Ukraine
2002 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Ukraine
Author: International Monetary Fund
Publication Date:
16 Jul 2002
eISBN:
9781451838954
Language:
English
Keywords:
ISCR; CR; cash collection rate; rate; inflation outturn; reserve requirements ratio; collection; broad money; Ukrainian authorities; exchange rate; debt service; economic growth; Arrears
Download PDF (2.1 MB)

This 2002 Article IV Consultation highlights that the economic situation in Ukraine has continued to improve in 2001. Real GDP growth is estimated to have increased from almost 6 percent in 2000 to 9 percent in 2001, mainly on account of double-digit growth of industrial output and a good grain harvest, resulting from favorable weather conditions and a lessening of government controls in agriculture. Fiscal policy through end-September 2001 was broadly on track, although indicators of revenue were affected by the accumulation of arrears on value-added tax refunds.

Abstract

This 2002 Article IV Consultation highlights that the economic situation in Ukraine has continued to improve in 2001. Real GDP growth is estimated to have increased from almost 6 percent in 2000 to 9 percent in 2001, mainly on account of double-digit growth of industrial output and a good grain harvest, resulting from favorable weather conditions and a lessening of government controls in agriculture. Fiscal policy through end-September 2001 was broadly on track, although indicators of revenue were affected by the accumulation of arrears on value-added tax refunds.

I. Introduction

1. In concluding the last Article IV consultation on December 19, 2000, Executive Directors welcomed the achievement of positive economic growth in 2000 and the progress made in several policy areas, notably the reduction of the budget deficit, the implementation of structural improvements in the fiscal area, the increase of cash collection ratios in the energy sector, and the adoption of a privatization law. However, Directors expressed concern that inflation had been higher than projected and regretted that no large enterprise had yet been privatized in a transparent manner. Directors urged the authorities to implement vigorously the 2001 government budget and to ensure that expenditure policies are flexible enough to accommodate possible shortfalls in budgeted privatization proceeds. Directors emphasized the need to keep monetary aggregates under control with a view to slowing inflation and urged the authorities to accept greater exchange rate flexibility. Directors also noted that high priority should be accorded to promptly addressing weaknesses in the banking system, to implementing structural reforms in the energy sector, and to enhancing the transparency of the privatization process.

2. A new government headed by Prime Minister Kinakh was appointed in late May 2001. Parliamentary elections are scheduled for late-March 2002.

3. The quality of Ukraine’s economic and financial database has further improved since the last Article IV consultation but substantial weaknesses remain, particularly in the areas of the national accounts, the balance of payments, and private sector external debt. However, these weaknesses do not prevent a meaningful assessment of economic policies, and core data are provided to the Fund on a timely basis.1 The authorities expect to subscribe to the Special Data Dissemination Standard (SDDS) by July 2002, and a mission to prepare the data module of the Report on Standards and Codes (ROSC) is scheduled for April 2002. The Fund continues to provide technical assistance in statistics, as well as in public finance, central bank accounting and internal auditing, and banking supervision. Statistical issues are discussed further in Appendix I, and the Fund’s recent technical assistance to Ukraine is summarized in Appendix II.

II. Recent Developments

4. Economic developments in 2001 turned out better than foreseen. Real GDP growth is estimated to have increased from almost 6 percent in 2000 to about 9 percent in 2001. The increase was mainly the result of double-digit growth of industrial output and a good grain harvest, the latter resulting from favorable weather and the lessening of government involvement in agriculture (Tables 1 and 3). The continued economic recovery in 2001 was made possible by: (i) considerable idle capacity; (ii) improved competitiveness of the Ukrainian economy in the wake of the real exchange rate depreciation in 1998-99, and, through the first half of the year, further expansion of Ukraine’s main export markets, in particular Russia; and (iii) the strengthening of domestic demand as a result of wage and pension increases granted in 2000-01; and (iv) the clearance of wage and pension arrears. Annual inflation, as measured by the consumer price index (CPI), declined sharply during the year to a rate of about 6 percent, well below the target of 12¾ percent (Figure 1). This reflected the impact of the good harvest on food prices, some delays in increasing administered prices—including for electricity—as well as the stable exchange rate.

