Press Release: IMF Approves US$16.4 Billion Stand-By Arrangement for Ukraine
IMF News, November 5, 2008
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- Published: November 5, 2008
IMF Approval and Immediate Financing
- The Executive Board approved a two-year Stand-By Arrangement (SBA) for SDR 11 billion (about US$16.4 billion).
- The SBA entails exceptional access equivalent to 802 percent of Ukraine's quota in the Fund and was approved under the Fund's fast-track Emergency Financing Mechanism.
- Immediate disbursement enabled: SDR 3 billion (about US$4.5 billion).
Program Objectives and Macroeconomic Strategy
- Program aims: restore financial and macroeconomic stability, strengthen confidence, and facilitate adjustment to a large terms-of-trade shock.
- Core policy pillars:
- Adopt a flexible exchange rate regime with targeted intervention and phase out recent exchange controls as confidence rebuilds.
- Pre-emptive bank recapitalization and decisive bank resolution processes.
- Prudent fiscal policy coupled with tighter monetary policy.
- Strengthen independence of the National Bank of Ukraine and accelerate progress toward inflation targeting.
Monetary and Exchange Rate Policy Measures
- Implement a flexible exchange rate regime; base money to serve as the near-term anchor until inflation targeting is implemented.
- Near-term monetary tightening to achieve the 2009 inflation objective of 17 percent.
- Eliminate exchange rate controls as soon as possible.
- Improve foreign exchange market operation, including cancellation of the foreign exchange transactions tax and a more transparent intervention policy.
Financial Sector Measures
- Prepare a comprehensive bank resolution strategy including resolution of problem banks and recapitalization of viable banks.
- Prominvest Bank (the sixth largest bank) was resolved through a sale to a strategic investor.
- Ensure viable banks have access to liquidity.
- Increase deposit insurance coverage to Hrv150,000 (about €20,000) from Hrv50,000 — covering 99 percent of individual accounts.
- Strengthen bank monitoring with enhanced on- and off-site inspections and improved cross-border supervisory cooperation.
- Proactive strategy to resolve corporate and household debt problems.
Fiscal Policy Measures
- Adopt a prudent fiscal stance while accommodating recession-related social expenditures, including higher funding for unemployment insurance and targeted income support.
- Fiscal targets:
- Deficit would not exceed 1 percent of GDP in 2008.
- General government budget would be balanced in 2009 (excluding bank recapitalization costs).
- Measures to achieve targets: expenditure restraint, phased increase in energy tariffs, adjust minimum wage/pension/social transfer increases in line with projected 2009 inflation.
- Program allows expansion of social safety nets if needed.
Recent Economic Developments (Annex)
- Growth since 2000 averaged more than 7 percent.
- By mid-2008: credit growth exceeded 70 percent; CPI inflation exceeded 30 percent; wage growth 30-40 percent; imports surged at an annual rate of 50-60 percent; current account deficit reached 7 percent of GDP in Q2 2008.
- Manufacturing contracted sharply: a 5-percent contraction in September (manufacturing sector).
- Deposit outflows: at least US$3 billion—4 percent of deposits—withdrawn during the first three weeks of October following receivership of Prominvest Bank.
- Gross reserves fell from US$38 billion to US$32 billion due to NBU intervention in October.
- Authorities imposed exchange controls and implemented anti-crisis legislation.
Program Summary, Scenarios, and Projections
- Program assumes a global recession and continued deleveraging in international credit markets in 2009, implying a recession in Ukraine with deteriorating exports, limited external financing, and a credit crunch.
- Projected impact on output: a 3 percent decline in 2009 (consistent with Ukraine's 2004–05 experience).
- Inflation path under program: expected to decrease to 17 percent by end-2009 from the projected 25.5 percent in 2008.
- Current account: projected to compress to about a 2 percent of GDP deficit from the mid-2008 level of 7 percent.
- Recovery scenario: assuming global recovery in the second half of 2009, economy could return to estimated potential growth of 5-6 percent by 2011 with inflation at 5-7 percent by late 2011.
- Current account deficits projected to remain small in 2010 and moderate thereafter, allowing reserves to rise.
