## _cr1152

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### Stand-By Arrangement (SBA) and Program Modalities
- 29-month SDR 10.0 billion (729 percent of quota, US$15.3 billion) SBA approved July 28, 2010.
- First purchase: SDR 1.25 billion at approval.
- Second tranche contingent on first review: SDR 1.0 billion (including approximately US$1 billion (SDR 655 million) for the budget).
- Phasing: initial SDR 1.25 billion purchased; second SDR 1.0 billion upon completion of this review; eight remaining tranches totaling SDR 7.75 billion contingent on subsequent quarterly reviews beginning March 2011.
- Access and phasing summary (selected):
  - July 28, 2010: 1,250 Millions of SDRs, 91.1 Percent of quota
  - November 30, 2010: 1,000 Millions of SDRs, 72.9 Percent of quota
  - March 15, 2011 – December 15, 2012: subsequent scheduled tranches summing to total SDR 10,000 Millions, 728.9 Percent of quota.

### Program Status and Key Performance
- Policy implementation broadly in line with program; all end-September quantitative performance criteria observed.
- All three structural benchmarks completed; two were met with delay (lifting ban on penalties for overdue utility bill payments; agreement on phasing out restrictions on the foreign exchange market).
- NBU met end-September NIR floor comfortably; NDA target met.
- End-September indicative ceiling on stock of VAT refund arrears met.
- Issuance of bank recapitalization bonds and government guarantees within program ceilings.

### Developments and Outlook
- Recovery broadening; policy focus shifting from crisis management to supporting adjustment and recovery.
- Real GDP growth H1 2010: 5.9 percent y-o-y.
- GDP growth 2010: set to reach, or slightly exceed, program projection of 3¾ percent.
- Growth expected to increase to 4½ percent in 2011.
- Output gap sizable; economic activity not expected to surpass pre-crisis peak until 2013.

### Inflation, Monetary, and External Conditions
- Consumer prices jumped in September to 10 percent due to higher food prices and hikes in gas tariffs and excise taxes; inflation then resumed downward path and remains within program objectives.
- Core inflation projected to fall to around 7 percent by year-end.
- Government Eurobond placed: US$2 billion (7.5 percent yield), first issuance since late 2007.
- Gross international reserves: US$33.2 billion as of end-November.
- Sovereign risk: lowest sovereign rating in Eastern Europe; spreads persistently above 500 basis points.
- Since September, NBU net seller of foreign currency—mostly seasonal and higher-than-anticipated import demand.
- 2011 balance of payments outlook: positive; strong FDI and IFI flows expected to cover a modest current account deficit and support further reserve strengthening.

### Fiscal Performance and 2011 Budget Strategy
- 2010 fiscal objectives: general government deficit of 5½ percent of GDP; combined deficit (including Naftogaz) of 6½ percent of GDP.
- Program aim: reduce combined general government and Naftogaz deficit ceiling to 3½ percent of GDP.
- 2011 general government budget submitted to parliament targets deficit of 3.1 percent of GDP (prior action).
- Implied tightening of cyclically adjusted general government primary balance: about 1 percent of GDP.
- Revenues:
  - Tax code broadly revenue neutral; no near-term tax policy changes envisaged.
  - Overall revenue expected to decline by 1⅔ percent of GDP in 2011—mainly due to lower NBU profit transfers and fixed nominal non-tax revenue items.
- Expenditures: budget measures to reduce spending by 3.7 percent of GDP including:
  - Limiting increases of average wages and pensions to inflation (passive effect): 3.4 percent of GDP reduction.
  - Wage-related expenditure cuts: additional 1.0 percent of GDP by reducing staff positions and eliminating some bonus/top-up regimes.
  - Reduction of goods and services spending: 0.2 percent of GDP.
  - Pension reform legislation (structural benchmark) to generate 0.4 percent of GDP in savings.
  - Reduction of transfers to enterprises: 0.3 percent of GDP.
- Partially offsetting increases:
  - Increased allocations for investment including Euro 2012: 0.7 percent of GDP.
  - Higher interest payments: 0.5 percent of GDP.
  - Increased household transfer programs to protect vulnerable groups: 0.1 percent of GDP.
- Additional public debt items not in general government deficit for 2011:
  - Government plans to issue guarantees of 1.2 percent of GDP.
  - Budget provides for recapitalization of state-intervened banks, limited to unused amounts carried over from 2010.
- Decomposition of expenditure changes, 2010–11 (selected figures):
  - 2010 Expenditure: 524.3 billion Ukrainian hryvnias; Percent of GDP: 48.4
  - Passive 2/: 42.2 billion; 3.4 percent of GDP
  - Interest expenditure: 8.6 billion; 0.7 percent of GDP
  - Discretionary policy measures: -14.9 billion; -1.2 percent of GDP
    - expenditure cuts: -23.2 billion; -1.9 percent of GDP
    - Cuts in wage bill: -12.0 billion; -1.0 percent of GDP
    - Cuts in goods and services: -2.2 billion; -0.2 percent of GDP
    - Cuts in subsidies to enterprises: -3.7 billion; -0.3 percent of GDP
    - Pension reforms: -4.8 billion; -0.4 percent of GDP
    - expenditure increases (higher capital investment): 8.2 billion; 0.7 percent of GDP
  - 2011 Expenditure: 560.2 billion; 44.7 percent of GDP
  - Note: 2010 and 2011 expressed against different GDP basis.
- Capital spending increased to about 3 percent of GDP for Euro-2012 and infrastructure upgrades.
- State guarantees limited to UAH 15 billion (1.2 percent of GDP), same as 2010.

### Naftogaz and Energy Sector Policies
- Naftogaz deficit projections and drivers:
  - Naftogaz’s deficit projected to exceed end-year target by UAH 3 billion (reaching 1.4 percent of GDP) due to lower domestic gas consumption, utility nonpayment, and delayed removal of ban on penalties.
  - Authorities agreed to pass legislation to remove the ban (prior action).
  - NERC to instruct communal utilities to raise end-user heating tariffs effective January 1, 2011 (prior action).
- 2011 projection: Naftogaz deficit expected to fall to 0.4 percent of GDP, supported by a second round of gas tariff hikes.
- Structural benchmarks and actions:
  - Additional 50 percent tariff hike to go into effect by April (structural benchmark); further increases as needed to meet 2011 deficit target and balance Naftogaz by 2012.
  - Strict enforcement of full price pass-through, lifting ban on penalties, and tight control of operational costs.
- Stockholm arbitration settlement:
  - Net liability for Naftogaz of about US$ 1.5 billion.
  - Purchase of natural gas for delivery to RUE facilitated by an advance payment of transit fees from Gazprom, extinguished over 2011-15 through foregone gas transit revenues.
  - Program adjustors included so settlement does not affect headline deficit targets for Naftogaz.
- Energy community and financing:
  - Protocol for accession to Energy Community Treaty signed in September; gas sector law adopted in July (end-December structural benchmark).
  - €610 million EU macro-financial assistance loan delayed, expected disbursed in 2011.
  - Need to speed up pilot projects for LNG and transit modernization with EBRD and EIB.

### Structural Reforms: Tax, Pensions, Public Administration
- New Tax Code:
  - Objective: reform tax system, reduce tax burden over time, strengthen administration, improve compliance.
  - Staff concerns: rapid tax cuts and proliferation of exemptions could drain revenues.
  - Authorities' commitments: slow corporate profit tax rate cuts to two percentage points per year through 2013; limit VAT exemptions for certain businesses/professions to 3-year period; any sign of revenue underperformance in 2011 met by swift expenditure reductions.
  - Main changes:
    - Elimination of many small taxes (reducing revenue by some 0.2 percent of GDP in 2011).
    - Corporate tax rate cut from 25 percent by two percentage points each year through 2013 to 19 percent, then gradually to 16 percent by 2016.
    - VAT rate reduced by 3 percentage points in 2014 to 17 percent.
    - New property tax for large homes; increase personal income tax on large incomes from 15 to 17 percent.
    - Increases in excise and other tax rates generating about 0.4 percent of GDP in revenues in 2011.
    - New tax holidays for small enterprises and specific industries; 3-year VAT exemption for several sectors.
- Pension Reforms:
  - Pension spending around 18 percent of GDP; transfers projected to reach 7 percent of GDP in 2010 to balance accounts.
  - Demographics: contributors projected to decrease by 25 percent and recipients increase by 8 percent over next 15 years.
  - Key elements:
    - Increase minimum qualification periods; gradually equalize retirement ages for men and women at 60 years (women increased by 6 months every year starting 2011).
    - Increase qualification period to receive full pension by 10 years; increase minimum insurance period from 5 to 15 years.
    - Cap large pensions and reduce benefits for working pensioners in special regimes.
  - Fiscal impact: immediate savings about 0.4 percent of GDP in 2011; gradually rising to about 2.5 percent of GDP per annum long term.
- Public Sector Reform:
  - Functional review of all budgetary institutions expected to identify improved central government administrative structure and eliminate redundancies.
  - Comprehensive public administration reform plan expected by end-March 2011 (structural benchmark).
  - Not expected to yield notable savings in 2011 but will reduce government cost over medium term.

### Monetary and Exchange Rate Policy and FX Liberalization
- NBU actions in 2010:
  - Gradual lowering of refinancing rate by 225 basis points to 8.75 percent for much of 2010.
  - In September, NBU tightened liquidity via CDs, repo operations, and outright sales of government securities; encouraged early repayment of emergency liquidity support by stronger banks.
- Policy guidance:
  - Monetary policy geared toward reaching projected disinflation path within a more flexible exchange rate regime.
  - Vigilance against second-round effects and rising inflation expectations; mop up liquidity and raise policy rates if necessary.
  - NBU should diminish regular participation in FX market where it clears excess demand and steers the hryvnia within a narrow band.
- Exchange rate liberalization steps and structural benchmarks (end-June 2011):
  - Bring banks’ net open foreign exchange position regulatory framework in line with international practice by gradually allowing full deductibility of loan loss provisions, beginning end-June 2011.
  - Set up framework for forward transactions between banks by end-June 2011.
  - Legislation adopted to eliminate foreign exchange transactions tax (end-December structural benchmark).
- Box 5 facilitation measures (selected): eliminate pension tax on fx transactions; remove requirement that banks first settle fx transactions in-house before trading interbank; allow banks to buy fx for open positions without underlying transactions; allow forward and swap transactions between banks.