Table 1.

Ukraine: Key Economic Indicators, 2001-02

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Sources: Ukrainian authorities; and Fund staff estimates and projections.
Table 2.

Ukraine: Consolidated Government Finances, 2002

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Sources: Ukrainian authorities: and Fund staff estimates.
Table 3.

Ukraine: Selected Economic Indicators, 1998-2002

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Sources: Ukrainian authorities; and Fund staff estimates and projections.

The revised program column refers to the projection shown in EBS/01/152, September 4, 2001.

Cash balance adjusted for the net accumulation of payments arrears on wages, pensions, and social benefits, and, in 2000, for the settlement of interest arrears to the National Bank of Ukraine (NBU).

Domestic financing includes purchases of treasury bills by nonresidents, and privatization proceeds. For 2002, includes gap to be filled of 0.8 percent of GDP.

Annual GDP divided by period-average broad money.

Includes Black Sea Fleet debt swap and repayments, and debt stock and actual payments under the commercial debt rescheduling of April 2000.

Historic debt data are preliminary.

After rescheduling.

From 1999 onward, the savings-investment balance reflects revised gas prices.

Figure 1.
Figure 1.

Ukraine: Contributions to CPI Changes, 2000-01

(In percent)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Ukraine authorities; and Fund staff estimates.1/ End-of-period annual change.

5. The external current account surplus is estimated to have narrowed from 4¾ percent of GDP in 2000 to 3½ percent in 2001. This owed mainly to strong import growth of almost 13 percent in volume terms, which was driven by the expansion of domestic demand. Export growth remained vigorous but slowed over the course of the year. As a result of the debt-rescheduling agreement with Paris Club creditors concluded in July 2001, the debt-service burden has been eased. Ukraine has also started to benefit from transfers, including in the form of World War II compensation payments, and from increasing inflows of foreign direct investment, although these remain low by comparison with Central European countries.

6. The exchange rate remained stable in 2001, standing at about Hrv 5.3 per U.S. dollar at end-December. The real effective exchange rate has remained broadly stable since mid-2000, after an appreciation of some 13½ percent over the first half of 2000, which partly reversed the real depreciation of 23 percent during 1999 (Figure 2).

Figure 2.
Figure 2.

Ukraine: Real Exchange Rate Developments January 1998-December 20011/

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Ukrainian authorities; and Fund staff estimates.1/ A decrease indicates depreciation.2/ INS calculation based on relative consumer prices.

7. With the NBU continuing its extensive purchases of foreign exchange on the interbank market, Ukraine’s official gross international reserves climbed to $3.1 billion at end-December 2001, equivalent to almost 8 weeks of imports, and net international reserves turned positive, reaching $1.1 billion (Figure 3). Spreads for Ukrainian eurobonds are now at about 650 basis points, some 800 basis points below their levels in the first half of 2001 (Figure 4).

Figure 3.
Figure 3.

Ukraine: International Reserves and NBU intervention January 1998-December 20011/

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Ukairian authorities; and Fund staff estimates.1/ From December 1998 defined as gross usable reserves.
Figure 4.
Figure 4.

Ukraine: Spreads on Ukaine, Russian and Emerging Markets Eurobond Index, April 2000-February 2002

(Basis Points)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Bloomberg for Eurobonds J.P. Morgen for EMBI-.

