Press Briefing IMF Executive Board Concludes the 2023 Article IV Consultation and the Second Review under the Extended Fund Facility Arrangement for Ukraine

December 12, 2023

Moderator: Hello and welcome today to the press conference for Ukraine. We've just completed the second review of Ukraine's program. And thank you very much for joining us both. Here are folks at the studio as well as people online. I know it's very late in Europe now, so we really appreciate you joining us at this late hour. So what we will do is we will the we just want to remind you that the press releases out on our website right now. If you need access, please let us know afterwards if you are having trouble accessing it. We will start with some opening remarks and then I will turn the floor over to you. So to begin, I will turn it over to Gavin Gray, who's the mission chief for Ukraine. He will start with some opening remarks. Also joining us today is not on Epstein and son on a team. They are the deputy mission chiefs for Ukraine. They will also contribute to the press conference. We will open with a few remarks and then I will turn the floor over to you for questions. Thank you. Gavin. Over to you.

Gavin Gray: The IMF Board completed the second review of Ukraine’s EFF earlier today. This will enable a disbursement of around US$900 million, taking total disbursements under Ukraine’s program to US$4.5 billion this year.

The authorities’ performance under the program has remained strong despite the extremely challenging war context. [Continued commitment to tackle the many tough reforms ahead in the program was underscored by President Zelenskyy during his visit to the IMF earlier today].

Specifically, the authorities met all quantitative performance criteria for end-June and indicative targets for end-September.

The majority of structural benchmarks for end-October were also met. Progress in the technically and politically challenging governance and anti-corruption reforms is an important achievement. In particular, the enactment of legislation to restore asset declarations and align AML legislation with international standards, and the adoption of legislation to strengthen the autonomy of the Specialized Anti-corruption Prosecutor’s Office are key recent actions.

The authorities have also begun implementing the FX Strategy developed by the National Bank of Ukraine under the program. Specifically, the NBU successfully exited its pegged exchange rate in early October, transitioning to a managed flexible exchange rate regime. It did so from a position of strength with inflation rapidly declining and FX reserves at a comfortable level. This represents an important step towards normalizing the monetary and exchange rate policy frameworks and operations.

Despite the war, Ukraine's economic indicators are showing strength. Given the stronger than expected recovery, the IMF upgraded Ukraine’s GDP growth to 4.5 percent in 2023, and it is expected to grow next year at 3-4 percent. However, the outlook remains exceptionally uncertain, with the war remaining the predominant risk.

Looking ahead, the authorities need to maintain robust policies to sustain the macroeconomic and financial stability. On the tax front, they will need to launch and vigorously implement the National Revenue Strategy and swiftly develop specific measures to advance domestic revenue mobilization. To help meet the financing needs, they should continue to tap the ample domestic liquidity in banks. Tax audits should resume promptly following enactment of the legislation last week, and long-delayed legislation to SOE corporate governance reforms should be adopted promptly.

An ambitious external commercial debt restructuring should be pursued in the first half of 2024 to help restore debt sustainability while creating much needed fiscal space.

We also concluded a very fruitful Article IV consultation—which takes a more medium-term approach to policymaking. We discussed how the current reforms under the EFF, particularly on public investment management and governance, will help support the reconstruction phase and lay the foundations for sustained, resilient and green growth in the post-war era.

Lastly, I would reiterate the criticality of the donors disbursing resources as promised and in a timely and predictable manner. Their support enables the authorities to maintain core functions of the state, including social spending to protect the most vulnerable segments of society. Without these resources, it will be hard to preserve the hard-won gains of macroeconomic and financial stability.

Reporter: Thank you so much for doing this. I want to build on my colleague's question there. Can you walk us through your, you know, worst case scenarios in these Article four, you know, proceedings, You look at the variables that affect countries revenue streams and things, but if there is some kind of collapse of support or debt, you know, fatigue. Right. Donor fatigue that we're starting to see or questions, how long can Ukraine can the Ukrainian government keep going with that if there is a collapse, for instance, or at least a reduction of the U.S. aid? And then have another question after that.

Gavin Gray: Thank you. The approach we're taking in this program is no different to any other country with no math program. So, we put in place a package with support from the international community of $122 billion. What we are doing, what we've done now in this review, as in any other program, is to look into the 12-month period ahead to determine where the resources may come from and to ensure that budgetary procedures are on track to deliver the funds which are assumed onto the program to secure the financing. Now, this is an ongoing process. It's quite dynamic and that is, of course, quite normal under IMF programs. I would say the risks to external financing are there, but they what they are the first review, they're not necessarily higher. Right now we have concrete budget proposals from key donors that represent those financing assurances. Those countries are going through their budgetary processes’ and we will have to wait for them to be completed. I would say those we certainly will discuss with the authorities steps they may take to address any short-term gaps. But above all, the expectation is that the donors will deliver on the promises. So this is approach we would take with any IMF program.

