## _cr09270 ## Source details **Canonical URL:** [_cr09270](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09270.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09270.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09270.pdf.json) --- ### Stand-By Arrangement and program modalities - Two-year SDR 11 billion SBA involving exceptional access (802 percent of quota) approved by the Executive Board on November 5, 2008. - Disbursements to date: - First purchase: SDR 3 billion. - Second purchase: SDR 1.9 billion. - Program foresees a disbursement of SDR 2.1 billion following completion of the second review. - Publication: Ukrainian authorities intend to allow publication of the staff report. - Access and phasing (selected): - November 2008: 3,000 Millions of SDRs; 218.7 percent of Quota. - 1 May 2009: 1,875 Millions of SDRs; 136.7 percent of Quota. - 15 June 2009: 2,125 Millions of SDRs; 154.9 percent of Quota. - Subsequent tranches through October 2010 totaling 11,000 Millions of SDRs; 802 percent of Quota. - Quantitative program anchors (selected levels preserved as in source): - Ceiling on cash deficit of the general government (Dec. 2008, Mar., May, Sep., Dec.): 30,026; 11,040; 22,500; 40,000; 55,000. - Floor on net international reserves of the NBU (Dec. 2008, Mar., May, Sep., Dec. in millions of U.S. dollars): 27,811; 22,238; 20,799; 16,600; 14,900. - Ceiling on base money (Dec. 2008, Mar., May, Sep., Dec.): 186,671; 174,764; 181,681; 210,000; 211,000. ### Program status and major policy actions - Overall implementation: - Since the first review, policy implementation broadly in line with the program. - All end-May quantitative performance criteria on base money, NIR, and the general government balance were observed. - Fiscal adjustments and commitments: - Definition of the fiscal deficit broadened to cover Naftogaz. - 2009 deficit target (excluding bank restructuring costs) adjusted to 8.6 percent of GDP comprising 6 percent of GDP for the general government and 2.6 percent of GDP for Naftogaz. - Authorities introduced 0.6 percent of GDP in measures (1.4 percent annualized), announced schedule of natural gas price increases, and committed to contain the 2010 deficit (including transfers to Naftogaz) to 4 percent of GDP. - Actions initiated to strengthen financial situation, transparency and governance of Naftogaz according to a strict timetable. - Government strengthened efforts to develop domestic financing, including accepting market rates in treasury bills auctions. - Monetary and exchange-rate policy: - Current monetary policy stance judged broadly appropriate given potential build up of a large monetary overhang amid subsiding inflation and exchange rate pressures. - NBU amended regulations that limited progress towards a more flexible exchange rate policy; mission urged consistent implementation of a flexible exchange rate policy. - Financial sector policy: - Resolution strategy for five systemic problem banks finalized and implementation started. - Legislative amendments prepared to strengthen bank resolution and resolve smaller insolvent banks swiftly. ### Recent economic developments and outlook - Growth and output: - Real GDP expected to contract by 14 percent in 2009 (revised from -8 percent at first review). - Real GDP fell 20.3 percent year-on-year in Q1 2009. - Recession led by plunge in export volumes and sharp contraction of domestic demand; industrial production plunged, large declines in metallurgy and chemical industries. - Recovery not expected before H2 2010; projected drivers: improved competitiveness after real exchange rate depreciation, recovery of steel prices, higher public and private investment in infrastructure and energy projects. - Labor and wages: - Official unemployment has increased significantly. - Nominal wage growth has come to a halt. - Inflation: - Headline CPI inflation at 15 percent year-on-year in June, down from 22.3 percent in January. - Headline inflation expected at 14 percent by end-2009 (base effects from H2 2008 slow the decline). - Inflation projected in single digits in 2010 and in the 5–7 percent range thereafter. - External sector and balance of payments: - Current account registered a small surplus in April-May; current account projected at 1.2 percent of GDP in 2009 in one framework and 0.5–0.6 percent of GDP in others (selected tables vary). - Imports declined sharply; exports fell due to weak external demand, especially for steel. - Financial account: signs of stabilization despite sharp decline in FDI; external debt rollover rates first five months ≈ 70 percent for banks and 100 percent for corporations. - Exchange rate and reserves: - Exchange rate depreciated by about 35 percent in nominal effective terms since early September 2008 and has been stable in recent months. - NBU scaled back interventions since March 2009; moderate exchange rate pressures reemerged in late June. - End-May NIR floor respected with a $1.1 billion margin. - External financing and markets: - Five-year CDS spreads markedly down; equity market staged pronounced recovery. - External financing held up better than expected; outflows of foreign exchange from banking system receded. ### Monetary and financial conditions - Key interest rates and base money: - Discount rate lowered by 100bp to 11 percent (June). - Main overnight refinance rate reduced to 18 percent. - Base money picked up significantly largely due to government’s conversion of its share of the second Fund disbursement into hryvnia; end-May 2009 ceiling met with significant margin. - Broad money and credit: - Despite surge in base money, broad money growth weak due to banks’ liquidity preference and weak credit demand. - Broad money contraction sharper than base money. - Aggregate deposits lost some 20 percent between October 2008 and April 2009 but stabilized in recent months. - Domestic currency lending picking up recently driven by state banks; other banks continue to reduce credit portfolios. - Credit in foreign currency declining fast. - Central bank liquidity provision and reserves: - Liquidity support to banking system reduced since April 2009. - Interbank interest rates dropped from peaks over 70 percent in early March to around 3 percent in June. - Stock of outstanding refinance credits remained high at about 9 percent of GDP at end-May. - Program gross international reserves (GIR) at end-2009 projected at $30 billion, or 90 percent of maturing debt in 2010. - Gross reserves (end of period, billions of U.S. dollars): 2009 Proj.: 31.0; 2010 Proj.: 30.0. - Gross reserves (months of next year's imports): 5.5. ### Fiscal policy, Naftogaz, and public finances - Fiscal balances and vulnerabilities: - General government deficit 1.8 percent of GDP during first five months of 2009 (program ceiling 2.4 percent); end-June government deficit 3 percent of GDP. - Government deficit reached 3.2 percent of GDP in 2008, breaching end-2008 program ceiling. - Without offsetting measures, general government deficit would increase from 4 to 6.5 percent of GDP in 2009. - Fiscal aggregates broadened to include Naftogaz’ deficit (about 2.7 percent of GDP in 2009). - Without corrective measures, 2009 public sector deficit (inclusive of Naftogaz’ deficit but excluding bank restructuring costs) would reach 9.2 percent of GDP. - Revised 2009 public sector deficit target set to 8.6 percent of GDP: 6 percent of GDP for general government and 2.6 percent of GDP for Naftogaz. - Naftogaz specifics: - NG expected operational deficit in 2009: UAH 25 billion (2.7 percent of GDP). - BOP projection incorporates 33bcm in gas imports per NG–Gazprom contract. - Program treatment: fiscal aggregates broadened to cover NG; prior action to improve NG transparency including adoption of revised financial plan, monitoring scheme, and a restructuring strategy to be developed in consultation with World Bank, EBRD, EIB under EU political leadership. - NG prior actions include capitalization by UAH 18.6 billion and announced household and utility gas tariff increases of 20 percent effective Sept 1 and Oct 1, respectively, bringing tariffs to 31 and 43 percent of import prices. - Quarterly 20 percent price increases starting January 2010 announced targeting tariffs at 60 and 80 percent of projected end-2010 import prices; these imply 1 percent of GDP savings in 2010. - Authorities’ fiscal measures for 2009: - Committed to reduce deficit by 0.6 percent of GDP in 2009; half permanent with estimated 0.7 percent of GDP annual impact. - Measures include capitalizing Naftogaz, gas tariff increases, increase electricity tariffs, reduce non-priority goods and services spending, strengthen tax administration, national tax compliance improvement plan, and time-bound reform road maps for pension and tax reforms. - Commitments: not to enact law envisaging infrastructure financing from advance NBU profit transfers; not to enact budget code leading to disorderly fiscal decentralization; not to introduce tax amnesty nor moratorium on tax audits; keep goods and services spending in line with budgeted amounts. ### Bank restructuring and financial sector policy - Progress and costs: - Resolution strategies for five systemic problem banks finalized and implementation started. - Initial public cost of bank restructuring estimated at around UAH 25–30 billion (about 3 percent of GDP) plus capitalization of state banks Oschadbank and Eximbank of about UAH 15 billion (about 2 percent of GDP). - Bank recapitalization program assumes issuance of bank recapitalization bonds of 24 billion hryvnia in 2009 and 20 billion hryvnia in 2010. - Capital injections and supervisory actions: - Shareholders of most private systemic banks committed to inject about UAH 21.5 billion ($2.6 billion) and have already brought in necessary capital ahead of schedule. - Seven domestically-owned banks initially unable to commit; NBU initiated temporary administration measures; two opted to raise required capital privately. - Capital needs of remaining systemic problem banks estimated at about UAH 20 billion by international audit firms. - Shareholders of 31 nonsystemic banks committed additional capital amounting to about UAH1.6 billion by December 2009. - Legal and supervisory reforms: - Draft legislative amendments to enable transfer of assets and liabilities without prior creditor approval, simplify mergers and acquisitions, enable government funding for banks under NBU resolution, and provide staff immunity for good faith actions. - Draft legislation and regulations for consolidated supervision and supplementary supervision of conglomerates underway. - Plan to publish more detailed bank financial information by September 2009; complete pending MoUs with home supervisors by end-2009. ### Program financing and risks (2009) - Financing summary (Millions of U.S. dollars): - Total financing sources: 31,114 - Net FDI (including capital transfers): 4,070 - Portfolio, net: -80 - Debt financing, total: 26,465 - Private: 21,905 - Official: 4,560 - World Bank 1,250; Project financing 500; Unidentified multilateral and bilateral 2,250; Other 1/ 560 - Reserve accumulation (-denotes increase): 659 - Total financing requirements: 41,191 - Current account deficit: -710 - Total amortization: 35,250 - Amortization of private debt: 32,262 - Amortization of government debt: 2,988 - Other capital outflows: 6,651 - Financing need: 10,077 - Fund credit (net): 10,077 - Gross reserves: 30,000 - Gross reserves (percent of short-term debt at remaining maturity in 2010): 90 - Gross reserves (months of next year's imports): 5.5 - 1/ Includes official debt restructuring. - Key program assumptions and risks: - Assumed 2009 rollover rates: banks 70 percent; corporate 80 percent. - Program adequately financed in baseline; risks include lower-than-expected official financing, renewed FX cash outflows from banking system, reduced FDI, and lower rollover rates. - If risks materialize, use of reserves buffers and/or additional policy adjustment would be needed. ### Debt sustainability and stress tests - Public debt and sustainability: - Public debt low at 20 percent of GDP in 2008, providing room to let automatic stabilizers cushion the downturn and absorb part of bank restructuring costs. - Fiscal sustainability could become a concern under unchanged policies, especially if recession more protracted than envisaged. - Failure to implement agreed 2010 measures (pension, tax, gas sector reforms) or adoption of new expansionary measures could jeopardize public debt sustainability longer term. - External debt dynamics and DSA: - Baseline external DSA shows rapidly declining external debt ratio, but deterioration in global conditions, adverse current account developments, shortfalls in FDI, or exchange rate overshooting would worsen debt dynamics. - Rollover rates (percent) — Rollover of Private External Debt, 2009 (comparison with program assumptions 1/): - Banks: 70 → 70 - Foreign banks: 85 → 80 - Domestic banks: 30 → 35 - Corporates: 80 → 80 - Multinational: 90 → 85 - Others: 70 → 70 - Aggregate: 70 → 70 - 1/ Rollover rates rounded to nearest 5 percent. - Stress test scenarios: - Permanent one-half standard deviation shocks to growth, interest rate, and primary balance; additional scenarios include exchange rate shock (one-time real depreciation of 30 percent) and contingent liability shock (20 percent of GDP, e.g., bank restructuring costs) occurring in 2010. - Examples of outcomes shown in figures: public debt baseline average projection 33; external debt baseline average projection 60; exchange rate shock can raise external debt ratios substantially (e.g., up to 109 in box figure). ### Conditionality, reporting, and institutional commitments - Prior actions for second review (A1–A5): - A1: Amend legislation to enable effective bank resolution. - A2: Finalize and start implementation of resolution strategies for systemic problem banks. - A3: Announce 20 percent gas price increases for households (effective September 1) and utilities (effective October 1) and schedule 20 percent quarterly increases starting January 2010; introduce mechanisms to enforce payment discipline. - A4: Improve Naftogaz transparency: approve revised 2009 financial plan, develop 2010 projected financial plan, commission independent review and monitoring framework with monthly public reporting. - A5: Improve FX market functioning including amending NBU regulation 108 to lift ban on FX forward and spot transactions. - Reporting requirements (selected, frequency and data preserved): - NBU monthly (no later than the 25th): aggregate balance sheet; consolidated DMB balance sheet. - Weekly/monthly: full breakdown of NBU accounts included in NIR at actual and program exchange rates. - Every 10 days: operational monetary survey of the NBU. - Daily: operational balance sheets of NBU and commercial banks; standard daily data sheet on government foreign receipts and payments. - MoF monthly (no later than 25 days): monthly treasury reports, cash deficit of general government, and details on external debt contracted or guaranteed. - STA monthly (no later than 25 days): tax arrears and VAT refund data in specified formats. - Naftogaz monthly (no later than 25 days): cash deficit and financial indicators; State Statistics Committee and Naftogaz to provide data on prices, volumes, and payments for imported/exported oil and natural gas no later than 45 days after month end. - Official exchange rate determination: - NBU to set official rate daily at average transaction-weighted rate of preceding day (with intraday adjustments to keep it within 2 percent of market rate). - Program safeguards and prohibitions (selected): - Prohibition on conclusion of bilateral payments agreements inconsistent with Article VIII. - Prohibition on imposition or intensification of import restrictions for BOP reasons. - Prohibition on imposition or intensification of restrictions on payments and transfers for current international transactions. ### Staff appraisal, risks, and priorities - Staff supports authorities’ request for completion of the second review. - Key risks: - Fragile political consensus and pressures for fiscal relaxation ahead of Presidential elections scheduled for January 2010. - Sharp decline in government revenues and Naftogaz financial position increasing fiscal pressures. - External risks: adverse regional/global developments, shortfalls in assumed official financing. - Domestic risks: weak political consensus, deterioration in payment discipline, expansionary measures under consideration (e.g., moratorium on tax audits, tax amnesty, parliamentary budget code changes, draft law proposing large increases in public wages and pensions amounting to 2 percent of GDP in 2009 and 4 percent of GDP in 2010). - Priorities and recommendations: - Corrective fiscal measures to ensure fiscal sustainability and avoid crowding out private borrowing. - Full implementation of gas price increases and reductions in current expenditure; commit to achieve additional savings of 1.5 percent of GDP through structural reforms for 2010. - Adoption and strict implementation of comprehensive strategy to strengthen and restructure Naftogaz on agreed timetable. - Swift recapitalization and resolution of banks to restore confidence in banking system. - NBU to remove remaining obstacles to exchange rate flexibility and implement a flexible exchange rate policy supported by base money targets and transparent intervention strategy. - Vigilant monetary policy: monitor monetary aggregates and bank liquidity and stand ready to raise policy rates if inflation reversal or strong exchange rate pressures re-emerge. - Continue to develop domestic debt market instruments and mobilize additional multilateral and bilateral funding. *IMF staff report — Executive Summary (content unit: _cr09270 - Executive Summary).* ### Executive Summary ### _cr09270 - Executive Summary ### Stand-By Arrangement and program modalities - A two-year SDR 11 billion SBA involving exceptional access (802 percent of quota) was approved by the Executive Board on November 5, 2008. - Disbursements to date: - First purchase: SDR 3 billion (following the Board meeting). - Second purchase: SDR 1.9 billion (following completion of the first review on May 8, 2009). - Program foresees a disbursement of SDR 2.1 billion following completion of the second review. - Publication: The Ukrainian authorities intend to allow the publication of the staff report. ### Program status and major policy actions - Overall implementation: - Since the first review, policy implementation has been broadly in line with the program. - All end-May quantitative performance criteria on base money, NIR, and the general government balance were observed. - Fiscal policy adjustments: - The definition of the fiscal deficit has been broadened to cover Naftogaz. - The 2009 deficit target (excluding bank restructuring costs) was adjusted to 8.6 percent of GDP, comprising: - 6 percent of GDP for the general government (4 percent in the first review). - 2.6 percent of GDP for Naftogaz. - Authorities introduced 0.6 percent of GDP in measures (1.4 percent annualized), announced a schedule of natural gas price increases, and committed to contain the 2010 deficit (including transfers to Naftogaz) to 4 percent of GDP. - Actions initiated to strengthen the financial situation, transparency and governance of Naftogaz, according to a strict timetable. - The government has strengthened efforts to develop domestic financing, including accepting market rates in treasury bills auctions. - Monetary and exchange rate policy: - The current monetary policy stance is judged broadly appropriate given the potential build up of a large monetary overhang amid subsiding inflation and exchange rate pressures. - The NBU amended recent regulations that limited progress towards a more flexible exchange rate policy; mission urged consistent implementation of a flexible exchange rate policy. - Financial sector policy: - Progress toward resolving systemic problem banks: resolution strategy for five systemic problem banks finalized and implementation started. - Legislative amendments prepared to strengthen bank resolution and resolve smaller insolvent banks swiftly. ### Political and program risks - The fragility of the political situation presents significant program implementation risks. - Sharp decline in government revenues and the financial position of Naftogaz increased fiscal pressures. - Effective policy implementation is constrained by weak political consensus. - Pressures for fiscal relaxation ahead of Presidential elections scheduled for January 2010 are rising. - Measures under consideration that could affect fiscal balances include a moratorium on tax audits, consideration of a tax amnesty, parliamentary modifications to the budget code implying additional transfers to local governments (which could exceed 1 percent of GDP in 2010), and a draft law suggesting large increases in public wages and pensions (2 percent of GDP in 2009, and 4 percent of GDP in 2010). ### Recent economic developments and outlook - Growth and output: - The recession deepened: real GDP now expected to contract by 14 percent in 2009 (against 8 percent at the time of the first review). - Real GDP fell 20.3 percent year-on-year in the first quarter of 2009. - The recession led by a plunge in export volumes and a very sharp contraction of domestic demand; industrial production has plunged, with large declines in metallurgy and chemical industries. - Labor and wages: - Official unemployment has increased significantly. - Nominal wage growth has come to a halt. - Inflation: - Headline CPI inflation at 15 percent year-on-year in June, down from 22.3 percent in January. - Inflation expectations of households and corporates remain high. - External sector and balance of payments: - Current account: continued adjustment, registering a small surplus in April-May. - Imports declined sharply due to contraction of domestic demand; exports fell due to weak external demand, especially for steel. - Financial account: signs of stabilization despite a sharp decline in FDI; external debt rollover rates for the first five months held up at about 70 percent for banks and 100 percent for corporations. - Exchange rate and reserves: - The exchange rate has depreciated by about 35 percent in nominal effective terms since early September 2008 and has been stable in recent months. - The NBU scaled back interventions since March 2009; moderate exchange rate pressures reemerged in late June. - The end-May NIR floor was respected with a $1.1 billion margin. - External financing and markets: - Five-year CDS spreads are markedly down; the equity market staged a pronounced recovery. - External financing held up better than expected; outflows of foreign exchange from the banking system have receded in recent months. ### Fiscal developments and vulnerabilities - Fiscal balances: - The general government deficit was 1.8 percent of GDP during the first five months of 2009, against a program ceiling of 2.4 percent of GDP; this largely reflects an increase in VAT refund arrears and advanced tax payments by large enterprises (0.5 percent of GDP). - At end-June, the government deficit stood at 3 percent of GDP. - The government deficit reached 3.2 percent of GDP in 2008, breaching the end-2008 program's ceiling. - Revenues and expenditures: - The deterioration of the fiscal position is primarily due to a sharp slowdown of government revenue. - Expansionary fiscal measures are being considered ahead of elections (see political risks above). - Public debt: - General government debt is increasing fast, though still low compared to neighboring countries. ### Monetary conditions and banking system - Liquidity and central bank operations: - Liquidity support to the banking system has been reduced since April 2009. - Banks’ excess reserves nearly doubled in recent months, albeit from very low levels. - Interbank interest rates dropped from peaks over 70 percent in early March to around 3 percent in June, though market activity remains limited and segmented. - Demand for NBU refinancing has fallen and provision of new refinance credits slowed, except for a large-size operation in mid-June related to financing of Naftogaz. - The stock of outstanding refinance credits remained high at about 9 percent of GDP at end-May. - Banking sector stabilization: - Deposit stabilization and progress on resolution of systemic banks signal some return of confidence, but the system remains fragile with many smaller insolvent banks needing swift resolution. ### Mission visit and contacts - Discussions held in Kyiv during June 24–July 10. - Mission met with: President Yushchenko; Prime Minister Tymoshenko; NBU Governor Stelmakh; Minister of Economy Danylyshyn; Acting Minister of Finance Umanskiy; the Presidential Administration; Party of Regions and other senior representatives and officials. - IMF staff team: Ms. Pazarbasioglu (head); Messrs. Hofman and Moulin, and Ms. Yang (all EUR), Mr. Arslanalp (FAD), Mr. Duenwald (SPR), and Mr. Olafsson (MCM). Mr. Alier (resident representative) assisted the mission. *IMF staff report — Executive Summary (content unit: _cr09270 - Executive Summary).