IMF Survey: Helping Ukraine Avoid a Hard Landing

IMF News, November 10, 2008

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A $16.4 billion loan for Ukraine was approved by the IMF's Executive Board on November 5 to help strengthen confidence and restore economic stability after Ukraine was hit by the global financial crisis.
The program is supported by a two-year Stand-By Arrangement with the IMF and was negotiated after the authorities requested IMF support in mid-October.

Ukraine's export structure: steel constitutes 40 percent of the country's exports, earning $17 billion a year in revenues.
Pre-crisis boom factors:
- Insatiable global demand for steel.
- Generous incomes policies passed on to the population.
- Rising capital inflows fueling a consumption boom and a rising current account deficit.
Overheating indicators by 2008:
- Inflation running at 25-30 percent.
- Wages hiked by 30-40 percent.
- Import bill growing by 50-60 percent.
Crisis triggers and transmission:
- Financial crisis hitting the world economy in mid-2008 curtailed access to international capital markets.
- Currency markets sold off the hryvnia.
- Credit rating agencies downgraded the country's debt.
- Ukrainian authorities sought IMF support in mid-October; a tentative agreement was reached later that month using the IMF's emergency lending procedures.

Exchange rate policy:
- Flexible exchange rate to act as a shock absorber and help restore competitiveness.
Banking sector measures:
- Recapitalization of viable banks to allow them to resume lending and minimize bankruptcies.
- Prompt resolution of banks with difficulties to speed recovery of the financial sector.
Fiscal and incomes policies:
- Prudent fiscal policy with a government aim to achieve a balanced budget in 2009 (subject to review in light of developments).
- Phased increases in energy tariffs to support fiscal consolidation.
- Balanced incomes policy: adjust minimum wage and other social transfers in line with projected inflation.
Social protection:
- Increase in targeted social spending amounting to 0.8 percent of GDP to shield vulnerable groups, with the government prepared to expand the safety net if necessary.

Three key government goals:
- Help the economy adjust to the new economic reality through a floating exchange rate and fiscal/incomes measures.
- Restore confidence and financial stability via bank recapitalization and prompt resolution of troubled banks.
- Protect vulnerable groups with targeted social spending increases of 0.8 percent of GDP.
Growth and inflation projections (conditional):
- The IMF believed the Ukrainian economy could be back at its estimated potential growth rate of 5-6 percent by 2011.
- Inflation expected to come down to single-digit levels.
- These projections assume the global economy starts recovering in the second half of 2009.

Downside risks:
- Recovery could be impeded if global conditions continue to deteriorate.
- Further deleveraging in global financial markets could hinder recovery.
Mitigants:
- The authorities' program is based on conservative assumptions.
- Contingency plans have been specified to address adverse scenarios.

IMF Survey: Helping Ukraine Avoid a Hard Landing