IMF Executive Board Concludes 2016 Article IV Consultation with Ukraine
IMF News, April 4, 2017
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- Published: April 4, 2017
Economic developments and recent performance
- Economy recovered from severe crisis in 2014–15 and grew by 2.3 percent in 2016.
- Flexible exchange rate, tight fiscal and monetary policies reduced internal and external imbalances.
- Current account deficit fell from over 9 percent of GDP in 2013 to 3.6 percent of GDP in 2016.
- International reserves doubled to US$15 billion (end-2016), though described as still low.
- Overall fiscal deficit—including the energy sector’s quasi-fiscal losses—declined from 10 percent of GDP in 2014 to 2.3 percent of GDP in 2016.
- Inflation declined from a peak of 61 percent in April 2015 to 12.4 percent by end-2016, within the National Bank of Ukraine (NBU) target range.
- Important structural achievements in the energy and financial sectors; limited progress in privatizing state-owned enterprises, land and pension reforms, and combating corruption.
Remaining challenges and risks
- Public debt projected to increase to close to 90 percent of GDP in 2017; remains high for an emerging market economy.
- International reserves, while higher, remain low by any metric.
- Financial system remains heavily dollarized; non-performing loans have reached a record high.
- Public sector described as large and inefficient, with pressures to increase public spending.
- Recent developments in the country have increased risks to the program and recovery.
Outlook and projections
- Growth projections:
- 2017: 2 percent (due to impact of the blockade in the eastern part of Ukraine)
- 2018: 3 percent
- Medium term: around 3½–4 percent, conditional on a major acceleration in structural reforms
- Inflation expected to gradually decline to NBU’s medium-term target of 5 percent in the coming years.
- Reserve adequacy (IMF composite index) expected to be achieved by end-2018.
- Public debt projected to drop below 70 percent of GDP by 2021, conditional on successful completion of the debt operation, preservation of fiscal consolidation, and gradual pickup of growth.
Executive Board assessment — findings and recommendations
- Commended decisive policy actions that returned growth, reduced inflation, increased reserves, and reduced imbalances.
- Recognized efforts: raising gas and heating tariffs, reigning in large budget deficits, cleaning up banking system, maintaining a flexible exchange rate.
- Urged acceleration of structural reforms to improve business environment and attract investment:
- Faster progress in privatization.
- Development of a land market.
- Reform of the large state-owned enterprise sector.
- Welcomed creation of new anticorruption institutions; strongly urged further strengthening and establishment of an independent anticorruption court to achieve concrete results.
- Emphasized need to consolidate fiscal progress to place public debt on a steady downward path and undertake structural fiscal reforms to secure medium-term sustainability:
- Adopt comprehensive pension reform without further delay, including increasing the effective retirement age to address pension fund deficits.
- Contain the wage bill, improve revenue and public administration, and implement health and education reforms.
- Financial sector recommendations:
- Continue measures to safeguard financial stability; nationalization of Ukraine’s largest bank welcomed.
- Pursue all available means to ensure repayment of loans to minimize cost to taxpayers.
- Ensure all banks meet capital and regulatory requirements and address high levels of nonperforming loans.
- Monetary policy and NBU:
- Agreed that NBU’s clear mandate and independence were key to progress.
- Preserve NBU’s strong institutional framework.
- Further relaxation of monetary policy and administrative measures should be contingent on continued progress in safeguarding financial stability and increasing reserves.
- Debt restructuring:
- Stressed importance of continued efforts to reach an agreement on restructuring Ukraine’s debt held by Russia in line with program parameters and the Fund’s policy on lending into arrears to official bilateral creditors.
Selected economic indicators (highlights from table)
- Nominal GDP (billions of Ukrainian hryvnias): 2014: 1,587; 2015: 1,989; 2016: 2,383; 2017 (Proj.): 2,734; 2018 (Proj.): 3,074.
- Real GDP (percent change): 2014: -6.6; 2015: -9.8; 2016: 2.3; 2017 (Proj.): 2.0; 2018 (Proj.): 3.2.
- GDP deflator: 2014: 15.9; 2015: 38.9; 2016: 17.1; 2017 (Proj.): 12.5; 2018 (Proj.): 9.0.
- Consumer prices (period average): 2014: 12.1; 2015: 48.7; 2016: 13.9; 2017 (Proj.): 11.5; 2018 (Proj.): 9.5.
- Nominal monthly wages (average): 2014: 6.1; 2015: 21.1; 2016: 23.3; 2017 (Proj.): 28.0; 2018 (Proj.): 12.0.
- Unemployment rate (ILO definition; percent): 2014: 9.3; 2015: 9.1; 2016: 8.8; 2017 (Proj.): 8.7.
- General government balance (percent of GDP): 2014: -4.5; 2015: -2.2; 2016: -3.0; 2017 (Proj.): -2.5.
- Overall balance (including Naftogaz balance): 2014: -10.0; 2015: -2.3.
- Public and publically-guaranteed debt (percent of GDP): 2014: 70.3; 2015: 79.3; 2016: 81.2; 2017 (Proj.): 89.8; 2018 (Proj.): 85.3.
- Broad money (end of period, percent change): 2014: 5.3; 2015: 3.9; 2016: 10.9; 2017 (Proj.): 10.8; 2018 (Proj.): 19.2.
- Credit to nongovernment (end of period, percent change): 2014: 12.4; 2015: -1.0; 2016: -1.1; 2017 (Proj.): 7.8; 2018 (Proj.): 8.4.
- Interbank o/n rate (annual average, percent): 2014: 12.2; 2015: 21.5; 2016: 16.9.
- Current account balance (percent of GDP): 2014: -4.2; 2015: -0.3; 2016: -3.6; 2017 (Proj.): -3.7.
- Foreign direct investment (percent of GDP): 2014: 0.2; 2015: 3.3; 2016: 3.6; 2017 (Proj.): 1.7; 2018 (Proj.): 2.5.
- Total external debt (percent of GDP): 2014: 95.4; 2015: 130.0; 2016: 123.8; 2017 (Proj.): 127.4; 2018 (Proj.): 126.3.
- Gross reserves (end of period, billions US$): 2014: 7.5; 2015: 13.3; 2016: 15.5; 2017 (Proj.): 21.8; 2018 (Proj.): 29.5.
- Months of next year’s imports of goods and services: 2014: 1.8; 2015: 3.1; 2016: 3.4; 2017 (Proj.): 4.6; 2018 (Proj.): 5.8.
- Percent of IMF composite metric (float): 2014: 25.1; 2015: 51.4; 2016: 61.9; 2017 (Proj.): 82.0; 2018 (Proj.): 102.4.
- Hryvnia per U.S. dollar (end of period): 2014: 15.8; 2015: 24.0; 2016: 27.2.
- Real effective rate (deflator-based, percent change): 2014: -20.9; 2015: -11.2.
Italic: IMF Communications Department, Press Release No. 17/112, April 4, 2017.