The Ukrainian authorities would like to thank staff and management for the hard work to make this Board Meeting possible under the emergency financing mechanism. I would like to apologize to my Board colleagues for the rather short time between the distribution of the staff report and the Board meeting.

On their part, the authorities have been fully engaged at all levels of the executive and legislative branches of government, as well as at all levels at the monetary and supervisory authorities. Timely Fund advice helped the authorities to keep the situation under control despite a sudden decline in capital flows, combined with an external terms of trade shock and visible slowdown of key sectors of the economy, aggravated by eroding confidence in the banking system. On top of global concerns, common liquidity strains in the banking sector, a rather unexpected, almost sudden, paralysis of the steel industry around the globe affected Ukraine not only in terms of loss of production, exports and jobs, but it also aggravated the assessment of the country’s prospects by external financial markets and rating agencies.

The sudden drop in steel prices by 65 percent since July 2008, combined with a substantial drop in global demand has already translated into a sharp deterioration in the real sector. As of last week, 18 out of 43 pig iron production facilities in Ukraine have been put out of operation, 40 out of 63 steel producing units were temporarily stopped, as well as all ferro alloy production and ore production. The country’s ports are loaded with 1.5 mln of steel products that cannot be sold because of lack of external demand. Investment projects in the steel industry have also been largely frozen, affecting the construction industry that had been already slowing down for some time.

Facing the combined current and capital account shocks, the economy has already started to adjust itself to a new external environment. According to customs’ statistics, imports dropped already by at least 15 percent in the month of October, in response to tighter domestic credit conditions, a weaker exchange rate and overall drop in confidence. The announced changes in macroeconomic policies, although they are rather painful for Ukrainian citizens, will help the economy to adjust more smoothly when combined with appropriate financing. None of the key stakeholders in the country considered the scenario of a hard landing with uncontrolled crisis adjustment a viable option. Furthermore, such a scenario might produce contagion effects throughout the region and beyond, given the common lender issues and the extreme volatility of the emerging debt asset class.

The authorities have taken the Fund’s advice from the previous Article IV consultation to heart – the exchange rate was allowed to float early in the year under appreciation pressure, and this has allowed to avoid the problems usually associated with exiting the peg under downward pressure. The monetary and credit policies have been tightened to prepare for a softer landing. Growth in consumer credit has been practically halved during the first three quarters of the year. Since 2007, the monetary and supervisory authorities adopted prudential measures to eliminate incentives for banks and other financial companies to fund themselves abroad with short-term debt.

The budget has been kept in surplus through most of the year, while the authorities tried to deliver the deficit outcome advocated by staff during Article IV discussions (up to 0.5 percent deficit). However, the most recent slowdown in important industries that provide a substantial revenue stream will probably result in a deficit of under 1 percent for 2008, despite the recent decisions to substantially slow down income growth in the public sector and to reduce energy subsidies. In fact, several previously made income policy decisions were cancelled on a very short notice.

Unfortunately, an engineered soft landing proved to be out of reach with the aggravation of the global crisis in October. Domestic confidence was also badly damaged by a hostile takeover attempt on the sixth largest bank that resulted in a run on the bank and one week of intense deposit withdrawals from many other banks. Some temporary administrative measures helped to ease the erosion of confidence. These controls, similar to those introduced back in 2004 during street protests, were implemented to prevent disorderly exchange market developments. The authorities are cognizant that a comprehensive policy package, including the recapitalization of the banking system, is needed to rebuild confidence. The legislation to this effect, that has been discussed with staff, has been adopted as part of the anti-crisis legislative package.

The authorities also realize that due to external and domestic shocks the economy will likely face a recession next year (much like many other parts of Europe). The strategy is to have an orderly adjustment to shocks. A sharp exchange rate adjustment would obviously affect balance sheets of corporate and individual borrowers who have borrowed in foreign currency. The confidence effect of a comprehensive program, the impact of supporting fiscal policy measures, and the maintenance of reserve buffers to create a credible threat of intervention should help avoid a sharp overshooting of the exchange rate. These policies will likely allow for a decline in the current account deficit to 2 percent of GDP. The program also supports the implementation of a comprehensive bank resolution strategy described in paras 62–63 of staff report (MEFP). Substantial amounts in terms of GDP (at least 8–10 percent) will be required to undertake recapitalization of viable banks. Alongside with the IMF, the World Bank and the EBRD are committed to provide substantial assistance in this area. The program also recognizes the possible need to facilitate a voluntary resolution of corporate and consumer debts, especially those denominated in foreign exchange.

Monetary policy will be anchored by base money targets. As the financial sector stabilizes, monetary policy will need to be shifted to a tighter stance to contain pressures on the exchange rate. In the medium term the authorities remain committed to their strategic goal of adopting an inflation-targeting regime.

Recession-related social and investment expenditures will have to be accommodated under very tight budget financing constraints. Moreover, the authorities realize that the adjustment of fiscal and incomes policies will limit the risks of disorderly exchange rate adjustment.

Additional buffers will be mobilized by energy policy changes – an increased pace of price adjustments to improve the pass-through of imported prices to all domestic consumers.

The program is based on a number of assumptions, including roll-over of 80 percent of private sector external debt. The authorities acknowledge these risks, but they also see upside risks. The government debt and public external debt in particular is very low by any standards. Some important corporate external credits are mainly intracompany loans (and reflect round tripping of previous export earnings). A significant amount of foreign assets of corporates are not captured by statistics. The important unregistered economy may provide a degree of cushion and absorb some of the unemployed. The flexible labor markets will also facilitate the adjustment. Ukraine is one of the few countries where agricultural land was not subject to sale, while the legislative ban is scheduled to expire soon. FDIs is expected to remain robust and the recent (September-October) radical modernization of the joint-stock company legislation is expected to improve the protection of investors’ rights and the investment climate in general. Foreign parent banks are committed to Ukraine and continued to support their Ukrainian subsidiaries during the month of October (about USD 1 Billion of fresh funds). The bumper harvest of this year would allow Ukraine to export additionally up to 10 million tons of grains. Many important enterprises can and will be privatized, some of those facilities (energy, communications, etc.) belong to traditionally cash rich industries that are presumably less affected by the global credit crunch. Finally the authorities are approaching other IFIs and bilaterals to secure additional financing as part of their contingency planning.

The strength of numerous prior actions implemented by the authorities and their commitment to the program calls for support of their adjustment efforts by international community and the Fund in particular.