### Financial Sector Rehabilitation and Banking Policies
- Recapitalization and resolution:
  - Private banks expected to meet recapitalization commitments by end-year (structural benchmark).
  - Nadra Bank external audit (end-October structural benchmark) shows capital shortfall of about UAH 8.8 billion.
  - Three other state recapitalized banks under temporary administration; resolution likely delayed until early 2011 pending financial advisor findings.
  - Due diligence studies of two state banks on track to be completed by year-end (structural benchmark).
- NPLs:
  - Range from 17 (narrow definition) to 41 percent (broad definition) of total loans.
  - Working group chaired by NBU overseeing reforms.
  - Planned reforms: corporate insolvency law adoption by end-June (structural benchmark) with out-of-court component; overhaul of personal bankruptcy code; tax changes to incentivize NPL realization; NBU regulation modernization in first half of 2011.
- Bank supervisory framework:
  - Legislation on ultimate controller and consolidated supervision submitted to Parliament.
  - Plan to phase out forbearance measures; cancel Resolution 650 by June 2011.
  - IFRS adoption: establish standards and make mandatory for banking system in 2011.
- Resolution principles for state intervention: least cost to government and adequate liquidity; merger or liquidation if bank deemed unviable.
- Quantitative program ceilings and adjustors include ceilings on cash deficit, publicly guaranteed debt, VAT refund arrears, and monetary targets with defined TMU adjusters.

### Program Financing, Capacity to Repay, and Safeguards
- Program remains fully financed; Ukraine’s capacity to repay Fund expected adequate.
- Higher capital inflows and recent Eurobond helped offset official creditor shortfalls in 2010.
- World Bank, European Commission, EBRD, and EIB expected to provide about $1½-2 billion in 2011-12.
- Budget support from EC and World Bank expected to resume in first half of next year.
- Safeguards assessment of NBU:
  - Updated assessment found NBU strengthened safeguards framework since 2008 by implementing related recommendations under its control.
  - Some specific resolutions and deferment of provisions under new NBU law impair NBU’s autonomy.
  - Specific recommendations to be incorporated at time of second review.

### Technical Memorandum of Understanding (TMU) and Reporting Requirements
- Program exchange rates fixed over program period (selected):
  - Swiss Franc: 0.9200 dollar
  - Euro: 1.2198 dollars
  - Pound Sterling: 1.5052 dollars
  - Japanese yen: 0.0113 dollars
  - Accounting exchange rate for the SDR: 1.4789 per dollar
  - Official gold: 1,236.00 dollars per fine ounce
- NIR on June 30, 2010: US$19,172 million.
- NIR/NDA adjustment Table B (cumulative program disbursements, in millions of US dollars at program exchange rate):
  - End-September 2010: 1,850
  - End-December 2010: 750
  - End-March 2011: 1,000
  - End-June 2011: 3,650
- Table B Q3–Q2 disbursement details include Eurobond $1.3 billion (Q3 2010) and planned Eurobond placement of $2 billion in Q2 2011.
- TMU definitions and automatic adjusters:
  - External project financing adjuster (Table C cumulative flows in millions of hryvnia): End-December 2010: 2,400; End-March 2011: 1,000; End-June 2011: 1,500.
  - Bank recapitalization adjuster: ceiling upward adjustment up to UAH 20 billion in 2010; unused 2010 amounts carry to 2011.
  - VAT bonds: ceiling on cash deficit end-December 2010 adjusted for full amount of VAT bonds used; no VAT bonds to be issued in 2011.
- Reporting requirements (selected):
  - NBU: weekly/daily reporting on reserves and FX interventions; monthly consolidated banking data; quarterly financial stability indicators; internal audit assurance reports within six weeks of test dates.
  - Ministry of Finance: monthly reports on cash deficit of general government no later than 15 or 25 days after month end (depending on report); monthly information on external and domestic debt no later than 25 days; monthly reporting on recapitalization costs no later than 15 days after month end.
  - STA: monthly data on tax arrears and VAT refunds no later than 25 days after month end; quarterly listing of tax exemptions no later than 2 months after quarter end.
  - Ministry of Fuel and Energy/Naftogaz: monthly cash deficit information no later than 25 days after month end; monthly information on Stockholm case flows and gas purchases/transfers.
  - State Statistics Committee and Naftogaz: monthly prices, volumes, and payments for imported/exported oil and gas no later than 45 days after month end.
- Ceilings and indicative targets (selected numbers from Appendix Table I.3):
  - Ceiling on stock of VAT refund arrears: 3,000; 2,891; 1,500; 0; 0
  - Floor on cumulative change in net international reserves (in millions of U.S. dollars): 19,171; -915; -628; 2,095; -2,860; -4,420; -560
  - Ceiling on publicly guaranteed debt: 15,000; 0; 15,000; 15,000; 15,000

### Staff Appraisal and Policy Priorities
- Macroeconomic outlook: steady recovery; window to implement difficult reforms in 2011.
- Near-term priorities: swift approval of 2011 budget consistent with program targets; tight control over budget execution; improve tax administration.
- Structural priorities: enact pension reform promptly and without dilution; pursue public administration reform; continue energy sector reforms including significant end-user energy price increases; more forceful reduction of subsidies to SOEs including Naftogaz.
- Financial sector priorities: expedite resolution of intervened banks; raise capital buffers; adopt forceful measures to deal with NPLs; approve legislation to strengthen supervision and consolidated supervision.
- Monetary policy priorities: shift gradually to a more flexible exchange rate regime; focus on bringing inflation down; maintain positive real refinancing rates and wind down crisis refinancing where prudent.

*Source: Executive Summary and selected excerpts from IMF Staff Report (Country Report No. 10/262) and associated TMU and MEFP documents (mission November 3–15; Kyiv, December 10, 2010; Statement December 22, 2010).*

### Executive Summary

### _cr1152 - Executive Summary

### Stand-By Arrangement (SBA) and Program Modalities
- A 29-month SDR 10.0 billion (729 percent of quota, US$15.3 billion) SBA involving exceptional access was approved by the Executive Board on July 28, 2010.
- A first purchase of SDR 1.25 billion was made following the Board meeting.
- The program foresees disbursement of SDR 1.0 billion following the completion of the first review, including approximately US$1 billion (SDR 655 million) for the budget (bringing 2010 budget support to US$2 billion).

### Program Status and Implementation
- Policy implementation has been broadly in line with the program; all end-September quantitative performance criteria were observed.
- Fiscal performance is broadly on track, though some spending restraint has been necessary to offset small overruns in Naftogaz finances.
- Bank recapitalization and legislation to strengthen supervision and regulation are on track.
- All end-September fiscal performance criteria and the indicative ceiling on the stock of VAT refund arrears were met.
- The issuance of bank recapitalization bonds and government guarantees are within program ceilings.
- The NBU met the end-September NIR floor by a comfortable margin; the NDA target was met.
- All three structural benchmarks were completed, though two (lifting the ban on penalties for overdue utility bill payments; agreement on phasing out restrictions on the foreign exchange market) were met with delay.

### Key Issues Reviewed in the Mission
- Formulation of the 2011 budget.
- Implications of the tax code for the revenue base and tax administration.
- Progress in implementing agreed fiscal structural reforms, including pension reforms.
- Measures to gradually liberalize the foreign exchange framework.
- Banking sector reforms.

### Mission Discussions
- Mission dates: November 3–15.
- Meetings with: Prime Minister Azarov; Deputy Prime Ministers Kolesnikov and Tihipko; Ministers of Finance Yaroshenko, Labor and Social Policy Nadraha, and Energy Boyko; Governor of the National Bank of Ukraine Stelmakh; First Deputy Chief of Staff of the Presidential Administration Akimova; other senior officials; representatives of international financial institutions, research institutes, labor unions, private banking and business communities; members of the opposition.
- IMF staff: Mr. Arvanitis (head); Messrs. Dohlman, Roudet, and Atoyan (EUR); Mr. Ljungman (FAD); Mr. Olafsson (MCM); Mr. Chensavasdijai (SPR); Mr. Alier (resident representative) assisted. Mr. Yakusha, Alternate Executive Director for Ukraine, attended most meetings.
- Mission cooperated closely with World Bank staff on structural issues.

### Developments and Outlook
- Recovery is broadening and policy focus is shifting from crisis management to supporting adjustment and recovery.
- Real GDP growth in the first half of 2010: 5.9 percent y-o-y.
- GDP growth for 2010 is set to reach, or slightly exceed, the program projection of 3¾ percent.
- Growth is expected to increase to 4½ percent in 2011.
- The output gap remains sizable; economic activity is not expected to surpass the pre-crisis peak until 2013.

### Inflation, Monetary, and External Conditions
- Consumer prices jumped in September to 10 percent following higher food prices and hikes in gas tariffs and excise taxes; inflation then resumed a downward path and remains within program objectives.
- Core inflation is projected to fall to around 7 percent by year-end.
- The government placed a US$2 billion Eurobond (7.5 percent yield), its first issuance since late 2007.
- Gross international reserves: US$33.2 billion as of end-November.
- Sovereign risk perceptions remain high: lowest sovereign rating in Eastern Europe and spreads persistently above 500 basis points.
- Since September, the NBU has been a net seller of foreign currency—mostly due to seasonal factors and higher-than-anticipated demand for imports.
- For 2011, the balance of payments outlook remains positive; strong FDI and IFI flows are expected to cover a modest current account deficit and support further reserve strengthening.

### Financial Sector Conditions
- Deposits are slowly returning; in November deposits surpassed their pre-crisis levels.
- Funding costs have fallen as deposit rates have dropped considerably.
- Banking sector remains unprofitable with a return on assets of around -2 percent.
- High NPL levels and weaknesses in the legal, tax, and judicial systems hinder aggressive resolution of bad loans.
- Banking system is highly liquid but credit growth remains anemic; lending to households stalled while enterprise lending shows some revival.

### Recovery and Sources of Future Growth (Box 1)
- Initial recovery drivers: net exports benefiting from rebound in commodity prices, particularly steel.
- Support is fading as imports rebound and steel prices soften.
- Expected replacement drivers: firming consumer and business confidence, lower interest rates, higher investment for Euro 2012.
- Medium-term growth requires stronger policies and productivity/business climate improvements.
- World Bank study identified impediments: (i) macroeconomic imbalances that deter capital inflows; (ii) high marginal tax rates and compliance costs; (iii) deteriorated infrastructure; (iv) shortage of technical skills; (v) deficiencies in property rights enforcement; (vi) high barriers to entry and operational costs; (vii) governance and corruption concerns that discourage FDI.

