Ukraine
2004 Article IV Consultation—Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
Publication Date:
24 Jan 2005
eISBN:
9781451977738
Language:
English
Keywords:
ISCR; CR; GDP; exchange rate; core PPI inflation; inflation; cash deficit; collection ratio; private sector; foreign currency; Ukrainian authorities; Arrears; Credit; fiscal policy
Download PDF (802.2 KB)

This 2004 Article IV Consultation highlights that six years after the 1998 financial crisis, Ukraine continues to recover strongly. In 2003, real GDP grew by 9.4 percent, despite a poor harvest, and reached 13.5 percent through July 2004. Growth in 2003–04 has been prompted by favorable external demand, a competitive cost structure, and dynamic domestic demand. Inflation has been moderate, but strong upward pressures are emerging. There has been progress in the structural reform agenda, but tax administration should improve.

Abstract

This 2004 Article IV Consultation highlights that six years after the 1998 financial crisis, Ukraine continues to recover strongly. In 2003, real GDP grew by 9.4 percent, despite a poor harvest, and reached 13.5 percent through July 2004. Growth in 2003–04 has been prompted by favorable external demand, a competitive cost structure, and dynamic domestic demand. Inflation has been moderate, but strong upward pressures are emerging. There has been progress in the structural reform agenda, but tax administration should improve.

I. Background

1. Six years after the 1998 crisis, Ukraine continues to recover strongly (Table 1). Over 2000–04, GDP growth has averaged 8.4 percent, above the Central and Eastern European average (3.8 percent), and the Commonwealth Independent States (CIS) average (8.0 percent), with a projected peak of 12.5 percent in 2004.1 This recovery, however, comes from a low base. Compared with most other transition countries, Ukraine’s output contraction in the 1990s was more pronounced (Figure 1). Moreover, delays in structural reforms and a weak business climate have hindered investment. Besides, growth appears not to have benefited everyone in the same proportion.2

Table 1.

Ukraine: Selected Economic Indicators, 1999–2005

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

Assumes an exchange rate of 5.33 Hrv/US$.

From 2003 onwards, based on an accounting treatment that excludes offset-based amortization to Russia, which decreases revenues and increases net external financing (and the budget deficit) by 0.2 percent of GDP relative to previous years.

Cash balance adjusted for the net accumulation of expenditure and VAT refund arrears, as well as for non-cash property income.

Government and government-guaranteed debt and arrears, plus NBU debt. Excludes debt by state-owned enterprises.

Annual GDP divided by end-period broad money (M3).

Period averages; (+) represents real appreciation; based on CPI and average trade weights for 1996–2002.

Figure 1.
Figure 1.

Cross-Country Growth and Foreign Direct Investment, 1990-2004

Citation: IMF Staff Country Reports 2005, 015; 10.5089/9781451977738.002.A001

Sources: World Economic Outlook; and Fund staff estimates.

Ukraine: Key Economic Indicators, 2000–04

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

2. While exports have triggered the acceleration in growth, domestic demand has played an increasingly important role (Figure 2). Rapid growth in China has boosted Ukraine’s steel exports, while continued growth in Russia has benefited Ukraine’s machinery exports. Consequently, annual export growth has averaged 25 percent since end-2002, yielding a sizable current account surplus and foreign reserve accumulation (Table 2). Exporters’ profits have helped fuel an investment and construction boom. A surge in credit to the private sector and rising disposable incomes have also supported domestic demand.

Figure 2.
Figure 2.

Ukraine: Exports, Growth, and Inflation, 2001-04

(Year-on-year change in percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2005, 015; 10.5089/9781451977738.002.A001

Sources: State Statistics Committee; and Fund staff estimates.
Table 2.

Ukraine: Medium-Term Balance of Payments, 2001–09

(In millions of U.S. dollars, unless otherwise indicated)

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

Includes lease receipts and offsetting repayments under the Black Sea Fleet debt swap agreement.

Public and publicly-guaranteed debt. Historic debt data are preliminary.

Arrears stemming from natural gas imports as reported by Naftogaz.

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

Estimates in 2000 and 2001 include goods-arrears swap transactions with Russia in 1999 and 2000.

World Bank, European Union, and central government commercial borrowing.

Ukraine: Contributions to Growth, 2001–05

(Percent)

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

3. However, unemployment remains high. The official unemployment rate (at about 4 percent since 2001) is an unreliable guide, owing to hidden unemployment and weak incentives to register for unemployment benefits. According to the International Labor Organization’s definition, unemployment, although down from 12 percent in 1999, remains at about 9 percent in 2004.