8. Program implementation in 2001 was broadly satisfactory but there were some slippages in revenue collection and delays in implementing structural reforms (Tables 4 and 5). 2 All performance criteria under the program for end-September and end-December 2001 were met, except for the end-December criterion on non-earmarked state cash revenue. Base money significantly exceeded its indicative targets, reflecting the impact of the largely unsterilized foreign exchange purchases by the NBU. The quantitative structural benchmarks concerning cash collections in the electricity and gas sectors were met.3 However, the completion of the second stage audit of the national gas company (Naftogaz) was delayed to end-December and the single account of the State Treasury of Ukraine was only partially implemented.

Table 4.

Ukraine: Quantitative Performance Criteria, Indicative Targets, and Quantitative Structural Benchmarks Under the Extended Arrangement. for September 2000-December 2001

(End-of-period; in millions of hryvnia, unless otherwise indicated; cumulative changes from September 29, 2000, unless otherwise indicated)

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Sources: Ukrainian authorities; and Fund staff estimates and projections.

Unless otherwise noted, targets for end-December 2000, end-March 2001, end-September 2001. and end-December 2001 are performance criteria, while targets for June 2001 are indicative targets.

For the purpose of calculating the adjustor to the deficit defined in the Technical Memorandum of Understanding (TMU) for arrears in the payment of scheduled interest on domestic debt instruments issued by the government, the levels of scheduled interest payments are the fo1lowing (in millions of hryvnia): 1.191 (December 2000); 524 (March 2001); 834 (June 2001); 1,351 (September 2001); and 1,794 (December 2001). For the purpose of calculating the adjuster to the deficit for deviations in the level of project loans, the levels of programmed project loans are the following (in millions of hryvnia): 0 (December 2000); 171 (March 2001); 197 (June 2001); 272 (September 2001); and 461 (December 2001). For both adjusters, 2000 figures are cumulative from January 1, 2000; 2001 figures are cumulative from January 1, 2001.

The figures for 2000 are cumulative from January 1, 2000, and the figures for 2001 are cumulative from January 1, 2001.

Ceilings established on the stock.

For the purpose of calculating the adjuster to NDA for deviation in foreign financing (excluding project financing) to the budget defined in the Technical Memorandum of Understanding (TMU), the programmed levels of foreign financing to the budget are the fallowing (cumulative since September 29, 2000; in millions of hryvnia): 388 (December 2000); 602 (March 2001); 707 (June 2001); 1,523 (September 2001); and 2,279 (December 2001).

Amounts for September and December 2000 are outstanding stocks.

For the purpose of calculating the adjuster to N1R defined in the TMU, the programmed levels of medium- and long-term cash foreign financing are the following (cumulative since September 29, 2000; in millions of US dollars): 70 (December 2000); 107 (March 2001); 130 (June 2001); 280 (September 2001); and 419 (December 20O1).

The nonaccumulation of the external arrears criterion applies on a continuous basis.

The ceilings on medium- and long-term loans (maturity of over one year) are on debt contracted; the ceiling on short-term loans (maturity of up to one year) applies on a continuous basis. The criterion for maturity up to one year does not apply to contracting of loans by the NBU.

The targets refer to total cash collection ratios for payments to the wholesale electricity market cumulatively since end-June 2000 for 2000, and since January 1, 2001 for 2001.

The targets are for total cash collection ratios by Naftogaz on all its gas sales, cumulative from the beginning of each year. Outcomes include mutual settlements through the banking system. Data are not independently verifiable.

Table 5.

Ukraine: Structural Benchmarks Under the Extended Arrangement for September and December 2001