### Securing Fiscal Adjustment (Section A)
- Policy framework centers on four pillars: (1) restoring confidence and fiscal sustainability; (2) implementing gas sector reforms and phasing out the deficit of Naftogaz; (3) strengthening the monetary and foreign exchange policy framework; (4) restoring and safeguarding banks’ soundness.
- Authorities are on track to meet the 2010 fiscal deficit targets, but sustained efforts needed in final weeks and to improve VAT refund administration.
- Fiscal performance to September: general government revenue increased at a somewhat slower pace than envisaged, but tight expenditure control kept the deficit under the program ceiling.
- Naftogaz deficit expected to exceed the end-year target by about 0.3 percent of GDP.
- Stock of VAT refund arrears:
  - Peaked at UAH 25 billion (2.3 percent of GDP) in mid-2010.
  - Declined through issuance of VAT bonds (1.5 percent of GDP) and cash payments.
  - End-September indicative ceiling of VAT arrears (UAH 3 billion) was met.
  - Authorities requested a modification of the end-December indicative target to allow for a small amount of arrears (0.1 percent of GDP).
  - Authorities committed to eliminating all arrears in early 2011 and to introduce a more systematic process for refunds by January 2011 (MEFP ¶13).

### The 2011 Budget and Fiscal Strategy (Box 2 and related text)
- Program aim: reduce the combined general government and Naftogaz deficit ceiling to 3½ percent of GDP.
- Breakdown change: a budgetary transfer to Naftogaz (compensating below-cost-recovery tariffs) is being terminated—reducing general government deficit and increasing Naftogaz deficit by equivalent amount.
- 2011 general government budget submitted to parliament targets a deficit of 3.1 percent of GDP (prior action).
- Implied tightening of the cyclically adjusted general government primary balance: about 1 percent of GDP.
- Revenues: tax code broadly revenue neutral; no near-term tax policy changes envisaged; tax revenues expected broadly unchanged as a share of GDP.
  - Overall revenue expected to decline by 1⅔ percent of GDP in 2011—mainly due to lower NBU profit transfers and fixed nominal non-tax revenue items.
- Expenditures: budget envisages measures to reduce spending by 3.7 percent of GDP to meet the 3.1 percent of GDP deficit target, including:
  - Limiting increases of several items (average wages and pensions) to inflation (passive effect): 3.4 percent of GDP reduction in spending.
  - Wage-related expenditure cuts of an additional 1.0 percent of GDP by reducing staff positions and eliminating some bonus/top-up regimes.
  - Reduction of spending on goods and services by 0.2 percent of GDP.
  - Enactment of pension reform legislation by end-December (structural benchmark) will generate 0.4 percent of GDP in savings.
  - Reduction of transfers to enterprises of 0.3 percent of GDP.
- Partially offsetting expenditure increases:
  - Increased allocations for investment, including for Euro 2012, of 0.7 percent of GDP.
  - Higher interest payments by 0.5 percent of GDP.
  - Increased spending on household transfer programs to protect vulnerable groups against utility price hikes (0.1 percent of GDP).
- Additional public debt items not reflected in general government deficit for 2011:
  - Government plans to issue guarantees of 1.2 percent of GDP.
  - Budget provides for recapitalization of state-intervened banks, limited to unused amounts carried over from 2010.
- Decomposition of expenditure changes, 2010–11 (selected figures):
  - 2010 Expenditure: 524.3 billion Ukrainian hryvnias; Percent of GDP: 48.4
  - Passive 2/: 42.2 billion; 3.4 percent of GDP
  - Interest expenditure: 8.6 billion; 0.7 percent of GDP
  - Discretionary policy measures: -14.9 billion; -1.2 percent of GDP
    - Of which: expenditure cuts: -23.2 billion; -1.9 percent of GDP
    - Cuts in the wage bill: -12.0 billion; -1.0 percent of GDP
    - Cuts in goods and services: -2.2 billion; -0.2 percent of GDP
    - Cuts in subsidies to enterprises: -3.7 billion; -0.3 percent of GDP
    - Pension reforms: -4.8 billion; -0.4 percent of GDP
  - Of which: expenditure increases: 8.2 billion; 0.7 percent of GDP (higher capital investment)
  - 2011 Expenditure: 560.2 billion; 44.7 percent of GDP
  - Note: 2010 and 2011 expressed against different GDP basis.
- Capital spending increased to about 3 percent of GDP to meet Euro-2012 commitments and infrastructure upgrades.
- State guarantees will be limited to UAH 15 billion (1.2 percent of GDP), the same level as in 2010, to control public sector indebtedness.

### Staff Appraisal Elements and Policy Priorities (summarized)
- Continue fiscal consolidation while protecting capital and social protection outlays.
- Improve VAT refund administration and eliminate VAT arrears early in 2011.
- Phase out Naftogaz deficit through gas sector reforms and termination of budgetary transfers compensating below-cost-recovery tariffs.
- Strengthen monetary and foreign exchange policy framework, including gradual liberalization of the foreign exchange market.
- Advance banking sector rehabilitation: complete recapitalization, strengthen supervision and regulation, and address NPLs through legal/tax/judicial improvements.

*Source: Executive Summary of IMF Staff Report (Country Report No. 10/262); mission November 3–15; IMF staff and Ukrainian authorities.*

### 11.      Major structural reforms under way will help improve the fiscal framework and

### 11.      Major structural reforms under way will help improve the fiscal framework and support efforts to rationalize current spending over the medium term:  

### A. New Tax Code
- Objective: Reform the complex tax system, reduce the tax burden over time, strengthen administration and improve compliance.
- Staff concerns: Rapid tax cuts and proliferation of exemptions could drain revenues and threaten fiscal targets.
- Authorities' commitments:
  - Slow down corporate profit tax rate cuts to two percentage points per year through 2013.
  - Limit VAT exemptions for certain business and professions to a 3-year period.
  - Any sign of revenue underperformance in 2011 would be met by swift action to reduce expenditure.
- Staff assessment: If successfully implemented, the new code would have a broadly neutral revenue impact in 2011, and gradually reduce revenues over the medium term.
- Main changes introduced by the code (Box 3):
  - Elimination of many small taxes (reducing revenue by some 0.2 percent of GDP in 2011).
  - Tax rate cuts:
    - Corporate tax rate will be cut from 25 percent by two percentage points each year through 2013, to 19 percent, and then gradually reduced to 16 percent by 2016.
    - VAT rate will be reduced by 3 percentage points in 2014, to 17 percent.
    - These measures will reduce revenues by about 0.2 percent of GDP in 2011.
  - New taxes and increases in existing rates:
    - Introduces a property tax for large homes.
    - Increases the personal income tax on large incomes from 15 to 17 percent.
    - Increases a number of excise and other tax rates (generating about 0.4 percent of GDP in revenues in 2011).
  - Tax holidays and exemptions:
    - New tax holidays for small enterprises and specific industries (hotels, shipbuilding and aerospace industry).
    - A 3-year VAT exemption for several sectors subject to significant VAT refund fraud.
    - IMF staff: overall revenue impact likely small, but measures bring unwelcome distortions, add to existing exemptions, and break the VAT chain.
  - Changes to corporate profit base calculation and tax deduction rules to close loopholes.

### B. Pension Reforms
- Problem statement:
  - Pay-as-you-go public pension fund system faces acute financial difficulties.
  - Pension spending at around 18 percent of GDP (one of the highest in the world).
  - Large transfers from the state budget required; transfers projected to reach 7 percent of GDP in 2010 to balance accounts.
  - Demographics: contributors projected to decrease by 25 percent and recipients projected to increase by 8 percent over the next 15 years.
- Prior action: Legislation expected to be submitted to Parliament by mid-December.
- Key reform elements:
  - Increase minimum qualification periods to receive minimum and full pension benefits.
  - Gradually equalize retirement ages for men and women at 60 years (by gradually increasing the retirement age for women to 60, by 6 months every year, starting in 2011).
  - Increase the qualification period to receive full pension benefits by 10 years.
  - Increase the minimum insurance period from 5 to 15 years.
  - Change the base for the 1 percent increase for every additional year worked over the minimum contribution period for full pension.
  - Cap large pensions and reduce benefits for working pensioners in special regimes.
- Fiscal impact:
  - Immediate savings of about 0.4 percent of GDP in 2011.
  - Gradually rising to about 2.5 percent of GDP per annum over the long term.
- Staff view: Current efforts will help contain budget pressures, but further reforms will be needed to ensure long-run financial sustainability.

### C. Public Sector Reform
- Measures underway to reduce the public sector wage bill and improve public sector efficiency.
- Functional review of all budgetary institutions expected to be completed shortly to identify better central government administrative structure and eliminate redundancies and overlaps.
- A comprehensive public administration reform plan to improve efficiency and quality of public services expected to be completed by end-March (structural benchmark).
- Expected fiscal timing:
  - Not expected to yield notable savings in 2011.
  - Will help reduce cost of government over the medium term, particularly in health and education.

### D. Energy Sector Policies (Naftogaz and broader reforms)
- Naftogaz finances:
  - Naftogaz’s deficit projected to exceed the end-year target by UAH 3 billion (reaching 1.4 percent of GDP) due to:
    - Lower-than-anticipated domestic gas consumption.
    - Utility companies unable to remain current on payments to Naftogaz due to delays in passing through recent gas price hikes to end-users.
    - Collection rates not sufficiently improved, hurt by a delay in removing the ban on penalties for overdue payments (missed structural benchmark for end-September).
  - Authorities agreed to pass legislation to remove the ban (prior action).
  - NERC to issue instructions to communal utilities to raise end-user heating tariffs (effective January 1, 2011) to reflect the August increases (prior action).
  - New independent regulator for utility prices expected to be fully operational by January 2011.
- Projections and policy:
  - Naftogaz’s deficit expected to fall to 0.4 percent of GDP in 2011, boosted by a second round of gas tariff hikes next year.
  - Additional measures: further 50 percent tariff hike to go into effect by April (structural benchmark), with further increases as needed during the year to achieve the 2011 deficit target and balance Naftogaz’s position by 2012.
  - Supplementary actions: strict enforcement of full price pass-through, lifting ban on penalties, and tight control over operational costs.
  - Risks: uncertainty over import gas prices related to renegotiation with Gazprom, and strength of domestic demand.
- Stockholm arbitration settlement:
  - Settlement with RosUkrEnergo results in a net liability for Naftogaz of about US$ 1.5 billion.
  - Purchase of natural gas for delivery to RUE facilitated by an advance payment of transit fees from Gazprom, extinguished over the 2011-15 period through foregone gas transit revenues.
  - Program adjustors included so settlement does not affect headline deficit targets for Naftogaz under the program.
- Broader energy sector reforms:
  - Protocol for Ukraine’s accession to the Energy Community Treaty signed in September, following approval of the gas sector law adopted in July (included provisions for restructuring Naftogaz; end-December structural benchmark).
  - Parliament expected to ratify the treaty soon.
  - A €610 million EU macro-financial assistance loan (including energy sector conditionality) delayed and now expected to be disbursed in 2011.
  - Need to speed up pilot projects for modernization of LNG facilities and gas transit system with EBRD and EIB involvement—in line with the Brussels Declaration.