* ### 9. Against the backdrop of falling ### _cr09270 - 9. Against the backdrop of falling ### Monetary and Financial Conditions - Key policy interest rates reduced: - Discount rate lowered by 100bp to 11 percent (June). - Main overnight refinance rate reduced to 18 percent. - Base money developments: - Base money picked up significantly, largely on account of the government’s conversion of its share of the second Fund disbursement into hryvnia. - The end-May 2009 ceiling was met with a significant margin. - Broad money and liquidity: - Despite the surge in base money, broad money growth has been weak, reflecting a strong liquidity preference by banks and weak credit demand. - Broad money contraction has been sharper than base money (Figure 5 and Figure 6 observations). - Exchange rate and reserve management: - The exchange rate has depreciated by some 35 percent against the dollar, but has recently appreciated. - The central bank significantly scaled back intervention since early May. - Program gross international reserves (GIR) at end-2009 projected at $30 billion, or 90 percent of maturing debt in 2010. - Inflation outlook: - Inflation pressures expected to decline due to a larger output gap. - Headline inflation expected at 14 percent by end-2009 (base effects from H2 2008 slow the decline). ### Banking Sector, Deposits, and Credit - Banking system under strain but deposits stabilized: - NPLs have increased since the onset of the crisis; many banks report successful restructuring of credit portfolios. - Aggregate deposits lost some 20 percent between October 2008 and April 2009 but have stabilized in recent months, allowing lifting of the ban on early withdrawal of time deposits. - Stabilization conceals heterogeneity: recently recapitalized state and foreign-owned banks generally gaining deposits; domestic banks continue to experience significant outflows. - Credit dynamics by bank ownership: - Domestic currency lending has been picking up recently, fully on account of lending by state banks; other banks continue to reduce credit portfolios. - Credit in foreign currency has been declining fast, reflecting greater awareness of risks. - Central bank liquidity provision: - NBU liquidity provision to the banking system has recently slowed. - NBU claims on banks and total loans-to-deposits ratio tracked in Figure 5. ### Revised Macroeconomic Framework and Projections (2008–10) - Growth and demand: - Real GDP projected to decline by 14 percent in 2009 (revised from 8 percent at first review), reflecting larger-than-expected Q1 2009 contraction and weak steel demand. - Table of selected revisions (percent change, unless otherwise indicated): - GDP growth: 2008 = 2.1; Est. 1st Review = -8.0; Rev. 1st Review = -14.0; 2009 = 1.0; 2010 = 2.7 - Domestic demand: 2008 = 8.0; Est. 1st Review = -18.8; Rev. 1st Review = -24.8; 2009 = 2.2; 2010 = 4.0 - CPI (end of period): 2008 = 22.3; Est. 1st Review = 16.0; Rev. 1st Review = 14.0; 2009 = 8.0; 2010 = 9.0 - Average real wage: 2008 = 6.8; Est. 1st Review = -11.2; Rev. 1st Review = -11.0; 2009 = -2.5; 2010 = -1.2 - Current account (percent of GDP): 2008 = -7.2; Est. 1st Review = 0.5; Rev. 1st Review = 0.6; 2009 = 1.2; 2010 = 0.1 - Export volume (goods) 1/: 2008 = -1.9; Est. 1st Review = -8.8; Rev. 1st Review = -13.6; 2009 = 5.8; 2010 = 6.1 - Import volume (goods) 1/: 2008 = 16.8; Est. 1st Review = -31.8; Rev. 1st Review = -36.4; 2009 = 5.6; 2010 = 6.6 - Terms of trade (goods) 1/: 2008 = 8.0; Est. 1st Review = -13.6; Rev. 1st Review = -13.6; 2009 = 3.0; 2010 = -2.1 - 1/ For 2008, staff estimates based on balance of payments data. - Recovery and medium-term outlook: - More vigorous recovery not expected before H2 2010. - Drivers of recovery: improved competitiveness after real exchange rate depreciation, recovery of steel prices, higher public and private investment related to infrastructure and energy projects. - Inflation projected in single digits in 2010 and in the 5–7 percent range thereafter. - Recovery risks: further decline in steel prices or renewed global financial stress could delay recovery; faster global recovery and return of political stability after January election could speed rebound. ### Program Financing and Risks (2009) - Financing summary (Millions of U.S. dollars, unless otherwise indicated): - Total financing sources: 31,114 - Net FDI (including capital transfers): 4,070 - Portfolio, net: -80 - Debt financing, total: 26,465 - Private: 21,905 - Official: 4,560 - Of which: World Bank 1,250; Project financing 500; Unidentified multilateral and bilateral 2,250; Other 1/ 560 - Reserve accumulation (-denotes increase): 659 - Total financing requirements: 41,191 - Current account deficit: -710 - Total amortization (includes short-term debt, trade credit, and medium- and long-term amortization): 35,250 - Amortization of private debt: 32,262 - Amortization of government debt: 2,988 - Other capital outflows: 6,651 - Financing need: 10,077 - Fund credit (net): 10,077 - Gross reserves: 30,000 - Gross reserves (percent of short-term debt at remaining maturity in 2010): 90 - Gross reserves (months of next year's imports): 5.5 - 1/ Includes official debt restructuring. - Key program assumptions and risks: - Assumed 2009 rollover rates: banks 70 percent; corporate 80 percent. - The program remains adequately financed in the baseline, but risks include: - Lower-than-expected official financing. - Renewed foreign currency cash outflows from the banking system. - Reduced FDI inflows and lower rollover rates. - If risks materialize, use of reserves buffers and/or additional policy adjustment would be needed. ### Fiscal Policy, Naftogaz, and Public Finances - Worsened outlook for public finances: - Without offsetting measures, general government deficit would increase from 4 to 6.5 percent of GDP in 2009. - Fiscal aggregates broadened to include Naftogaz’ deficit (about 2.7 percent of GDP in 2009). - Without corrective measures, 2009 public sector deficit (inclusive of Naftogaz’ deficit but excluding bank restructuring costs) would reach 9.2 percent of GDP. - Revised 2009 fiscal deficit targets: - Public sector deficit (inclusive of Naftogaz, excluding bank restructuring costs) target set to 8.6 percent of GDP. - 6 percent of GDP for the general government. - 2.6 percent of GDP for Naftogaz. - This implies a broadly unchanged fiscal stance relative to 2008 as measured by the cyclically-adjusted balance. - Naftogaz (NG) financial situation (Box 1): - NG expected operational deficit in 2009: UAH 25 billion (2.7 percent of GDP), reflecting the gap between domestic and imported prices, lower-than-expected sales to industry, and higher payment noncompliance by utility companies. - BOP projection incorporates 33bcm in gas imports, in line with NG–Gazprom contract. - Program treatment: fiscal aggregates broadened to cover NG; prior action to improve NG transparency including adoption of a revised financial plan, a monitoring scheme, and a restructuring strategy to be developed in consultation with the World Bank, EBRD, EIB under EU political leadership (as agreed under the Brussels Declaration, March 23, 2009). - International discussions: June 29 Brussels meeting convened by the European Commission to discuss financing to pay for additional storage gas; assistance contingent on continued gas sector reform. - Authorities’ fiscal consolidation measures for 2009: - Authorities committed to reduce the deficit by 0.6 percent of GDP in 2009; half of these measures are permanent with an estimated impact of 0.7 percent of GDP on an annual basis. - Specific measures taken or committed: - Capitalize Naftogaz and announce household and utility gas tariff increases of 20 percent: - Effective dates: households on September 1; utilities on October 1. - These will bring tariffs to 31 and 43 percent of import prices, respectively. - Quarterly 20 percent price increases starting January 2010 are announced (implying 1 percent of GDP savings in 2010), targeting tariffs at 60 and 80 percent of projected end-2010 import prices. - A task force created to better target existing social safety nets to protect vulnerable households. - Increase electricity tariffs and reduce spending in non-priority areas (goods and services). - Strengthen tax administration in line with IMF Technical Assistance advice, including adopting a national tax compliance improvement plan to: - Strengthen large taxpayer administration. - Enhance VAT administration. - Intensify arrears collection. - Commitments by the authorities: - Not to enact a law envisaging infrastructure financing from advance NBU profit transfers. - Not to enact a budget code that would lead to disorderly fiscal decentralization. - Not to introduce any tax amnesty nor implement a moratorium on tax audits. - To keep goods and services spending in line with budgeted amounts (in particular payments to contractual workers). - Time-bound reform road maps: - Adopted road map for pension and tax reforms. - Commit to issue, by end-September, a comprehensive analysis of the pension system and tax system. - Plan to formulate concrete policy actions by end-October 2009 to be implemented as part of the 2010 budget. ### Debt Sustainability and Stress Tests - Public debt position and risks: - Public debt low at 20 percent of GDP in 2008, providing room to let automatic stabilizers cushion the downturn and absorb part of bank restructuring costs. - Fiscal sustainability could become a concern under unchanged policies, especially if the recession is more protracted than envisaged. - Failure to implement agreed 2010 measures (pension, tax, and gas sector reforms) or adoption of new expansionary measures could jeopardize public debt sustainability in the longer run. - External debt dynamics and DSA: - Baseline external DSA shows a rapidly declining external debt ratio. - Deterioration in global economic/financial conditions, adverse current account developments, further shortfalls in FDI, or exchange rate overshooting would negatively affect debt dynamics. - Rollover rates (percent) — Rollover of Private External Debt, 2009 (comparison with program assumptions 1/): - Banks: 70 → 70 - Foreign banks: 85 → 80 - Domestic banks: 30 → 35 - Corporates: 80 → 80 - Multinational: 90 → 85 - Others: 70 → 70 - Aggregate: 70 → 70 - 1/ Rollover rates are rounded to the nearest 5 percent. - Stress test scenarios (public and external debt bound tests): - Permanent one-half standard deviation shocks applied to growth, interest rate, and primary balance; additional scenarios include exchange rate shock (one-time real depreciation of 30 percent) and contingent liability shock (20 percent of GDP, e.g., bank restructuring costs) occurring in 2010. - Examples of outcomes in figures: - Public debt: baseline average projection 33 (in boxes), various shocks increase public debt paths (growth shock, PB shock, interest rate shock, exchange rate and contingent liability shocks). - External debt: baseline average projection 60 (in boxes), shocks (CA shock, combined shock, real depreciation shock) produce higher external debt ratios (e.g., exchange rate shock up to 109 in box figure). - The analyses underscore vulnerability to combined shocks and contingent liabilities. *Sources: State Committee of Statistics; National Bank of Ukraine; Ukrainian authorities; Ministry of Finance; IMF staff estimates, calculations, and projections.