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9. Budget execution in 2001 was broadly on track, but the accumulation of arrears on VAT refunds—estimated at about ½ percent of GDP—helped meet the program fiscal targets. The consolidated cash deficit was kept at 1.6 percent of GDP, below the limit of 3 percent of GDP set in the 2001 budget law, because of lower-than-expected privatization proceeds (Table 6). While local taxes and payroll tax collections were boosted by the increase in real incomes and the repayment of wage arrears, enterprise profit tax and VAT performance deteriorated in the second half of the year. Tax collection was undermined by the tax amnesty granted in early 2001, tax loopholes created by the ad hoc extension of privileges to industries, and the rapid accumulation of new tax arrears, notably of the energy sector (Box 1). During 1998-2001, tax revenue (excluding payroll contributions) declined continuously from 24 percent of GDP to 20 percent, without major changes in tax rates (Figure 5). The stock of arrears on VAT refunds reached Hrv 2.1 billion (1 percent of GDP) at year-end. Spending policies were kept under control until the last quarter of 2001. However, in the last quarter expenditure policies failed to adjust fully for the shortfall in privatization proceeds, resulting in some additional domestic financing. Most wage arrears accumulated by local governments in the second quarter of 2001 were cleared by year-end, and the reduction in social arrears exceeded the target. The stock of payments arrears on energy and other utilities remained at 1 percent of GDP.

Table 6.

Ukraine: Consolidated Government Finances, 1998-2002

(In millions of hryvnia)

(In percent of GDP)Sources: Ukrainian authorities; and Fund staff estimates and projections.

Assumes the repayment of all VAT refund arrears (Hrv 2,095 million as of Jan. 1, 2002).

II Starting with the 2001 fiscal outturn, the accounts of the Accident Insurance Fund, the revenue of which is equivalent to 0.4 percent of GDP, are brought on budget

Due to a new budget classification introduced for the 2002 budget law, the components of government expenditures in 20O2 are not strictly comparable to earlier years.

After debt rescheduling.

Includes the discrepancy between above-the-line and financing data.

The commitment balance is the cash balance adjusted for the net accumulation of arrears on wages, pensions, and benefits (social arrears), and, in 2000, for the settlement of interest arrears to the NBU

Figure 5.
Figure 5.

Ukaine: Tax Revenue of the Consolidated Budget, 1998-2001

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Ukrainian authorities; and Fund staff estimates.

Tax Amnesty

Ukraine’s Law on Payments to the Budget, enacted on April 1, 2001, modernized the existing system of tax collection enforcement; however, it also provided for a broad tax amnesty.1 Both tax arrears and fines and penalties accrued prior to January 1, 2000, were written off, while unmet tax obligations accrued throughout 2000 were eligible for restructuring (the repayment period is up to 60 months with no interest). All legal entities and self-employed entrepreneurs were eligible for the tax amnesty, and all tax and non-tax arrears were subject either to writing-off or restructuring. The total amount of gross claims subject to the amnesty is estimated at Hrv 20 billion (about 10 percent of GDP).

Over the course of the year, a number of troubling aspects of the amnesty became apparent. An example concerns VAT arrears: while taxpayers’ gross debts were forgiven, the budget liabilities, in the form of unpaid VAT refunds, remained valid, including to the beneficiaries of the tax amnesty. Another troubling aspect of the amnesty is the implicit encouragement of nonpayments. As of December 31, 2001, new tax arrears accumulated since the launch of the tax amnesty reached Hrv 6.3 billion, or 12 percent of the consolidated budget revenues collected by that date. For the state budget alone, these figures are Hrv 5.6 billion and 18 percent, respectively.

1/ The amnesty was opposed by the Cabinet of Ministers; a subsequent effort by the President to scale down the extent of the amnesty was voted down by parliament.

10. The authorities put in place several important budget and tax administration reforms. The Budget Code was enacted in July 2001 (see also EBS/01/152; 9/4/2001). Tax collection methods were overhauled by replacing the Kartoteka II system with modern procedures to seize delinquent taxpayers’ assets, and an inventory of all existing tax exemptions and privileges was completed. However, tax incentives continued to be actively used as an instrument of industrial policy. While tax privileges for joint-ventures with foreign investment were canceled in December 2001, tax breaks to the metallurgical and engineering sectors were renewed. In addition, the administration of the VAT came under pressure because of the shortfall in gross revenue and the accumulation of overdue VAT-refund requests.

