rates) exceed program projections, the ceiling on the consolidated general government deficit will be adjusted upward by 100 percent of the excess.
  - If cumulative proceeds from external project financing fall short of program projections, the ceiling on the consolidated general government deficit will be adjusted downward by 100 percent of the shortfall.

*Excerpted content from the MEFP and Technical Memorandum of Understanding included in the provided material.*

### 10.      The ceiling on the cash deficit of the general government is subject to an automatic

### _cr08384 - 10.      The ceiling on the cash deficit of the general government is subject to an automatic

### Fiscal treatment of bank recapitalization costs
- The ceiling on the cash deficit of the consolidated general government will be adjusted upward by 100 percent of the budgetary costs associated with the recapitalization of banks.
- These costs affect the cash deficit of the general government in two ways:
  - Upfront cost for the budget of the recapitalization.
  - Associated subsequent interest payments.
- These recapitalization-related costs are excluded from the calculation of the fiscal targets defined in the program.

### Prior actions to stabilize the banking and exchange rate frameworks
- Prior Action A1:
  - Issue NBU resolutions laying out specifics for implementing a flexible exchange rate regime (MEFP ¶8).
  - The NBU council will abolish the exchange rate band and the NBU board will define the official rate as the preceding day’s market exchange rate (with intraday adjustments if necessary to keep it within 2 percent of the market rate).
- Prior Action A2:
  - Issue law or decree laying out the terms of financial support to banks (MEFP ¶12).
  - Financial support will include allocation of financial resources in the form of recapitalization bonds.
  - Access to recapitalization funds limited to banks evaluated as solvent and viable.
- Prior Action A3:
  - Make necessary legal amendments to facilitate bank resolution (MEFP ¶12).
  - Authorize the NBU to undertake bank resolution processes including purchase and assumption, sales of part or whole bank, and reduction in value of existing shareholders’ equity and voting rights to absorb losses.
- Prior Action A4:
  - Finalize the resolution of the Prominvest Bank (MEFP ¶13).
  - Resolution requires sale to a strategic investor or merger with a viable bank; if deposit outflows impair solvency, rapid liquidation is required.

### Structural performance criteria and benchmarks for the banking sector
- Structural Performance Criterion B1:
  - Complete diagnostic study of large systemic banks (NBU’s group 1 banks) by December 15, 2008.
  - NBU to initiate diagnostic studies and targeted examinations as precondition for access to resources, including assessment of asset quality, liquidity position, off-balance sheet items, risk management and capital position.
  - Coordination of diagnosis by the NBU with participation of international experts and several reputable audit firms.
- Structural Performance Criterion B2:
  - Resolve all problem banks by end June 2009 so that viable banks meet the regulatory minimum capital and nonviable banks are promptly liquidated.
- Structural Benchmark B5:
  - NBU to adopt framework for publication, on monthly and quarterly basis, of detailed bank-by-bank financial information in line with international best practices (detailed balance sheets and income statements; information on bank capitalization and asset quality; separate information for domestic and foreign currency assets and liabilities).

### Reporting requirements — National Bank of Ukraine (NBU)
- Monthly submissions to the IMF no later than the 25th day of the following month:
  - Aggregate balance sheet for the NBU and a consolidated balance sheet for deposit money banks.
  - Full breakdown of NBU accounts included in net international reserves (at both actual and program exchange rates) on weekly and monthly basis, no later than the 25th of the following month.
  - Monthly report on treasury bills; weekly report on primary treasury bill market and auction reports posted on the NBU web site.
  - Data on total financing (including refinancing) issued by the NBU to commercial banks, broken down by original maturity, no later than the 25th of each month.
- Every 10 days:
  - Operational monetary survey of the NBU, including additional information needed to monitor monetary policy and banking sector developments.
- Daily submissions:
  - Daily operational balance sheet of the NBU and commercial banks in the standard format, including detailed information on banking sector credit to the general government.
  - Standard daily data sheet on currency operations including Government foreign receipts and payments, breakdown of interbank market operations by currencies, explanations for main currency flows; continued daily information on exchange market transactions, including exchange rates.
  - Reports N 381.25; 381.26 with information on reserve requirements and reports on CD operations when performed.
- Monthly and quarterly sectoral submissions:
  - Monthly projection for external payments falling due in the next twelve months.
  - Quarterly stock of external debt for both public and private sector.
  - Consolidated banking sector data and aggregated data for the largest banks (accounting for at least 80 percent of the total banking system assets) on a quarterly basis, no later than 30 days after the end of the quarter, including: (i) balance sheet; (ii) loan classification (standard, watch, sub-standard, doubtful, loss); (iii) provisions for all assets (required and actual); (iv) foreign currency denominated lending and deposits; (v) capital adequacy ratios for normative and regulatory capital (Tier II and I), normatives H2 and H3; weighted averages based on banks’ total assets; (vi) liquidity normatives H5 and H6; weighted averages based on banks’ total assets.
  - Quarterly balance of payments data in electronic format.
- Other NBU obligations:
  - Provide data on credit to nongovernment units guaranteed by the NBU on a monthly basis no later than 25 days after the end of the month.
  - Inform IMF staff if the Treasury does not pay interest or principal on treasury bills due to the NBU, deposit money banks, or non-bank entities and individuals, and provide information on outstanding interest and principal payments.
  - Inform IMF staff of any changes to reserve requirements for deposit money banks and communicate in writing any changes in accounting conventions, valuation principles, Charts of Accounts, and reporting forms prior to introduction.

