IMF Survey: IMF Approves $15.1 Billion Loan for Ukraine

IMF News, August 11, 2010

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IMF’s Executive Board approved a $15.1 billion loan for Ukraine to put the country on the path to fiscal sustainability, reform the gas sector, and shore up the country’s banking system (announced on August 6).
Approval of the 29-month Stand-By Arrangement triggered an immediate disbursement of $1.89 billion.
Subsequent disbursements will be subject to quarterly reviews.
IMF First Deputy Managing Director John Lipsky: “The authorities are committed to addressing existing imbalances and putting the economy on a path of durable growth through important fiscal, energy, and financial sector reforms.”

Late 2008 and 2009 global economic crisis severely affected Ukraine: decline in demand for steel products, reduced access to capital markets, system-wide run on deposits, collapse of real GDP, plunge in domestic demand, and strained public finances.
A prior program supported by a $16.4 billion loan from the IMF in late 2008 helped restore macroeconomic and financial stability but went off track in late 2009; several structural weaknesses remained.
A government that took office in March has formulated a medium-term plan of economic reforms to tackle outstanding weaknesses and promote durable growth.

Core objective: comprehensive consolidation strategy to safeguard fiscal sustainability.
Targets and objectives:
- lead to a deficit that can be fully financed by markets by 2011;
- set the public and publicly guaranteed debt-to-GDP ratio firmly on a downward path, with the objective of stabilizing it below 35 percent by 2015.
- general government deficit targets of 3.5 percent of GDP in 2011 and 2.5 percent in 2012.
Policy measures:
- Fiscal adjustment reinforced in 2010 and deepened in 2011–12.
- Robust structural reforms of the pension system, public administration, and the tax system to broaden the tax base and curtail current spending.
- Efforts to free up resources for more spending on essential infrastructure.
- Aim to reduce the government’s role in the economy over time.

Priority: modernize the gas sector and restore financial viability of state-owned Naftogaz.
Commitment: Starting in 2011, Naftogaz's deficit will be eliminated, including through gas tariff increases and a price mechanism that depoliticizes price setting of public utilities.
Broader reforms: improve infrastructure and energy efficiency in coming months with support from other multilateral institutions.
Social mitigation:
- Program promotes better use of targeted social assistance programs to limit the impact of gas price increases on the most vulnerable.
- Government increasing transfers—to about 5 percent of households—using established support programs and has set up a working group to improve the targeting of social programs.

Objectives: restore and safeguard banks’ soundness, strengthen financial sector supervision, and create conditions for healthy private sector credit growth.
Key commitments:
- Complete bank recapitalization by end-2011.
- Several legislative initiatives to improve the framework of financial system oversight and bank resolution.
Statement by John Lipsky: "The planned recapitalization of banks and steps to strengthen the supervisory and institutional framework are essential to restore financial stability, tackle the mounting problem of impaired assets, and eliminate impediments for robust economic recovery.”
Monetary policy: develop a more robust monetary policy framework geared to reducing the still-high inflation under a flexible exchange rate regime; recently approved amendments to the National Bank of Ukraine’s law seen as important steps to enhance independence and accountability.

Rationale: considerable financing needs from maturing external liabilities, reduced access to international capital markets, and the need to strengthen central bank reserves.
Exceptional access granted: amounting to 728.9 percent of Ukraine’s quota in the Fund.
Program success conditions:
- Depends crucially on strong political resolve to implement planned policies and reforms.
- A robust policy framework would help coalesce support from the official sector and markets, boost long-term growth prospects, and ensure greater economic resilience to future shocks.

IMF Survey: IMF Approves $15.1 Billion Loan for Ukraine (August 11, 2010).