11. Monetary aggregates continued to expand rapidly in 2001. Base and broad money grew by 37 percent and 42 percent, respectively, while the share of foreign currency deposits in broad money continued to fall (Tables 7 and 8, and Figure 6). The strong money growth accommodated a further increase in money demand as evidenced by the balance of payments surplus, and in line with the economic growth, the continuing remonetization of the economy, and the return of confidence in the hryvnia. The rise in monetary aggregates in 2001 was fueled by largely unsterilized foreign exchange market intervention by the NBU (Figure 7); foreign exchange purchases through end-December totaled $2.1 billion. The intervention was only partly sterilized by the NBU and by a temporary accumulation of government deposits at the NBU. The liquidity inflows allowed the banks to further boost their lending to the private sector, with credit to the economy rising by 41 percent over the year.

Table 7.

Ukraine: Monetary Survey, 1998-2002

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Sources: Ukrainian authorities; and Fund staff estimates and projections.

Deflated by the CPI.

Period average; for March, June, and September, annualized quarterly GDP divided by the average stock of money during the quarter.

End-of-period; for March, June, and September, annualized quarterly GDP divided by the stock of money at end-quarter.

Figures for March, June, and September refer to changes from previous quarter.

Table 8.

Ukraine: Accounts of the National Bank of Ukraine and of Deposit Money Banks, 1998-2002

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Sources: Ukrainian authorities; and Fund staff estimates and projections.

Figures for March, June, and September refer to changes from previous quarter.

Figure 6.
Figure 6.

Ukraine: Inflation and Broad Money Growth, 1998-2001

(12 month changes, in percent)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Ukrainian authorities.
Figure 7.
Figure 7.

Ukraine: Components of Base Money, 1998-2001

(In millions of hryvnias)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: National Bank of Ukraine.

12. Nominal interest rates fell during 2001 but, with the sharp decline in inflation, remained high in real terms. The NBU steadily lowered the discount rate from 27 percent at end-2000 to 11 ½ percent as of March 11, 2002. The interbank market remains underdeveloped with interest rates fluctuating widely. While the weighted average interest rate for retail hryvnia loans dropped from about 37 percent at end-2000 to 30 percent at end-January 2002, interest rate spreads remained at 19 percentage points (Figure 8). In April 2001, the authorities introduced a system of differential reserve requirements ratios; the weighted average ratio was reduced from 14 percent to 12.4 percent as of December 10, 2001, and further to 11.6 percent as of March 1, 2002

Figure 8.
Figure 8.

Ukraine: Interest Rates, January 1998-December 2001

(In percent)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: National Bank of Ukraine.

13. The health of the banking sector improved—the banking sector as a whole reported profits for 2001, after recording losses in 2000—but weaknesses remain. At end-December 2001,19 out of 153 operating banks were not complying with one or more prudential regulations and the share of nonperforming loans in the total loan portfolio amounted to 13 percent (comprises loans classified as problem, past-due, and doubtful). The level of financial intermediation was still comparatively low, although the total banking sector loan portfolio increased rapidly for the second year in a row. The NBU made some progress in improving banking supervision by implementing new regulations in accordance with international standards based on the new Law on Banks and Banking Activity. The Law on the Household Deposit Guarantee Fund was enacted in September 2001, increasing the insured amount per depositor from Hrv 500 to Hrv 1, 200.

14. The situation of a few commercial banks is worrisome. These banks do not comply with minimum capital requirements and are undergoing rehabilitation programs. The NBU has undertaken on-site inspections of such banks, some of which had been delayed since mid-2001. Household deposits and loans portfolios continue to grow rapidly in some of these banks, notably to the agricultural and energy sectors. There have been instances of political appointments to the Supervisory Councils of banks.