### Reporting requirements — Ministry of Finance (MoF)
- Treasury and monthly reporting:
  - Treasury to provide report on daily operational budget execution indicators, and on a 10-day basis data on revenue of the state, local government, and consolidated budget revenues.
  - Monthly treasury reports in electronic form, including revenue and expenditure figures of the consolidated, state and local government, no later than 25 days after the end of the month; reports to provide expenditure data by programs and key spending units and by standard functional and economic classifications.
  - 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.
  - Final fiscal accounts at end of each fiscal year, no later than March of the following year; annual financial statements for extrabudgetary funds no later than April of the following year.
  - Report any revisions to monthly and annual fiscal reports and any amendments to state budget and local government budgets within a week after their approval.
- Monthly cash-deficit reporting:
  - MoF to report monthly, no later than 15 days after the end of the month, the cash deficit of the general government, with details on budget execution data for privatization receipts of the state and local governments; disbursements of external credits (including budget support and project loans for on-lending) to the consolidated budget and amortization of external debt by the consolidated budget; net domestic borrowing of the general government, including net t-bill issuance, issuance of other government debt instruments, and change in government deposits.
- State-owned companies and arrears:
  - Monthly information on borrowing (disbursements, interests and amortization) for Naftogaz, UrkAvtoDor, UkrZaliznytsya, Ukrtelecom and Heteroatom.
  - Data on the stock of all budgetary arrears on a monthly basis, no more than 25 days after the end of the month, including separate line items for wages, pensions, social benefits, energy, communal services, and all other arrears on goods and services; Treasury to report monthly accounts payable for state and local budgets.
  - Monthly information, no later than 25 days after the end of each month, on the amounts and terms of all external debt contracted or guaranteed by the general government.
  - Monthly electronic data, no later than 25 days after the end of the month, on: (a) outstanding stock of domestic and external debt of the state and local budgets (including general and special funds); (b) standard files planned and actual external debt disbursement, amortization, and interest payments (including general and special funds), broken down in detail by creditor categories as agreed with Fund staff; and (c) report on external debt amortization and interest payments by days and currencies. Also report accumulation of any budgetary arrears on external and domestic debt service.
  - MoF and NBU to provide data on external and domestic credit to nongovernment units guaranteed by the government or the NBU on a monthly basis, no later than 25 days after the end of the month.
- Social funds and payroll:
  - Provide data on approved budgets and quarterly operational data (monthly for the Pension Fund only) on revenue, expenditures, arrears, and balance sheets of Pension Fund, Social Insurance Fund, Employment Fund (monthly breakdowns expected for Pension and Employment Funds), Occupational Accident and Sickness Insurance Fund, and any other extrabudgetary funds managed at state level, no later than 25 days after the end of each quarter (each month in case of the Pension Fund). Within-year amendments to these budgets to be reported within a week after approval.
  - Report semi-annual data on the number of employees of budgetary institutions financed from central and local budgets, starting from January 2008.
  - After any public sector wage increase, provide estimate of its costs for the current and subsequent fiscal years for state and local government budgets.
- Recapitalization cost reporting:
  - Provide, no later than 15 days after the end of each month, monthly data on the budgetary costs associated with the recapitalization of banks, including the upfront impact on the cash deficit of the general government and costs associated with payment of interests.

### Reporting requirements — State Tax Administration (STA)
- Monthly data on tax arrears:
  - Provide monthly data, no later than 25 days after the end of the month, on tax arrears inclusive of deferred payments, interest and penalties outstanding in the specified tabular format (Beginning Stock; Netting out during month; Deferrals during month; Write-offs (arrears written off during month); Collections of outstanding debt at beginning of month; New Arrears (tax liabilities becoming overdue during month); Ending Stock), with breakdowns for Total, Principal, Interest, Penalties.
- Sector- and taxpayer-specific reporting:
  - Monthly data, no later than 25 days after the end of the month, on stock and flow of tax arrears in the energy industry, in total and separately for electricity, gas and coal sectors; list identifying taxpayers of the 10 largest accumulated stocks of tax liabilities at end of month and the 10 largest additions to the stock of arrears during that month, prepared separately for electricity, gas and coal sectors.
  - Quarterly, no later than 25 days after the end of the quarter, aggregate data on tax arrears in the above format for the 50 largest tax debtor enterprises and their cumulative monthly tax payments since the beginning of the year.
  - Quarterly, no later than 2 months after the end of the quarter, a listing of all tax exemptions granted specifying beneficiary, the exemption provided, duration, and estimated subsequent revenue loss for the current fiscal year.
- VAT refunds:
  - Monthly information, no later than 25 days after the end of the month, on VAT refunds in the specified format: (i) beginning stock of refund requests; (ii) refund requests paid in cash; (iii) netted out against obligations of the taxpayer; (iv) denied requests; (v) new refund requests; (vi) end-of-period stock; and (vii) stock of end-of-period requests that are overdue in accordance with the VAT law (currently, refunds are overdue after 1 month for exporters and 3 months for other VAT taxpayers). Monthly data operational; quarterly figures subject to verification and finalization.

### Reporting requirements — Ministry of Economy and Ministry of Fuel and Energy
- Quarterly and monthly sectoral information:
  - Ministry of Economy to provide quarterly information on actual levels of communal service tariffs in all regions for major services (heating, water supply, sewage and rent).
  - Ministry of Economy and European Integration, the State Housing Policy Committee, and the National Energy Regulatory Commission to provide methodology underlying tariff calculations for full cost recovery, including electricity and gas.
  - For each month, no later than the 25th of the following month, government (based on information from Ministry of Fuel and Energy, Ministry of Economy and European Integration, STA, MoF, NERC, and Naftogaz) to provide IMF staff with information in electronic form on financial indicators in the gas, electricity and coal sectors, including sales, tariffs, arrears, payments to the budget, subsidies, and debt.