### E. Monetary and Exchange Rate Policy
- Recent NBU actions:
  - NBU began to tighten monetary conditions given upside risks to inflation.
  - For much of 2010, disinflation, rising deposits, robust capital inflows, and a large output gap allowed gradual lowering of refinancing rate by 225 basis points to 8.75 percent.
  - In September, NBU tightened liquidity by stepping up placements of CDs, repo operations, and outright sales of government securities; encouraged early repayment by stronger banks of emergency liquidity support.
- Policy guidance:
  - Monetary policy should be geared toward reaching the projected disinflation path within a more flexible exchange rate regime.
  - Vigilance against second-round effects and rising inflation expectations; further mopping up liquidity and raising policy rates if necessary.
  - NBU should diminish regular participation in the foreign exchange market where it has been clearing excess demand and steering the hryvnia within a narrow band against the US dollar.
- Exchange rate liberalization steps:
  - Re-imposition in early August of a 20 percent reserve requirement on short-term inflows that was suspended in late 2008.
  - Staff: increased exchange rate flexibility important for price stability, buffering external shocks, and discouraging dollarization and excessive risk-taking.
  - Agreed schedule to gradually improve functioning of the foreign exchange market (drawing from MCM mission recommendations, Box 5).
  - Near-term measures and structural benchmarks (end-June 2011):
    - Bring regulatory framework for banks’ net open foreign exchange position in line with international practice by gradually allowing full deductibility of loan loss provisions, beginning end-June 2011 (structural benchmark).
    - Set up a framework for forward transactions between banks by end-June 2011 to facilitate better management of exchange rate risks (structural benchmark).
  - Legislation adopted to eliminate the foreign exchange transactions tax (end-December structural benchmark).
- Box 5 highlights (measures discussed by NBU):
  - Facilitation: eliminate the pension tax on fx transactions; eliminate requirement that banks first settle fx transactions in-house before trading in the interbank market; allow banks to buy foreign exchange for open position without underlying transactions; allow banks to trade on both sides of the interbank market during the same day; eliminate requirement that residents obtain a certificate of expert pricing evaluation for foreign trade transactions when buying fx and transferring it to non-residents; eliminate requirement that foreign investors rely solely on authorized banks for conversion of hryvnia into foreign currency before transferring abroad.
  - Enhancing exchange rate determination: use exchange rates for government transactions with the NBU that do not deviate from the contemporaneous exchange rate in the interbank market by more than 2 percent; eliminate the NBU’s authorization to introduce limits on fx market spreads; allow cash bureaus to change their exchange rate quotes during the day.
  - Strengthening risk management: align methodology for calculation of the open foreign exchange position with best international practice by gradually allowing full deductibility of loan loss provisions; allow forward and swap transactions between banks.

### F. Rehabilitation of the Financial Sector
- Recapitalization and resolution progress:
  - Private banks expected to meet recapitalization commitments by end year (structural benchmark).
  - Resolution of Nadra Bank progressing; external audit (end-October structural benchmark) shows capital shortfall of about UAH 8.8 billion.
  - Government and NBU considering options to fully resolve Nadra Bank, including sale to a private investor.
  - Three other state recapitalized banks remain under temporary administration; resolution likely delayed until early next year pending financial advisor findings and further NBU review.
  - Due diligence studies of the two state banks on track to be completed by year-end (structural benchmark).
- Legislative actions:
  - Legislation to strengthen the financial sector framework submitted to Parliament; approval of ultimate controller and consolidated supervision draft legislation would increase transparency and address related lending issues.
- Non-performing loans (NPLs):
  - NPLs range from 17 (narrow definition) to 41 percent (broad definition) of total loans.
  - Working group chaired by NBU overseeing key reforms.
  - Reforms to address NPLs:
    - Legislative: Corporate insolvency law being prepared with IMF and WB input for adoption by end-June (structural benchmark), expected to include an out-of-court component. Overhaul of personal bankruptcy code needed.
    - Tax: Key issues include tax deductibility of loan loss provisions (addressed in new tax code) and tax deductibility of loan write-downs or sale to third parties.
    - Regulations: NBU plans to modernize regulations governing NPLs and provisioning in the first half of 2011, with IMF support.
    - Other: Strengthen security of collateral and efficiency of the judicial system.

### G. Program Modalities, Capacity to Repay, and Safeguards (select program elements)
- Monitoring and conditionality:
  - Program performance monitored by quarterly quantitative performance criteria and structural benchmarks; list of quantitative performance criteria and indicative targets unchanged; end-December monetary targets remain valid (adjustor included).
  - New structural benchmarks for 2011 (Appendix Table I.2) include:
    - Put in place a more effective VAT refund process (end-January).
    - Approve an increase in gas tariffs by 50 percent for all households and utility companies (effective April 15).
    - Gradually phase out NBU Resolution 109 to bring banks’ foreign exchange positions more in line with international best practices (end-June).
    - Establish a framework to develop the forward exchange market (end-June).
    - Submit to parliament a 2012 budget consistent with a general government deficit of 2.5 percent of GDP (end-September).
- Stand-By Arrangement (Box 6) summary points:
  - Access and length: SDR 10 billion over 29 months.
  - Phasing: SDR 1.25 billion (US$1 billion for budget support) purchased at approval on July 28, 2010. Second tranche of SDR 1 billion will be made available subject to completion of this review (US$1 billion for budget support). Eight remaining tranches totaling SDR 7.75 billion contingent upon completion of subsequent quarterly reviews, beginning March 2011.
  - Prior actions included submission to Parliament of a 2011 budget consistent with a 3.1 percent of GDP deficit for the general government; submission of pension reform legislation; revocation of law banning penalties for overdue utility payments; NERC instructions to raise end-user heating tariffs by January 1, 2011.
  - Quantitative and continuous performance criteria and indicative targets listed in Box 6 (floor on net international reserves; ceiling on net domestic assets; ceiling on cash deficit of the general government; ceiling on cash deficit of the general government and Naftogaz; ceiling on publicly guaranteed debt; non-accumulation of external debt payments arrears by the general government; ceiling on monetary base; ceiling on VAT refund arrears).
  - Structural benchmarks and associated deadlines include multiple actions by December 31, 2010; January 31, 2011; March 31, 2011; June 30, 2011; and September 30, 2011 (see Box 6).

*IMF country report content excerpt.*

### 23.      The program remains fully financed, and Ukraine’s capacity to repay the Fund

### _cr1152 - 23.      The program remains fully financed, and Ukraine’s capacity to repay the Fund

### Program financing and Ukraine’s capacity to repay the Fund
- The program remains fully financed, and Ukraine’s capacity to repay the Fund is expected to be adequate.
- Higher capital inflows, including the recent Eurobond placement, helped offset financing shortfalls from official creditors in 2010.
- With delays in lending activities and the bulk of disbursements shifting to 2011, the World Bank, European Commission, EBRD, and EIB are now expected to provide about $1½-2 billion in 2011-12.
- Budget support from the EC and World Bank—accounting for the bulk of official financing in 2011— is expected to resume during the first half of next year.
- Ukraine’s strong political commitment to the program and improved access to private capital markets continue to provide assurances that it will fulfill its financial obligations to the Fund in a timely manner.

### Safeguards assessment of the National Bank of Ukraine (NBU)
- An updated safeguards assessment of the NBU was undertaken (MEFP ¶27).
- The assessment found that the NBU has strengthened its safeguards framework since the 2008 assessment by implementing all of the related recommendations under its control.
- However, some specific resolutions and the deferment of some provisions under the new NBU law enacted in 2010 impair the NBU’s autonomy.
- Specific recommendations under the updated assessment will be incorporated in the program at the time of the second review.

### Staff appraisal — macroeconomic outlook and reform priorities
- The Ukrainian economy is steadily recovering, and the current juncture offers a window to push difficult reforms ahead.
- While macroeconomic risks are falling, they remain considerable.
- The challenge is to stay the course on policies agreed under the program, establish a strong record of policy implementation, and undertake other measures to improve the business environment and support private-sector led growth.
- 2011 is a key year in this regard, given the government’s strong political position and no scheduled elections.
- On the basis of these efforts, staff supports the authorities’ request for completion of the first review.

### Policy implementation and structural reform progress
- Policies under the program remain on track.
  - All end-September performance criteria have been met, and the authorities are on track to meet the end-year targets.
  - Satisfactory progress has been made on structural reforms, with completed actions in the financial sector, foreign exchange market, and energy.
  - Authorities have put policies in place to meet core program objectives and conditionality due in 2011.
- The authorities’ overhaul of the tax and budget system:
  - A new budget code was approved in the summer introducing a medium-term perspective.
  - A new tax code overhauls the taxation regime aiming to reduce the tax burden and the size of government over time.
  - The tax code introduces positive changes but its quality could have been better; it was a missed opportunity to eliminate exemptions and simplify the tax system.
  - Efforts should focus now on fair and transparent administration of the tax code.

### Fiscal position, public debt, and state-contingent liabilities
- The underlying fiscal position is stabilizing, but more is needed to control debt-creating liabilities and place public debt firmly on a declining path.
- In 2010, expenditure control and revenue collection efforts have kept the budget deficit within targets despite an unstable revenue base.
- The draft 2011 budget and Naftogaz’s 2011 financial plan are set to deliver the adjustment envisaged under the program, based on a new tax code, current spending compression, and the initiation of structural reforms to address long standing fiscal rigidities.
- Authorities should strictly limit liabilities generated through state guaranteed loans, including for all Euro 2012-related construction.
- Recent actions that have added to public debt levels include:
  - Recapitalization of state banks and Naftogaz.
  - Issuance of VAT bonds to clear the stock of arrears.
  - The recent Naftogaz-RUE settlement adds further pressure.
- Key fiscal control measures recommended:
  - Careful and transparent assessment and prioritization of projects.
  - Strict control over state guarantees.

### Social spending and public administration reforms
- Spending adjustment backed by structural reforms is a priority.
- Parametric pension reform legislation submission is welcome and needs prompt enactment—without diluting objectives—to stabilize pension fund finances.
- An ambitious public administration reform to streamline public employment and improve quality of public services is under preparation.
- Structural reforms in the energy sector—including continued and significant energy price hikes to end-users—are needed.
- A more forceful reduction of subsidies to SOEs, including Naftogaz, will be crucial to reduce current spending durably and create fiscal space for prioritized infrastructure spending.

### Financial sector repair and banking system policies
- The financial system is on the mend, but further efforts are needed to heal the scars of the crisis.
- Capital buffers are being raised to help banks withstand pressures if credit quality worsens.
- Authorities are focusing on addressing the NPL problem; forceful measures need to be developed to help banks deal effectively with bad loans.
- Faster improvement in banks’ balance sheets will enable them to support credit growth.
- Recently submitted legislation to parliament to strengthen bank supervision, once approved, will improve bank oversight and risk monitoring.
- Authorities need to expedite actions with respect to the three intervened banks.

