Press Release: IMF Announces Staff Level Agreement with Ukraine on US$14-18 Billion Stand-By Arrangement

IMF News, March 27, 2014

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Canonical URL: Press Release: IMF Announces Staff Level Agreement with Ukraine on US$14-18 Billion Stand-By Arrangement

IMF mission worked in Kyiv during March 4-25 to assess the economic situation and discuss an economic reform program.
Mission Chief for Ukraine: Nikolay Gueorguiev.
Date of release: March 27, 2014.
The mission reached a staff-level agreement on a two-year Stand-By Arrangement (SBA).
Financial support from the broader international community unlocked by the program amounts to US$27 billion over the next two years.
IMF assistance under the program will range between US$14-18 billion, with the precise amount to be determined once all bilateral and multilateral support is accounted for.
The agreement is subject to approval by IMF Management and the Executive Board; Executive Board consideration is expected in April following adoption of a package of prior actions by the authorities.

Exchange rate policy (until recently): pegged and overvalued.
Current account deficit: over 9 percent of GDP.
International reserves fell to a critically low level of two months of import in early 2014.
2013 fiscal deficit: 4½ percent of GDP.
2013 deficit of the state-owned gas company Naftogaz: nearly 2 percent of GDP.
Without policy action, combined budget/Naftogaz deficit would widen to over 10 percent of GDP in 2014.
Large foreign debt repayments loom in 2014-15.
Economic outlook: economy falling back into recession; no market access at present.

Restore macroeconomic stability.
Put the country on a path of sound governance and sustainable economic growth.
Protect the vulnerable in society.
Focus areas: monetary and exchange rate policies; the financial sector; fiscal policies; the energy sector; governance, transparency, and the business climate.

Exchange rate: National Bank of Ukraine (NBU) floated the exchange rate in February to safeguard reserves and address currency overvaluation.
Monetary policy: will target domestic price stability while maintaining a flexible exchange rate to eliminate external imbalances, improve competitiveness, support exports and growth, and facilitate gradual rebuilding of international reserves.
Inflation framework: NBU plans to introduce an inflation targeting framework over the next twelve months to firmly anchor inflation expectations.
Financial sector reforms will focus on:
- (i) ensuring that banks are sound, liquid, and well-capitalized;
- (ii) upgrading the regulatory and supervisory framework of the NBU, including complying with international best practice and supervision on a consolidated basis;
- (iii) facilitating resolution of non-performing loans in the banking sector.

Short-term: fiscal policy will secure priority spending during the coming months.
Medium-term: implement deeper fiscal adjustment over the medium-term.
Initial stabilization in 2014 will be achieved through a mix of revenue and expenditure measures.
For 2015-16, the program envisions a gradual expenditure-led fiscal adjustment—proceeding at a pace commensurate with the speed of economic recovery and protecting the vulnerable—aiming to reduce the fiscal deficit to around 2½ percent of GDP by 2016.

Aim: reduce the sector’s fiscal drag, attract new investment, and enhance efficiency.
Key step: commitment to step by step energy reform to move retail gas and heating tariffs to full cost recovery, along with early action towards that goal.
Mitigation: scaled up social protection to mitigate the impact on the most vulnerable.
Additional measures: improve the transparency of Naftogaz’s accounts and restructure the company to reduce costs and raise efficiency.

Central elements of the program include:
- adoption of a new procurement law to close loopholes allowing evasion of a competitive procedure;
- measures to facilitate VAT refunds to businesses;
- an independent quarterly audit of the Naftogaz accounts.
Coordination: measures will be fully developed with assistance from the World Bank, EBRD, and other international financial organizations.
IMF commitment: prepare a comprehensive diagnostic study covering the anti-corruption and governance framework, the design and implementation of laws and regulations, the effectiveness of the judiciary, and tax administration.

Program success depends on steadfast implementation of the authorities' economic reform program.
The package of prior actions by the authorities is a precondition for Executive Board consideration in April.
The program is expected to unlock US$27 billion in broader international support over the next two years, including IMF assistance of US$14-18 billion.

Press Release No. 14/131 — March 27, 2014. IMF COMMUNICATIONS DEPARTMENT. Media Relations.