Reporter: Thank you so much, Mira. I'd like to ask about following on the questions already asked, in particular about the about the U.S. role here as the largest, largest shareholder in the IMF and what message you may have, you know, in terms of the need for a donor, you know, of the size of the U.S. to serve as a Bloomberg terminal or here what, you know, message you have for the U.S. in terms of, you know, what the current backlog or the current stand-off in terms of approving financing and the lack of assurances mean for, you know, for donor resources available to Ukraine overall and what you would want to see from the U.S..

Gavin Gray: So far this year, the donors have dispersed resources as planned and on time. And that has been important because it has enabled the authorities to execute their budgets to maintain the level of expected expenditure. And it's enabled the authorities to preserve adequate levels of reserves and thus preserve economic and financial stability. And this is a sign that the program has been working. And I would say this and this reflects a collective effort by the donors. And our sense is that for all donors, it is critical that they deliver on expectations in order to preserve that state of affairs. But broadly speaking, where we are is that we have budget proposals which are on the table and the processes have to have to play out. And that's something we're watching very, very, very closely and we have to wait for them to be completed.

Reporter:. Just a quick question about the meeting that happened today. I don't know if that's something that you're planning to address at all, the meeting that happened today. If there's anyone has a comment on that. I see. We've just received a statement, but I unfortunately haven't read it yet. And just another question around the question of the fiscal deficit. And you mentioned the Ukraine's fiscal deficit remains very high. I'm just sort of wondering if you can talk a little bit about how you would look to address that as we go forward. The high fiscal deficit.

Gavin Gray: I think the statement has been issued, which perhaps we could circulate to the reporters present if that's if that's not been made available. On your second question over the course of the program. We expect the authorities to progressively bring down the budget deficit, and that will require, in particular, measures to rebuild domestic revenues, tax revenues. We expect revenues to rise between 3 to 4 percentage points of GDP. A key initiative to achieve that is a national revenue strategy, which we expect the authorities to to launch this this month. And those measures will allow them to to bring down bring down the financing requirements and are consistent with the strategy of restoring debt sustainability and laying the foundations for long term growth. Thank you.

Reporter: Good evening. In Europe, this is a go to story from Politico Europe. I have two questions because as you might be aware, tomorrow the European Commission will be presenting a proposal to use profits from Russian frozen assets to provide support to Ukraine. Do you think this could be a feasible way of going around the scope of work or fatigue in Western Europe, in Western countries that is seizing profits from Russian assets? And I have the second question. If you provide an explanation as to why Ukraine is growing in GDP despite the effects of the of the war.

Gavin Gray: I will tackle the first question in. My colleague Natan Epstein will cover the growth question. We are closely following the debate on the possible usage of Russian frozen assets. We understand the rationale. The IMF is neutral across members and also mindful of the risks to the international monetary system. Have any such initiatives? Of course, if any revenues from frozen assets were to be made available to Ukraine, we would assess their impact on the budgets and Ukraine's program. Okay.

Natan Epstein: On the on the question of growth. So indeed, we have as you've seen in the press release, we have upgraded the growth forecast for this year from a range of one, two, 3% to 4.5%, and it might even end up slightly higher. Clearly, the Ukraine economy, in the face of these difficult, challenging war related challenges, have shown remarkable resilience in their capacity to recover from the sharp contraction in 2022. Ultimately, the policymakers in Ukraine have done an excellent job in responding to the war from the outset of the war. Both the government as well as the central bank. But we also see households, firms continuously adapting to the war environment, and this is reflected in stronger domestic demand, both in consumption and investment as confidence, even in the face of the war, is continuously improving, improving. As we said at the outset of the of the press conference, of course, the outlook and outlook is always extremely uncertain. And as much as we foresee continued expansion in GDP next year, the risks around this this outlook is exceptionally high given the exceptionally high uncertainty.

Reporter: I'd like to ask you possibly obvious think today's decision means that science has upgraded the program in terms of structural reforms, which is needed to be done by government. Could you please specify what exactly a Ukrainian side should do to in order to gain the next step, which is expected in in spring?