### Reporting requirements — State Statistics Committee (Derzhkomstat)
- Monthly energy trade data:
  - State Statistics Committee and Naftogaz to provide to the IMF, on a monthly basis, no later than 45 days after the end of the month, data on prices, volumes, and payments for imported and exported oil and natural gas by country of origin and destination.

*International Monetary Fund — UKRAINE — Request for Stand-By Arrangement — Informational Annex — Prepared by the European Department — November 3, 2008*

### APPENDIX I: UKRAINE—FUND RELATIONS

### APPENDIX I: UKRAINE—FUND RELATIONS (As of September 30, 2008)

### I. Membership and Quota
- Joined 09/03/1992; Article VIII
- Quota: 1,372.00 SDR Million (100.00 percent)
- Fund holdings of currency: 1,445.14 SDR Million (105.33 percent)
- Reserve position in Fund: 0.02 SDR Million (0.00 percent)

### II. SDR Department
- Holdings: 1.23 SDR Million (N/A)

### III. Outstanding Purchases and Loans
- Extended arrangements: 73.14 SDR Million (5.33 percent of quota)

### IV. Financial Arrangements (Type, Approval Date, Expiration Date, Amount Approved (SDR million), Amount Drawn (SDR million))
- Stand-by: 03/29/04 – 03/28/05; Amount Approved 411.60; Amount Drawn 0.00
- EFF: 09/04/98 – 09/03/02; Amount Approved 1,919.95; Amount Drawn 1,193.00
- Stand-by: 08/25/97 – 08/24/98; Amount Approved 398.92; Amount Drawn 181.33

### V. Projected Payments to Fund (Expectations Basis) (SDR million; based on existing use of resources and present holdings of SDRs)
- 2008
  - Principal: 15.85
  - Charges/Interest: 1.16
  - Total: 17.01
- 2009
  - Principal: 57.28
  - Charges/Interest: 0.96
  - Total: 58.24

Note:
- "This schedule presents all currently scheduled payments to the IMF, including repayment expectations and repayment obligations. The IMF Executive Board can extend repayment expectations (within predetermined limits) upon request by the debtor country if its external payments position is not strong enough to meet the expectations without undue hardship or risk."

### VI. Projected Payments to Fund (Obligations basis) (SDR million; based on existing use of resources and present holdings of SDRs)
- 2008
  - Principal: 15.85
  - Charges/Interest: 1.16
  - Total: 17.01
- 2009
  - Principal: 57.28
  - Charges/Interest: 0.96
  - Total: 58.24
- 2010
  - Principal: 0.0
  - Charges/Interest: 0.0
  - Total: 0.0
- 2011
  - Principal: 0.0
  - Charges/Interest: 0.0
  - Total: 0.0
- 2012
  - Principal: 0.0
  - Charges/Interest: 0.0
  - Total: 0.0

Note:
- "This schedule is not the currently applicable schedule of payments to the IMF. Rather, the schedule presents all payments to the IMF under the illustrative assumption that repayment expectations—except for SRF repayment expectations—would be extended to their respective obligation dates by the IMF Executive Board upon request of the debtor country. SRF repayments are shown on their current expectation dates, unless already converted to an obligation date by the IMF Executive Board."

### VII. Safeguards Assessment (National Bank of Ukraine—NBU)
- A new Safeguards Assessment is required by the time of the first review.
- Last safeguards assessment (with respect to the Stand-By Arrangement approved on March 29, 2004) completed on July 14, 2004.
- Assessment findings:
  - NBU has made progress towards strengthening its safeguards framework.
  - Need for further improvements in financial reporting and legal structure and independence areas.
- Main recommendations:
  - (i) Full adoption of International Financial Reporting Standards (IFRS).
  - (ii) A detailed review of the NBU Law, and other legislation that impinges on the central bank, in order to strengthen the NBU's independence.
  - (iii) Semi-annual audits by the NBU's internal audit function of the monetary data reported to the Fund.

### VIII. Exchange Arrangements and Controls
- Introduction of the hryvnia (Hrv) in September 1996 at conversion rate Krb 100,000 to Hrv 1.
- Exchange rate history and classifications:
  - Initially informally pegged to the dollar.
  - September 1997: formal band Hrv 1.7–Hrv 1.9 per U.S. dollar (limits moved on several occasions).
  - Since March 19, 1999: exchange rate determined by the interbank market.
  - February 22, 2000: NBU confirmed intention to allow free float but intervened regularly; de facto peg around Hrv 5.33 per U.S. dollar, and from March 2005 around Hrv 5.05 per U.S. dollar.
  - From April 2008: reclassified as a managed float.
  - On October 28, 2008: interbank market rate stood at Hrv 6.1 per U.S. dollar.
- Article VIII acceptance:
  - On September 24, 1996, Ukraine accepted the obligations of Article VIII, Sections 2, 3, and 4; two remaining restrictions were eliminated in May 1997.
  - New restrictions on current international transactions introduced in September 1998 and removed in March 1999.
- October 2008 exchange controls introduced (details referenced in source):
  - (i) Restrictions on early withdrawal of time deposits by non-residents (and residents).
  - (ii) Prohibition of early repayment of foreign exchange loans by banks.
  - (iii) Limitation on purchases of foreign currency by banks, in order to discharge foreign exchange loans due, to amounts within their open foreign exchange limit.
  - (iv) Controls over advanced payments for imports that do not enter the territory of Ukraine. (The fourth restriction has already been eliminated.)
  - (v) A six-day delay for investors wishing to convert hryvnia profits, revenues or the sale of assets into foreign currency.
- Staff commitment:
  - By the time of the first review, staff will complete the assessment of whether any of these exchange controls give rise to exchange restrictions subject to Article VIII, Section 2(a) of the Fund’s Articles and whether such restrictions warrant temporary approval by the Executive Board.

