Press Release: IMF Executive Board Approves US$15.15 Billion Stand-By Arrangement for Ukraine

IMF News, July 28, 2010

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Canonical URL: Press Release: IMF Executive Board Approves US$15.15 Billion Stand-By Arrangement for Ukraine

Approved: 29-month Stand-By Arrangement (SBA) valued at SDR 10 billion (about US$ 15.15 billion).
Initial disbursement available immediately: SDR 1.25 billion (US$ 1.89 billion).
Subsequent disbursements: subject to quarterly reviews.
Exceptional access: amounting to 728.9 percent of Ukraine’s quota in the Fund.
Date of press release: July 28, 2010.

Context: Ukraine recently emerged from a period when the economy was severely hit by external shocks and exacerbated by domestic vulnerabilities.
Policy focus areas:
- Fiscal, energy, and financial sector reforms to address imbalances and put the economy on a path of durable growth.
- A comprehensive consolidation strategy to safeguard fiscal sustainability, with fiscal adjustment starting in 2010 and deepening in 2011–12.
- Robust structural reforms of the pension system, public administration, and the tax system.
- Strengthening the financial position of the gas sector through domestic price hikes and broader reforms, supported by other multilateral institutions, to eliminate energy subsidies and protect the most vulnerable with better targeted social assistance programs.
- Rehabilitation of the financial system and enhancing the National Bank of Ukraine’s independence and accountability, including planned recapitalization of banks and steps to strengthen the supervisory and institutional framework.
Expected outcomes:
- Entrench macroeconomic stability, boost confidence, facilitate access to capital markets, and achieve more balanced and robust growth if reforms are sustained.

The Board reviewed a Managing Director report on provision of data on net international reserves (NIR), which led to:
- Two noncomplying purchases in 2009.
- A breach of obligation under Article VIII, Section 5 of the IMF’s Articles of Agreement.
Board response:
- Given the minor economic effect of the deviation and that action has already been taken to change the NIR definition under the new Stand-By Arrangement, the Board agreed to grant waivers of nonobservance of the performance criterion and that no further remedial action is required.

Crisis impact:
- The global economic financial crisis hit Ukraine hard in late 2008 and 2009.
- As a major steel exporter and borrower in international markets, Ukraine was severely hit by the decline in demand for steel products and reduced access to capital markets.
- Pre-existing economic and financial vulnerabilities amplified the impact.
- Confidence in the currency and banks waned, causing a system-wide run on deposits; real GDP collapsed, domestic demand fell; and falling fiscal revenues strained public finances.
Recovery and program performance:
- The 2008 program managed to restore macroeconomic and financial stability despite the sharp adjustment required by large pre-existing imbalances.
- Measures to restore banking system confidence helped stabilize deposits and exchange rate pressures eased by mid-2009, when an incipient recovery was under way.
- The program later went off track as policies weakened and reforms stalled in the run up to the Presidential elections.

Overarching objectives:
- Consolidate public finances.
- Restore banking system soundness.
- Develop a more robust monetary policy framework.
Institutional and policy measures to achieve objectives:
- Tax and expenditure policy adjustments.
- Pension and energy sector reforms.
- Measures to strengthen central bank independence.
- Rehabilitation of the banking system, including recapitalization.
Four key areas of focus with specific targets and measures:
- Restore confidence and fiscal sustainability:
- Reduce the general government deficit to 3.5 percent of GDP in 2011 and 2.5 percent in 2012.
- Set public debt firmly on a downward path below 35 percent by 2015.
- Modernize the gas sector and eliminate Naftogaz’s deficit starting from 2011:
- Achieve this including through gas tariff increases and a price mechanism that depoliticizes price setting of public utilities.
- A new gas law adopted in early July will improve efficiency through unbundling production, transit, and distribution to end-users, and allowing new entrants and investment into the domestic gas sector.
- Restore and safeguard banks’ soundness:
- Complete recapitalization plans by end-2010 and strengthen supervision.
- Develop a more robust monetary policy framework:
- Focus on domestic price stability under a flexible exchange rate regime to be implemented by a more independent National Bank of Ukraine.

Ukraine’s IMF membership and quota:
- Ukraine joined the IMF as a member on September 3, 1992.
- Quota: SDR 1,372 million (about US$2,078.4 million).

The Board also noted cancellation of the SBA for Ukraine that was approved on November 5, 2008 (see Press Release No 08/271).

Press Release No. 10/305 — International Monetary Fund