### Monetary and exchange rate policy
- As the economy exits from the crisis, a more flexible exchange rate regime should be set in place.
- Monetary policy has aimed to balance inflation objectives within a weak credit environment.
- Going forward, monetary policy should be freed up to focus more squarely on bringing inflation down.
- A gradual shift to a more flexible exchange rate regime will better support Ukraine’s objectives.
- The current regime should be gradually modified to allow banks more flexibility to manage exchange rate risks while maintaining incentives for the population to avoid taking excessive risks.

### Policy conclusion
- Continued adherence to prudent policies is essential to entrench macroeconomic stability and facilitate sustained growth.
- The program is off to a good start; policies for the coming year—including the 2011 budget, pension reform, energy reforms, and bank rehabilitation reforms—show the authorities’ willingness to persevere with strengthening the Ukrainian economy.

*Source: IMF staff report excerpts (Kyiv, December 10, 2010).*

### 1.      The economic recovery continues to gain strength. Growth is likely to exceed the

### _cr1152 - 1.      The economic recovery continues to gain strength. Growth is likely to exceed the

### Macroeconomic framework and outlook
- The economic recovery continues to gain strength; growth is likely to exceed the levels anticipated under the program, supported by a gradual shift of activity from export to domestic-oriented sectors.
- Headline inflation accelerated recently due to higher grain and administrative prices, but is expected to remain within program levels; core inflation is expected to fall to single digits this year.
- Macroeconomic risks have receded considerably, boosting confidence and allowing the government to regain access to international capital markets for the first time since 2007.
- Growth projection for 2011: pick up to about 4½ percent, as private consumption and investment (including public spending for the Euro 2012) gain momentum.
- Current account deficit expected to remain low, around 2½ percent of GDP, supporting continued buildup in international reserves.

### Program performance and request
- Performance under the program has generally been strong: all end-September performance criteria were met and steady progress on structural reforms due end-September and end-October, with some small delays.
- Request: completion of the first review under the Stand-By Arrangement and disbursement of the second tranche under the program.

### Fiscal policy (2010–2011)
- 2010 fiscal objectives: general government deficit of 5½ percent of GDP and a combined deficit (including Naftogaz) of 6½ percent of GDP.
- To offset higher revenue earmarking and Naftogaz overrun, the government will exercise strict expenditure control, including reductions of:
  - subsidies to enterprises: UAH 3 billion;
  - transfers to households: UAH 1 billion;
  - capital expenditure: UAH 2 billion.
- 2011 fiscal strategy: reduce the general government deficit to 3.1 percent of GDP; a 2011 draft budget consistent with this target has been submitted to parliament (prior action).
- Main adjustment via lower spending through measures:
  - Initiating pension reform expected to begin generating savings in 2011.
  - Wage policy: wages for government sector employees will, on average, increase in line with inflation in 2011; additional measures to generate savings of UAH 12.4 billion (1 percent of GDP) in budgetary spending units by: eliminating vacant positions and positions of employees retiring in 2011; reducing staff training; limiting bonuses and benefits; shifting part of wages to budgetary institutions’ own source revenue; eliminating compensation for those that perform the duties of absent employees; limiting maximum total compensation.
  - Keeping subsidies to enterprises (excluding Naftogaz) stable in nominal terms (through which expenditure falls by an equivalent of 0.2 percent of GDP).
- Draft budget allocations also include:
  - strengthening social programs to ensure gas price hikes do not worsen living standards for the poorest (particularly the extreme poor);
  - increasing capital expenditure.
- Bank recapitalization in 2011 from the budget limited to amounts budgeted for but delayed from 2010.
- New state guarantees in 2011 capped at no more than UAH 15 billion (quantitative performance criterion).

### Fiscal reforms and tax policy
- Adopted a new tax code to unify and streamline tax legislation, aiming over time to reduce the overall tax burden while improving revenue yields and tackling tax evasion. Key elements:
  - eliminates a number of small taxes;
  - reforms the personal income tax, introducing a 17 percent bracket for incomes above ten minimum wages;
  - overhauls the corporate tax rate, including a two percentage point cut in 2011;
  - envisages a reduction of the VAT rate to 17 percent in 2014;
  - introduces a property tax for large homes;
  - amends tax deduction rules relating to writing-off non-performing bank loans against provisions (in line with NBU regulations).
- The reform is believed to be revenue neutral in 2011 and the medium term.
- Tax administration measures:
  - Reduced stock of VAT refund arrears considerably but cannot eliminate them by end-December as planned; request to modify end-year indicative target, increasing it to UAH 1.5 billion.
  - Commitment to eliminate these arrears in early 2011.
  - Set up a more systematic, timely, and transparent refund process by end-January 2011 (structural benchmark), including electronic reporting and accounting of VAT, a register of tax invoices, automatic compensation of honest taxpayers, and state responsibility for failure to refund on time.
  - Refrain from issuing any further VAT refund bonds, relying fully on existing refund procedures of cash refunds.

### Pension and public administration reforms
- Pension reform objectives: strengthen financial foundation of the pension system, ensure a balanced budget for the Pension Fund of Ukraine, and introduce personal savings accounts over the medium term.
- Prior actions and benchmarks:
  - Government to submit a draft pension law to parliament by December 13, 2010 (prior action), aiming for approval by end-2010 (structural benchmark), and implementation starting in early 2011.
- Pension reform measures include:
  - Increasing Pension Fund revenues through tax reform, legalization of wages, and improving payment of contributions.
  - Gradually increasing the retirement age for women over 10 years by adding 6 months every year starting in 2011; equalize retirement age for men and women by 2020; provide incentives to encourage women to stay in the workforce after age 55.
  - Implement other measures described in the July MEFP.
- Public administration reform:
  - Functional review of ministries and central government agencies under way to reduce overlaps and eliminate redundant functions.
  - A comprehensive plan with objectives, measures, and timetable to be specified by end-March 2011 (structural benchmark).

### Naftogaz financial plan and sector strategy
- Naftogaz’s 2010 deficit likely to reach UAH 15 billion due to lower gas sales volumes and lack of utility tariff adjustment reducing payment compliance.
- Parliament passed law to revoke the ban on penalties on overdue utility payments (prior action) and legislation to make distribution accounts mandatory for settling all utility bills.
- 2011 government financial plan for Naftogaz aims at a deficit of 0.4 percent of GDP and reflects policies:
  - Approve in March 2011 a 50 percent increase in gas prices for households and utilities, effective April 15, 2011 (structural benchmark); if necessary, take further actions to ensure program deficit target is achieved.
  - Full pass-through of higher domestic gas prices to heating tariffs. Independent regulator for utility prices to be operational in January 2011; NERC to issue instructions by December 16, 2010 to communal utility companies to raise end-user heating tariffs effective January 1, 2011 (prior action). Future adjustments based on individual cost structures assessed by the new regulator or NERC; NERC—or the new regulator—will continue to adjust heating tariffs as needed to ensure full pass-through.
  - Tight control over operational costs.
- Settlement of commercial dispute with RosUkrEnergo (RUE) agreed, involving:
  - Naftogaz to purchase 12.1 bcm in gas from Gazprom and transfer it in monthly installments to RUE over the coming year;
  - Naftogaz to receive immediately US$1.5 billion in payment for RUE’s debt to Naftogaz (equivalent to the value of the debt minus a US$0.2 billion fine);
  - Gazprom to facilitate Naftogaz’s new gas purchases through a US$1.5 billion advance payment of transit fees to Naftogaz—this will be repaid over the medium term (plus a charge of 4 percent interest) at a pace depending on transited gas volumes and associated transit fees;
  - Gazprom to increase annual volumes of gas transit through Ukraine to 112 bcm from the 100 bcm envisaged in the gas contract.
- Energy sector and international engagement:
  - New gas sector law adopted in July in compliance with EU rules; Accession Protocol to European Energy Community signed on September 24; parliament to ratify treaty by end-2010.
  - Progress on modernization of the gas transit system with IFIs; a €610 million EU macro-financial assistance loan expected to be signed soon and pilot projects with EBRD and EIB involvement progressing.
  - Commitments to make further progress towards joining EITI, aligning laws with the EU legal framework, and implementing a development strategy for Naftogaz consistent with accession conditions.

### Monetary and exchange rate policy
- Recent uptick in headline inflation viewed as temporary (drought-related increases in food and administrative prices); projected 2011 inflation path broadly in line with program projections.
- Higher inflation, uncertain external conditions, and import uptick reduced net FX market flows and put pressure on the exchange rate.
- NBU policy actions: increased foreign exchange intervention; stepped up placements of CDs and repo operations; outright sales of government securities; sought early repayment of emergency liquidity support loans.
- Commitment to remain vigilant to FX market developments and possible second-round effects; with increased exchange rate flexibility, will promptly tighten policy as needed to maintain core inflation on a downward trajectory and support foreign reserves. Measures include:
  - maintaining positive real refinancing rates;
  - further accelerating the winding down, where prudent, of the stock of refinancing credits provided to banks during the crisis;
  - approval of new or restructuring of existing stabilization loans to meet NBU’s new liquidity framework stipulated in Resolution 327.
- Plan to support a more flexible exchange rate framework and improve FX market functioning with a time-bound plan (end-October structural benchmark) including:
  - Realigning the regulatory framework for open foreign exchange position with best international practices; phase out Resolution 109 as crisis effects subside; open FX positions to fully account for loan loss provisions on FX loans and FX off-balance sheet items; announce and start implementing a gradual schedule by end-June 2011 (structural benchmark).
  - Develop hedging mechanisms and a forward exchange market: allow forward transactions between banks to cover client exposures and forward transactions between banks without underlying transactions by end-June 2011 (structural benchmark).
  - Strengthen framework for exchange rate determination: by end-December 2010, exchange rate for government transactions with the NBU will not deviate from the contemporaneous interbank rate by more than 2 percent.
  - Eliminate pension tax: by end-December 2010, amend the law “On surcharges for the purposes of mandatory state pension insurance” to permanently eliminate the surcharge on non-cash purchases and sales of foreign currency (structural benchmark).