### IX. Article IV Consultation (2008)
- Discussions for the 2008 Article IV Consultation took place in Kyiv between March 20 and April 1, 2008.
- Concluding statement of the mission posted on April 16, 2008.
- IMF team composition: Messrs. Ford (Head), Flanagan, Moulin (all EUR), Mr. Driessen (MCM), Ms. Zakharova (FAD), Mr. Hofman (PDR), and Mr. Horvath, Resident Representative. Mr. Yakusha (OED) attended.
- Meetings held with: NBU Governor Stelmakh; Finance Minister Pynzenyk; Economy Minister Danylyshyn; First Deputy Chief of Staff to the President Shlapak; other senior officials; representatives of parliament; the diplomatic community; financial sector; and think tanks.
- Background publications referenced (separately published):
  - Selected Issues Paper: (1) Two Aspects of the Ukrainian’s Business Cycle; (2) Strengthening Ukraine’s Fiscal Framework.
  - Working Paper: Resolving Large Contingent Fiscal Liabilities.

### X. FSAP Participation and Standards Assessments
- Joint World Bank–IMF FSAP mission assessed Ukraine financial sector: May 10–24, 2002.
- Update mission: February 18–21, 2003.
- Financial Sector Stability Assessment (FSSA) report (IMF Country Report No. 03/340) considered by the Executive Board on May 14, 2003.
- Standards and codes assessed (2002/2003): Basel Core Principles for Effective Banking Supervision; Code of Good Practices on Transparency in Monetary and Financial Policies; CPSS Core Principles for Systemically Important Payment Systems; OECD Principles for Corporate Governance; Accounting and Auditing Practices; World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights System; and AML/CFT Methodology.
- Further update mission: June 11–22, 2007 and July 9–20, 2007.
- Additional assessments (2007/2008): Basel Core Principles for Effective Banking Supervision; IOSCO Core Principles of Securities Regulation.
- An updated FSSA was considered by the Executive Board as part of the 2008 Article IV consultation.

### XI. ROSCs (Reports on the Observance of Standards and Codes)
- Data ROSC Module: conducted April 3–17, 2002; considered by the Executive Board on August 5, 2003 (IMF Country Report No. 03/256).
- Fiscal Transparency Module (experimental): issued September 1999; update April 2004 (IMF Country Report No. 04/98).

### XII. Fund Technical Assistance Missions, 2003–08 (As of April 16, 2008)
- FAD
  - Modernizing the State Tax Service: February 7–21, 2006
  - Macro-fiscal Analysis: January 10–18, 2006
  - Reform of the State Customs Service: December 2006
  - Proposals to Reform the Tax System: October 5–18, 2005
  - Customs Administration: June 7–21, 2005
- LEG
  - Workshop on the Use of Cash Couriers and Cross-Border Operations for Money Laundering and the Financing of Terrorism: April 2007
  - Workshop on Effective Enforcement of Criminal Justice Measures in Anti-Money Laundering and Combating the Financing of Terrorism: April 2005
- MCM (extensive list of missions and dates)
  - Monetary policy operations: September 2008
  - Monetary Policy Operations: March 27–April 4, 2008
  - Monetary policy, banking supervision, and other core central bank functions: November 5–11, 2007
  - Operational Preparations for Exchange Rate Flexibility: September 3–10, 2007
  - Monetary policy, banking supervision, and other core central bank functions: July 14–17, 2007
  - NBU Internal Audit and Financial Reporting; Monetary Policy Communication Strategy: September 4–12, 2006; March 6–14, 2006
  - Monetary Policy Operations: January 23–February 2, 2006
  - Operational Preparations for Exchange Rate Flexibility: December 11–21, 2005
  - Action Plan for Transition to Inflation Targeting: October 10–14, 2005
  - Foreign Exchange Markets: July 20–28, 2005
  - Debt Management Strategy (with ICM): June 23–July 7, 2005
  - Central Bank Accounting: June 1–15, 2005
  - Implementing Effective AML/CFT Measures: May 11–20, 2005
  - Management of Foreign Exchange Risk in Transitioning to Greater Exchange Rate Flexibility: April 18–29, 2005
  - Dealing with Problem Banks: March 30–April 6, 2005
  - Inflation Targeting: November 15–19, 2004
  - Banking Supervision: October 25–November 12, 2004
  - Banking Supervision, Monetary Framework and Operations, Government Securities Market: April 13–26, 2004
  - Review of TA Needs: February 9–11, 2004
- STA
  - External Sector Statistics: April 14–25, 2008
  - Balance of Payments Statistics: June 29–July 12, 2005
  - Real Sector Statistics: March 21–April 1, 2005
- ICM
  - Management of External Debt: May 31–June 3, 2005

