Press Release: IMF Approves Three-Year Extended Fund Facility for Ukraine
IMF News, September 4, 1998
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- Authors: Arrangement. Despite
- Published: September 4, 1998
Approval and Financing
- The IMF approved a three-year credit for Ukraine under the Extended Fund Facility (EFF) equivalent to SDR 1,645.55 million (about US$2,226 million).
- Of the total, SDR 190 million (about US$257 million) is available immediately.
- Note on the EFF: repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, currently is about 4.47 percent.
Background and Recent Developments
- Ukraine made considerable progress under its 1996 economic reform program supported by a Stand-By Arrangement: inflation fell rapidly and a measure of stability was achieved, though real GDP continued to decline.
- August 1997: new 12-month Stand-By Arrangement began; overall performance was less than aimed for due to inability to contain expenditures, slow structural reform progress, adverse international capital market developments, and unsettled domestic politics. Positive: reduced inflation and halted decline in output.
- First six months of 1998: real GDP rose by 0.2 percent, the first increase since independence, reflecting output increases mainly in construction and agriculture.
- Mid-August 1998 adverse regional developments: National Bank of Ukraine increased interest rates and allowed faster depreciation. Despite tight monetary policy, foreign exchange market remained under pressure and gross international reserves declined.
- New exchange rate band: hryvnia 2.5-3.5 to the U.S. dollar will take effect from September 5, 1998.
- Policy responses initiated: voluntary rescheduling scheme for treasury bills held by residents; excise taxes raised; some VAT exemptions eliminated; payroll taxes reduced.
Medium-Term Strategy and Macroeconomic Objectives (1998-2001)
- Key objectives: strengthen public finances; implement ambitious structural reforms to promote economic growth and improve living standards; counter negative effects of regional shocks.
- Macroeconomic objectives (1998-2001):
- 4 percent growth in GDP by 2001 from -0.3 percent in 1997.
- Bring inflation down to 7 percent by 2001 from 10 percent in 1997.
- Achieve gross international reserves equivalent to 7 weeks of import cover in 2001 from 6.3 weeks in 1997.
- Impact of shocks and program adjustments:
- Inflation expected to pick up in the last few months of the year due to widened hryvnia band, but with full program implementation, inflation for 1999 should be contained to about 7 percent on an end-of-period basis.
- Projected real GDP growth in 1999 revised recently to 1 percent from about 3 percent.
- Monitoring: monthly monitoring for early warnings; quarterly reviews for continuous IMF–Ukrainian dialogue.
Fiscal Measures, Debt Restructuring, and Monetary Policy
- Fiscal priority: strengthen financial position of the government.
- Fiscal package highlights:
- Substantial reduction in payroll taxes by 10 percentage points.
- Public administration reform.
- Scaling down of subsidy programs.
- Revenue targets to be met through improvements in tax administration.
- Introduction of the expenditure limits system and regular expenditure adjustments tied to revenue developments.
- Debt restructuring: expected positive fiscal impact via lower domestic interest payments in 1998, partly offset by higher external debt payments.
- Budget targets:
- Budget deficit in 1998 expected to be held to 2.8 percent of GDP.
- Budget for 1999 to be based on a deficit of 1 percent of GDP.
- Monetary policy: a stronger fiscal stance should allow continued tight monetary policy to keep inflation under control.
Structural Reforms
- Emphasis that stabilization gains alone are insufficient; fundamental systemic reforms are crucial.
- Structural reform components:
- Strengthening fiscal and monetary institutions, especially the Ministry of Finance and the tax and customs administration.
- Reductions in the size of government and its intervention in economic activities.
- Progress in privatization, deregulation, and administrative reforms.
- Reforms in the energy and agricultural sectors.
- Accelerated reform in the coal sector to lessen budgetary expenditure pressures.
- Purpose: enhance implementation capacity, promote private investment, and resume economic growth.
Social Protection and Social Costs
- Rationalize and streamline the social protection system to eliminate general subsidies and improve targeting to the truly needy.
- Government intends to:
- Eliminate most budgetary privileges.
- Review benefits provided by the Chernobyl Fund, the Social Insurance Fund, and the Employment Fund.
- Establish a financially sustainable pension system that provides adequate social protection, including introduction of personal savings accounts and nonstate pensions.
Risks, Challenges, and Policy Advice
- Near-term vulnerability: continued susceptibility to unexpected capital market fluctuations that could undermine fiscal position and pressure the exchange rate and international reserves.
