Press Release: IMF Executive Board Approves 4-Year US$17.5 Billion Extended Fund Facility for Ukraine, US$5 Billion for Immediate Disbursement

IMF News, March 11, 2015

Source details

Canonical URL: Press Release: IMF Executive Board Approves 4-Year US$17.5 Billion Extended Fund Facility for Ukraine, US$5 Billion for Immediate Disbursement

Executive Board approved a four-year extended arrangement under the Extended Fund Facility (EFF) for Ukraine amounting to SDR 12.348 billion (about US$17.5 billion, 900 percent of quota), approved under the Fund's exceptional access policy.
The Board took note of Ukraine’s decision to cancel the Stand-By Arrangement (SBA) for Ukraine that was approved on April 30, 2014 (Press Release No. 14/189).
Immediate disbursement enabled: SDR 3.546 billion (about US$5 billion), with SDR 1.915 billion (about US$2.7 billion) allocated to budget support.
Further disbursements to be based on standard quarterly reviews and performance criteria.

Program aims:
- Put the economy on the path to recovery.
- Restore external sustainability.
- Strengthen public finances.
- Support economic growth by advancing structural and governance reforms while protecting the most vulnerable.
Emphasis on building and deepening reforms launched under the SBA.
Prior actions and measures adopted to mitigate implementation risks and to secure broad political support for program objectives and policies.

Priority: stabilize financial system, maintain confidence in banks, and strengthen financial regulation and supervision.
Measures include:
- Recapitalizing systemic banks.
- Resolving weak non-systemic banks.
- Reducing related party lending.
- Resolving impaired assets.
Decisive implementation of the banking strategy deemed crucial to regain public confidence.

Fiscal approach: expenditure-led adjustment and frontloaded energy price increases to reduce quasi-fiscal losses and set debt on a downward path.
Specific policy components:
- Improving pension system sustainability.
- Reforming public employment.
- Reforming healthcare and education systems.
- Announced debt operation intended to help secure program financing and restore debt sustainability with high probability; a successful debt operation with high participation is a key consideration for the first program review.
Target: eliminate large quasi-fiscal losses of Naftogaz by 2017 via increased tariffs, improved collection rates, and fundamental restructuring of the company.
Social protection: funding to protect the most vulnerable from energy price increases will be raised to alleviate social costs and build support for reforms.

Reforms to revive the business climate and attract investment:
- Governance reforms, including anti-corruption and judicial measures.
- Deregulation and tax administration reforms.
- Comprehensive reform of state-owned enterprises to improve corporate governance and reduce fiscal risks.
- Broader energy sector reforms to increase energy efficiency and foster energy independence.

Program subject to exceptional risks, especially from the conflict in the East, which may affect the country’s ability to sustain stabilization and deliver structural overhaul.
Crisis also presents an opportunity to implement reform-oriented and sustainable policies with strong ownership.
Mitigating factors: prior actions, broad political support, and potential to unlock sizable international official assistance and private capital inflows.

2014 outcomes and shocks:
- Deep recession in 2014 despite policy efforts.
- Conflict in Eastern Ukraine disrupted trade and industrial production, led to loss of confidence, capital outflows, and sharp exchange rate depreciation.
- Banks came under increasing stress, public debt increased, and international reserves fell to low levels.
Under the SBA, authorities began difficult reforms: fiscal adjustment, greater exchange rate flexibility, energy price increases, regulatory simplification, and governance measures. New shocks made SBA objectives difficult to meet, prompting cancellation and replacement by the EFF arrangement.

2015 (near term, difficult environment):
- Real GDP expected to contract by about 5½ percent in 2015.
- Inflation expected to spike temporarily and then subside to about 27 percent at end-2015.
- Current account deficit should fall to about 1½ percent of GDP.
- Gross international reserves expected to reach around 3.3 month of imports coverage at end-2015 with sizable international assistance.
- Public sector debt expected to rise to 94 percent of GDP in 2015.
- External debt expected to rise to 158 percent of GDP in 2015.
Medium term:
- Real GDP growth expected to rebound to 2 percent in 2016 and rise to 4 percent in the medium term.
- Current account deficit projected to stabilize at around 1¼ percent of GDP in 2016–18.
- By end-2018, inflation expected to fall to mid-single digits and the NBU will build international reserves to cover nearly 83 percent of short term debt.
- Following the debt operation and sustained fiscal adjustment, public debt expected to decline to around 71 percent of GDP by 2020.

IMF Press Release No. 15/107, March 11, 2015