### XIII. Fund Resident Representatives and Advisors, 2003–08 (as of April 1, 2008)
- Resident Representatives
  - Senior Resident Representative: Mr. Franks, September 2004 – August 2007
  - Senior Resident Representative: Mr. Figliuoli, August 2001–August 2004
  - Resident Representative: Mr. Horvath, Since October 2007
  - Resident Representative: Mr. Lissovolik, July 2001–January 2004
- Advisors
  - Advisor on Inflation Targeting to the NBU: Mr. Vavra, Since January 2006, several visits. (Also listed November 2004–November 2005)
  - Macro Policy Advisor to the Ministry of Finance: Mr. Marion, 2005–06
  - Banking Supervision Advisor at the NBU: Mr. Livesay, April 2005–October 2005

*APPENDIX I: UKRAINE—FUND RELATIONS (As of September 30, 2008).*

### 1.      This note assesses the risks to the Fund arising from the proposed Stand-By

### This note assesses the risks to the Fund arising from the proposed Stand-By Arrangement (SBA) for Ukraine

### Background and past IMF engagement
- Ukraine has been a member since September 1992.
- Obligations to the Fund (all GRA) peaked in 1999 at just over SDR 2 billion.
- Current credit outstanding is SDR 73.14 million.
- The 2004 SBA arrangement was treated as precautionary upon approval and quickly went off-track.
- The 2005 Ex Post Assessment of Longer-term Program Engagement concluded that better program ownership, rooted in stronger political consensus, would be key to improving the chances of success for potential future program-based engagement.
- Ukraine has repurchased Fund’s resources in a timely fashion.

### Proposed SBA — access, phasing, and immediate effects
- Authorities request a 24-month SBA with access of SDR 11 billion (802 percent of quota).
- A front-loading of SDR 3 billion (219 percent of quota) would be made available upon approval of the arrangement.
- Phasing of purchases (Table 1):
  - 2008 November (approval): SDR 3,000 (218.7 percent of quota) — cumulative 218.7
  - 2009 February: SDR 1,250 (91.1 percent of quota) — cumulative 309.8
  - 2009 May: SDR 2,500 (182.2 percent of quota) — cumulative 492.0
  - 2009 August: SDR 750 (54.7 percent of quota) — cumulative 546.6
  - 2009 November: SDR 2,000 (145.8 percent of quota) — cumulative 692.4
  - 2010 February: SDR 375 (27.3 percent of quota) — cumulative 719.8
  - 2010 May: SDR 375 (27.3 percent of quota) — cumulative 747.1
  - 2010 August: SDR 375 (27.3 percent of quota) — cumulative 774.4
  - 2010 October: SDR 375 (27.3 percent of quota) — cumulative 801.7
  - Total: SDR 11,000 (801.7 percent of quota)
- Note: Starting in February 2009, purchases will depend on the completion of a review.

### Ukraine’s external debt profile (selected figures)
- Total external debt (millions of U.S. dollars):
  - 2005: 38,843
  - 2006: 53,633
  - 2007: 81,939
  - 2008 (projected to end-2008): 102,128
- Composition (2008 projected to end-2008):
  - Public: 19,485
  - Private: 82,644
  - Public share of total external debt: 19.1 percent
  - Private share of total external debt: 80.9 percent
- Total external debt (percent of GDP):
  - 2005: 45.1 percent
  - 2006: 49.7 percent
  - 2007: 57.8 percent
  - 2008 (projected): 54.3 percent
- Public external debt (percent of GDP):
  - 2007: 11.0 percent
  - 2008 (projected): 10.4 percent
- By end-2007, public external debt was 11 percent of GDP.

### Risks to the Fund from the proposed SBA
- Access would far exceed previous arrangements with Ukraine and would exceed both the annual and cumulative limits.
- If all purchases are made as scheduled:
  - Ukraine’s outstanding use of Fund resources would rise from about 5 percent of quota currently to over 200 percent with the first drawing.
  - Access would reach over 800 percent of quota in October 2010 and remain at this level through January 2012.
- The proposed SBA would take Ukraine’s total outstanding use of Fund resources to:
  - 2.5 percent of GDP following the first purchase.
  - 11.5 percent of GDP if fully disbursed.
- Ukraine would become the Fund’s third largest user of Fund resources, taking into account the first drawing and those under proposed programs for Iceland and Hungary.
- Fund share of Ukraine’s external debt and debt service if SBA fully drawn:
  - Outstanding use of Fund resources would account for half of Ukraine’s projected public external debt by end-2009 and peak slightly above that by the end of the program.
  - Ukraine’s projected debt service to the Fund would peak in 2013 at about SDR 5 billion.
  - Debt service to the Fund would reach over 70 percent of public external debt service in 2012 and over 80 percent in 2013.
  - External debt service to the Fund in terms of exports of goods and services would exceed 5 percent in 2012 and 8 percent in 2013.
- Surcharges on credit outstanding: level-based surcharges of 100 basis points over the basic rate of charge (adjusted for burdensharing) on credit outstanding exceeding 200 percent of quota from the time of approval of the arrangement through January 2014, and surcharges of 200 basis points on credit outstanding exceeding 300 percent of quota from February 2009 to October 2013.