15. The authorities’ progress in implementing their privatization program has been limited. Total privatization receipts amounted to Hrv 2.6 billion in 2001, considerably short of the target of Hrv 5.8 billion. Despite the successful sale of six electricity distribution companies (oblenergos), only 23 out of a total of 68 tenders for large companies were successful, with low bidders’ interest, asset stripping, and some political interference constituting the main obstacles. An independent review of privatizations completed in the first nine months of 2001 indicates that compliance with transparency criteria was satisfactory. The list of companies excluded from privatization (negative list) was reduced and parliament adopted a law banning asset-stripping of state-owned enterprises.

16. In the energy sector, payments discipline continued to improve as a result of adequate budget allocations for energy consumption and stricter implementation of cut-off policies (Figure 9). Average cash collection ratios for the electricity and gas sectors in 2001 increased to 65 percent and 87 percent, respectively, and in the gas sector exceeded the program target Electricity tariffs for the privatized oblenergos were increased in line with the agreed procedures. However, no progress was made in resolving the existing electricity sector debt, estimated to total $2 billion. The completion of the second-stage audit of Naftogaz, a benchmark under the program for September 2001, was largely achieved by year-end. However, the audit report contains a large number of qualifications that significantly impair a financial assessment and did not include combination procedures to obtain the consolidated view of the gas-related assets of Naftogaz, as required by the terms of reference. The provision of information to the auditor by Naftogaz was the main problem in this area.

Figure 9.
Figure 9.

Ukraine: Cash Collection Ratios in Electricity and Gas Sectors, 2001-01

(In percent of total sales)

Citation: IMF Staff Country Reports 2002, 146; 10.5089/9781451838954.002.A001

Sources: Ukrainian authorities.

III. Policy Discussions4

17. As performance under the 2001 program was broadly satisfactory, staff and the authorities agreed on the need to consolidate the progress made in stabilizing the economy, but failed to reach full understandings on economic and financial policies for 2002. The main outstanding issues concerned the timing of elimination of VAT refunds arrears and the uncertainty surrounding implementation of a number of measures that the government intended to take to close the 2002 fiscal gap. In addition, the policy discussions focused on measures needed to sustain the ongoing recovery, based on a shared assessment that the economic growth so far has stemmed from increased capacity utilization in traditional sectors (Box 2) and that sustainable economic growth would require a broad-based acceleration of structural reforms (Box 3).

Interim Assessment of Growth in Ukraine

The recovery started in late 1999. The timing appears to have been related to die prior achievement of macroeconomic stability; it was less clearly associated with acceleration of structural reforms (see Box 3).

Key factors underlying the recovery:

  • From the production side, the strong rebound of industrial production (especially metals, food, and chemical processing) was the predominant factor; from the expenditure side, the main growth factor (at least through mid-2001) was net exports.

  • Judging from a comparative perspective relative to other BRO countries, there was substantial overshooting in the adjustment of output to post-Soviet prices and trading patterns. Accordingly, at the outset of the recovery, there was ample idle, though potentially profitable, industrial capacity. At the level of individual industries, the extent of recovery is positively associated with the extent of the earlier output collapse.

  • External factors were critical, especially in 2000 when both competitiveness (owing to the earlier real depreciation) and strong external demand played a major role.

  • Real wages fell sharply in the period through 1999; this was one of the main mechanisms that offset at least in part the “legacy” inefficiencies embodied in the Soviet-era capital stock.

  • Another process that had an important role in setting the stage for the recovery was “learning by doing” in adjusting production to market requirements (advertising, packaging, etc.).

  • The key policy issue is how to channel the recovery, thus far based primarily on increasing capacity utilization, into an expansion based on productivity growth, which can only be brought about by private (including foreign) investment.

1 A staff team is carrying out a study of the recent growth experience of Ukraine; the results are expected to be published as an IMF Working Paper by mid-2002.