- Policy advice:
- Monitor developments closely and respond quickly if necessary.
- As structural reforms progress, avoid borrowing with short-term maturities to alleviate short-term liquidity problems associated with capital market volatility.
Country IMF Quota and Outstanding Use of IMF Credit
- Ukraine joined the IMF on September 3, 1992; its quota is SDR 997.3 million (about US$1,349 million).
- Outstanding use of IMF credit currently totals SDR 1,807 million (about US$2,444 million).
Selected Economic Indicators, 1997–2001 (key figures as presented)
- Nominal GDP (in millions of hryvnia):
- 1997: 92,484
- 1998: 100,378
- 1999: 105,658
- Q3 (1998): 26,792
- Q4 (1998): 35,676
- Projection 1999: 112,277
- Projection 2000: 129,082
- Projection 2001: 143,486
- (Additional projection value) 160,059
- Real GDP (percent change)1:
- 1997: -3
- 1998 Q3: 0
- 1998 Q4: ...
- 1999: 3
- 2000: 1
- 2001: 4
- Consumer prices (percent change, period average)1:
- 1997: 16
- 1998: 9
- 1999: 15
- 2000: 21
- 2001: 8
- (Additional series) 23, 7
- Consumer prices (percent change, end of period)1:
- 1997: 10
- 1998: 29
- 1999: 11
- 2000: 13
- Public finance (in percent of GDP):
- Revenue:
- 1997: 38.4
- 1998: 35.7
- 1999: 34.3
- 2000: 35.1
- 2001: 30.2
- (Projections) 35.4, 35.3
- Expenditure:
- 1997: 44.0
- 1998: 39.0
- 1999: 37.1
- 2000: 37.5
- 2001: 30.6
- (Projections) 38.0, 36.3
- General government budget balance:
- 1997: -5.6
- 1998: -3.3
- 1999: -2.8
- 2000: -2.4
- 2001: -0.5
- (Projections) -2.0, -1.0
- Underlying balance2:
- 1997: -5.2
- 1998: -2.3
- 1999: -1.9
- 2000: -1.1
- 2001: 2.4
- (Projection) 0.3
- Primary balance:
- 1997: -3.8
- 1998: -0.3
- 1999: 0.0
- 2000: 0.8
- 2001: 2.0
- (Projections) 2.1, 2.6
- Net domestic financing3:
- 1997: 5.3
- 1998: 0.6
- 1999: 1.2
- 2000: 1.6
- 2001: -0.9
- Net external financing:
- 1997: 2.7
- 1998: -0.2
- 1999: 2.9
- 2000: 0.4
- Money and credit (percent change during period)1:
- Credit to nongovernment:
- 1997: 24
- 1998: 2
- 1999: 5
- (1999 entry) …
- NDA of the NBU:
- 1997: 32
- 1998: 49
- 1999: 20
- Base money:
- 1997: 45
- 1998: 12
- 1999: 6
- Broad money:
- 1997: 34
- Balance of payments (in millions of dollars):
- Current account balance:
- 1997: -1,288
- 1998: -1,741
- 1999: -1,182
- 2000: -531
- 2001: 235
- (Projections) -1,775, -679, -806, -822
- (in percent of GDP)
- 1997: -2.6
- 1998: -3.6
- 1999: -3.5
- 2000: -1.8
- Net international reserves (end period) / Gross official reserves (end period):
- 1997: 2,375
- 1998: 1,460
- 1999: 1,240
- 2000: 1,335
- 2001: 2,100
- (Projections) 1,400, 2,319, 2,942
- In weeks of current year imports of goods:
- 1997: 6.3
- 1998: 4.0
- 1999: 3.5
- 2000: 3.6
- 2001: 3.8
- (Projections) 5.90, 7.0
- External liabilities (percent of GDP):
- 1997: 23.8
- 1998: 25.9
- 1999: 29.0
- 2000: 30.0
- 2001: 35.5
- (Projection) 32.9
- Debt service ratio (percent of exports of GNFS)4 5:
- 1997: 9.4
- 1998: 20.0
- 1999: 19.9
- 2000: 11.6
- 2001: 11.4
- (Projections) 17.6, 19.4
- Interest payments (percent of exports of GNFS)4:
- 1997: 3.2
- 1998: 5.9
- 1999: 4.4
- 2000: 4.1
- 2001: 4.3
Press Release No. 98/38 (September 4, 1998), International Monetary Fund