### Impact on Fund liquidity, exposure, and prudential metrics (selected figures from Table 6)
- Fund GRA credit outstanding to Ukraine (SDR millions, repurchases follow obligations schedule):
  - 2008: 3,057.3
  - 2009: 9,500.0
  - 2010: 11,000.0
  - 2011: 11,000.0
  - 2012: 8,312.5
  - 2013: 3,281.3
  - 2014: 468.8
- Fund GRA credit outstanding to Ukraine (percent of quota):
  - 2008: 222.8
  - 2009: 692.4
  - 2010: 801.8
  - 2011: 801.8
  - 2012: 605.9
  - 2013: 239.2
  - 2014: 34.2
- One-year Forward Commitment Capacity (FCC) as of September 30, 2008: SDR 127,615.8
- Ukraine's impact on FCC (single-country negative impact defined as the country's sum of Fund credit and undrawn commitments minus repurchases one-year forward): (11,000.0)
- Fund GRA credit outstanding to Ukraine (percent of current precautionary balances): 44.1
- Ukraine's GRA credit outstanding (percent of total public external debt):
  - 2008: 24.5
  - 2009: 50.3
  - 2010: 53.6
  - 2011: 51.7
  - 2012: 41.9
  - 2013: 19.9
- Ukraine's GRA credit outstanding (percent of GDP):
  - 2008: 2.5
  - 2009: 10.9
  - 2010: 11.5
  - 2011: 10.5
  - 2012: 7.0
  - 2013: 2.4
- Ukraine's GRA credit outstanding (percent of gross international reserves):
  - 2008: 15.2
  - 2009: 48.4
  - 2010: 49.4
  - 2011: 43.1
  - 2012: 28.7
  - 2013: 10.6
- Ukraine's GRA debt service to the Fund (percent of exports of goods and services):
  - 2008: 0.1
  - 2009: 0.7
  - 2010: 1.0
  - 2011: 1.0
  - 2012: 5.2
  - 2013: 8.2
- Ukraine's GRA debt service to the Fund (percent of total public external debt service):
  - 2008: 2.1
  - 2009: 16.4
  - 2010: 22.6
  - 2011: 26.7
  - 2012: 73.4
  - 2013: 81.2
- Projected payment of charges to the Fund on GRA credit outstanding (SDR millions):
  - 2008: 16.2
  - 2009: 257.9
  - 2010: 500.7
  - 2011: 551.8
  - 2012: 513.0
  - 2013: 306.7
  - 2014: 78.7
- Projected debt service payments to the Fund on GRA credit outstanding (SDR millions):
  - 2008: 32.0
  - 2009: 315.2
  - 2010: 500.7
  - 2011: 551.8
  - 2012: 3,200.5
  - 2013: 5,337.9
  - 2014: 2,891.2
- The proposed arrangement would reduce Fund liquidity by about 9 percent: commitments under the proposed arrangement would reduce the one-year forward commitment capacity of SDR 127.6 billion as of end-September by SDR 11 billion.
- Fund credit to Ukraine as a share of total current Fund credit from the GRA would increase to 20 percent with the first drawing, taking into account the proposed arrangements for Iceland and Hungary.
- The share of the top five borrowers of total outstanding credit would remain virtually unchanged at about 92 percent taking all three potential programs into account.
- Charges on the new GRA obligations will be about SDR 250 million over the next year, or more than twice the Fund’s estimated residual burden-sharing capacity (taking into account the first purchases of the three forthcoming arrangements).

### Prudential considerations and burden-sharing risks
- Were Ukraine to accrue arrears on charges under the proposed arrangement, the Fund’s burden sharing mechanism could be put under very serious strain.
- Charges on the new GRA obligations (~SDR 250 million over the next year) exceed the Fund’s estimated residual burden-sharing capacity.
- Potential GRA exposure to Ukraine would be substantial in relation to the Fund’s current level of precautionary balances: outstanding GRA credit to Ukraine would be about 44 percent of the Fund’s current level of precautionary balances upon approval.

### Assessment and downside risks to program success
- The proposed access and substantial front-loaded financing aim to strengthen confidence to address plunging commodity prices and global deleveraging, bolster reserves, and provide breathing room for adjustment under the proposed program.
- Considerable financial risks are associated with the proposed arrangement for Ukraine; the arrangement is large in terms of both available Fund resources and debt service implications for Ukraine.
- Substantial downside risks to the baseline scenario include:
  - a worsening of external financial conditions. A further deepening, or exceptionally long duration, of the ongoing deleveraging could delay access to international financial markets, affecting particularly the private sector with large and increasing financing needs;
  - a possible overshooting of the exchange rate. A significant exchange rate depreciation would exacerbate pressures on households and banks (with mixed effects on corporates);
  - delays in moving forward with financial sector reforms and enactment of a comprehensive bank resolution strategy. The upfront banking recapitalization provides for a strong start, but implementation will require steady and decisive policy actions;
  - a challenging political situation that could adversely affect program implementation and market confidence. Parliamentary passage of anti-crisis legislation and commitment by ruling coalition and opposition leaders provide support, but forthcoming parliamentary and presidential elections could cloud an already fractious political environment and pose a potentially serious risk to program implementation.

*Source: IMF staff note assessing risks to the Fund from the proposed Stand-By Arrangement for Ukraine (content unit: _cr08384).*

### 12.      These risks may adversely affect Ukraine’s capacity to repay the Fund. The

### _cr08384 - 12.      These risks may adversely affect Ukraine’s capacity to repay the Fund. The

### Executive decision and financing terms
- The Executive Board approved a two-year Stand-By Arrangement (SBA) for SDR 11 billion (about US$16.4 billion).
- The SBA entails exceptional access equivalent to 802 percent of Ukraine’s quota in the Fund and was approved under the Fund’s fast-track Emergency Financing Mechanism.
- Immediate disbursement enabled: SDR 3 billion (about US$4.5 billion).

### Key risks to Fund repayment and program success
- The proposed access is significant in terms of both Fund resources and the debt service burden it generates in a medium-term context of demanding external financing requirements.
- Mitigating factors required:
  - Authorities’ commitment to firm implementation of the program (already demonstrated via substantial prior actions).
  - Prompt response to changes in underlying conditions.
  - Continued political support.

