Press Release: IMF Executive Board Concludes 2013 Article IV Consultation, First Post-Program Monitoring, and Ex Post Evaluation of Exceptional Access with Ukraine

IMF News, December 19, 2013

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Press Release: IMF Executive Board Concludes 2013 Article IV Consultation, First Post-Program Monitoring, and Ex Post Evaluation of Exceptional Access with Ukraine

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• Published: December 19, 2013

Economic outlook and growth

• The Ukrainian economy has been in recession since mid-2012; in January–September 2013 GDP contracted by 1¼ percent y-o-y.
• Consumer prices stayed flat, held down by decreasing food prices and tight monetary policy.
• Weak external demand and impaired competitiveness kept the trailing 12-month current account deficit elevated at about 8 percent of GDP by end-September.
• International reserves fell below the equivalent of 2½ months of imports by end-October 2013.
• Under currently planned policies, modest growth should return in 2014, driven by improvements in external demand, strong grain exports, and continuing consumption expansion.
• The outlook is subject to significant risks from inconsistent policy mix and heightened political and economic uncertainty.

Fiscal stance, public finances, and energy sector

• The fiscal stance loosened in 2012–13, contributing to vulnerabilities.
• Large pension and wage increases, generous energy subsidies, and soccer cup spending led to a widening of the combined deficit of the general government and Naftogaz to 5½ percent of GDP in 2012.
• In 2013, the combined government-Naftogaz deficit is projected to expand to 7¾ percent of GDP.
• Overall energy subsidies in Ukraine reached about 7½ percent of GDP in 2012.
• Very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage high energy consumption.
• Naftogaz’s losses in 2013:H1 more than doubled and the company is late on payments for imported gas.

Monetary policy and external sector policies

• Tight monetary policy in 2012–13 focused on defending exchange rate stability while accommodating the expanding fiscal deficit.
• Base money increased by nearly 15 percent in the year to September 2013.
• Authorities tightened foreign exchange regulations and controls to ensure steady supply of foreign exchange, increasing transactions costs.
• Directors noted the overvalued exchange rate contributed to a widening external current deficit, loss of competitiveness, and steady depletion of international reserves.
• Directors advised allowing greater exchange rate flexibility and accelerating the transition to an inflation targeting framework.

Banking sector and financial stability

• The banking system appears stable at present, but vulnerabilities persist.
• High average capital adequacy ratio of 18 percent provides some cushion against an elevated non-performing loan ratio of 14 percent.
• High interest rates offered by banks induced a more than 30 percent increase in hryvnia deposits in the year to November, while credit to the economy expanded only modestly.
• Directors recommended enforcing consolidated supervision and high reporting standards, proceeding with independent audits of vulnerable banks, and developing contingency plans to support banks if needed.

IMF engagement, program status, and exceptional access ex-post evaluation (EPE)

• Ukraine remains current on all its payments to the Fund; authorities reaffirmed commitment to repay all outstanding Fund credit.
• On the obligation basis, outstanding Fund credit to Ukraine would decline below 200 percent of quota by February 2014 and below 100 percent of quota by September 2014.
• The EPE of the 2010 Stand-By Arrangement finds the SBA-supported program was appropriately designed and delivered achievements including the passage of pension reform in 2011.
• The program quickly went off-track as the authorities stopped implementing agreed policies, reflecting insufficient ownership.
• Key shortcomings that derailed the 2010 SBA included reluctance to sufficiently adjust energy prices and increase exchange rate flexibility.
• EPE lessons:
  • Exceptional access and long-duration arrangements may be too ambitious in countries with low program policy ownership; arrangements with lower access focused on critical areas may have better prospects of success.
  • A mechanism to terminate off-track arrangements could be useful in designing future IMF programs, especially when program ownership is an issue.
  • Prior actions remain a powerful tool for implementing program policies; they were responsible for the majority of achievements under the 2010 SBA.

Executive Board Assessment — recommended comprehensive policy adjustments

• Directors noted the current macroeconomic policy mix generated large external and fiscal imbalances and contributed to deepening the recession.
• Recommended areas for comprehensive policy adjustments:
  • Curtail the fiscal and external current account deficits.
  • Phase out energy subsidies with upfront, meaningful, and broad-based tariff increases, accompanied by measures to protect the most vulnerable households.
  • Strengthen the banking sector.
  • Improve external competitiveness.
• Fiscal consolidation measures advised:
  • Rationalize public procurement.
  • Restrain growth in public sector wages and employment.
  • Limit pension indexation to inflation.
  • Refrain from unaffordable tax cuts.
• Energy sector reforms urged to reduce quasi-fiscal losses, attract new investments, and improve governance; energy-saving reforms, increased domestic gas production, and import diversification welcomed but cannot substitute for tariff adjustments.
• Structural reforms to improve business climate encouraged: enhance institutional capacity, strengthen the judicial system, improve law enforcement and tax administration, and eradicate corruption.
• On program design for Ukraine going forward, Directors agreed arrangements with lower access and strong prior actions would be most appropriate; most Directors preferred shorter duration arrangements, though some noted that the structural nature of many problems calls for a sufficiently long time horizon.