Progress with Structural Reforms

Ukraine has made slow but steady progress with structural reforms. In 2001, the country’s progress on the EBRD’s transition indicator scale was among the highest in the region. Ukraine’s institutional developments score (the unweighted average of indicators for large-scale privatization, governance and enterprise reform, competition policy, finance and infrastructure) now stands at 2.3, only slightly below the regional average of 2.4.1

In the area of large-scale privatization, Ukraine’s achievements reflect the average of transition countries. However, corporate restructuring has been slow and major unresolved issues regarding corporate governance remain, despite significant steps to harden budget constraints. More than 25 percent of large-scale enterprise assets are now in private hands or in the process of being privatized. Ukraine has implemented a nearly comprehensive program of small-scale privatization. Ukraine’s private sector share of GDP in mid-2001 amounted to 60 percent, in line with the average for all transition countries.

Ukraine has made substantial progress in liberalizing prices and largely phased out state procurement at non-market prices, in line with most other countries in the region. Although almost all quantitative and administrative import and export restrictions have been removed, liberalization of trade and foreign exchange has been less decisive than in most other transition countries, 13 of which are by now members of the WTO. While legislation and institutions have been set up to strengthen competition, entry restrictions have not yet been reduced substantially, leaving Ukraine’s indicator on external liberalization at a level somewhat below average.

Ukraine’s pace of reforms in the banking sector and security markets has been slower than average, although liberalization of interest rates and credit allocation has been significant. Substantial progress in the establishment of bank solvency and of a framework for prudential supervision and regulation remains to be achieved. While securities exchanges, market makers, and brokers have been established, the issuance of securities by private enterprises remains limited.

Ukraine’s progress with electricity sector restructuring has been somewhat better than the regional average, as legislation providing for full-scale restructuring of the industry has been passed; some progress has been made with tariff reform and revenue collection; and private sector involvement has begun. With the exception of the roads sector, progress in other areas of infrastructure, including telecommunications, has been less than in other transition countries.

1 Based on indicators presented in the EBRD Transition Report 2001. “Transition countries” and all averages refer to the 27 countries of Central and Eastern Europe, the Baltics, and the CIS. EBRD’s average transition indicator score advanced only marginally between 1997 and 2000, but improved in 2001. The indicator scores progress in transition on a scale from 1 to 4, with 1 meaning no reforms and 4 meaning full transition to a market economy.

18. The macroeconomic framework for 2002 envisages a continuation of the economic recovery but at a more moderate pace than in 2000-01. The staff projects real GDP growth to diminish to 5 percent in 2002, reflecting lower growth of industrial output and the impact of a return of normal weather conditions on agricultural production. Economic growth in 2002 would be led by increasing domestic demand, resulting from further gains in disposable incomes and higher investment. Export growth is expected to continue but at a significantly lower rate than in previous years, owing to lower economic growth in Ukraine’s main trading partners, as well as anti-dumping actions and other restrictions against Ukrainian exports. Imports are projected to increase in line with domestic demand. As a result, the external current account surplus is expected to narrow from 3½ percent of GDP in 2001 to 1½ percent in 2002 (Tables 9 and 10). Annual inflation is expected to edge up in 2002, reflecting the rebound of food prices and some planned administrative price hikes, but is targeted to remain below 10 percent.

Table 9.

Ukraine: Medium-term Balance of Payments, 1998-2006

(In millions of U.S. dollars)

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Sources: Ukrainian authorities; and Fund staff estimates and projections.

Before 1999, the imports of gas are reported at a decreed price rather than actually observed price.

Includes Black Sea Fleet debt swap and repayments. Includes debt stock and actual payments under the commercial debt rescheduling of April 2000.

As reported by Naftogaz. Assumed rescheduled as of end 2001 under the terms of the preliminary agreement between Ukraine and the Russian Federation.

The definition of gross reserves excludes unusable reserves. Gross reserves at end-1998 were reported as US$949 million before this exclusion.

Rescheduling by the Paris Club and other bilateral creditors (on comparable terms).

Historic debt data are preliminary.

Official external program financing, largely from the World Bank and the European Union.

Assumes that all purchases potentially available under the program are made.