Press Release: IMF Approves a Stand-By Credit for Ukraine

IMF News, May 10, 1996

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The International Monetary Fund approved a nine-month stand-by credit for Ukraine equivalent to SDR 598.2 million (about $867 million).
Purpose: to support the Government's 1996 economic reform program.

October 1994–early 1995 reforms: unification of the exchange rate; liberalization of many features of the exchange system; abolition of price controls; increase in interest rates to positive levels in real terms.
Early 1995 outcomes: lower-than-expected inflation, nominal exchange rate stability, capital inflows, strong export performance, and expanded private sector activity.
Second half of 1995 slippages: credit overruns relative to program targets; renewal of budgetary subsidies to the enterprise sector; delays in privatization and export liberalization.
Consequences of 1995 slippages: weakening of the karbovanets on the exchange market, surge in inflation, erosion of confidence, and virtual cessation of foreign financing in support of the program.
Late 1995–early 1996 corrective measures helped stabilize the financial situation, halt depreciation of the karbovanets, and reduce inflationary pressures.

Key policy objectives:
- Reduce inflation to about 1-2 percent per month by the end of the year.
- Limit the decline of output.
- Realize the country's economic potential.
Fiscal targets and measures:
- Target: reduce the consolidated budget deficit to 3.5 percent of GDP in 1996 from 5 percent of GDP in 1995.
- Following 1995 tax reform, most ad hoc tax exemptions will be removed; new taxes will be levied to support restructuring of the energy sector.
- Expenditure-side measures: regulate budgetary wage increases so they do not exceed 80 percent of inflation; reduce subsidies; adjust or postpone several other programs to meet financial targets.
- Parliament adopted a budget deficit of 4 percent of GDP, but authorities are confident they can contain public expenditure to achieve the program's deficit target.
- A new treasury management system will centralize paying agents' funds, help project cash flows, and manage liquid resources to facilitate control over expenditure commitments.
Monetary policy:
- Will be consistent with objectives of lowering inflation and replenishing net international reserves.
External financing:
- Ukraine's 1996 program is expected to be supported by official external financing of about $2 billion from multilateral and bilateral creditors.

Privatization:
- Goal by end-1996: privatize at least 70 percent of the shares in a total of 5,000 medium and large enterprises.
- Measures: streamline preparation procedures for privatization; circulate new privatization certificates to boost demand at auctions; no official intervention in price setting at auctions.
Price liberalization:
- Halve the number of goods requiring advanced declarations of price increases to the Government.
Competition and land reform:
- Strengthen competition policies for government procurement orders.
- A land reform is expected to take place, including introduction of a title registration system.

Improve targeting of social protection policies in 1996 by improving the household budget survey to better identify population segments in greatest need.
Improve efficiency of income-based housing subsidy scheme limited to households where housing and energy costs exceed 15 percent of total income.
Strengthen the pension system to make it sustainable, affordable, and more effective in providing benefits to the large number of pensioners.

The 1996 program aims to set the stage for future recovery, but many tasks remain to transform the economy into a market-oriented one and achieve sustained growth.
Chief challenge: widening and deepening structural reforms.

Ukraine joined the IMF on September 3, 1992.
Ukraine's quota is SDR 997.3 million (about $1,446 million).
Ukraine's outstanding use of IMF credit currently totals SDR 1,037 million (about $1,503 million).

Real GDP (percent change): 1992 -17; 1993 -14; 1994 -23; 1995* -12; 1996** -2
Consumer prices (percent change, within period): 1992 2,000; 1993 10,155; 1994 401; 1995* 182; 1996** 42
Overall fiscal balance (deficit –) (percent of GDP): 1993 -8.2; 1994 -5.0; 1996** -3.5
External current account balance (deficit –) (percent of GDP): 1992 -4.4; 1993 -3.2

*Estimate **Program

Press Release No. 96/24 — May 10, 1996. International Monetary Fund