## 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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## Bibliographic details
- Published: December 19, 2013

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### 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.*

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_Source: https://www.imf.org/en/news/articles/2015/09/14/01/49/pr13531_