IMF Survey : Ukraine Unveils Reform Program with IMF Support

IMF News, April 30, 2014

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IMF Executive Board approved a $17.01 billion loan on April 30.
Loan is under a two-year Stand-By Arrangement.
$3.2 billion made immediately available; the remainder subject to frequent reviews.
Stand-By Arrangement entails exceptional access amounting to 800 percent of Ukraine's IMF quota.
Program expected to unlock additional international official assistance and restore private investor confidence.

Exchange rate and monetary policy
- Maintain a flexible exchange rate to restore competitiveness and foster accumulation of reserves.
- Focus monetary policy on domestic price stability.
- Keep public and minimum wage increases in line with productivity growth.

Financial sector and banking
- Maintain confidence in the financial system.
- Strengthen infrastructure for financial regulation and supervision.
- Ensure banks strengthen their balance sheets as necessary.

Fiscal policy and public finances
- Meet near-term fiscal obligations and gradually reduce the fiscal deficit.
- Stabilize budget revenue and embark on a medium-term fiscal adjustment path that distributes the burden equitably.
- Public debt placed on a declining path from 2015 on.

Energy sector
- Achieve a self-sustained energy sector and reduce its fiscal drain.
- Eliminate Naftogaz’s deficit by 2018 as a key benchmark toward energy independence.
- Raise Naftogaz revenue and reduce costs, increase gas and heating retail tariffs gradually, and implement structural and governance reforms in Naftogaz.

Governance and structural reform
- Implement comprehensive structural reforms including public procurement and tax administration.
- Reduce corruption, improve the business climate, and support high and sustainable growth.

Expenditure-side measures (emphasis)
- Suspend unaffordable wage and pension increases planned by previous government.
- Reduce public employment through attrition.
- Achieve savings on government purchases enabled by a new procurement law.
- Rationalize social assistance spending through better targeting and means testing.

Revenue-side measures
- Eliminate fraudulent tax evasion schemes.
- Shift to uniform excises on fuel.
- Increase excises on alcohol and tobacco.
- Close value-added tax loopholes.

Rationale and sequencing
- Without measures, combined deficit of government and Naftogaz would have reached 12 percent of GDP in 2014.
- Program targets a moderate structural fiscal adjustment; the budget deficit will increase between 2013 and 2014 taking into account the weaker economy.
- Emphasis in 2015-16 on gradual expenditure-led fiscal consolidation combined with measures to enhance public sector efficiency.

Tariff policy and impacts
- Envisaged gas and heating tariff increases are gradual but meaningful and broad-based.
- Even after programmed increases in 2014, household prices will remain several times lower than in other gas-importing European countries.
- Increases will lead to comparatively moderate increases in the share of household budgets spent on utilities.

Protection for the vulnerable
- Government launching a new social protection program: eligible families receive a benefit equal to the difference between pre- and post-increase gas and heating bills.
- 4.5 million families—about 27 percent of the total—will receive government support through existing and new social assistance schemes.
- In cooperation with the World Bank, social assistance benefits will be re-prioritized to a well-targeted means-tested framework.
- For a fraction of the cost of existing utility subsidies, the government could fund additional social assistance programs that would substantially reduce poverty.

Policy measures include:
- Adoption of a new procurement law to reduce exemptions from regular competitive procedures.
- Measures to facilitate value-added tax refunds for businesses.
- High-frequency audits of Naftogaz’s accounts.
IMF will prepare a comprehensive diagnostic study to assess governance arrangements, identify areas for strengthening, rank priorities, and propose remedial measures and time frames for implementation, likely supported under the program.

Context and risks
- Ukraine experiencing its second major economic crisis in six years.
- Vulnerabilities included an overvalued exchange rate, loose fiscal policy, sizable Naftogaz losses, large twin deficits, rising indebtedness, recurrent external financing difficulties, and reserve depletion.
- Considerable uncertainties and risks exist from outside (e.g., geopolitical tensions) and within (vested interests).

Ownership and capacity
- Authorities have taken strong ownership of economic reforms and implemented upfront actions demonstrating commitment.
- Success hinges on unwavering commitment despite resistance from entrenched vested interests.
- Program design includes measures to mitigate identified risks.

IMF Survey: Ukraine Unveils Reform Program with IMF Support — April 30, 2014