### Program objectives and overall strategy
- Purpose: restore financial and economic stability and strengthen confidence; stabilize domestic financial system amid global deleveraging and a domestic crisis of confidence; facilitate adjustment to a large terms-of-trade shock.
- Core elements:
  - Monetary and exchange rate policy shifts.
  - Banking recapitalization (pre-emptive).
  - Fiscal and incomes policy adjustments.
- Expected near- and medium-term outcomes cited:
  - Reduce inflation to single digits by the end of the program (resolute implementation).
  - Absorb external shocks via a flexible exchange rate regime with targeted intervention.
  - Phase out recent exchange controls as confidence rebuilds.
  - Accelerate progress towards inflation targeting and enhance independence of the National Bank of Ukraine (NBU).

### Monetary and exchange rate policy (program measures)
- Implement a flexible exchange rate regime to better absorb external shocks.
- Use base money as the near-term anchor for monetary policy until an inflation targeting regime can be implemented.
- Strengthen independence of the NBU.
- Near-term monetary policy: tighten to help achieve the 2009 inflation objective of 17 percent.
- Eliminate exchange rate controls as soon as possible.
- Improve foreign exchange market operation: cancel foreign exchange transactions tax; adopt a more transparent intervention policy.

### Financial sector policy (program measures)
- Prepare a comprehensive bank resolution strategy including resolution of problem banks and recapitalization of viable banks to prevent a credit crunch.
- Prominvest Bank (sixth largest) was resolved through a sale to a strategic investor.
- Ensure viable banks have access to liquidity.
- Increase deposit insurance coverage to Hrv150,000 (about €20,000) from the current Hrv50,000 (coverage: 99 percent of individual accounts).
- Strengthen monitoring of banks, including enhanced cross-border supervisory cooperation.
- Proactive strategy to resolve corporate and household debt problems, especially foreign-exchange-denominated debt.
- Staff note: substantial amounts in terms of GDP (at least 8-10 percent) will be required to undertake recapitalization of viable banks.
- World Bank and EBRD committed to provide substantial assistance alongside the IMF.

### Fiscal policy (program measures and contingencies)
- Adopt a prudent fiscal stance while accommodating recession-related social expenditures (including higher funding for unemployment insurance and targeted income support).
- Fiscal targets:
  - Deficit would not exceed 1 percent of GDP in 2008.
  - General government budget would be balanced in 2009 (excluding bank recapitalization costs).
- Even with a substantial increase of 0.8 percent of GDP social spending during the recession, targets are deemed attainable.
- Authorities prepared to adjust targets as needed given uncertainties in macroeconomic outlook and financing.
- Measures to achieve targets:
  - Correct pricing policies in the energy sector (phased increase in energy tariffs).
  - Pursue a more balanced incomes policy by adjusting minimum wage, pension, and social transfer increases in line with projected 2009 inflation.
- Ukraine has an extensive safety net and can expand it if needed.

### Recent economic developments and immediate stresses
- Growth since 2000: expanding by more than 7 percent on average.
- By mid-2008 the economy was overheating:
  - Credit growth exceeded 70 percent.
  - CPI inflation exceeded 30 percent.
  - Wage growth in the 30-40 percent range.
  - Imports surged at an annual rate of 50-60 percent.
  - Current account deficit reached 7 percent of GDP in Q2 2008.
- Vulnerabilities: high short-term external debt relative to reserves; high exposure of banks to foreign funding; balance sheet mismatches; weak underlying fiscal position.
- Commodity shock: falling steel prices contributed to a substantial deterioration in the current account outlook and real sector stress.
- Manufacturing sector: sharp 5-percent contraction in September (real sector impact).
- Banking sector confidence event: after Prominvest Bank receivership, at least US$3 billion—4 percent of deposits—withdrawn during the first three weeks of October.
- NBU intervention in October reduced reserves from US$38 billion to US$32 billion.
- Authorities imposed exchange controls to stem outflows.

### Program projections, scenarios, and macroeconomic outlook
- Program baseline assumes global recession and continued deleveraging in international credit markets in 2009, implying a recession in Ukraine, deteriorating exports, limited external financing, and a credit crunch.
- Projected impact on output: a 3 percent decline (consistent with Ukraine’s experience in 2004-05).
- Inflation trajectory under the program:
  - Projected 2008 inflation: 25.5 percent.
  - Expected inflation by end-2009: 17 percent.
  - Medium-term inflation target: single digits by end of the program; 5-7 percent by late 2011 under recovery scenario.
- Current account:
  - Mid-2008 level: 7 percent of GDP deficit.
  - Compressed to about 2 percent of GDP under the program.
- Under assumption of a global recovery in the second half of 2009:
  - Economy could be back at estimated potential growth rate of 5-6 percent by 2011.
  - Current account deficits projected to remain small in 2010 and moderate thereafter, allowing reserves to rise.

### Structural and contingent considerations (authorities’ remarks)
- External assumptions include roll-over of 80 percent of private sector external debt.
- Authorities note upside factors:
  - Government debt and public external debt are very low by any standards.
  - Some corporate external credits are mainly intracompany loans; significant foreign assets of corporates may be unrecorded.
  - Unregistered economy and flexible labor markets may absorb some adjustment.
  - Legal changes (joint-stock company legislation) expected to improve investor protection and investment climate.
  - Foreign parent banks provided about USD 1 Billion of fresh funds in October.
  - Bumper harvest could allow additional exports of up to 10 million tons of grains.
  - Plans to privatize several enterprises in cash-rich industries.
  - Authorities engaging other IFIs and bilaterals to secure additional financing as contingency planning.