### Financial sector policies and bank resolution
- Commitment to restoring banks’ soundness: private banks on track to complete recapitalization by end-December (structural benchmark) per NBU-approved plans.
- About 60 percent of identified capital needs in private banks from the extended audit completed as of end-October.
- Bank closures and interventions: eighteen banks being liquidated and four banks remain under temporary administration.
- Plan to phase out forbearance measures introduced during the crisis; cancel Resolution 650 by June 2011.
- Establish system of standards and accounting rules in compliance with IFRS in 2011 and make it mandatory for the banking system.
- Nadra Bank: IFRS-based audit completed in late October (structural benchmark) identified a capital shortfall of UAH 8.8 billion to reach a 10 percent Capital Adequacy Ratio; resolution principles: least cost to government and adequate liquidity; all loan obligations to the NBU to be settled according to an agreed schedule.
- State-intervened banks: extended audit found significant additional capital shortfalls in three previously recapitalized state-owned banks. In December, internationally reputable financial and legal advisors to be selected to assess viability and prepare least-cost resolution recommendations; if delayed into 2011, an adjustor has been requested to address recapitalization or winding down costs in 2011.
- If any state-intervened bank is determined unviable, government stands ready to merge it with a viable bank or liquidate it.
- Due diligence: two reputable international auditing firms selected on terms of reference agreed with Fund staff are conducting due diligence on two state banks with a goal to conclude by end-December (structural benchmark); studies will assess financial, legal, operational risks, adequacy of risk management and internal controls, and future viability under different scenarios.
- NPL resolution strategy and working group chaired by the NBU:
  - Tax policy: amend tax law to provide proper incentives for realization of NPLs; maintain bank provisions formulation up to 40 percent of loans and other relevant assets in 2010, and 30 percent in 2011 and beyond.
  - Insolvency legislation: enact amendments by end-June 2011 (structural benchmark) to speed up insolvency processes, make them more transparent, and facilitate out-of-court restructuring, including expedited court approval of restructuring agreements; initiate work on personal insolvency legislation as needed.
  - Allow the moratorium on foreclosures to expire by end-December as planned.
  - Undertake reforms on judicial enforcement and security of collateral.

*IMF staff report content unit _cr1152 - 1.*

### 25.      We will continue other work to strengthen the supervisory and regulatory

### _cr1152 - 25.      We will continue other work to strengthen the supervisory and regulatory

### Strengthening supervisory and regulatory frameworks
- Legislation governing ultimate controllers and consolidated supervision have been prepared, in consultation with the IMF and World Bank.
- Legislation on ultimate controllers and consolidated supervision has been submitted to Rada.
- Key actions over the six months following their enactment will include approval of banking regulations governing ultimate controllers and consolidated supervision.
- Further efforts will be undertaken to conclude and effectively implement MoUs with foreign banks’ supervisory authorities.

### Central depository and capital market infrastructure
- Intention to merge in 2011 the two existing depositories to create a single central depository, which will fully comply with internationally agreed standards.
- The central depository will be governed in the most transparent way, based on agreed corporate governance principles for representing interests of market players and the State.
- Participation of the State will imply drafting of efficient corresponding legal base and minimizing of financing from the state funds.

### Safeguards
- In the context of the second review, an agreed plan will be formulated to implement the recommendations of the 2010 safeguards assessment mission.
- Objective: improve the NBU’s autonomy and strengthen its control, reporting, and auditing frameworks.

### Program monitoring and phasing of IMF arrangement
- The phasing of purchases under the arrangement and the quarterly review schedule are unchanged.
- Prior actions and structural benchmarks are set out in Table I.2; quantitative targets for end-December 2010 and for end-March and end-June 2011, and continuous performance criteria, are set out in Table I.3.
- The attached technical memorandum of understanding (TMU) describes the revised understandings between the Ukrainian authorities and IMF staff regarding the monitoring of the program.

### Access and phasing under the Stand-By Arrangement (Appendix Table I.1 highlights)
- July 28, 2010: 1,250 Millions of SDRs, 91.1 Percent of quota — Board approval of arrangement
- November 30, 2010: 1,000 Millions of SDRs, 72.9 Percent of quota — First review and end-September 2010 performance criteria
- March 15, 2011: 1,000 Millions of SDRs, 72.9 Percent of quota — Second review and end-December 2010 performance criteria
- June 15, 2011: 1,000 Millions of SDRs, 72.9 Percent of quota — Third review and end-March 2011 performance criteria
- September 15, 2011: 1,000 Millions of SDRs, 72.9 Percent of quota — Fourth review and end-June 2011 performance criteria
- December 15, 2011: 1,000 Millions of SDRs, 72.9 Percent of quota — Fifth review and end-September 2011 performance criteria
- March 15, 2012: 1,000 Millions of SDRs, 72.9 Percent of quota — Sixth review and end-December 2011 performance criteria
- June 15, 2012: 1,000 Millions of SDRs, 72.9 Percent of quota — Seventh review and end-March 2012 performance criteria
- September 15, 2012: 1,000 Millions of SDRs, 72.9 Percent of quota — Eighth review and end-June 2012 performance criteria
- December 15, 2012: 750 Millions of SDRs, 54.7 Percent of quota — Ninth review and end-September 2012 performance criteria
- Total: 10,000 Millions of SDRs, 728.9 Percent of quota
- Source: IMF staff estimates.

### Prior actions (selected, Appendix Table I.2)
- Prior Action 1: Submit to Parliament a 2011 budget consistent with a general government deficit of 3.1 percent of GDP and the commitments included in the MEFP, paragraph 6.
- Prior Action 2: Submit to Parliament legislation on pension reforms consistent with commitments in the MEFP, paragraph 11.
- Prior Action 3: Pass legislation to revoke the Law “On Temporary Ban to Levy Penalties on Ukraine’s Citizens for Overdue Payments of Utility Bills” (MEFP, paragraph 14).
- Prior Action 4: NERC will issue (by December 16, 2010) instructions to communal utility companies to raise end-user heating tariffs (effective January 1, 2011) to reflect the August increases (MEFP, paragraph 15).

### Structural benchmarks (selected, Appendix Table I.2)
- 1. Pass legislation to revoke the Law “On Temporary Ban to Levy Penalties on Ukraine’s Citizens for Overdue Payments of Utility Bills” — End-September 2010 — Reset as prior action
- 2. Agree with Fund staff on a schedule for phasing out existing restrictions on the foreign exchange market — End-October 2010 — Met with delay
- 3. Complete the audit for Nadra Bank before any decision on its resolution — End-October 2010 — Met
- 4. Parliamentary approval of legislation on pension reforms consistent with commitments in the MEFP, paragraph 11 — End-December 2010
- 5. All banks should meet capital requirements and capital deficient banks should increase their capital in line with the approved plans (MEFP, paragraph 20) — End-December 2010
- 6. Complete due diligence of state-owned banks in line with paragraph 23 of the MEFP — End-December 2010
- 7. Initiate the implementation of the reform and restructuring strategy for Naftogaz in accordance with the principles of the Brussels declaration — End-December 2010 — Met
- 8. Amend the law "On surcharges for the purposes of mandatory state pension insurance" to permanently eliminate the surcharge on non-cash purchases and sales of foreign currency (MEFP, paragraph 19) — End-December 2010
- 9. Set up a more systematic, timely, and transparent VAT refund process (MEFP, paragraph 13) — End-January 2011
- 10. Formulate a comprehensive public administration reform plan aiming to improve the cost efficiency of public service delivery (MEFP, paragraph 12) — End-March 2011
- 11. Approve an increase in gas tariffs for all households and utility companies by 50 percent, effective April 15 (MEFP, paragraph 15) — End-March 2011
- 12. Adopt amendments to the Law of Ukraine “On restoring the solvency of the debtor or announcing him/her bankrupt” and related regulations to speed up the insolvency process, make it more transparent, and facilitate out-of-court restructuring (MEFP, paragraph 24) — End-June 2011
- 13. Implement a schedule to phase out Resolution 109 with a gradual reduction of banks' foreign exchange positions in line with the MEFP, paragraph 19 — End-June 2011
- 14. Establish a framework to develop the forward exchange market, including by allowing transactions between banks in line with the MEFP, paragraph 19 — End-June 2011
- 15. Submit to Parliament a 2012 budget consistent with a general government deficit of 2.5 percent of GDP — End-September 2011

### Quantitative program targets and TMU highlights (Appendix Table I.3 and TMU)
- Selected quantitative figures and outcomes (Appendix Table I.3):
  - Ceiling on the cash deficit of the general government (examples shown): 47,000; 69,556; 59,051; 60,000; 10,600; 21,200
  - Ceiling on the cash deficit of the general government and Naftogaz (examples shown): 56,000; 78,556; 69,786; 71,000; 15,000; 27,000
  - Floor on cumulative change in net international reserves (in millions of U.S. dollars): 19,171; -915; -628; 2,095; -2,860; -4,420; -560
  - Ceiling on cumulative change in net domestic assets: 67,940; 9,916; 7,644; -19,366; 25,733; 43,040; 17,800
  - Ceiling on publicly guaranteed debt: 15,000; 0; 15,000; 15,000; 15,000
  - Ceiling on cumulative change in base money: 219,527; 5,040; -2,800; 5,454; 10,460; 15,740
  - Ceiling on stock of VAT refund arrears: 3,000; 2,891; 1,500; 0; 0
  - Note: Sources: Ukrainian authorities; and IMF staff estimates and projections. Definitions and adjustors are specified in the Technical Memorandum of Understanding (TMU).

- TMU exchange rate and valuation assumptions (Section 3):
  - Program exchange rates fixed over the program period:
    - Swiss Franc: 0.9200 dollar
    - Euro: 1.2198 dollars
    - Pound Sterling: 1.5052 dollars
    - Japanese yen: 0.0113 dollars
    - Accounting exchange rate for the SDR: 1.4789 per dollar
    - Official gold holdings valued at 1,236.00 dollars per fine ounce
  - These program exchange rates are kept fixed over the program period and differ from the actual exchange rate set in the foreign exchange market.

- Net International Reserves (NIR) definition and components (TMU Section I.A):
  - On June 30, 2010, the NIR of Ukraine amounted to US$19,172 million (in equivalent).
  - Usable gross international reserves exclude, inter alia:
    - assets denominated in foreign currencies held at, or claims on, domestic institutions; NBU foreign currency claims on domestic banks; NBU deposits held at the Interbank Foreign Currency Exchange Market and domestic banks for trading purposes;
    - any precious metals or metal deposits, other than monetary gold and gold deposits, held by the NBU;
    - assets corresponding to claims of commercial banks in foreign currency on the NBU and reserve assets that are: (i) encumbered; or (ii) pledged as collateral; or (iii) frozen;
    - reserve assets not readily available for intervention in the foreign exchange market because of lack of quality or lack of liquidity that limits marketability at the book price.
  - Reserve-related liabilities comprise:
    - all short-term liabilities of the NBU vis-à-vis 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 (refers to the notional value of the commitments, not the market value).

