The Executive Board of the International Monetary Fund (IMF) today approved a four-year extended arrangement under the Extended Fund Facility for Ukraine. The arrangement amounts to the equivalent of SDR 12.348 billion (about US$17.5 billion, 900 percent of quota) and was approved under the Fund’s exceptional access policy. The Board also took note of Ukraine’s decision to cancel the Stand-By Arrangement (SBA) for Ukraine that was approved on April 30, 2014 (see
The authorities’ economic program supported by the Extended Fund Facility (EFF) will build on and deepen reforms launched under the SBA. The program aims to put the economy on the path to recovery, restore external sustainability, strengthen public finances, and support economic growth by advancing structural and governance reforms, while protecting the most vulnerable.
The approval of the extended arrangement under the EFF enables the immediate disbursement of SDR 3.546 billion (about US$5 billion), with SDR 1.915 billion (about US$2.7 billion) being allocated to budget support. Further disbursements will be based on standard quarterly reviews and performance criteria.
Following the Executive Board’s discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:
“Notwithstanding a strong policy-led adjustment effort in 2014, the Ukrainian economy continues to be affected by the conflict in the East and the attendant loss of confidence. The deep recession and sharp exchange rate depreciation aggravated existing vulnerabilities, weakened bank balance sheets, and raised public debt.
“Demonstrating strong resolve, Ukraine’s authorities have developed a new program to restore macroeconomic stability and address long-standing structural obstacles to growth, including weak governance. The authorities recognize that the resolute implementation of the program is critical to restore confidence and growth, bring inflation to single digits, keep external deficits manageable, and replenish international reserves.
“The authorities recognize that the best support for the hryvnia is the restoration of confidence through strong policies and reforms. To support this new regime, appropriate reserve targets are included in the program. While program policies are taking hold, the authorities plan to maintain monetary policy rates positive in real terms to anchor inflation expectations, and remove capital controls and restrictions at an appropriately calibrated pace as the balance of payments improves.
“The authorities are determined to stabilize the financial system, maintain confidence in banks, and strengthen financial regulation and supervision. To this end, they have made progress toward recapitalizing systemic banks and resolving weak non-systemic banks. The decisive implementation of the banking strategy would be crucial to regain public confidence.
“Recognizing the need for fiscal consolidation, the authorities have launched an expenditure-led adjustment and frontloaded energy price increases to reduce quasi-fiscal losses and set debt on a firm downward path. Policies to underpin the fiscal adjustment include improving the pension system’s sustainability, reforming public employment, and reforming the healthcare and education systems. The planned debt operation would also help secure program financing and restore debt sustainability with high probability. A successful debt operation with high participation will be a key consideration to proceed with the first program review.
“The authorities plan to eliminate the large quasi-fiscal losses of Naftogaz by 2017 by undertaking bold measures to increase tariffs, improve collection rates, and fundamentally restructure the company. Funding to protect the most vulnerable from the impact of the energy price increases will be raised to alleviate social costs and build support for the reforms.
“Addressing deep-rooted structural problems is critical to create an enabling environment for investment and private sector activity. Tackling weak governance and improving the business climate is critical to increase investment and achieve higher growth. A comprehensive strategy to reform state-owned enterprises is important to enhance efficiency and reduce fiscal risks.
“The program is subject to exceptional risks, especially those arising from the conflict in the East, which may affect the country’s ability to sustain the stabilization efforts and deliver the structural overhaul needed to resume growth. On the other hand, the crisis provides an opportunity for the government to make a decisive break from the past and implement
reform-oriented and sustainable policies with strong ownership. The authorities’ program responds appropriately to present challenges and deserves strong support. The implementation risks are being mitigated by a critical set of measures adopted as prior actions and by securing broad political support for program objectives and policies. These should help unlock sizable international official assistance and private capital inflows.”