* ### 16. The authorities and the mission agreed on a fiscal deficit target of 4 percent of ### _cr09270 - 16. The authorities and the mission agreed on a fiscal deficit target of 4 percent of ### Fiscal policy and public deficit - Authorities and mission agreed on a fiscal deficit target of 4 percent of GDP (including transfers to Naftogaz) for 2010. - Without measures, the deficit would be expected to reach 6.5 percent of GDP in 2010, compounding adverse medium-term debt dynamics. - Full implementation of the gas price increases and reductions in current expenditure agreed in the current review would bring the public sector deficit to 5.5 percent of GDP in 2010. - Authorities committed to achieving additional savings of 1.5 percent of GDP through planned structural reforms (pension reform, tax reform) and further moderation in current spending. - The use of Fund resources to support the budget is essential to smooth the fiscal adjustment but will have to be phased out going forward. ### Naftogaz: financial strengthening and restructuring - Authorities committed to take structural measures to strengthen Naftogaz’s financial situation and to restructure the company. - Adopted a revised 2009 and a projected 2010 financial plan for Naftogaz that, in addition to gas price increases, envisages: - Measures to increase payment discipline by households and utility companies. - A strengthened mechanism to set heating tariffs. - Commissioned an international audit firm to implement a monitoring framework and establish regular (monthly) and timely reporting of key financial data. - Committed, in accordance with principles agreed with the European Union in the March 23, 2009 Brussels declaration, to restructure Naftogaz by: - Adopting separate cost centers for gas imports, domestic gas production and gas transit. - Establishing a mechanism for transparent financing of gas transit modernization. - Strategy to be implemented on a strict timetable. ### Budget financing and IMF disbursements - Despite progress, authorities face challenges financing the budget deficit. - Recent ability to place increasing amounts of domestic debt as bonds carried interest rates more in line with market rates; work underway to develop domestic debt market procedures and instruments. - Plan to launch significant privatizations. - As of end-June, authorities have almost depleted their deposit accounts and allocation of further IMF disbursements to the budget is needed to ensure sufficient financing in the months ahead. - Mission urged authorities to develop instruments to tap savings outside the banking system (“mattress money”) and to strengthen efforts to secure additional funding from multilateral and bilateral creditors. - Authorities requested that the disbursement for the second review (SDR 2.1 billion) be channeled to the budget to help finance the deficit, including payment of gas imports from Gazprom. ### Monetary and exchange rate policy - Authorities taking measures to improve functioning of foreign exchange market but continue to resort to administrative controls and moral suasion. - Official exchange rate aligned with the market rate of the previous day (within a 2 percent margin). - With stabilization of the FX market, interventions have slowed markedly; NBU continued auctions of foreign exchange aimed at facilitating repayment of external debts by households and SMEs. - Authorities committed to revoke shortly the ban on FX forward and spot transactions (introduced in April) and to bring regulations on open foreign exchange positions in line with international good practices. - Monetary policy stance described as broadly appropriate given deep recession, weak credit demand, and liquidity hoarding by banks. - Agreement that a further reduction in policy rates was not prudent given deteriorating fiscal balances and Naftogaz payment problems. - NBU agreed to closely monitor monetary aggregates and bank liquidity and avoid buildup of a large monetary overhang; NBU to stand ready to raise policy rates if inflation reversal or strong exchange rate pressures re-emerge. - A special review of NBU refinancing and FX interventions by a reputable external auditor suggests NBU broadly followed approved procedures and authorization policies; results to be published by NBU per terms of reference. - Authorities confirmed intention to strengthen NBU independence, planning legislation to strengthen governance by end-September 2009; a Fund technical assistance mission planned for July-August, 2009. ### Financial sector policy and bank restructuring - Bank restructuring program progressing; resolution strategies for five systemic problem banks finalized. - Diagnostic studies for nonsystemic banks completed on time; legislative changes to ensure effective bank resolution prepared. - Initial public cost of bank restructuring estimated at around UAH 25–30 billion (about 3 percent of GDP) plus capitalization of state banks Oschadbank and Eximbank of about UAH 15 billion (about 2 percent of GDP). - Systemic banks (accounting for about 85 percent of capital of the banking system): - Shareholders of most private systemic banks committed to inject about UAH 21.5 billion ($2.6 billion) and have already brought in the necessary capital ahead of schedule. - NBU placed several banks under enhanced monitoring and restricted activities until compliance. - Seven domestically-owned banks initially unable to commit to capital injections; NBU initiated measures including temporary administration; two of these banks opted to raise required capital privately. - Capital needs of remaining systemic problem banks estimated at about UAH 20 billion by international audit firms; due diligence and restructuring options to follow. - Two state banks recapitalized in line with diagnostic results and received extra capital cushion; recent quasi fiscal operations and large exposures to state-owned enterprises may affect their financial position; authorities agreed to follow up with due diligence and design restructuring strategy as needed. - Shareholders of 31 nonsystemic banks committed to provide additional capital amounting to about UAH1.6 billion by December 2009. - Legal amendments planned to strengthen bank resolution: enable transfer of assets and liabilities without prior creditor approval, simplify mergers and acquisitions, enable government funding for banks under NBU resolution, and provide staff immunity for good faith actions. - Discussion of recapitalization bond design: under anti-crisis legislation NBU obliged to purchase recapitalization bonds if banks desire cash redemption; liquidity needs to be satisfied based on projected needs and agreed schedule. - Draft legislation and regulations to implement consolidated supervision and supplementary supervision of conglomerates underway; plan to publish more detailed bank financial information by September 2009; complete pending MoUs with home supervisors by end-2009. ### Program modalities, capacity to repay, and conditionality - Attached LOI describes progress and sets out conditionality through December 2009. - Prior actions for completion of second review include finalization of resolution strategy for systemic problem banks, measures to enable effective bank resolution for other problem banks, measures to contain fiscal risks related to Naftogaz, and removal of controls on foreign exchange forward transactions. - Staff believes program leaves Ukraine in a position to fulfill obligations to the Fund in a timely manner. - Fund credit outstanding would peak in 2010 at 55 percent of Ukraine’s gross reserves. - Peak payments would be in 2012–13 at 12 and 25 percent of gross reserves, respectively. - Programmed fiscal adjustment expected to preserve public debt sustainability. ### Staff appraisal: risks and priorities - Sharp recession and fragile political consensus pose difficult challenges; contraction aids current account adjustment but stresses banking system and weakens government revenue. - Deterioration in payment discipline of households and companies exacerbates financial constraints of state-owned companies, especially Naftogaz. - Pressures for fiscal relaxation in run up to presidential elections in January 2010 are rising; recent expansionary fiscal initiatives have been contained and government should resist further initiatives. - Corrective fiscal measures are a priority to ensure fiscal sustainability and avoid crowding out of private borrowing. - Adoption of comprehensive strategy to strengthen and restructure Naftogaz is important; critical to implement measures on agreed timetable. - Staff welcomes measures to improve FX market functioning but urges NBU to remove remaining obstacles to exchange rate flexibility and implement a flexible exchange rate policy supported by base money targets and transparent intervention strategy. - Monetary policy appropriate but authorities need vigilance; base money targets will become more binding as bank recapitalization and fiscal deficit financing exert upward pressure on money base. - Further progress needed to restore normalcy in banking system; swift recapitalization and resolution actions are critical to regain public confidence and facilitate economic recovery. - Program remains fully financed despite higher fiscal deficit target but subject to substantial risks: external risks (adverse regional/global developments, shortfalls in assumed official financing) and domestic risks (difficult political environment and implementation risks). *Excerpt from IMF staff report content provided.* ### 41. Implementation of policies consistent with the program provides the best chance ### _cr09270 - 41. Implementation of policies consistent with the program provides the best chance ### Summary and program status - Implementation of policies consistent with the program provides the best chance for Ukraine to overcome the economic crisis. - Staff supports the authorities’ request for completion of the second review under the Stand-By Arrangement. - Policy assumptions underlying projections include: (i) exchange rate flexibility as from 2008 (managed float / de facto peg references are used in tables); (ii) convergence of natural gas import prices to Western European levels (adjusted for transit) by 2010; (iii) public-financed recapitalization of banks for a total amount of Hrv 24 bln. ### Macroeconomic outlook and real economy (selected indicators) - Real GDP (percent change): 2006: 7.3; 2007: 7.9; 2008: 2.1; 2009 Est.: -8.0; 2009 Proj.: -14.0; 2010 Proj.: 2.7. - Contributions to Real GDP: - Domestic demand: 2006: 13.1; 2007: 17.2; 2008: 9.1; 2009 Est.: -22.5; 2009 Proj.: -29.7; 2010 Proj.: 4.2. - Net exports: 2006: -5.8; 2007: -9.3; 2008: -7.0; 2009 Est.: 14.5; 2009 Proj.: 15.7; 2010 Proj.: -1.5. - Unemployment rate (ILO definition; percent): 2006: 6.8; 2007: 6.4; 2008: 6.4; 2009 Est.: 9.9; 2009 Proj.: 10.7; 2010 Proj.: 10.0. - Consumer prices (period average): 2006: 9.1; 2007: 12.8; 2008: 5.2; 2009 Est.: 7.2; 2009 Proj.: 6.3; 2010 Proj.: 10.3. - Consumer prices (end of period): 2006: 11.6; 2007: 16.6; 2008: 2.3; 2009 Est.: 6.0; 2009 Proj.: 4.0; 2010 Proj.: 9.0. - Nominal monthly wages (average): 2006: 29.2; 2007: 29.7; 2008: 3.7; 2009 Est.: 4.0; 2009 Proj.: 3.5; 2010 Proj.: 9.0. - Real monthly wages (average): 2006: 18.4; 2007: 15.0; 2008: 6.8; 2009 Est.: -11.2; 2009 Proj.: -11.0; 2010 Proj.: -1.2. - 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 enrolment (percent net): 84 (2005). ### Public finance and fiscal projections - General government balance (percent of GDP): 2006: -1.4; 2007: -2.0; 2008: -3.2; 2009 Est.: -4.0; 2009 Proj.: -6.0; 2010 Proj.: -3.0. - Overall balance (including Naftogaz and