Press Release: IMF Approves Stand-by Credit and Second STF Drawing for Ukraine
IMF News, April 7, 1995
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- Published: April 7, 1995
Summary of Approval and Financing
- The IMF approved credits for Ukraine totaling SDR 1,246.62 million (about $1.96 billion) to support the Government's 1995 economic reform program.
- Allocation of the total:
- SDR 997.3 million (about $1.57 billion) under a one-year stand-by credit.
- SDR 249.3 million (about $392 million) as Ukraine's second drawing under the systemic transformation facility (STF).
- The first STF drawing, SDR 249.3 million, was approved on October 26, 1994 (Press Release No. 94/76).
- Ukraine joined the IMF on September 3, 1992. Its quota is SDR 997.3 million (about $1.57 billion), and its outstanding use of IMF credit currently totals SDR 249 million (about $391 million).
Background and Policy Context
- The Government that took office in the summer of 1994 took measures under the first STF program to address a deep economic crisis.
- Measures in the final quarter of 1994 included:
- Containing a prospective explosion of the budget deficit.
- Limiting the growth of credit to enterprises.
- Beginning liberalization of prices and the exchange and trade system.
- Policy implementation under the first STF program was described as generally good, with most policy commitments eventually achieved and a tightening of financial policies that surpassed expectations.
- Persistent difficulties remained in inflation, the balance of payments, and economic activity, highlighting large macroeconomic imbalances and structural impediments to output recovery.
The 1995 Program: Objectives and Targets
- Key aims:
- Achieve a swift and enduring reduction in inflation.
- Liberate the economy's export potential.
- Implement meaningful structural reforms.
- Normalize financial relations with creditors.
- Specific inflation targets:
- Reduce monthly inflation to low single digits by the middle of the year.
- Reduce inflation to about 1 percent by end-1995.
- Output and external balance objectives:
- Limit the decline in real GDP to 10 percent in 1995.
- Contain the deficit in the current account of the balance of payments to about $1.3 billion in 1995.
- Fiscal policy:
- State budget deficit targeted to decline to 3.3 percent of GDP in 1995 from 8.6 percent in 1994, entirely on the basis of a reduction in expenditure.
- Expenditure reductions to reflect government withdrawal from operations better discharged by the nongovernment sector, including:
- Substantial withdrawal from agricultural financing.
- Replacement of budget subsidies to the coal industry by a system of intra-industry transfers.
- Curtailment of budget lending.
- Other expenditure restraint measures: strict wage policy in the budgetary sphere, cash limits in certain areas, further increases in public utility charges, housing rents, and energy prices to households to contain subsidies.
- Monetary and labor policy:
- Monetary projections support keeping the rate of monetary expansion substantially below the projected rate of increase in nominal activity in the first half of the year.
- Program envisages a policy of wage restraint to support adjustment and limit prospective unemployment increases.
Structural Reforms
- Measures to remove administrative controls and provide incentives for enterprise innovation, market entry, and cost reduction.
- Price policy:
- Government will substantially reduce price controls by the end of the year.
- Adjust prices for subsidized goods, continually reducing the level of subsidization.
- Privatization program:
- Privatization through vouchers of about 8,000 medium and large-scale enterprises, as well as the majority of small-scale enterprises, by the end of the year.
- Sales to foreign investors contemplated through individually negotiated deals and tenders of blocks of shares in the auction process.
- Trade liberalization:
- Further reform of the trade system to remove impediments to export promotion.
- Most export quotas already eliminated; preregistration scheme streamlined.
- Removal of the export quota on grain planned in the course of the year.
Social Protection and Mitigating Social Costs
- Authorities prioritize protecting the most vulnerable social groups from adjustment and liberalization impacts.
- Budget provides for an increase in spending on social protection by close to 2 1/2 percent of GDP.
- Existing benefits will be indexed to wage increases, with, where necessary, a flattening of the pension-benefit structure to allow minimum incomes to keep pace with inflation.
- With World Bank assistance, a review of all social benefits will begin in 1995, including design of measures to strengthen the pension and unemployment compensation systems.
Challenges and External Support
- Restructuring the Ukrainian economy and restoring external viability extends beyond 1995 and will require continued adjustment and external assistance over the medium term.
- The program has received pledges of support from the international community in the form of grants, credits, and debt rescheduling for a total of US$1.5 billion.
Ukraine: Selected Economic Indicators
- Real GDP (percent change)
- 1992: –17
- 1993: –23
- 1994*: –10
- 1995**: (program target) — limit decline to 10 percent
- Consumer prices (percent change)
- 1992: 1,210
- 1993: 4,735
- 1994*: 891
- 1995**: 389
- External current account balance (deficit –) (millions of dollars)
- 1992: ---
- 1993: –849
- 1994*: –1,396
- 1995**: –1,335
- State budget balance (deficit –) (percent of GDP)
- 1992: –30.4
- 1993: –10.1
- 1994*: –8.6
- 1995**: –3.3
- Sources: Ukrainian authorities; and IMF staff estimates.
- *Estimated.
- **Program.
International Monetary Fund — Press Release No. 95/19 (April 7, 1995)