- NIR and NDA adjustment mechanisms (TMU):
  - NIR targets will be adjusted upward (downward) by the full amount of the cumulative excess (shortfall) in program disbursements relative to the baseline projection (Table B).
  - Program disbursements are defined as external disbursements from official multilateral creditors (World Bank, European Commission, European Investment Bank, and European Bank for Reconstruction and Development), official bilateral creditors (net), and external bond placements usable for the financing of the central government budget.
  - NIR target for end-December 2010 will be adjusted downward by the amount of the cumulative NBU’s sale of foreign currency (not exceeding US$600 million) in the interbank market during the last five business days of December earmarked for Naftogaz.
  - NDA targets will be adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in program disbursements relative to the baseline projection and evaluated at the program exchange rate.
  - NDA target for end-December 2010 will be adjusted upward by the amount of the cumulative NBU’s sale of foreign currency (not exceeding US$600 million) in the interbank market during the last five business days of December earmarked for Naftogaz.

- Table B. NIR/NDA Adjustment technical assumption for program disbursements (cumulative flows from end-June 2010, in millions of US dollars at program exchange rate):
  - End-September 2010: 1,850
  - End-December 2010: 750
  - End-March 2011: 1,000
  - End-June 2011: 3,650
  - Q3 2010 disbursement details included: Eurobond placement of $1.3 billion, EU disbursement of $0.15 billion, EBRD disbursement of $0.3 billion, other project financing of $0.1 billion.
  - Q4 2010 included: World Bank disbursement of $0.5 billion, EU disbursement of $0.3 billion, other project financing of $0.1 billion; as well as $2 billion repayment of official bilateral financing (including Russian bridge loan).
  - Q1 2011 included: World Bank disbursement of $0.04 billion, EU disbursement of $0.16 billion, other project financing of $0.06 billion.
  - Q2 2011 included: Eurobond placement of $2 billion, World Bank disbursement of $0.54 billion, EU disbursement of $0.11 billion.

### Definitions of other key targets (selected TMU points)
- Net Domestic Assets (NDA) of the NBU: difference between the monetary base and the NIR, with NIR valued at program exchange rate of UAH 7.9070 per dollar and expressed in hryvnia. On June 30, 2010, NDA amounted to UAH 67,940 million.
- Monetary base (indicative target): On June 30, 2010, the NBU’s monetary base amounted to UAH 219,527 million.
- Cash deficit of the general government (performance criterion): measured by net financing flows comprising:
  - total net treasury bill sales (with specified exclusions);
  - other net domestic banking system credit to government;
  - total receipts from privatization received by the State Property Fund and local governments;
  - the difference between disbursements and amortization on any bond issued by the government or the NBU to nonresidents for financing the deficit;
  - the difference between disbursements of official foreign credits to the general government and amortization of official foreign credits by the general government (with specified inclusions and exclusions);
  - net sales of SDR allocation in the SDR department;
  - 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.

*Source: Excerpt from IMF staff and Ukrainian authorities documents in the Technical Memorandum of Understanding and MEFP (December 10, 2010).*

### 10.      For the purposes of measuring the deficit of the general government, all flows

### _cr1152 - 10.      For the purposes of measuring the deficit of the general government, all flows

### Measurement rule for foreign-currency flows
- For measuring the deficit of the general government, all flows to/from the budget in foreign currency will be accounted in hryvnias at the official exchange rate established as of the date of the transaction.
- For the purposes of measuring the deficit of Naftogaz, all flows in foreign currency will be accounted in hryvnias at the official exchange rate established as of the date of the transaction.

### Adjustment mechanism — External project financing (automatic adjuster)
- The ceiling on the cash deficit of the general government is subject to an automatic adjuster based on deviations of external project financing (defined as disbursements from bilateral and multilateral creditors to the consolidated general government for specific project expenditure) from program projections.
- If the cumulative proceeds from external project financing (in hryvnia evaluated at actual exchange rates):
  - a) exceed program projections, the ceiling on the consolidated general government deficit will be adjusted upward by 100 percent of the excess in external project financing; and
  - b) fall short of program projections, the ceiling on the consolidated general government deficit will be adjusted downward by 100 percent of the shortfall in external project financing.
- Table C. External Project Financing Adjustment — Cumulative flows from beginning of the year (In millions of hryvnia):
  - End-December 2010: 2,400
  - End-March 2011: 1,000
  - End-June 2011: 1,500

### Adjustment mechanism — Bank recapitalization (automatic adjuster)
- The ceiling on the cash deficit of the general government is subject to an automatic adjuster corresponding to the upfront budgetary costs associated with the recapitalization of banks (excluding subsequent interest payments on the securities or other instruments issued for recapitalization purpose).
- The ceiling on the cash deficit of the general government will be adjusted upward by (but not exceed) a maximum of UAH 20 billion in 2010.
- The ceiling on the cash deficit of the general government for 2011 will be adjusted upward by any amount of the UAH 20 billion bank recapitalization ceiling under the program that is not used in 2010.

### Adjustment mechanism — Budgetary arrears on social payments (automatic adjuster)
- The ceiling on the cash deficit of the general government is subject to an 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, and social benefits owed by the Pension Fund, and the central or local governments.
- Budgetary arrears are defined as payments not made thirty days after they are due.
- Wages are defined to comprise all forms of remuneration for work performed for standard and overtime work.
- Pension obligations of the Pension Fund comprise all pension benefits and other obligations of the Pension Fund.

### Adjustment mechanism — VAT bonds and VAT refund arrears
- The ceiling on the cash deficit of the general government at end-December 2010 is subject to an automatic upward adjustment for the full amount of bonds used to pay VAT refunds (VAT bonds). No such bonds will be issued in 2011, and therefore there is no such adjustment for the other test dates.
- The ceiling on the cash deficit of the general government at end-December 2010 will be automatically adjusted downward by:
  - (i) the difference between the total amount of bonds used as payments for VAT refunds and the amount of overdue VAT refunds at end-2009 (UAH 16.4 billion); and
  - (ii) the stock of VAT refund arrears (as defined in section E) in excess of the ceiling on VAT refund arrears as set in section E.
- The ceiling on the cash deficit of the general government at all other test dates will be automatically adjusted downward by the stock of VAT refund arrears (as defined in Section E).

### Ceiling on VAT refund arrears (Indicative target)
- The ceiling on VAT refund arrears is set to UAH 1.5 billion at end-December 2010, and zero for all other test dates under the program.
- Definition of stock of VAT refund arrears:
  - Claims not settled (through a cash refund, netting out against obligations of taxpayers, payment with a government bond (VAT bond) or an official decision to reject the claim) within a specified time period after the VAT refund claim has been submitted to the STA.
  - In 2010, this time period is 60 days.
  - In 2011, this time period will be increased to 74 days once the STA has put in place an adequate monitoring framework.
  - VAT refund claims rejected by the STA but for which an appeal has been registered in courts are not considered to be in arrears.
- According to this definition, the stock of VAT refund arrears as of December 31, 2009 was UAH 16.4 billion.

### Ceiling on the Cash Deficit of the General Government and Naftogaz (Performance Criterion)
- Definition:
  - The cash deficit of the General Government and Naftogaz is the cash deficit of the General Government as defined above plus the cash deficit of Naftogaz.
- Naftogaz definition: the national joint stock company “Naftogaz of Ukraine”.
- The cash deficit of Naftogaz is measured from below the line as the sum of the following components:
  - net domestic banking system credit to the company (all financing in either domestic or foreign currency extended to the company by banks less the change in company deposits in the banking system);
  - the difference between disbursements of private foreign loans to Naftogaz (including private placements) and the amortization of private foreign loans (including private placements)—for the purpose of the program, the advance transit fee paid by Gazprom as part of the settlement of the Stockholm court case will not be accounted for as a loan, but as revenue;
  - the difference between disbursements of official foreign credits to Naftogaz (including project loans) and the amortization of official foreign credits (including project loans);
  - 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 the 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;
  - net receipts from sale of financial assets (including recapitalization or other form of treasury securities issued to the company, irrespective of their issuance date)—for the purpose of the program, the net transfer by RosUkrEnergo (including the buyback of a debt claim and collection of a penalty fee) in the settlement of the Stockholm court case will not be accounted for as a sale of financial asset, but as a revenue;
  - any other forms of financing of the company not identified above.

### Adjustment mechanism — Naftogaz-specific adjusters
- The ceiling on the cash deficit of the general government and Naftogaz will be adjusted upward by the amount of financing by multilateral institutions and official bilateral creditors disbursed to Naftogaz for investment projects. The baseline under the program assumes no such financing for Naftogaz.
- The ceiling on the cash deficit of the general government and Naftogaz will be adjusted downward by the net transfers made by Gazprom (advance transit fee) and RosUkrEnergo (buyback of a debt claim and collection of a penalty fee) as part of the settlement of the Stockholm court case. These transfers are measured on a cumulative basis from the beginning of each calendar year.
- The ceiling on the cash deficit of the general government and Naftogaz will be adjusted upward by the amount of gas transferred to RosUkrEnergo to settle the Stockholm court case. These gas transfers, capped at 12.1 bcm, will be measured on a cumulative basis from the beginning of each calendar year, and valued at prevailing gas prices (under the gas import contract with Gazprom) and official exchange rates at the time of the transactions.

### Ceiling on the Non-Accumulation of External Debt Payments Arrears by the General Government (Continuous Performance Criterion)
- Definition: An external debt payment arrear is a payment by the general government which has not been made within seven days after falling due (including grace period, if any).
- The performance criterion will apply on a continuous basis throughout the program period.

### Ceiling on Publicly Guaranteed Debt (Performance Criterion)
- The ceiling on publicly guaranteed debt applies to the amount of guarantees issued in 2010 and 2011 by the central (state) government.
- The program exchange rate will apply to all non-UAH denominated debt.
- New state guarantees in 2010 will amount to no more than UAH 15 billion.
- New state guarantees in 2011 will amount to no more than UAH 15 billion.