bank recapitalization costs, percent of GDP): 2006: -1.4; 2007: -2.0; 2008: -3.2; 2009 Est.: -10.8; 2009 Proj.: -11.4; 2010 Proj.: -6.4. - Overall balance (including Naftogaz operational deficit, percent of GDP): 2006: -1.4; 2007: -2.0; 2008: -3.2; 2009 Est.: -5.9; 2009 Proj.: -8.6; 2010 Proj.: -4.0. - Privatization proceeds (percent of GDP): 2006: 0.4; 2007: 0.6; 2008: 0.3; 2009 Est.: 0.3; 2009 Proj.: 0.3; 2010 Proj.: 0.4. - Net domestic financing (percent of GDP): 2006: -0.3; 2007: 0.4; 2008: 2.5; 2009 Est.: 2.5; 2009 Proj.: 5.8; 2010 Proj.: 2.8. - Net external financing (percent of GDP): 2006: 1.3; 2007: 1.0; 2008: 0.4; 2009 Est.: 3.2; 2009 Proj.: 2.6; 2010 Proj.: 0.8. - Public debt (end of period, percent of GDP): 2006: 15.7; 2007: 12.9; 2008: 19.9; 2009 Est.: 32.5; 2009 Proj.: 35.4; 2010 Proj.: 38.6. - Of which external debt (foreign currency denominated, percent of GDP): 2006: 12.5; 2007: 10.1; 2008: 15.0; 2009 Est.: 23.1; 2009 Proj.: 25.0; 2010 Proj.: 23.8. - Table 4 (Billions of Ukrainian hryvnia; selected lines, 2008–10): - Revenue: 2008: 419.7; 2009 Est.: 410.0; 2010 Proj. (with measures): 445.7. - Tax revenue: 2008: 358.1; 2009 Est.: 352.0; 2010 Proj.: 375.4. - Expenditure: 2008: 449.6; 2009 Est.: 455.0; 2010 Proj.: 482.2. - Overall balance 3/ (billions): 2008: -30.0; 2009 Est.: -40.0; 2010 Proj.: -31.6. - Overall balance (including Naftogaz and bank recapitalization costs): 2008: -30.0; 2009 Est.: -107.1; 2010 Proj.: -67.2. - Bank recapitalization program assumes issuance of bank recapitalization bonds of 24 billion hryvnia in 2009 and 20 billion hryvnia in 2010. ### External sector and balance of payments - Current account balance (percent of GDP): 2006: -1.5; 2007: -3.7; 2008: -7.2; 2009 Est.: 0.5; 2009 Proj.: 0.6; 2010 Proj.: 0.1. - Foreign direct investment (percent of GDP): 2006: 5.3; 2007: 6.4; 2008: 5.5; 2009 Est.: 4.6; 2009 Proj.: 3.4; 2010 Proj.: 3.8. - Goods exports (annual volume change in percent): 2006: 2.7; 2007: 3.2; 2008: -1.9; 2009 Est.: -8.8; 2009 Proj.: -13.6; 2010 Proj.: 6.1. - Goods imports (annual volume change in percent): 2006: 12.5; 2007: 2.0; 2008: 31.6; 2009 Est.: 31.8; 2009 Proj.: 36.4; 2010 Proj.: 6.6. - Gross international reserves (end of period, billions of U.S. dollars): 2006: 22.3; 2007: 32.4; 2008: 22.3; 2009 Est.: 2.4; 2009 Proj.: 31.0; 2010 Proj.: 30.0 (Table 2 / Table 3 discrepancies reflect different table frames; staff projections in selected tables). - Months of next year's imports of goods and services: 2006: 3.7; 2007: 3.9; 2008: 6.4; 2009 Est.: 5.3; 2009 Proj.: 5.5; 2010 Proj.: 5.2. - Total gross external debt (percent of GDP): 2006: 46.3; 2007: 45.1; 2008: 49.7; 2009 Est.: 54.0; 2009 Proj.: 54.5; 2010 Proj.: 85.4. - Short-term external debt (original maturity, percent of total external debt): 2006: 35.0; 2007: 28.2; 2008: 28.4; 2009 Est.: 26.7; 2009 Proj.: 20.7; 2010 Proj.: 16.6. - Gross external financing need (billions of U.S. dollars, Table 9): 2009 Proj.: 34.5; 2010 Proj.: 33.4. ### Monetary and financial sector indicators - Base money (end of period, percent change): 2006: 17.5; 2007: 46.0; 2008: 31.6; 2009 Est.: 6.6; 2009 Proj.: 10.1; 2010 Proj.: 9.6. - Broad money (end of period, percent change): 2006: 34.5; 2007: 51.7; 2008: 3.4; 2009 Est.: 0.2; 2009 Proj.: 3.8; 2010 Proj.: 1.5. - Credit to nongovernment (percent change, end of period): 2006: 70.6; 2007: 74.0; 2008: 7.4; 2009 Est.: 2.1; 2009 Proj.: 7.8; 2010 Proj.: 3.1. - Monetary multipliers and velocity (memorandum): - Velocity: 2006: 2.08; 2007: 1.80; 2008: 1.84; 2009 Est.: 1.85; 2009 Proj.: 1.75; 2010 Proj.: 1.76. - Money multiplier (Table 5): 2006: 2.34; 2007: 2.69; 2008: 2.79; 2009 Est.: 2.76; 2009 Proj.: 2.69; 2010 Proj.: 2.55. - Financial market indicators (latest observations): - Short-term interest rate (percent): 6.3 (2004), 4.2 (2005), 3.6 (2006), 2.3 (2007), 13.7 (2008), 2.3 (2009); latest: 17-Jul-09. - EMBI secondary market spread (basis points, end of period): 2,551; 841; 7,230; 32,7; 711,1; 4917 - Jul-09. - Exchange rate (hryvnia per U.S. dollar, end of period): 2006: 5.3; 2007: 5.1; 2008: 5.1; 2009 Est.: 5.1; 2009 Proj.: 7.7; latest: 17-Jul-09 shows 7.6. ### Banking sector soundness (selected indicators) - Number of banks (latest series): peaked entries show private and domestic ownership; recent number examples: 187 and later 85 (tables list changing counts). - Regulatory capital to risk-weighted assets (percent): range examples: 14.0, 14.0, 13.9, 13.9, 13.3, 13.4, 13.6, 14.0, 15.4, 14.5. - Capital to total assets (percent): around 12.9–14.0 in series. - Nonperforming loans (NPLs) to total loans 2/: values include 7.6; 16.5; 14.8; 13.2; 13.1; 13.6; 14.5; 17.4; 24.0; 29.9 (periods vary). - Specific provisions to NPLs (percent): 20.8; 23.7; 25.9; 26.3; 26.7; 26.3; 26.0; 29.6; 29.3; 29.8. - Foreign exchange risk: - Loans in foreign currency to total loans (percent): 50.8; 51.2; 51.5; 49.8; 49.4; 49.3; 51.2; 51.2; 48.9; 56.5. - Deposits in foreign currency to total deposits (percent): 38.8; 36.5; 34.6; 32.1; 33.1; 32.5; 31.8; 44.0; 44.4. - Profitability (selected): Return on assets (after tax; end-of-period): 1.6; 1.4; 1.4; 1.5; 1.4; 1.3; 1.3; 1.0; -3.2; -3.3. ### Vulnerabilities, debt sustainability and scenarios - Public sector debt trajectory (percent of GDP): baseline path shows public sector gross debt rising from 19.9 (2008) to 35.4 (2009) to 38.6 (2010) and projected to decline gradually to 32.6 by 2014 under baseline. - Public sector debt-stabilizing primary balance: table shows calculation methodology; debt-stabilizing primary balance outcomes reported in Table 2: 2004: -5.9; 2005: -5.4; 2006: -3.1; 2007: -3.4; 2008: -2.3; 2009: 10.1 (illustrative). - External debt (percent of GDP) baseline: 2004: 46.3; 2005: 45.1; 2006: 49.7; 2007: 54.0; 2008: 54.5; 2009: 85.4; 2010: 85.3; projected decline thereafter. - Gross external financing need (billions of U.S. dollars; Table 9): 2009 Proj.: 34.5; 2010 Proj.: 33.4; future years remaining elevated (Table 9 details). ### Policy recommendations and structural reforms (road map) - Fiscal reforms: - Revenue administration: FAD TA provided; Cabinet to start implementing the national compliance improvement plan starting August 2009. - Tax reform: FAD TA in August 2009 to identify measures; identified measures to be included in the 2010 budget. - Pension reform: High level committee to identify pension reforms measures, in consultation with WB and IMF; identified measures to be included in the 2010 budget. - Energy sector reform: Eliminate the gas subsidy by 2011; improve transparency of Naftogaz. One-time gas price increase in 2009 and quarterly adjustments in 2010; implementation of measures identified in the March Brussels declaration. - New initiatives and status: - Budget Code: Approved by Rada; proper testing is needed; not to be used in the 2010 budget formulation. - Euro 2012: Approved by Rada; assessed as against NBU law and impinges on NBU independence; sources of funding other than advance NBU profits need to be identified. - Minimum wage/pension bill: Passed first reading in Rada (to be voted for second reading in September); coalition members will not support it. - Moratorium on tax audit: Approved by Rada; government will not enforce it. - Tax amnesty: Under consideration in Cabinet; the Cabinet will not submit it to Rada. - Separation of Treasury from Ministry of Finance: Under consideration in Cabinet; the Cabinet will not approve it. ### Key risks emphasized in documentation - Large fiscal costs from Naftogaz operational imbalance and bank recapitalization: Naftogaz operational balance (before measures) in Table 4 shows -18.1 bln (2009), -25.0 bln (2010) in one presentation; after measures, reductions are projected; bank recapitalization costs reported as -49.0 bln (2009) in nominal table and bonds issuance assumptions of 24 bln (2009) and 20 bln (2010). - High and front-loaded external financing needs in 2009–10, with substantial short-term external debt shares and elevated external debt ratios. - Banking sector asset quality deterioration (rising NPLs) and currency mismatches between FX loans and FX deposits. *Sources: Ukrainian authorities; and IMF staff estimates and projections included in the content unit.* ### 1. Like most European economies, the economy of Ukraine has been affected by the ### _cr09270 - 1. Like most European economies, the economy of Ukraine has been affected by the ### Macroeconomic framework — outlook and recent performance - Real GDP: - Decline in real GDP in 2009 expected to be more pronounced than the 8 percent projected at the first review, possibly reaching approximately -14 percent. - Economy expected to grow by around 3 percent in 2010. - Inflation and external sector: - Inflation now expected at around 13 percent by end-2009 compared to 16 percent at the time of the first program review. - Merchandise imports and exports contracted by 52 percent and 44 percent, respectively, during the first 5 months of 2009 compared to the same period in 2008. - Current account is expected to record a surplus of about 0.5 percent of GDP in 2009. - Banking and financing conditions: - Outflow of deposits and contraction of credit worsened early in 2009 but financial strains have moderated significantly in recent months. - Improvement of global conditions and program policies expected to strengthen the banking sector and resume credit flows. ### Fiscal policy — deficits, adjustments, and Naftogaz - End-May indicators and projected deficits: - Cash deficit of the general government at end-May was 1.8 percent of GDP, below the program ceiling of 2.4 percent of GDP. - General government deficit projections may increase from 4 percent to 6.5 percent of GDP in 2009 (excluding bank recapitalization costs). - Naftogaz deficit estimated at 2.7 percent of GDP (Hrv 25 billion) and program monitoring will be broadened to explicitly cover this deficit. - Corrective measures and targets: - Announced corrective measures amount to 0.6 percent of GDP to contain the general government deficit to 6 percent of GDP in 2009, excluding banks’ recapitalization costs and the Naftogaz deficit to 2.6 percent of GDP. - Public commitment to a 4 percent deficit target for 2010. - Measures to strengthen Naftogaz and utilities: - Capitalized Naftogaz by UAH 18.6 billion. - Announced gas tariff increases for households (effective September 1, 2009) and utility companies (effective October 1, 2009) by 20 percent (prior action). - These increases will bring tariffs to levels of 31 and 43 percent of import prices, respectively. - Schedule of 20 percent quarterly price increases for households and utility companies starting in January 2010 (prior action). - Taskforce formed to enforce social safety net; objective to achieve convergence of all tariffs with import prices while protecting vulnerable groups. - Adjusted electricity tariffs for consumption over 600 kw; measures to strengthen tax administration; plans to curtail goods and services expenditure in non-priority areas; better targeting of social transfers. - Time-bound road map for pension and tax reform: comprehensive analysis of pension and tax systems to be issued by end-September, with concrete policy recommendations by end-October 2009. - Legislative amendments by end-September to introduce distribution accounts for heating utilities, transfer heating tariff authority to NERC, and eliminate ban on penalties for non-payment of gas and communal utility bills. - Adopted revised 2009 financial plan and developed 2010 projected financial plan (prior action) for Naftogaz; commissioned special audit by an international audit firm (prior action) to establish monthly public reporting of key financial data. - Privatization and domestic financing: - Government and State Property Fund to privatize substantial enterprises within one year, including oblast energy distribution companies; privatization of the “Odessa sea-port plant” to be completed in September. - Domestic debt placements have increased as bonds carried market-aligned interest rates; ongoing work to develop domestic debt market and secure