### Selected economic and social indicators (highlights from Annex)
- Nominal GDP (billions of hryvnias): 2005: 441; 2006: 544; 2007: 713; 2008 Proj.: 993; 2009 Proj.: 1,112.
- Real GDP (percent change): 2005: 2.7; 2006: 7.3; 2007: 7.6; 2008 Proj.: 6.0; 2009 Proj.: -3.0.
  - Contributions to 2009 Real GDP: Domestic demand: -14.3; Net exports: 11.3.
- Unemployment rate (ILO definition; percent): 2005: 7.2; 2006: 6.8; 2007: 6.4; 2008 Proj.: 6.0; 2009 Proj.: 9.5.
- Consumer prices (period average): 2005: 13.5; 2006: 9.1; 2007: 12.8; 2008 Proj.: 25.6; 2009 Proj.: 21.0.
- Consumer prices (end of period): 2005: 10.3; 2006: 11.6; 2007: 16.6; 2008 Proj.: 25.5; 2009 Proj.: 17.0.
- Nominal monthly wages (average, percent change): 2005: 36.7; 2006: 29.2; 2007: 29.7; 2008 Proj.: 37.1; 2009 Proj.: 10.5.
- Real monthly wages (average, percent change): 2005: 20.4; 2006: 18.4; 2007: 15.0; 2008 Proj.: 9.1; 2009 Proj.: -8.7.
- Public finance (percent of GDP):
  - Cash balance excluding banks. recap: 2005: -2.3; 2006: -1.4; 2007: -2.0; 2008 Proj.: -1.0; 2009 Proj.: 0.0.
  - Augmented balance, including effects of banks recap.: 2005: -2.3; 2006: -1.4; 2007: -2.0; 2008 Proj.: -2.0; 2009 Proj.: -4.5.
  - Privatization proceeds: 2005: 5.0; 2006: 0.4; 2007: 0.6; 2008 Proj.: 0.2; 2009 Proj.: 0.1.
  - Net domestic financing: 2005: -3.3; 2006: -0.4; 2007: 0.3; 2008 Proj.: 1.8; 2009 Proj.: 4.4.
  - Net external financing: 2005: 0.6; 2006: 1.3; 2007: 1.0; 2008 Proj.: 0.0; 2009 Proj.: 0.0.
  - Public debt: 2005: 18.7; 2006: 15.7; 2007: 13.0; 2008 Proj.: 10.6; 2009 Proj.: 17.4.
- Money and credit (end of period, percent change):
  - Base money: 2005: 53.9; 2006: 17.5; 2007: 46.0; 2008 Proj.: 33.0; 2009 Proj.: 10.9.
  - Broad money: 2005: 54.4; 2006: 34.5; 2007: 51.7; 2008 Proj.: 37.2; 2009 Proj.: 9.4.
  - Credit to nongovernment: 2005: 61.8; 2006: 70.6; 2007: 74.0; 2008 Proj.: 40.9; 2009 Proj.: -9.8.
- Balance of payments (percent of GDP):
  - Total external debt 2/: 2005: 45.1; 2006: 49.7; 2007: 57.8; 2008 Proj.: 54.3; 2009 Proj.: 78.2.
  - Current account balance: 2005: 2.9; 2006: -1.5; 2007: -3.7; 2008 Proj.: -6.2; 2009 Proj.: -2.0.
  - Foreign direct investment: 2005: 8.7; 2006: 5.3; 2007: 6.5; 2008 Proj.: 6.2; 2009 Proj.: 6.8.
  - Gross reserves (end of period, billions of U.S. dollars): 2005: 19.4; 2006: 22.3; 2007: 32.4; 2008 Proj.: 31.4; 2009 Proj.: 30.7.
    - In months of next year's imports of goods and services: 2005: 4.4; 2006: 3.7; 2007: 4.0; 2008 Proj.: 5.1; 2009 Proj.: 4.5.
  - Goods exports (annual volume change in percent): 2005: -8.5; 2006: 2.7; 2007: 3.2; 2008 Proj.: 0.3; 2009 Proj.: 0.8.
  - Goods imports (annual volume change in percent): 2005: 13.0; 2006: 12.5; 2007: 20.3; 2008 Proj.: 16.0; 2009 Proj.: -19.7.
  - Goods and services terms of trade (percent change): 2005: 4.9; 2006: 1.5; 2007: 7.4; 2008 Proj.: 8.9; 2009 Proj.: -10.5.
- Social indicators (selected): Per capita GDP: US$ 2,282 (2006); Poverty (percent of population): 8.0 (2006; World Bank estimate); Life expectancy at birth: 68.2 years (2006); Infant mortality (per 1,000): 16.0 (2005); Gross primary enrollment (percent net): 84 (2005).

### Implementation priorities and expected supportive actions
- Reinforce financial sector stabilization:
  - Pre-emptive bank recapitalization and resolution measures.
  - Increased oversight, targeted on- and off-site inspections, improved cross-border supervisory cooperation.
- Monetary policy tightening as liquidity pressures diminish to guard against inflation.
- Phase out exchange controls and improve transparency of FX interventions.
- Fiscal consolidation via expenditure restraint and energy tariff adjustments while protecting vulnerable groups via safety nets and increased social spending where needed.
- International support coordination: IMF financing complemented by World Bank, EBRD, and other IFIs and bilaterals as part of contingency planning.

*Press Release No. 08/271; November 5, 2008. International Monetary Fund.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08384.pdf_