Journal Issue

Statement by the Staff Representative on Ukraine, August 29, 2014

International Monetary Fund. European Dept.
Published Date:
September 2014
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1. This statement provides information that has become available since the staff report for the first review of the SBA-supported program was circulated to the Executive Board. This information does not alter the thrust of the staff appraisal.

2. Recent data point to a deepening recession in line with the revised program. Industrial production fell by 5.8 percent y-o-y in January–July 2014 (from 4.7 percent in 2014:H1) with significantly more pronounced contractions in the conflict-ridden regions of Donetsk and Luhansk. Retail trade turnover continued its downward trend as well, registering a decline of 1 percent in real terms for January–July. The Consensus Forecast in August downgraded growth in 2014 but remains broadly similar to staff projections (-5.6 percent and 0.8 percent in 2014-15, respectively). A larger decline of imports of goods and services (-16.6 percent) compared to exports (-9.9 percent) has more than halved the current account deficit in 2014:H1 (-64.2 percent y-o-y), in line with staff projections.

3. The National Bank of Ukraine (NBU) has taken several measures to contain depreciation pressures on the hryvnia. The NBU has hiked its overnight refinancing and deposit certificates rate by 250 basis points. Furthermore, the existing surrender requirement for export and some other foreign currency proceeds was raised to 100 percent for the next three months (from 50 percent up to August 20). The NBU has also tightened verification requirements for advance trade payments and some other client transactions. However, the complicated security situation and the announcement of elections in October have sustained the depreciation pressures, with the hryvnia reaching UAH 13.6-14/US$1 in recent days.

4. All outstanding prior actions have been completed and verified. The NBU has achieved the required level of NIR by purchasing over US$200 million. Naftogaz has deposited US$3.1 billion in a restricted account with the NBU to be used to settle gas bills and arrears with Gazprom, if and when such payments need to be made. Finally, the government has established a coordinating body subordinated to the Cabinet of Ministers to lead the regulatory simplification effort.

5. As expected, parliamentary elections will be held in October. President Poroshenko dissolved parliament (the Rada) on August 25 and announced elections on October 26. Despite its dissolution, the Rada will remain operational until the elections.

6. Leading political parties have confirmed their support for the authorities’ economic program. In an open letter to the Managing Director, Mr. Sobolev, chairman of the MPs’ faction of the All-Ukrainian Alliance “Bat’kivschyna”, stated the alliance’s support for the key objectives and policies of the authorities’ Fund-supported program. Another parliamentary-represented party, UDAR, has issued a statement on its website supporting the program as well.

7. Since the Article VIII assessment mission in June, the authorities have removed one of the two new exchange restrictions identified by the mission. The mission found an exchange restriction arising from the imposition of absolute limits on the availability of foreign exchange for certain current international transactions (EBS/14/104, ¶12). These limits were initially imposed in early 2014 and most recently modified in May. Since the measures were imposed prior to the approval of the SBA, and the modification in May was not considered an intensification of the measure, the continuous performance criterion regarding the imposition or intensification of exchanges measures was not implicated. Effective July 29, the relevant provisions limiting access to non-cash foreign exchange for current international transactions were repealed. Staff has since reviewed the revised legal framework and determined that the exchange restriction has now been removed. The authorities are committed to removing the remaining exchange restriction and the MCPs. In this regard, staff had very productive discussions on the matter during the recent Article VIII mission, but a number of issues need to be discussed further. Pending resolution of these issues, staff does not propose approval of these measures for now. Staff will keep the Board informed of developments.

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