additional multilateral and bilateral funding. - Fiscal rules for wages and transfers: - Policy to limit increases in minimum and average public wages, pensions, and other social transfers in line with projected inflation in 2009 (average and end-period basis). - Government will veto draft bills that would increase minimum wages and pensions to unsustainable levels. ### Monetary, exchange rate, and financial sector policies - Exchange rate and reserves: - Official exchange rate aligned with the average interbank rate of the previous day with deviation not exceeding 2 percent. - Authorities bought a small amount of reserves following recent positive FX market developments. - Amended NBU regulation 108 to lift the ban on foreign exchange forward and spot transactions (prior action); brought regulations 107 and 109 in line with international good practices. - Monetary stance and banking liquidity: - Inflation falling and pressures on the hryvnia eased, permitting policy rate reductions; readiness to tighten policy if exchange rate or inflation pressures reemerge. - Outflow of deposits has halted, allowing revocation of the requirement limiting early withdrawal of deposits prior to maturity. - Authorities will closely monitor monetary aggregates and bank liquidity to avoid a large monetary overhang. - Central bank liquidity and governance: - Tightened criteria for access to central bank liquidity for refinancing operations and liquidity support to problem banks. - Ernst and Young agreed-upon-procedures on refinance credit and foreign currency provision to banks in Q4 2008 concluded; preliminary results suggest NBU followed approved procedures; main findings to be published per agreed terms of reference. - Legislation to strengthen NBU governance and independence to be enacted by end-September 2009; authorities will veto legislation that impinges on NBU independence. - Bank recapitalization, restructuring, and supervision: - Rapid progress intended on bank recapitalization and restructuring program. - Shareholders of most systemic private banks have brought in capital; follow-up with noncomplying banks to ensure pledges materialize; completion of pending MoUs with home supervisors aimed by end-2009. - Resolution strategy finalized and implementation started for five systemic problem banks where shareholders are unable to bring required capital: three banks already recapitalized; decision by end-July regarding state involvement for the other two banks (prior action). - Strategy includes identifying fair value of shares, government recapitalization, appointment of professional management, and thorough due diligence assessing restructuring options post-recapitalization. - Setup and staffing of relevant units at MoF and NBU completed; recapitalization implementation will avoid undue monetary expansion and safeguard NBU financial position. - Two state banks recapitalized in line with diagnostics; by September 2009 a set of measures to strengthen their financial sustainability will be developed. - Diagnostics for Group 3 and 4 non-systemic banks completed; banks informed about needed capital increases by end-2009. - Legal amendments adopted (prior action) to identify ultimate controllers of banks and strengthen the bank resolution process; resolution strategy for non-systemic insolvent banks to be finalized and implemented by end-September, 2009. - Amendments to implement consolidated supervision and supplementary supervision of financial conglomerates planned to be enacted by May 2010. - Since April 2009, banks required to disclose detailed financial information. ### Program phasing, access, and performance criteria (selected figures) - Access and phasing under proposed Stand-By Arrangement (Appendix I. Table 1): - November 2008: 3,000 Millions of SDRs; 218.7 percent of Quota; Condition: Board approval of arrangement. - 1 May 2009: 1,875 Millions of SDRs; 136.7 percent of Quota; Conditions include observance of end-March 2009 performance criteria, prior actions and completion of the first review. - 15 June 2009: 2,125 Millions of SDRs; 154.9 percent of Quota; Conditions include observance of end-May 2009 performance criteria, prior actions and completion of the second review. - 15 November 2009: 2,500 Millions of SDRs; 182.3 percent of Quota; Conditions include observance of end-September 2009 performance criteria and completion of the third review. - 15 February 2010: 375 Millions of SDRs; 27.3 percent of Quota; Conditions include observance of end-December 2009 performance criteria and completion of the fourth review. - 15 May 2010: 375 Millions of SDRs; 27.3 percent of Quota; Conditions include observance of end-March 2010 performance criteria and completion of the fifth review. - 15 August 2010: 375 Millions of SDRs; 27.3 percent of Quota; Conditions include observance of end-June 2010 performance criteria and completion of the sixth review. - 15 October 2010: 375 Millions of SDRs; 27.3 percent of Quota; Conditions include observance of end-September 2010 performance criteria and completion of the seventh review. - Total: 11,000 Millions of SDRs; 802 percent of Quota. - Selected quantitative performance criteria (figures shown in the program table): - Ceiling on the cash deficit of the general government (levels shown for Dec. 2008, Mar., May, Sep., Dec.): 30,026; 11,040; 22,500; 40,000; 55,000. - Ceiling on the cash deficit of the general government including Naftogaz (same periods): 30,026; 10,097; 21,847; 58,600; 79,100. - Floor on net international reserves of the NBU (in millions of U.S. dollars) (Dec. 2008, Mar., May, Sep., Dec.): 27,811; 22,238; 20,799; 16,600; 14,900. - Ceiling on base money (Dec. 2008, Mar., May, Sep., Dec.): 186,671; 174,764; 181,681; 210,000; 211,000. - Continuous performance criteria and adjusters (selected): - Project financing (flows): 2/ 799; 324; 1,050; 1,568; 2,091. - Cost of bank recapitalization: 3/ 0; 0; 0; 0; 0. - Stock of budgetary arrears on social payments: 4/ 76...100;100;100. - Notes included: ceilings adjusted for project financing shortfalls; ceiling on cash deficit adjusted upward by 100 percent of fiscal cost of bank recapitalization; ceiling adjusted downward for arrears on social payments; exclude bonds issued for capitalization of Naftogaz. - Prohibitions and policy safeguards included in program: - Prohibition on conclusion of bilateral payments agreements inconsistent with Article VIII. - Prohibition on imposition or intensification of import restrictions for balance of payments reasons. - Prohibition on imposition or intensification of restrictions on making payments and transfers for current international transactions. *Source: _cr09270 - 1. Like most European economies, the economy of Ukraine has been affected by the* ### Appendix I. Table 2. Ukraine: Quantitative and Continuous Performance Criteria 1/ ### _cr09270 - Appendix I. Table 2. Ukraine: Quantitative and Continuous Performance Criteria 1/ ### Prior Actions for the Second Review (A1–A5) - A1. Amend legislation to enable effective bank resolution. The amendments should include revaluation of shareholder capital, transfer of assets and liabilities without prior approval of creditors, simplifying and accelerating the process for bank mergers and acquisitions, enabling the government to provide funds for banks under resolution by the NBU, and definition and disclosure of ultimate controllers of banks. - A2. Finalize the resolution strategy for each of the systemic problem banks and start implementation. In particular, implement the recapitalization for the three banks for which the decision thereto has already been taken, and decide on the expediency of the state involvement in replenishing the capital of the other two banks. - A3. Announce an increase in the price of natural gas paid by households (effective September 1) and utility companies (effective October 1) by 20 percent to bring these tariffs at 31 and 43 percent of import prices, respectively, and announce a schedule of 20 percent quarterly price increases for households and utility companies starting in January 2010. Introduce mechanisms to enforce payment discipline of utility companies and households. - A4. To improve transparency of Naftogaz: approve a revised 2009 financial plan and develop a 2010 projected financial plan for Naftogaz, based on credible financing assumptions, and commission an independent review, by an international audit firm, to put in place a monitoring framework for the cash result of the company and to establish regular (monthly) and timely public reporting of key financial data. - A5. Improve the functioning of the foreign exchange market, including by amending NBU regulation 108 to lift the ban on foreign exchange forward and spot transactions. ### Structural Benchmarks (B1–B8) and Dates - B1. Enact legislation to strengthen the overall governance structure of the NBU; in particular, reform the NBU council, transforming it into a narrower technical body and revise the NBU Law as needed to address all safeguards-related weaknesses, as noted by the recent safeguards assessment. — End-Sept 2009 - B2. Amend the Law of Ukraine “On restoring solvency of a debtor or announcing him/her a bankrupt” and related laws to facilitate voluntary out-of-court rehabilitation and by reducing the scope for excessive appeals. — End-Sept 2009 - B3. Publish detailed information on banks, in particular detailed balance sheets and income statements, information on bank capitalization, ownership and asset quality, with separate information for domestic and foreign currency assets and liabilities. — End-Sept 2009 - B4. Finalize the resolution strategy for each of the non-systemic problem banks and start implementation. — End-Sept 2009 - B5. Initiate the implementation of the reform and restructuring strategy for Naftogaz, including a mechanism for transparent financing of gas transit modernization needs, in accordance with the principles of the Brussels declaration. — End-Sept 2009 - B6. Develop a set of measures to strengthen the financial sustainability of State banks. — End-Sept 2009 - B7. Eliminate the foreign exchange transaction tax. — End-Sept 2009 - B8. Enact necessary amendments to legislation to implement consolidated supervision and provide for supplementary supervision of financial conglomerates. — End-May 2010 ### Quantitative Targets — Definitions and Adjustment Mechanisms - Floor on Net International Reserves (NIR) - NIR defined as usable gross international reserve assets minus reserve-related liabilities to nonresidents, evaluated at program exchange rates. - Usable gross international reserve assets exclude, 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 reserves assets that are: (i) encumbered; or (ii) pledged as collateral (in so far as not already included in foreign liabilities, or excluded from reserve assets); or (iii) frozen; - any reserve assets that are not readily available for intervention in the foreign exchange market. - Reserve-related liabilities comprise: - all short-term liabilities of the NBU vis-à-vis nonresidents 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. - Components of Net International Reserves listed by NBU balance sheet accounts (referenced as in the source). - Program exchange rates (kept fixed over the program period) used to evaluate reserve levels: - Swiss Franc = 0.9056 dollar - Euro = 1.4349 dollars - Pound Sterling = 1.8029 dollars - Japanese yen = 106.1346 per dollar - SDR = 1.56407 per dollar - Official gold holdings = 833.95 dollars per troy ounce - 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 as: Currency—banknotes and coins—(NBU accounts 3000 (net)+3001 (net)-3007A-3009A-1001A-1004A-1007A-1008A-1009A) minus cash in vault at deposit money banks (DMBs) (DMB accounts 1001A:1005A and 1007A). - Banks’ reserves defined as: cash in vault at deposit money banks (DMB accounts 1001A:1005A, and 1007A) 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). - Ceiling on Cash Deficit of the General Government — Definition and Automatic Adjusters - General government comprises the 