Press Release No. 05/182

The following statement was issued today in Kiev, Ukraine, by an International Monetary Fund (IMF) mission:

"An IMF mission visited Kiev during July 25-August 2 to conduct the annual Article IV consultation discussions. The mission met with Finance Minister Pynzenyk and National Bank of Ukraine (NBU) Governor Stelmakh, and other senior officials. The discussions covered recent economic and financial developments, fiscal and monetary policies, the status of structural reforms, and economic prospects for 2006 and beyond.

"Since 2004, inflation pressures have mounted while real growth has slowed. Inflation is approaching 15 percent. Growth has eased from 12 percent in 2004 to 4 percent in the first half of 2005. Strong consumption should help increase the pace of growth next year, with a rebound in investment if uncertainty about the government's reprivatization plans is resolved quickly and the difficult investment climate improves.

"Reducing inflation remains the main macroeconomic challenge. The NBU has undertaken operations to absorb liquidity and, in April, took first steps toward a more flexible exchange rate. But these efforts have been insufficient to set inflation on a declining path. To reduce inflation to single digits, the NBU should increase operations to restrain base money growth, and adopt a monetary framework that enables it to better achieve its inflation goals, including by shifting to greater flexibility in the exchange rate.

"Fiscal policy has been tightened in 2005 and many tax loopholes closed, but large increases in public pensions and wages have stoked inflationary pressures. The budget performance so far this year is consistent with a general government deficit of 2½ percent of GDP, well below the 4½ percent of GDP deficit reached in 2004. However, the government should address risks that the 2005 deficit target may be exceeded due to VAT refund claims payable, possible shortfalls in transfers from state enterprises, and social spending pressures. To help control inflation, the mission recommends maintaining a tight fiscal stance in 2006 (a general government deficit somewhat lower than this year's target). This would leave little room for new spending initiatives or tax cuts, and require that further wage and pension increases be strictly limited.

"The authorities have articulated a vision of sweeping structural reforms, which the mission supports. However, much remains to be done to translate this vision into reality. Among the key steps the mission recommends are: (i) rapid and transparent resolution of the reprivatization issue; (ii) other steps to improve the difficult investment climate; (iii) early implementation of the remaining legislation needed for World Trade Organization (WTO) membership; (iv) measures to develop domestic capital markets; (v) continued efforts to strengthen the financial sector; and (vi) reforms to restore the financial viability of the public pension fund. These efforts should be undertaken in a cohesive and well-communicated government strategy that avoids sending mixed signals.

"Discussions between the IMF and the Ukrainian authorities will continue on Thursday and Friday, with the visit of IMF Managing Director Rodrigo de Rato, who will meet with President Yushchenko, Prime Minister Tymoshenko, and NBU Governor Stelmakh."