Press Release: IMF Executive Board Approves 2-Year US$17.01 Billion Stand-By Arrangement for Ukraine, US$3.19 Billion for immediate Disbursement
IMF News, April 30, 2014
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- Published: April 30, 2014
Stand-By Arrangement (SBA) — size and disbursement
- Arrangement amount: SDR 10.976 billion (about US$17.01 billion, 800 percent of quota).
- Approved under the Fund's exceptional access policy.
- Immediate disbursement: SDR 2.058 billion (about US$3.19 billion).
- Of the immediate disbursement, SDR 1.29 billion (about US$2 billion) allocated to budget support.
- Subsequent disbursements:
- Second and third disbursements based on bi-monthly reviews and performance criteria.
- Remainder of program period subject to standard quarterly reviews and performance criteria.
Program objectives and core policy pillars
- Overall aim: restore macroeconomic stability, strengthen economic governance and transparency, and launch sound and sustainable economic growth while protecting the most vulnerable.
- Program focuses:
- Maintaining a flexible exchange rate to restore competitiveness.
- Stabilizing the financial system.
- Gradually reducing the unaffordable fiscal deficit.
- Eliminating losses in the energy sector while enhancing social safety nets.
- Decisively breaking with problematic past governance practices.
Monetary and exchange rate policy
- Authorities committed to maintaining a flexible exchange rate regime following the floating of the hryvnia.
- Monetary policy will focus on domestic price stability.
- Initially adopt a money-based monetary framework.
- With IMF technical assistance, plan to adopt inflation targeting by mid-2015.
Financial sector reforms
- Objectives:
- Stabilize the financial system and maintain confidence in banks.
- Strengthen balance sheets and financial regulation and supervision.
- Measures:
- Diagnostic studies of the largest banks to assess resilience to economic shocks.
- Reforms to restore confidence and stem deposit outflows.
- Review and upgrade regulatory and supervisory framework.
- Steps to facilitate restructuring of banks’ non-performing loans (NPLs).
Fiscal policy and public finances
- Fiscal strategy:
- Meet near-term spending obligations and gradually reduce the fiscal deficit over the medium-term.
- Authorities target a structural fiscal adjustment of 2 percent of GDP over the program horizon.
- For 2015–16, aim to reduce the fiscal deficit to about 3 percent of GDP by 2016 through further gradual expenditure-based fiscal adjustment proceeding at a pace matching the economy’s speed of recovery.
- Wage policy:
- Aim to keep the minimum wage and public wage growth in line with productivity.
Energy sector reforms
- Objective: eliminate large quasi-fiscal losses of Naftogaz by 2018 and strengthen transparency and governance.
- Measures:
- Gradual, meaningful, and broad-based gas and heating tariff increases starting from May 2014.
- Enhanced social assistance measures to protect the poorest from energy price adjustments.
- Structural and governance reforms in Naftogaz to improve governance and reduce operational costs.
- Importance of resolving gas dispute:
- Early agreement on repayment of accumulated arrears and the gas price dispute with Gazprom emphasized to prevent disruptions in energy trade.
Governance, transparency, and business climate reforms
- Measures already taken and planned:
- New public procurement law enacted to reduce misuse of public resources.
- Address governance issues in state-owned companies and seek recovery of stolen assets.
- Build capacity for enforcement of anti-money laundering and anti-corruption legislation.
- Enhance effectiveness of the judiciary and tax administration.
- Intended outcome: reduce corruption, improve the business climate, and remove long-standing barriers to growth.
Recent economic developments (context)
- Macroeconomic vulnerabilities and past policy failures:
- Pegged and overvalued exchange rate led to deterioration of competitiveness and slower export growth.
- Current account deficit reached over 9 percent of GDP in 2013.
- Public debt rose to 41 percent of GDP; external debt at 79 percent of GDP.
- International reserves fell to around two months of imports.
- Policy shift:
- National Bank of Ukraine allowed the exchange rate to float in February, helping stabilize financial markets.
- Ongoing challenges:
- Economic activity contracting; international debt markets closed.
- Government revenues fallen due to political uncertainty and weak economic performance.
- Political tensions in some regions; early presidential elections scheduled for May 25, 2014.
Macroeconomic projections and key statistics
- 2014 outlook:
- Real GDP expected to contract by about 5 percent in 2014.
- Inflation expected to reach 16 percent at end-2014.
- Current account deficit expected to fall to about 4½ percent of GDP.
- Gross international reserves expected to stabilize at around 2½ months of import coverage.
- Public sector debt expected to rise to 57 percent of GDP.
- External debt expected to rise to just below 100 percent of GDP.
- Unemployment rate: 8½ percent in 2014.
- 2015–16 and medium term:
- Real GDP growth expected to rebound to 2 percent in 2015, rising to 4-4½ percent in the medium term.
- Unemployment expected to decline to 7½ percent by 2016.
- Exports projected to grow by over 6 percent a year in 2015–16.
- By end-2016, inflation expected to fall to about 6 percent.
- NBU expected to build international reserves to cover nearly 4 months of imports by end-2016.
Risks, conditionality, and implementation challenges
- Risks:
- Program risks described as high.
- Further escalation of tensions with Russia and unrest in the east pose a substantial risk to the economic outlook.
- Implementation conditions:
- Steady and rigorous implementation of policy measures and maintaining broad public support critical for success.
- Successful implementation would unlock sizable international official assistance and private capital inflows.
Press Release No. 14/189, April 30, 2014 — IMF Communications Department