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). - Cash deficit measured from below the line as the sum of: - total net treasury bill sales (per NBU registry); - other net domestic banking system credit to government (all non-treasury-bill financing extended to the government by banks less the change in all government deposits in the banking system); - total receipts from privatization received by the SPF and local governments; - the difference between disbursements and amortization on any bond issued by the government or the NBU to nonresidents for purposes of financing the deficit of the general government; - the difference between disbursements of official foreign credits to the general government (including project loans on-lent to public enterprises) and the amortization of official foreign credits by the general government (including of on-lent project loans, and excluding offset-based amortization with Russia); - the 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. - All foreign-currency flows to/from the budget converted into hryvnia at the official exchange rate prevailing at close of business on the date of the transaction. - Automatic adjuster for external project financing: - 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 fall short of program projections, the ceiling will be adjusted downward by 100 percent of the shortfall. - Automatic adjuster for recapitalization of banks: - The ceiling will be adjusted upward by 100 percent of the budgetary cost of recapitalization (upfront cost plus associated subsequent interest payments). - Automatic adjuster on the stock of budgetary arrears on social payments: - Budgetary arrears on social payments comprise all arrears of the consolidated budget on wages, pensions (including on Chernobyl pensions), and social benefits owed by the Pension Fund, the central, or local governments. - Budgetary arrears defined as payments not made thirty days after they are due. - Ceiling on Cash Deficit of the General Government including Naftogaz — Definition - Cash deficit of the General Government including Naftogaz equals the cash deficit of the General Government (as defined above) plus the cash deficit of Naftogaz. - Naftogaz comprises the national joint stock company “Naftogaz of Ukraine” and its nine subsidiaries (Ukrgasproduction, Chomomornaftogaz, Ukrtransgas, Ukratransnafta, Gas of Ukraine, Dnipropetrovskgas, Luganskgas, Zaporizhgas, and Mykolayivgas), as audited by an international auditor. - Cash deficit of Naftogaz measured from below the line as the sum of: - net domestic banking system credit to the company (all financing extended to the company by banks less the change in company deposits in the banking system); - the difference between disbursements of private foreign loans to Naftogaz (including private placements) and amortization of such loans; - the difference between disbursements of official foreign credits to Naftogaz (including project loans) and amortization of such credits; - the disbursements of trade credits from Gazprom to import gas; - the difference between disbursements and amortization on any bonds issued by the company; - the difference between disbursements of loans from the Single Treasury Account and amortization of loans from the Single Treasury Account; - the net change in deposits of the company in nonresident banks, or other nonresident institutions; - net proceeds from any promissory note or other financial instruments issued by the company; - total receipts from sale of assets received by the company; - any other forms of financing of the company not identified above. - All Naftogaz foreign-currency flows converted into hryvnia at the official exchange rate prevailing at close of business on the date of the transaction. ### Official Exchange Rate (Determination) - The NBU will, on a daily basis, set the official rate at the average transaction-weighted rate of the preceding day (with intraday adjustments if necessary to keep it within 2 percent of the market rate). ### Reporting Requirements (selected NBU and related reporting) - Monthly (no later than the 25th day of the following month): - aggregate balance sheet for the NBU; - consolidated balance sheet for the deposit money banks. - Weekly and monthly (no later than the 25th of the following month): - full breakdown of NBU accounts included in net international reserves, at both actual and program exchange rates. - Continue to provide on NBU web site the weekly report on the primary treasury bill market, reports on each treasury bill auction, and provide to the IMF the monthly report on treasury bills. - Monthly (no later than the 25th): - data on the total financing (including refinancing) issued by the NBU to commercial banks, broken down by original maturity. - Every 10 days: - operational monetary survey of the NBU, including any additional information needed for IMF staff monitoring. - Daily: - operational balance sheets of the NBU and commercial banks according to standard reporting forms, including detailed information on loans of the banking sector provided to the general government, with weekly detailed breakdown by indebtedness of the central government and local budgets, including in national and foreign currency, by loan and by security. - standard daily data sheet on government foreign receipts and payments, breakdown of interbank market operations by currencies, explanations for main currency flows; continue daily information on exchange market transactions, including exchange rates. - Monthly: - a projection for external payments falling due in the next twelve months. - Quarterly: - the stock of external debt for both public and private sector. *Source: Appendix I. Table 2 and accompanying Technical Memorandum of Understanding (excerpts) from the IMF document.* ### 25. The NBU will provide to the IMF reports N 381.25; 381.26 with information on ### _cr09270 - 25. The NBU will provide to the IMF reports N 381.25; 381.26 with information on ### A. National Bank of Ukraine (NBU) reporting obligations - Provide to the IMF reports N 381.25; 381.26 with information on reserve requirements and reports on CD operations when performed. - Continue to provide on a monthly basis, no later than 25 days after the end of the month, banking system monitoring indicators in an agreed format. - Provide consolidated banking sector data and aggregated data (without specifying the names of the banks) 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, substandard, 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. - Continue to provide quarterly balance of payments data in electronic format. - Provide data on credit to nongovernment units that is 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 nonbank entities and individuals; provide information on outstanding interest and principal payments in such case. - Inform IMF staff of any changes to reserve requirements for deposit money banks. - Communicate in writing to the IMF staff any changes in accounting conventions and valuation principles incorporated into the balance sheet data and notify the staff before introducing any change to the Charts of Accounts of the NBU and the Commercial Banks, as well as changes in the reporting forms. - NBU Internal Audit Department to continue to provide an assurance report to the Fund, no later than six weeks after each test date, confirming that: - (i) the monetary data are in accordance with program definitions and have been verified and reconciled to accounting records; - (ii) that there have been no changes to the chart of accounts or valuation methods that would impact the data reporting. - Continue to provide the Fund with a copy of the annual management letter from the external auditor within six weeks of completion of each audit; as required under the Fund's safeguard policy, this will remain in effect for the duration of the arrangement and for as long as credit remains outstanding. ### B. Ministry of Finance reporting obligations - Treasury to continue to provide to the IMF its report on daily operational budget execution indicators, on a 10-day basis data on revenue of the state, local government, and consolidated budget revenues. - Continue to provide in electronic form monthly treasury reports, 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 based on standard functional and economic classifications. - Provide monthly reports 1.P0 on actual tax revenue and 1.P6 on tax arrears, no later than 25 days after the end of each month. - Report the final fiscal accounts at the end of each fiscal year, no later than March of the following year; these reports to provide expenditure data by programs and key spending units, and based on standard functional and economic classifications. - Report any revisions to monthly and annual fiscal reports as well as any amendments to the state budget and local government budgets within a week after their approval. - Report to the IMF on a monthly basis, no later than 15 days after the end of the month, the cash deficit of the general government, with details on: - budget execution data for privatization receipts of the state and local governments; - disbursements of external credits (including budget support and project loans for on-lending) to the consolidated budget and amortization of external debt by the consolidated budget; - net domestic borrowing of the general government, including net t-bill issuance, issuance of other government debt instruments, and change in government deposits. - Provide, on a monthly basis, information on the borrowing (disbursements, interests and amortization) for the following state-owned companies: Naftogaz, UrkAvtoDor, UkrZaliznytsya, Ukrtelecom and Energoatom. - Provide 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. The Treasury will report monthly data on accounts payable for state and local budgets (economic and functional classification). - Provide monthly information, no later than 25 days after the end of each month, on the amounts and terms of all external debt contracted or guaranteed by the general government. - Provide to the IMF in electronic form on a monthly basis, no later than 25 days after the end of the month: - (a) data on the outstanding stock of domestic and external debt of the state and local budgets (including general and special funds); - (b) the standard files planned and actual external debt disbursement, amortization, and interest payments (including general and special funds), broken down in detail by creditor categories as agreed with Fund staff; - (c) the report on external debt amortization and interest payments by days and currencies. - Also report the accumulation of any budgetary arrears on external and domestic debt service. - Ministry of Finance and the NBU will provide data on external and domestic credit to nongovernment units that is guaranteed by the government or the NBU on a monthly basis no later than 25 days after the end of the month. - Provide data on the approved budgets and quarterly operational data (daily for the Pension Fund only) on the revenue, expenditures, and arrears, and balance sheets of the Pension Fund (detailed data on the breakdown of revenues and expenditure by main categories are expected for this Fund), Social Insurance Fund, Employment Fund (detailed data on the breakdown of revenues and expenditure by main categories are expected for this Fund), Occupational Accident and Sickness Insurance Fund, and any other extrabudgetary funds managed at the state level no later than 25 days after the end of each quarter (each month in case of the Pension Fund). Any within-year amendments to the budgets of these funds will be reported within a week after their approval. Report the annual financial statement including the final fiscal accounts of those funds at the end of each fiscal years, no later than April of the following year. - Report semi-annual data on the number of employees of budgetary institutions financed from the central and local budgets, starting from January 2008. After any public sector wage increase, provide an estimate of