Abstract
IMF Country Report No. 14/145
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IMF Country Report No. 14/145
UKRAINE
2013 ARTICLE IV CONSULTATION AND FIRST POST-PROGRAM MONITORING—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR UKRAINE
May 2014
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2013 Article IV Consultation and First Post-Program Monitoring, the following documents have been released and are included in this package:
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on December 16, 2013, following discussions that ended on October 29, 2013, with the officials of Ukraine on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 2, 2013
An Informational Annex prepared by the IMF.
A Staff Statement of December 16, 2013 updating information on recent developments.
Press Release including a statement by the Chair of the Executive Board, and summarizing the views of the Executive Board as expressed during its December 16, 2013 consideration of the staff report on issues related to the Article IV Consultation and First Post-Program Monitoring.
A Statement by the Alternate Executive Director for Ukraine.
The following document has been or will be separately released.
Ex Post Evaluation of Exceptional Access Under the 2010 Stand-By Arrangement
The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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Title Page
UKRAINE
STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION AND FIRST POST-PROGRAM MONITORING
December 2, 2013
Key Issues
Context: Weak external demand and inconsistent macroeconomic policies have contributed to a prolonged economic recession. A combination of an effectively pegged exchange rate, loose fiscal policy, and sizable quasi-fiscal losses in the energy sector has pushed the fiscal and external current account deficits to very high levels. A gradual depletion of international reserves and other buffers is making the economy particularly vulnerable to external shocks.
Outlook and risks: A modest economic recovery should commence in late 2013. However, a difficult business climate and impaired external competitiveness are weighing on the medium-term outlook. The current policy mix is not sustainable as it generates large imbalances and depresses growth. The risk of a costly market-forced adjustment is high.
Main policy recommendations:
Allow the exchange rate to adjust to its equilibrium level and increase its flexibility. Accelerate preparations for the introduction of inflation targeting.
Strengthen the financial system’s resilience to shocks, including by developing comprehensive contingency plans to cover potential capital and liquidity shortfalls under various scenarios.
Curtail the fiscal deficit through a reform-based current expenditure consolidation and the cancelation of unaffordable tax cuts.
Reduce the quasi-fiscal losses in the energy sector by increasing the very low household gas and heating tariffs in the context of a comprehensive energy sector reform plan, while protecting the most vulnerable households.
Launch broad structural and governance reforms to improve the business climate and boost sustainable growth.
Approved By
Poul M. Thomsen and Mark Flanagan
Discussions were held in Kyiv during October 17–29, 2013. The mission met with Prime Minister Azarov; First Deputy Prime Minister Arbuzov; Minister of Finance Kolobov; Minister of Revenues and Duties Klymenko; Minister of Economic Development and Trade Prasolov; Minister of Energy Stavitskyi; Governor of the National Bank of Ukraine Sorkin; and other senior officials, ambassadors, and representatives of international financial institutions, research institutes, trade unions, and business community. The staff team comprised Mr. Gueorguiev (head); Mr. Gorbanyov, Ms. Kaltani, and Ms. Jajko (EUR); Messrs. Kazarian (MCM), Poghosyan (FAD), and Youssef (SPR). Mr. Vacher (Resident Representative) assisted the mission. The mission cooperated closely with World Bank staff. Mr. Petryk, Alternate Executive Director for Ukraine, attended many policy meetings.
Contents
CONTEXT
RECENT DEVELOPMENTS
EXTERNAL STABILITY ASSESSMENT
OUTLOOK AND RISKS
REPORT ON DISCUSSIONS
A. The Policy Mix and Medium-Term Outlook
B. Moving Towards a Sustainable Exchange Rate Regime and Monetary Framework
C. Maintaining Financial Stability
D. Launching Fiscal Consolidation to Support the Adjustment
E. Reducing Quasi-Fiscal Losses and Raising Growth with Energy Sector Reforms
F. Boosting Sustainable Growth
CAPACITY TO REPAY THE FUND
STAFF APPRAISAL
BOXES
1. Stand-By Arrangements in 2008–12
2. 2012 Article IV Consultation: Key Recommendations and Actions Taken
FIGURES
1. Performance Among Peers, 2000–12
2. Real Sector Indicators, 2009–13
3. Inflation, Monetary, and Exchange Rate Developments, 2009–13
4. External Sector Developments, 2008–13
5. Debt and Rollover of Debt, 2008–13
6. Financial Sector Indicators, 2009–13
7. Structural Reforms
8. Baseline and Adjustment Scenarios, 2011–18
TABLES
1. Baseline Selected Economic and Social Indicators, 2009–18
2. Baseline General Government Finances, 2010–18
3. Baseline Balance of Payments, 2010–18
4. Baseline Gross External Financing Requirements, 2010–18
5. Baseline Monetary Accounts, 2010–18
6. Financial Soundness Indicators for the Banking Sector, 2009–13
7. Adjustment Scenario: Selected Economic and Social Indicators, 2012–18
8. Baseline General Government Finances, GFSM 2001 Presentation, 2010–18
9. Indicators of Fund Credit, 2009–18
ANNEXES
I. Competitiveness, Exchange Rate Assessment, and Reserve Adequacy
II. Risk Assessment Matrix
III. Public and External Debt Sustainability Analysis
IV. The Role of Devaluation Expectations in Determining the Spread Between Local and Foreign Currency Interest Rates in Ukraine
V. Enhancing the Operational Monetary Policy Framework
VI. Determinants of Sovereign Borrowing Costs from International Markets
VII. Government Expenditures—Options for Fiscal Consolidation
VIII. Reforming Energy Subsidies in Ukraine
IX. Boosting Potential Growth in Ukraine Through Structural Reforms