Gavin Gray: For the third review, which we expect to undertake in indeed in the spring we will assess the authority's economic performance at the end of December. So, we will assess the performance of the budgets, the performance of reserves relative to the quantitative performance criteria. We will also assess the performance on key structural reforms. Those includes the launch of the National Revenue Strategy, which is expected in December. We will also increase in detail the law on the specialized anti-corruption prosecutor's office, which was just been submitted to see whether it's in compliance with the structural benchmark. And we will also look at other structural benchmarks, the start of the year, including an initiative to identify short term, revenue measures. Above all, in addition to the authorities’ performance, we will reassess the whole macro framework based on available financing to assess whether it's still consistent with economic and financial stability.

Reporter: I was wondering, you were talking about the resilience of Ukrainian economy, and there was a lot of discussion in Ukraine about turning the economy more on the military footing. Do you expect any major transformations for the next year in Ukraine's economy?

Gavin Gray: We, of course, follow such debates closely. But in terms of the IMF role, we focus on the big picture in the whole economy. And what we're considering is the extent to which the growth can be sustained in 2024 and what mix of policies, fiscal and monetary policies will be required to sustain sustained growth, but also ensure stability in terms of the level of reserves and financial stability. That's where we're focusing our engagement.

Reporter: You the question that was just asked is something that's been on my mind too. Do you have any thoughts on pinning in economies’ growth to sort of its military industrial complex? Does that make sense to you from a strategic point of view, or is it something that you might be cautioning the authorities against given the realities of the situation?

Gavin Gray: It's not a direct issue which we would focus on. As I say, we're more focusing on considering the mix of policies which would restore stability on more broadly structural policies, which can help sustain growth in the medium term, particularly in the postwar reconstruction in the postwar reconstruction area. That's where we focus our attention.

Reporter: Just one more question about the outflow of refugees. So it's been a porous border. It's been inflows outflows. Can you tell us what your kind of assumption is for the return of those people who've left? And, you know, just some numbers, specific numbers. I think the estimates are that as many as 7 million people have left, although some have returned and continue to leave and go.

Sanaa Nadeem: Thanks for your question. So, indeed, this is a very important factor that we look at and coming up with our macro projections relative, given that we are assumption on the war, is that it continues through 2024 and the fact that we need some basic recovery spending to take place to encourage the return of migrants. It would take time for migrants to return to Ukraine. So we expect only a small net inflow next year in 2024, and by the end of our projection period, similar to what we had at the time of the first review in the program, approval, we expect there to be a net negative outflow of 2 million persons. Relative to the pre-war scenario. And this is assumption is not change relative to the program approval that's 2 million from the of get in that will stay.

Reporter: Can you share with them with expectations regarding the restructuring of commercial debt of Ukraine next year. Thanks.

Gavin Gray: And thank you for your question. So as communicated by the authorities at this point in March of 2022, there was a standstill provided by both private creditors and official creditors. The official creditor standstill is expected to go through to the end of the program, period while the private creditors standstill is expected to expire in August of 2024. So as communicated by the authorities, they expect to conclude the commercial debt restructuring by the middle of next year. And that is our assumption. On the timing of the restructuring.

Reporter: Thank you very much. I'd like to ask one clarification regarding a national revenue strategy, which you mentioned today. Does the IMF have in mind some parameters or specific condition of these this big issue?

Gavin Gray: The National Revenue Strategy  will be a comprehensive plan to strengthen tax revenue over time. It will include measures in the area of tax policy, tax administration and Customs Administration. So it's a comprehensive plan. It will be a living document as well. So, it will over time as the authorities and we learn more about what is feasible, The plan will evolve over time. But what is crucial is to progressively built up domestic revenue sources so that there will be such resources in the postwar era to cover what will be essential needs in terms of social spending, but also postwar restructuring. Thank you.

Moderator: Thank you very much. Are there any more questions in the room or online? I don't see any questions. I will ask Gavin and the team if you want to have any closing remarks or any highlights that you may have missed.

Gavin Gray: The completion of the second review is a testament of the strong performance by the Ukrainian authorities in extremely challenging times, not least that they have completed the majority of the structural benchmarks. Most of the others also have been completed without delay. And this includes reforms in the governance space, which are technically and politically challenging. So, the structural performance has been strong. The authorities have also met the all the quantitative performance criteria. And meanwhile, we've upgraded growth. We see inflation coming down. We see stability. So, this is a strong basis to complete the second review and we will continue working with the authorities and donors to help sustain that. Thank you.


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