its costs for the current and subsequent fiscal years, for the state and local government budgets. - 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 of the recapitalization of banks as well as the costs associated with the payment of interests. - Provide quarterly data on the revenues, expenditures and net lending of the Agrarian Fund. - Provide weekly data on the outstanding balance of the single Treasury account compartmentalized into funds ascribed to: - (a) general fund of the state budget; - (b) special fund of the state budget with a subcategory for own receipts of budgetary institutions; - (c) local budgets; - (d) other funds; - and data on net outstanding temporary loans to Pension Fund and local budgets. ### C. State Tax Administration (STA) reporting obligations - 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 stock-and-flow format (Beginning, Netting out during month, Deferrals during month, Write-offs, Collections of outstanding debt at beginning of month, New Arrears, Ending Stock) with breakdowns for Total, Principal, Interest, Penalties. - Provide monthly data, no later than 25 days after the end of the month, on the stock and flow of tax arrears in the energy industry, in total and separately for the electricity, gas and coal sectors; provide the list (identifying taxpayers) of the 10 largest accumulated stocks of tax liabilities at the end of the month, and the list (identifying taxpayers) of the 10 largest additions to the stock of arrears during that month (flow). These lists to be prepared separately for the electricity, gas and coal sectors. - Provide on a quarterly basis, 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. - Continue to provide on a quarterly basis, no later than 2 months after the end of the quarter, a listing of all tax exemptions granted, specifying the beneficiary the exemption provided, the duration, and the estimated subsequent revenue loss for the current fiscal year. - Continue to provide monthly information, no later than 25 days after the end of the month, on VAT refunds in the following format: - (i) beginning stock of refund requests; - (ii) refund requests paid in cash; - (iii) netted out against obligations of the taxpayer; - (iv) netted out in line with Cabinet of Ministers’ resolutions #85 of February 4, 2009, and #312 of April 2, 2009; - (v) denied requests; - (vi) new refund requests; - (vii) end-of-period stock; - (viii) 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). - Note: while monthly data could be operational, quarterly figures will be subject to verification and will be final. ### D. Ministry of Economy and Ministry of Fuel and Energy reporting obligations - Ministry of Economy will 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, the Ministry of Housing and Municipal Economy of Ukraine, and the National Energy Regulatory Commission will provide the methodology underlying the tariff calculations for full cost recovery, including electricity and gas. - For each month, no later than the 25th of the following month, the government (based on information by the Ministry of Fuel and Energy, the Ministry of Economy, STA, MoF, NERC, and Naftogaz) will provide IMF staff with information in electronic form (in an agreed format) on financial indicators in the gas, electricity and coal sectors, including sales, tariffs, arrears, payments to the budget, subsidies, and debt. - For each month, no later than the 25th of the following month, the government (based on information by Naftogaz) will provide IMF staff with information in electronic form (in an agreed format) on the cash deficit of the company, as defined above. ### E. State Statistics Committee and Naftogaz reporting obligations - State Statistics Committee and Naftogaz will 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 — Second Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria—Informational Annex — Prepared by the European Department in Consultation with Other Departments — Approved by Poul M. Thomsen and Lorenzo Giorgianni — July 23, 2009* ### APPENDIX I: UKRAINE—FUND RELATIONS ### APPENDIX I: UKRAINE—FUND RELATIONS (As of June 30, 2009) ### I. Membership Status - Joined 09/03/1992; Article VIII ### II. General Resources Account - Quota: 1,372.00 SDR Million; 100.00 percent - Fund holdings of currency: 6265.40 SDR Million; 456.66 percent - Reserve position in Fund: 0.02 SDR Million; 0.00 percent ### III. SDR Department - Holdings: 3.13 SDR Million; N/A ### IV. Outstanding Purchases and Loans - Stand-By Arrangements: 4,875.00 SDR Million; 355.32 percent of quota - Extended arrangements: 18.40 SDR Million; 1.34 percent of quota ### V. Latest Financial Arrangements - Stand-By: Approval Date 11/05/08; Expiration Date 11/04/10; Amount Approved (SDR million) 11,000.00; Amount Drawn (SDR million) 4,875.00 - Stand-By: Approval Date 03/29/04; Expiration Date 03/28/05; Amount Approved (SDR million) 411.60; Amount Drawn (SDR million) 0.00 - EFF: Approval Date 09/04/98; Expiration Date 09/03/02; Amount Approved (SDR million) 1,919.95; Amount Drawn (SDR million) 1,193.00 ### VI. Projected Payments to Fund (Expectations Basis) - Note: (SDR million; based on existing use of resources and present holdings of SDRs) - Principal and charges/interest by year (as presented): - 2009 Principal: 18.40 - 2009 Charges/Interest: 47.48 - 2009 Total: 65.88 - 2010 Principal: 1,968.75 - 2010 Charges/Interest: 96.18 - 2010 Total: 1,096.18 - 2011 Principal: 2,437.50 - 2011 Charges/Interest: 96.18 - 2011 Total: 2,533.68 (implicit from listed components) - 2012 Charges/Interest: 77.39 - 2013 Charges/Interest: 28.72 - 2013 Total: 2,466.22 - Footnote: The 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. ### VII. Exchange Arrangements - Introduction of the hryvnia (Hrv) in September 1996 at conversion rate karbovanets (Krb) 100,000 to HRV 1. - Initial informal peg to the dollar; September 1997 formal band Hrv 1.7–Hrv 1.9 per U.S. dollar; band limits moved several times. - Since March 19, 1999, exchange rate determined by the interbank market. - February 22, 2000: NBU confirmed intention to allow free float, but intervened to limit fluctuations (around Hrv 5.33 per U.S. dollar, and from March 2005, around Hrv 5.05 per U.S. dollar). Classified as a de facto peg. - From April 2008, arrangement reclassified as a managed float. - September 24, 1996: Ukraine accepted obligations of Article VIII, Sections 2, 3, and 4; two remaining restrictions eliminated in May 1997. - New restrictions on current international transactions introduced September 1998 and removed March 1999. ### VIII. Article IV Consultation - 2008 Article IV Consultation discussions: Kyiv, March 20–April 1, 2008. Concluding statement posted April 16, 2008. - IMF team: Messrs. Ford (Head), Flanagan, Moulin (all EUR), Mr. Driessen (MCM), Ms. Zakharova (FAD), Mr. Hofman (PDR), and Mr. Horvath, Resident Representative. - Meetings 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. Mr. Yakusha (OED) attended. - Background publications: Selected Issues Paper on (1) Two Aspects of the Ukrainian’s Business Cycle; (2) Strengthening Ukraine’s Fiscal Framework. Working Paper on Resolving Large Contingent Fiscal Liabilities. ### IX. FSAP Participation - Joint World Bank–IMF FSAP assessment: May 10–24, 2002. - Update mission: February 18–21, 2003. Financial Sector Stability Assessment (FSSA) report (IMF Country Report No. 03/340) considered by Executive Board on May 14, 2003. - Assessed standards and codes included: 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 missions: June 11–22, 2007 and July 9–20, 2007. Assessed: Basel Core Principles for Effective Banking Supervision; IOSCO Core Principles of Securities Regulation. - Updated FSSA considered by Executive Board as part of the 2008 Article IV consultation. ### X. ROSCS - Data ROSC Module: April 3–17, 2002; considered by 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). ### XI. SAFEGUARD ASSESSMENT - Update safeguards assessment of the NBU completed April 16, 2009 in connection with the Stand-By Arrangement approved on November 5, 2008. - Key findings: - NBU continues to publish externally audited financial statements. - Strengthened aspects of safeguards framework since 2004, in particular the internal audit function. - Ongoing economic crisis has significantly increased the NBU's financial and operational risks. - Independence has been impaired in the past by ad hoc legislation. - Weak governance structure, lack of independent audit oversight, and non-transparent decision-making add further safeguards risks. - Recommendations and follow-up actions: - External review of the NBU's liquidity support and foreign exchange operations during Q4 2008 recommended and subsequently conducted by Ernst & Young Kiev. - Enactment of legal revisions proposed to strengthen independence and the governance structure, provide for independent audit oversight, and ensure consistency in financial reporting. - NBU Internal Audit Department agreed to review monetary data at program test dates and formally report findings to the Fund to safeguard data integrity and compliance with program definitions. ### Press Release — IMF Completes Second Review Under Stand-By Arrangement with Ukraine and Approves US$3.3 Billion Disbursement (Press Release No. 09/271, July 28, 2009) - Executive Board completed second review of Ukraine’s performance under the two-year Stand-By Arrangement (SBA) and approved immediate release of the third tranche equivalent to SDR 2.12 billion (about US$3.3 billion). - Total disbursements under the SBA will be SDR 7 billion (about US$10.9 billion). - Executive Board approved modification of a performance criterion on the fiscal deficit to include the deficit of Naftogaz. - SBA approved on November 5, 2008 in amount equivalent to SDR 11 billion (about US$16.4 billion). - Statements by Mr. John Lipsky, First Deputy Managing Director and Acting Chair: - Financial stress has eased and Ukraine’s current account is adjusting rapidly. - The fall in output is more pronounced than expected, necessitating further significant policy adjustments. - The revised economic program aims to mitigate effects of the global crisis, restore confidence in the banking system, and preserve fiscal sustainability while protecting vulnerable populations. - Program adjustments include: - Broadening fiscal deficit target to reflect Naftogaz imbalances. - Corrective fiscal measures and structural reforms to ensure fiscal sustainability and avoid crowding out private sector borrowing. - Reduction of nonpriority expenditures. - Steps to restore viability in the natural gas sector, including schedule of natural gas price increases to bring domestic prices in line with international prices. - Better targeting of social safety net programs to protect vulnerable households. - Strategy to strengthen financial situation and transparency of Naftogaz. - Plans for pension and tax reforms in the context of the 2010 budget to help entrench fiscal sustainability and reduce fiscal financing needs. - Monetary policy stance characterized as adequate; NBU to monitor monetary aggregates and stand ready to tighten policies if inflation or exchange rate pressures reemerge. - NBU measures to increase currency flexibility, including amending regulation to allow foreign exchange forward transactions, to: - Help Ukraine adjust better to external shocks. - Discourage dollarization and excessive risk taking by unhedged borrowers. - Allow monetary policy to focus on inflation objectives. - Restoring confidence in the banking system is a key priority; recent steps include recapitalization of systemic banks, decisions regarding two other banks, and legal amendments to enable resolution of nonsystemic banks. - Authorities plan to phase out remaining import restrictions in line with program commitments. - Close adherence to the program emphasized as key to facilitate an expeditious economic recovery. *International Monetary Fund — APPENDIX I: UKRAINE—FUND RELATIONS (As of June 30, 2009)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09270.pdf_