Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Stabilizing Ukraine’s Economy

September 2, 2014

  • IMF reviews Ukraine’s economic program; unlocks additional $1.39 billion
  • Strong program implementation; difficult measures taken amid volatile situation
  • Conflict in the East, disruption in gas supplies weigh on economy and society

Ukraine has generally implemented policies as agreed under its economic program, but with ongoing conflict and geopolitical tensions, the country needs to address short-term challenges while not losing sight of deep-seated structural problems and vulnerabilities.

Independence Square, Kiev, Ukraine.  The economic environment has become much more challenging than envisaged at the time of the program approval  (photo: Ian Trower/Robert Harding/Newscom)

Independence Square, Kiev, Ukraine. The economic environment has become much more challenging than envisaged at the time of the program approval (photo: Ian Trower/Robert Harding/Newscom)


In an interview shortly after the IMF’s first review of Ukraine’s economic program, Poul Thomsen, Acting Director of the IMF’s European Department, discusses the complex challenges of stabilizing and reforming the country’s economy.

“Overall, Ukraine’s program implementation is off to a promising start, but a number of adverse risks highlighted at program inception have materialized and compensatory measures are needed to bring the program back on track,” Thomsen said. “Furthermore, in light of the formidable risks, Ukraine needs to continue the path of strong policy performance and adhere to the planned reforms to stabilize the economy and restart growth.”

Last April Ukraine unveiled a comprehensive program of economic reforms which was backed by a $17.1 billion loan approved on April 30 by the IMF’s Executive Board. The completion of the first review unlocks an additional $1.39 billion, which would bring the total amount that Ukraine has received so far this year to $4.6 billion.

The loan, under a two-year Stand-By Arrangement, backs a policy program that aims to restore macroeconomic stability, promote sustainable growth, and strengthen economic governance and transparency.

IMF Survey: Is Ukraine’s economic program evolving as initially expected, given the ongoing conflict?

Thomsen: Program policies have generally been implemented as planned, as the authorities have persisted in taking difficult and sometimes socially challenging measures despite the extremely volatile political situation. In view of implementation slippages that marred previous Fund-supported programs with Ukraine, the authorities’ perseverance and determination are very encouraging. This augurs well for their ability to continue to keep the program on track amid a much worse environment than hoped for when the program was approved.

And unfortunately, the economic environment has become much more challenging than envisaged at the time of the program approval. In fact a number of risks have already materialized, including an intensification of the conflict in the eastern part of the country and an escalation of the gas price and arrears dispute between Ukraine’s national gas company Naftogaz and Russia’s oil and gas company Gazprom. This in turn has led to a notable deterioration in the economic outlook, budget performance, and balance of payment flows.

In light of these challenges, key program targets for end-2014 and beyond have been revised. In fact, some temporary deviations from the initial program targets will be accommodated, while compensatory measures related to foreign exchange market purchases, fiscal measures, and Naftogaz bill collections will also be put in place to ensure that key program objectives are met.

IMF Survey: What are the main risks to the program?  Do you think that it may need to be redesigned if the conflict continues?

Thomsen: The program is faced with major uncertainties related to the conflict. We are assuming that that the conflict will begin to subside in the coming months. But the balance of risks appears to be tilted to the downside. If this assumption does not hold, we would have to reconsider elements of the program strategy, and the program’s viability could hinge on larger assistance from Ukraine’s international partners. We will have to see. 

IMF Survey: Are you concerned about the fiscal outlook for the country, given possibly higher financial sector needs and a larger deficit in Naftogaz?

Thomsen: In light of the challenging economic prospects in the short term, the program’s fiscal strategy has been rebalanced allowing for a larger budget deficit this year to accommodate the temporary loss of revenue caused by the conflict and avoid undue economic and social hardship. Nonetheless, staying the course of fiscal adjustment in 2015 and beyond is necessary in view of the deteriorating debt dynamics and the significant financing constraints. Over the program period, the targeted structural adjustment over 2014-16 is now stronger than the one envisaged at the time of the program request.

The program has also taken a more conservative stance toward potential fiscal costs stemming from the financial sector and Naftogaz. It now envisages higher potential bank restructuring costs and larger support for Naftogaz to cover its increased deficit and repay external liabilities. These revised fiscal outlays will add to general government debt in 2014-15. Despite the higher outlays, Ukraine’s public and publicly guaranteed debt remains sustainable, although its peak level and attendant risks have increased. The authorities remain committed to eliminate the deficit of Naftogaz by 2018 as planned at the approval of the arrangement. As most of the deviation this year is due to one-off factors, this objective remains feasible.

IMF Survey: How do you assess the government’s commitment to the reform agenda, including on governance reforms?

Thomsen: The success of the program critically depends on the government’s ability to make a decisive break with a past riddled with weak governance, widespread corruption, and abysmal business climate. So far, notwithstanding some pushback from special interest groups, the new government has been determined to achieve this objective.

Specifically, in consultation with IMF staff, the government conducted a diagnostic study on governance issues to identify areas for reforms, focusing on tackling corruption and improving the business climate and the effectiveness of the judiciary. Following through with the plans to create an effective anti-corruption agency and strengthen the anti-money laundering framework, as well as steps to simplify the regulatory environment for business activity will be a critical test of the authorities’ willingness to address these issues. Over the course of the program, further structural reforms (supported by the IMF and other international partners) will be introduced, as priorities shift from economic stabilization toward raising potential growth.

While the situation in Ukraine is exceptionally difficult, I am encouraged by the fact that our new interlocutors in Kiev appear genuinely convinced that radical structural reforms are urgently needed. In fact, they are determined to spend time and political capital to push ahead with such reforms even as they deal with an acute and complex situation relating to the conflict in Eastern Ukraine.