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

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

IMF Survey: Helping Ukraine Avoid a Hard Landing

November 10, 2008

  • IMF Board signs off on $16.4 billion loan for Ukraine
  • Program aimed at restoring financial, macroeconomic stability
  • Recapitalization will allow solvent banks to resume lending, minimizing bankruptcies

A $16.4 billion loan for Ukraine, approved by the IMF's Executive Board on November 5, will help the government strengthen confidence and restore economic stability after the country became the latest victim of the financial crisis sweeping the global economy.

Helping Ukraine Avoid a Hard Landing

Factory in Donetsk, Ukraine—where slowing global growth has resulted in sharp fall in demand for exports, especially steel (photo: Newscom)


Until the financial crisis hit the world economy in mid-2008, Ukraine was riding on the coattails of a global economy that had an insatiable demand for steel—a commodity that constitutes 40 percent of the country's exports, earning $17 billion a year in revenues. The government passed on the gains from high economic and steel exports growth to the population through generous incomes policies.

Together with rising capital inflows, this fueled an unprecedented consumption boom—and a rising current account deficit. By 2008, the economy had overheated, with inflation running at 25-30 percent, wages being hiked by 30-40 percent, and the import bill growing by 50-60 percent.

From boom to bust

When the financial crisis hit the world in the summer of 2008, Ukraine was among the many emerging markets to suffer from the fallout. Access to international capital markets was curtailed sharply, currency markets sold off the hryvnia, and the credit rating agencies downgraded the country's debt.

Ukraine's government acted proactively by putting together a comprehensive package of policies and requesting IMF support in mid-October. Later that month, a tentative agreement on a program was reached through use of the IMF's emergency lending procedures. And on November 5, the IMF's Executive Board gave the agreement its stamp of approval.

"The authorities' program, supported by a two-year Stand-By Arrangement with the IMF, aims to restore financial and macroeconomic stability," Deputy Managing Director Murilo Portugal said in a press release. "The commitment of leaders of the main political parties to the core elements of the program increases the prospects for successful program implementation. All these elements give confidence that the program will succeed in stabilizing economic and financial conditions," he said.

Restoring confidence

Ukraine's program is underpinned by policies aimed at restoring economic and financial stability. The package includes a flexible exchange rate, measures to recapitalize the banking system, and prudent fiscal and incomes policies, which take into account the need for additional social spending to address the impact of the recession on the population.

The government is hoping to achieve three key goals.

Help the economy adjust to the new economic reality. Allowing the exchange rate to float will act as a shock absorber, and will help the economy recover some of its lost competitiveness. The government is also planning to achieve a balanced budget in 2009, although this goal will be reviewed in light of economic developments. To achieve this, the authorities intend to phase in increases in energy tariffs. They also plan to pursue a balanced incomes policy that protects the population while slowing the rapid increase in prices: the minimum wage and other social transfers will be adjusted in line with projected inflation.

Restore confidence and financial stability. Recapitalizing viable banks will help shield the economy from a potential credit crunch. Dealing promptly with banks with difficulties will help the rest of the financial sector recover more quickly, and will allow solvent banks to resume lending to households and companies.

Protecting vulnerable groups in society. Ukraine already has an adequate social safety net, but the economic downturn is bound to put pressure on vulnerable groups. To counter the immediate effects of the crisis, the IMF-backed program envisages an increase in targeted social spending amounting to 0.8 percent of GDP to shield vulnerable groups. The government has indicated it is prepared to expand the social safety net further if necessary.

Recovery in sight

Ceyla Pazarbasioglu, the IMF's mission chief for Ukraine, told reporters on November 5 that the IMF believes the Ukrainian economy could be back at its estimated potential growth rate of 5-6 percent by 2011 while inflation will come down to single-digit levels, assuming that the global economy starts recovering in the second half of 2009.

"The road ahead is difficult," Pazarbasioglu told reporters. "But Ukraine has enormous potential and should be able to reach it with consistent implementation of adequate policies."

Asked about the worst-case-scenario for Ukraine, Pazarbasioglu said that the country's recovery could be impeded if global conditions continue to deteriorate and if there is further deleveraging in global financial markets. But she pointed out that the authorities' program is based on conservative assumptions and that contingency plans have been specified.

Comments on this article should be sent to imfsurvey@imf.org