Ukraine — Selected Economic Indicators, 2010–14 (As of December 2, 2013)

• Nominal GDP (billions of Ukrainian hryvnias): 2010: 1,083; 2011: 1,302; 2012: 1,409; 2013: 1,432; 2014 (Projections): 1,503
• Real GDP (percent change): 2010: 4.1; 2011: 5.2; 2012: 0.2; 2013: -0.3; 2014 (Projections): 1.0
• GDP deflator (percent change): 2010: 13.8; 2011: 14.3; 2012: 8.0; 2013: 2.0; 2014 (Projections): 4.0
• Unemployment rate (ILO definition; percent): 2010: 8.1; 2011: 7.9; 2012: 7.5; 2013: (no value reported)
• Consumer prices (period average, percent): 2010: 9.4; 2011: 0.6; 2012: 1.6; 2013: (no value reported)
• Core inflation (period average) 1/ (percent): 2010: 8.6; 2011: 7.7; 2012: 3.3; 2013: 1.4
• Nominal monthly wages (average, percent change): 2010: 17.7; 2011: 17.5; 2012: 14.9; 2013: 9.0; 2014 (Projections): 5.6
• Real monthly wages (average, percent change): 2010: 7.6; 2011: 8.8; 2012: 14.2; 2013: 9.3; 2014 (Projections): 3.9
• General government balance (percent of GDP) 2/: 2010: -5.8; 2011: -2.8; 2012: -4.5; 2013: -5.7; 2014 (Projections): -4.6
• Overall balance (including Naftogaz operational deficit, percent of GDP): 2010: -7.4; 2011: -4.3; 2012: -5.5; 2013: -7.7; 2014 (Projections): -6.6
• Structural general government balance (percent of GDP): 2010: -3.7; 2011: -3.0; 2012: -4.1; 2013: (no value reported)
• Public debt (end of period, percent of GDP) 3/: 2010: 40.5; 2011: 36.8; 2012: 37.4; 2013: 41.3; 2014 (Projections): 44.7
• Base money (end of period, percent change): 2010: 15.8; 2011: 6.3; 2012: 6.4; 2013: 14.7; 2014 (Projections): 12.9
• Broad money (end of period, percent change): 2010: 22.7; 2011: 12.8; 2012: 16.8; 2013: 14.1; 2014 (Projections): (no value reported)
• Credit to nongovernment (end of period, percent change): 2010: 1.1; 2011: 9.5; 2012: 2.2; 2013: 7.8; 2014 (Projections): 8.2
• Interbank overnight rate (annual average, percent) 4/: 2010: 5.8; 2011: 10.8; 2012: …; 2013: (no value reported)
• Current account balance (percent of GDP): 2010: -2.2; 2011: -6.3; 2012: -8.1; 2013: -8.3; 2014 (Projections): -8.2
• Foreign direct investment (percent of GDP): 2010: 4.2; 2011: 4.3; 2012: 3.8; 2013: 2.4
• Gross reserves (end of period, billions of U.S. dollars): 2010: 34.6; 2011: 31.8; 2012: 24.5; 2013: 18.5; 2014 (Projections): 11.2
• Months of next year's imports of goods and services: 2010: 3.7; 2011: 3.0; 2012: 1.3; 2013: (no value reported)
• Percent of short-term debt (remaining maturity): 2010: 73.3; 2011: 55.4; 2012: 40.0; 2013: 32.3; 2014 (Projections): 18.8
• External debt (percent of GDP): 2010: 86.0; 2011: 77.2; 2012: 76.6; 2013: 76.7; 2014 (Projections): 75.3
• Goods exports (annual volume change in percent): 2010: 7.1
• Goods imports (annual volume change in percent): 2010: 15.0; 2011: 22.6; 2012: 2.6
• Goods terms of trade (percent change): 2010: 0.3; 2011: -3.2
• Exchange rate — Hryvnia per U.S. dollar (end of period): (no values reported in table)

1/ Excludes unprocessed food, fuel, and administrative services. 2/ The general government includes the central and local governments and the social funds. In 2013, the general government deficit includes recognized arrears (1.3 percent of GDP). 3/ Government and government-guaranteed debt (includes debt to IMF). 4/ For 2013, average of rates for the first ten months.

Press Release No. 13/531, December 19, 2013, IMF Communications Department.

References

• Ukraine and the IMF
• Press Releases
• PRESS CENTER
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