4. Inflation has been moderate, but strong upward pressures are emerging. From a low of –0.6 percent in December 2002, the 12-month consumer price index (CPI) rate reached 8.2 percent in December 2003. While much of this increase seemed to reflect supply-side factors—especially the impact of a poor harvest—inflation had increased to 9.9 percent by August 2004. Producer price inflation index (PPI) inflation reached 22.2 percent in August 2004, reflecting mostly higher world prices for energy and metals. Even excluding these items, “core” PPI inflation would exceed 10 percent. In June 2004, the average nominal wage for the entire economy was 26.3 percent above its level the previous year.

5. Capital market access and financial indicators have improved. After regaining access to international capital markets in 2003, Ukraine issued a $600 million seven-year Eurobond in March 2004, and a $500 million five-year floating rate Eurobond in August. Both issuances contain collective action clauses. Spreads are relatively low (about 360 basis points) but remain correlated with fluctuations in Russia. Standard and Poor’s upgraded Ukraine’s long-term sovereign credit rating to B+, on par with other rating agencies, and Moody’s raised its outlook to positive (Table 3). Interest rates and stock prices have moved favorably (Figure 3), while the recent banking sector difficulties in Russia have not affected Ukraine.

Table 3.

Ukraine: Indicators of Vulnerability, 2000–04

(In percent of GDP, unless otherwise indicated)

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Sources: Ukrainian authorities; Moody’s Investors Service; DataStream; and Fund staff estimates.

Domestic and external debt contracted by the general government and the NBU; includes budgetary arrears; VAT refund arrears data only begin in 2001.

Series break due to new classification rules in 2003. NPLs are those classified as substandard, doubtful, and loss. Excluding the timely serviced “substandard” loans reduces the ratio of NPLs to total loans to 7.9 percent at end-June 2004.

Data include amortization of public debt falling due within the year, central bank short-term liabilities, short-term financial liabilities of commercial banks, and treasury bill holdings of non-residents. There are no reliable data on private capital flows and some capital inflows may be misclassified as current account transactions.

An appreciation is indicated by a positive growth rate; period average; CPI-based and average trade weights (1996–2002).

Based on the average weighted price (in U.S. dollars) of common shares of issuers meeting Ukraine’s First Stock Trading System (PFTS) listing requirements with the highest liquidity. The index base is 100 as of October 1, 1997.

Moody’s Investors Service. Note that in August 2004, Standard & Poor’s upgraded Ukraine’s long term sovereign rating from B to B+, on par with ratings by Fitch and Moody’s. Moody’s raised its outlook from “stable” to “positive” in September 2004.

Emerging Market Bond Index (EMBI+) for Ukraine. December average or latest month reported.

Figure 3.
Figure 3.

Ukraine: Financial Market Indicators, 2000–04

Citation: IMF Staff Country Reports 2005, 015; 10.5089/9781451977738.002.A001

Sources: Ukrainian authorities; Bloomberg; and Fund staff estimates.1/ Emerging market bond index.

6. The public debt-to-GDP ratio has fallen (Figure 4). Primary surpluses and strong growth during 1999–2003 have helped reduce the debt ratio from 61 percent of GDP to a projected 27 percent at end–2004. Revenue gains—principally from personal income and payroll taxes, and state enterprise dividends (Table 4)—have offset a rise in spending from 34 percent to almost 38 percent of GDP.

Figure 4.
Figure 4.

Ukraine: Fiscal Policy, 2000-04 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 015; 10.5089/9781451977738.002.A001

Sources: Ukrainian authorities; and Fund staff estimates.1/ Ratios for H1–2004 are based on data for June 2003 to June 2004. This eliminates seasonal effects.2/ Expenditure for wages for H1–2004 is not yet available.
Table 4.

Ukraine: Consolidated Government Finances, 2003–05

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Sources: Ministry of Finance, NBU and staff projections and calculations.

Based on spending authorized in the supplementary budget. Assumes that (i) all excess privatization proceeds are spent; (ii) local governments spend about three-quarters of their foreign borrowing and privatization proceeds; and (iv) VAT refunds arrears are fully eliminated during the second half of the year.

Assumes: (i) Hrv 1 billion in privatization proceeds are not spent; (ii) Kyiv spends only one-quarter of its Eurobond proceeds; (iii) that the government issues only Hrv 10.8 billion in VAT refunds (consistent with the supplementary budget estimates); and (iv) the capital budget is underimplemented by Hrv 1 billion.

Excludes offset with Russia involving US$ 98 million amortization for 2003–2004.

Due to a new budget classification introduced for the 2002 budget, the 2002 expenditure are not strictly comparable to earlier years.