Key Assumptions
- (i) Increased exchange rate flexibility as from 2008.
- (ii) Convergence of natural gas import prices to Western European levels (adjusted for transit) by 2010.
- (iii) Pass-through of rising energy import prices in 2009.
- (iv) Public-financed recapitalization of banks for a total amount of Hrv 54 bln (10 bln by end-2008 and 44 bln in the first half of 2009).
Selected Economic and Social Indicators (2005–09)
- Nominal GDP (billions of hryvnias): 2005: 441; 2006: 544; 2007: 713; 2008: 993; 2009 Proj.: 1,112
- Real GDP (percent change): 2005: 2.7; 2006: 7.3; 2007: 7.6; 2008: 6.0; 2009 Proj.: -3.0
- Contributions to 2009 change: Domestic demand: -14.3; Net exports: 11.3
- Unemployment rate (ILO definition; percent): 2005: 7.2; 2006: 6.8; 2007: 6.4; 2008: 9.5; 2009 Proj.: (not separately listed)
- Consumer prices (period average): 2005: 13.5; 2006: 9.1; 2007: 12.8; 2008: 25.6; 2009 Proj.: 21.0
- Consumer prices (end of period): 2005: 10.3; 2006: 11.6; 2007: 16.6; 2008: 25.5; 2009 Proj.: 17.0
- Nominal monthly wages (average): 2005: 36.7; 2006: 29.2; 2007: 29.7; 2008: 37.1; 2009 Proj.: 10.5
- Real monthly wages (average): 2005: 20.4; 2006: 18.4; 2007: 15.0; 2008: -8.7
- Public finance (percent of GDP) — Cash balance excluding banks recap.: 2005: -2.3; 2006: -1.4; 2007: -2.0; 2008: -1.0; 2009 Proj.: 0.0
- Privatization proceeds: 2005: 5.0; 2006: 0.4; 2007: 0.6; 2008: 0.2; 2009 Proj.: 0.1
- Net domestic financing: 2005: -3.3; 2006: -0.4; 2007: 0.3; 2008: 1.8; 2009 Proj.: 4.4
- Public debt (percent of GDP): 2005: 18.7; 2006: 15.7; 2007: 13.0; 2008: 10.6; 2009 Proj.: 17.4
- Base money (end of period, percent change): 2005: 53.9; 2006: 17.5; 2007: 46.0; 2008: 33.0; 2009 Proj.: 10.9
- Broad money (end of period, percent change): 2005: 54.4; 2006: 34.5; 2007: 51.7; 2008: 37.2; 2009 Proj.: 9.4
- Credit to nongovernment (end of period, percent change): 2005: 61.8; 2006: 70.6; 2007: 74.0; 2008: 40.9; 2009 Proj.: -9.8
- Total external debt (percent of GDP) 2/: 2005: 45.1; 2006: 49.7; 2007: 57.8; 2008: 54.3; 2009 Proj.: 78.2
- Current account balance (percent of GDP): 2005: 2.9; 2006: -1.5; 2007: -3.7; 2008: -6.2
- Foreign direct investment (percent of GDP): 2005: 8.7; 2006: 5.3; 2007: 6.5; 2008: 6.2
- Gross reserves (end of period, billions of U.S. dollars): 2005: 19.4; 2006: 22.3; 2007: 32.4; 2008: 31.4; 2009 Proj.: 30.7
- Gross reserves (in months of next year's imports): 2005: 3.7; 2006: 4.0; 2007: 5.1; 2008: 4.5
- Goods exports (annual volume change in percent): 2005: 3.2; 2006: 0.8
- Goods imports (annual volume change in percent): 2005: 12.5; 2006: 20.3; 2007: 16.0; 2008: -19.7
- Goods and services terms of trade (percent change): 2005: 4.9; 2006: 1.5; 2007: 7.4; 2008: 8.9
- Social indicators: Per capita GDP: US$ 2,282 (2006); Poverty (percent of population): 8.0 (2006; World Bank estimate); Life expectancy at birth: 68.2 years (2006); Infant mortality (per 1,000): 16.0 (2005); Gross primary enrollment (percent net): 84 (2005)
Source: Press Release No. 08/271 (November 5, 2008).