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

### Official exchange rate determination
- The NBU will, 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 — National Bank of Ukraine (selected obligations and timelines)
- Monthly: aggregate balance sheet for the NBU and a consolidated balance sheet for the deposit money banks — no later than the 25th day of the following month.
- Weekly: with daily data the stock of net and gross international reserves, at both actual and program exchange rates.
- Weekly and monthly: full breakdown of NBU accounts included in net international reserves — no later than the 25th of the following month.
- Daily: information on official foreign exchange interventions and detailed results of foreign exchange auctions (format agreed with IMF staff).
- Daily on NBU web site and monthly to IMF: daily holdings of treasury bills broken down by type of holders at primary market prices, reports on each treasury bill auction, and monthly report on treasury bills (format agreed with IMF staff).
- Daily: information on daily transactions (volumes and yields) on the secondary market treasury bills (including over the counter transactions).
- Weekly: daily data on the total financing (including refinancing) issued by the NBU to commercial banks, broken down by original maturity, and transactions to absorb liquidity from the banking system.
- Daily: information on the banks’ claims on loans provided and liabilities under attracted funds (format agreed with IMF staff).
- Monthly: general information on the NBU financing (as well as refinancing) of the banks of Ukraine, and on operations of mopping up liquidity (including through the CDs issuance) — format agreed with IMF staff.
- Quarterly: report on banking sector financial stability indicators — no later than 30 days after the expiration of the reporting quarter (format agreed with IMF staff).
- Every 10 days: operational monetary survey of the NBU, including additional information needed for IMF monitoring.
- Monthly: net domestic assets data based on monthly balance sheets within three weeks following the end of the month.
- 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 (state) government and local budgets, including in national and foreign currency, by loan and by security.
- Monthly: projections for external payments falling due in the next twelve months; actual settlement of external obligations (separately principal and interest) for public and private sectors on a quarterly basis within 80 days following the end of the quarter.
- Quarterly: stock of short- and long-term external debt (including arrears) for both public and private sectors.
- Daily: aggregated data on main currency flows, including government foreign receipts and payments by currencies and currency breakdown of interbank market operations; daily information on exchange market transactions including the exchange rate.
- Reports N 381.25; 381.26: information on reserve requirements and reports on CD operations when performed.
- Monthly: banking system monitoring indicators — no later than 25 days after the end of the month (including data on nonperforming loans: substandard, doubtful, and loss criterion).
- Quarterly: consolidated banking sector data and aggregated data (without specifying bank names) for the largest banks (accounting for at least 80 percent of total banking system assets) — no later than 30 days after the end of the quarter; required items include (i) structure of assets, liabilities, capital, revenues and expenditures; (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; and (vi) liquidity normatives H5 and H6; weighted averages based on banks’ total assets.
- Quarterly: detailed balance of payments data in electronic format within 80 days after the end of the quarter.
- Monthly: data on credit to nongovernment units guaranteed by the NBU — no later than 25 days after the end of the month.
- Notification: NBU will 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, and will provide information on outstanding interest and principal payments.
- Notification: NBU will inform IMF staff of changes to reserve requirements for deposit money banks.
- Notification: NBU will communicate electronically to the IMF staff any changes in accounting and valuation principles applicable to balance-sheet data and notify staff before introducing changes to Charts of Accounts and reporting forms of both the NBU and commercial banks.
- Internal audit and assurance:
  - The NBU Internal Audit Department will provide an assurance report to the Fund, no later than six weeks after each test date, confirming (i) monetary data are in accordance with program definitions and verified and reconciled to accounting records; and (ii) no changes to the chart of accounts or valuation methods that would impact data reporting.
  - The NBU will provide the Fund with a copy of the annual management letter from the external auditor within six weeks of completion of each audit; this remains in effect for the duration of the arrangement and while credit remains outstanding.

### Reporting requirements — Ministry of Finance (selected obligations and timelines)
- Treasury will 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.
- Treasury will provide electronic monthly and quarterly treasury reports — no later than 25 and 35 days after the end of the period respectively.
- Treasury will provide the final fiscal accounts at the end of each fiscal year — no later than March of the following year; reports provide expenditure data by programs and key spending units, and standard functional and economic classifications; quarterly reports contain standard information on budget expenses to cover called government guarantees.
- Ministry of Finance will 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.
- Ministry of Finance will report monthly data on the public wage bill in line with the template agreed with IMF staff, and monthly reports on execution of the Stabilization Fund and the Road Fund.
- Ministry of Finance will 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.
- Ministry of Finance will provide monthly information on borrowing (disbursements, interests and amortization) for specified state-owned companies or agencies (Naftogaz, UrkAvtoDor, State Mortgage Institution and the National Agency in Charge of preparation and Conduction of Euro-2012 Soccer Championship) in line with format agreed with IMF staff.
- Ministry of Finance will 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).

*Source: _cr1152 - 10.      For the purposes of measuring the deficit of the general government, all flows*

### 51.      The Ministry of Finance will provide monthly information, no later than 25 days

### _cr1152 - 51.      The Ministry of Finance will provide monthly information, no later than 25 days

### Ministry of Finance — debt, budgets, and cash management (reporting requirements)
- The Ministry of Finance will provide monthly information, no later than 25 days after the end of each month, on the amounts and terms of all external debt contracted or guaranteed by the general government.
- The Ministry of Finance will 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.
- The Ministry of Finance will also report the accumulation of any budgetary arrears on external and domestic debt service.
- The Ministry of Finance will provide to the IMF monthly debt (domestic and external) amortization schedules updated on a weekly basis.
- The Ministry of Finance will provide data on external and domestic credit to nongovernment units that is guaranteed by the government (amount of sovereign guarantees extended by executive resolutions and actually effectuated; total amount of outstanding guarantees and list of their recipients) on a monthly basis no later than 25 days after the end of the month.
- The Ministry of Finance will provide data on the approved budgets and quarterly operational data (daily for the Pension Fund only) on the revenue, expenditures, and arrears, and balance sheets of:
  - the Pension Fund (detailed data on the breakdown of revenues and expenditure by main categories are expected for this Fund),
  - 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 extra budgetary funds managed at the state level
  - These data are due no later than 50 days after the end of each quarter (each month in case of the Pension Fund). Any within-year amendments to the budgets of these funds will be reported within a week after their approval.
  - The Ministry of Finance will also report the annual financial statement including the final fiscal accounts of those funds at the end of each fiscal year, no later than April of the following year.
- The Ministry of Finance will report semi-annual data on the number of employees of budgetary institutions financed from the central (state) and local budgets, starting from January 2010.
  - After any public sector wage increase, the Ministry of Finance will provide an estimate of its costs for the current and two subsequent fiscal years, for the state and local government budgets.
- The Ministry of Finance will provide, no later than 15 days after the end of each month, monthly data on the budgetary costs associated with the recapitalization of banks. This cost includes 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.
- The Ministry of Finance and the Treasury will provide, in line with the template agreed with the IMF staff, weekly data on the outstanding balance of the single Treasury account (including its foreign exchange component) compartmentalized into funds ascribed to:
  - (a) general fund of the state budget;
  - (b) special fund of the state;
  - (c) local budgets;
  - (d) other funds
  - as well as data on net outstanding temporary loans to Pension Fund and local budgets.

### State Tax Administration (STA) — reporting on arrears, exemptions, and VAT refunds
- The State Tax Administration (STA) will provide monthly data, no later than 25 days after the end of the month, on tax arrears, inclusive of deferred payments, interest and penalties outstanding, in the following format:
  - Beginning Stock; Netting out during month; Deferrals during month; Write-offs (arrears written off during month); Collections of outstanding debt at beginning of month; New Arrears (tax liabilities becoming overdue during month); Ending Stock — with breakdowns for Total, Principal, Interest, Penalties; Tax arrears.
- The STA will 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;
  - the estimated subsequent revenue loss for the current fiscal year.
- The STA will continue to provide monthly information, no later than 25 days after the end of the month, on VAT refunds in the following format:
  - (i) beginning stock of refund requests;
  - (ii) refund requests paid in cash;
  - (iii) refunds netted out against obligations of the taxpayer;
  - (iv) denied requests;
  - (v) new refund requests;
  - (vi) end-of-period stock of requests;
  - (vii) stock of VAT refund arrears according to the definition in paragraph 11 (unsettled VAT refund claims submitted to the STA more than 60 days before the end-of-period).

### Ministry of Economy and Ministry of Fuel and Energy — energy, tariffs, and sector financials
- The 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) and their level of cost recovery.
  - The 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 Ministry of Fuel and Energy (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. The end-quarter reports will have been audited.
- For each month, no later than the 25th of the following month, the Ministry of Fuel and Energy (based on information by Naftogaz) will provide IMF staff with information on all flows related to the settlement of the Stockholm court case, including:
  - transfers made by Gazprom (advance transit fee) and RosUkrEnergo (buyback of a debt claim) and collection of a penalty fee;
  - purchases of gas to be transferred to RUE;
  - actual amounts of gas transferred to RUE.

### State Statistics Committee and Naftogaz — trade in oil and gas
- The 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.

### Statement by the Staff Representative on Ukraine (December 22, 2010) — key program updates and Press Release No. 10/511
- The statement provides information available since the Staff Report circulated to the Executive Board on December 10, 2010; it does not alter the thrust of the staff appraisal.
- The four prior actions for the first review have been met:
  - The government has submitted to parliament the 2011 budget consistent with a general government deficit of 3.1 percent of GDP. The draft budget has since been approved in the first of three readings. Final approval is expected by end-year.
  - The government has submitted to parliament a draft pension reform law consistent with commitments under the program. Approval by end-December is a structural benchmark under the program.
  - NERC (the temporary regulator for utility prices) has instructed communal utility companies to raise end-users heating tariffs to reflect the gas price increase that took place in August. The new tariffs will be effective on January 1, 2011.
  - Parliament has passed legislation that revoked the temporary ban to levy penalties on citizens for overdue payments of utility bills.
- Press Release No. 10/511 — IMF Completes First Review Under Stand-By Arrangement with Ukraine and Approves €1.2 Billion Disbursement:
  - The completion of the review enables the immediate disbursement of SDR 1 billion (about €1.2 billion, or US$1.5 billion).
  - Drawing the full amount would bring total disbursements under the program to SDR 2.25 billion (about €2.6 billion, or US$3.4 billion).
  - Ukraine’s 29-month SBA was approved on July 28, 2010, in the amount of SDR 10 billion (about €11.7 billion, or US$15.3 billion).
  - The SBA entails exceptional access to IMF resources, amounting to 728.9 percent of Ukraine’s quota in the Fund.
- Statement by Mr. John Lipsky, First Deputy Managing Director and Acting Chair:
  - Notes satisfactory performance under the program and policy commitments supporting recovery and broadening economic activity.
  - Emphasizes continued commitment to fiscal, energy, and financial sector reforms to entrench macroeconomic stability, boost confidence, facilitate access to capital markets, and promote more balanced and robust growth.
  - Highlights near-term priorities: swift approval of the 2011 budget consistent with program targets, tight control over budget execution, and efforts to improve tax administration.
  - Emphasizes longer term fiscal sustainability depends on structural reforms in pension, public administration, and state-owned enterprises; timely approval and implementation of the pension reform legislation submitted to parliament will be key.
  - Notes steps to strengthen the financial position of Naftogaz, including revenue collection improvements, and calls for further efforts including gas price increases and structural reforms to create a more viable and transparent energy sector.
  - Calls for expedited implementation of measures to tackle sizeable impaired assets in the banking system that are hindering the financial sector’s support for a sustainable economic recovery.

*Statement by the Staff Representative on Ukraine; Press Release No. 10/511 (December 22, 2010).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1152.pdf_