## The Case for Supporting Ukrainian Economic Reforms, Remarks by David Lipton, IMF First Deputy Managing Director, delivered at Peterson Institute, April 7, 2015

_IMF News, April 7, 2015_

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## Bibliographic details
- Published: April 7, 2015

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### Ukraine — The Past: diagnosis and context
- Ukraine’s post-independence trajectory marked by “lost opportunities,” with economic mismanagement, corruption, oligarchy, and half-hearted reforms obstructing growth.
- Key historical and comparative points:
  - Independence in 1991; per capita income at independence was higher than Poland’s, but by 2013 Ukraine’s standard of living had fallen “more than 60 percent behind Poland.”
  - Since 1991, Ukraine entered into eight IMF programs, “none of which achieved the objective of prompting sustained reform.”
- Macroeconomic deterioration before the 2014–15 crisis:
  - After the 2009/10 program ended unsuccessfully, wages and costs rose while productivity did not, eroding competitiveness; GDP stopped rising and exports stagnated.
  - In early 2013, warnings were given that inaction risked crisis.
- Crisis drivers and 2014 outcomes:
  - Loss of Crimea and conflict in Donbass caused sharp output declines; industrial production, construction, retail sales, and household income fell.
  - Fourth quarter of 2014: “GDP contracted 14.8 percent from a year earlier.”
  - Unemployment approaching double digits.
  - Banking system stress: “deposits fell by 28 percent by end March of this year” and “nonperforming loans soared to nearly 20 percent of all loans at the end of 2014.”
  - Hryvnia depreciation: “lost two-thirds of its value in the past 15 months.”
  - Inflation “spiked above 40 percent.”
  - Energy sector fiscal drain: energy subsidies and Naftogaz support “equal to more than 7 percent of GDP.”

### Ukraine — The Present: IMF program, financing, and stabilization measures
- IMF support and program framing:
  - IMF approved “$17.5 billion of financing to Ukraine as part of a four-year program under our Extended Fund Facility.”
  - Program goals: “to stabilize Ukraine's deeply destabilized finances; to restore growth; and to support the long-overdue modernization.”
- Financing need and external support:
  - Ukraine’s external financing needs estimated at “about $40 billion over the next four years.”
  - This sum equals “nearly one-third of estimated 2014 GDP.”
  - Most financing is “already pledged by the international community,” with the remainder to be addressed via a debt operation under discussion.
- Reserve targets and sequencing:
  - Program aims to “triple Ukraine’s official reserves to about $18 billion at the end of this year from just $5.6 billion before agreement was reached with the Fund.”
  - Reserves projected to reach “$35 billion by end-2018—slightly more than 100 percent of the Fund’s reserve adequacy metric.”
  - Reserve import cover likely to reach “three months by June compared with less than one month’s cover before the IMF agreement,” aided by front-loaded Fund disbursements and bilateral loans and swaps.
- Stabilization policy mix and outcomes sought:
  - Restore stability to the foreign exchange market through “appropriately tight monetary targets and temporary administrative measures”; recent stabilization and reversal of reserve drain noted.
  - Inflation objective: “help inflation recede toward single digits by end 2016” once one-off effects fade.
  - Debt sustainability and restructuring:
    - “Public and publicly guaranteed debt is projected to peak at 94 percent of GDP in 2015.”
    - Restructuring aims to “secure $15 billion in additional financing over 2015-18 to bring debt below 71 percent of GDP by 2020,” and to avoid repayment bunching post-program.

### Ukraine — The Future: restoring growth and structural reform agenda
- Core growth challenges and policy directions:
  - Restore competitiveness undermined by prior exchange rate overvaluation — achieved through exchange rate depreciation and flexibility at the new level.
  - Fiscal and quasi-fiscal restraint to reduce crowding out, including addressing Naftogaz’s quasi-fiscal deficit.
- Energy sector reforms:
  - Significant household gas price and heating tariff increases implemented.
  - Prior gas prices “stood at or below 20 percent of cost recovery”; the “remaining 80 percent of costs has added to the broad public sector deficit.”
  - Measures to protect vulnerable populations: “new and strengthened targeted programs” being put in place.
- Banking sector repair:
  - Actions include resolving insolvent banks via recapitalization and liquidation; recapitalization needs included in program architecture.
  - Future requirement that large financial institutions “are kept well capitalized by their owners” to reopen sustainable credit flows.
- Broader structural reforms to attract investment and sustain growth:
  - Address banking ownership structures that “too often funnels excessive lending to insiders.”
  - Strengthen regulatory and supervisory frameworks to align with international best practices.
  - Improve business climate via deregulation, tax administration reform, transparency, and state-owned enterprise reforms.
  - Specific Naftogaz measures: “an independent audit of Naftogaz’s receivables, and a restructuring of the company to separate its transmission and distribution arms.”
  - Anti-corruption priorities: strengthened anti-corruption legislation, measures to enhance judicial effectiveness, and steps to curb oligarchic influence.
- Social protection and equity measures:
  - “Total spending on social assistance programs will reach 4.1 percent of GDP this year, an increase of 30 percent from 2014.”
  - Energy bill assistance “will in fact quadruple from 6 billion hryvnia in 2014 to 24 billion hryvnia in 2015.”
  - “Unemployment benefits will rise 15 percent.”
- Risks and contingency considerations:
  - Principal downside risk: renewed intensification of the conflict in the East could undermine recovery and program sustainability.
  - Political risk: maintaining public support for difficult reforms, particularly among those hardest hit by the crisis.
- IMF stance and conditionality summary:
  - IMF support contingent on Ukraine pursuing the reform path and demonstrating results; the Fund’s role is “to support members in crisis provided they are trying to put themselves right.”
  - Program combines stabilization, debt-restructuring efforts, bank-sector repair, energy pricing reform with targeted social protection, and broad governance and structural reforms.

*Source: The Case for Supporting Ukrainian Economic Reforms, Remarks by David Lipton, IMF First Deputy Managing Director, delivered at Peterson Institute, April 7, 2015*

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## References

- [Russian Federation and the IMF](http://www.imf.org/external/country/RUS/index.htm)
- [Ukraine and the IMF](http://www.imf.org/external/country/UKR/index.htm)
- [Republic of Poland and the IMF](http://www.imf.org/external/country/POL/index.htm)
- [The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp040715_