IMF Executive Board Concludes 2016 Article IV Consultation and Completes Third Review of Ukraine’s EFF, Approving US$1.00 Billion Disbursement

Following the 2014-15 crisis, the economy is growing again and tight fiscal and monetary policies have greatly reduced internal and external imbalances. Inflation has been successfully brought down and reserves-while still being relatively low-have doubled to US$15 billion. The pace of the recovery, however, has been modest, and faster growth is needed if Ukraine is to catch up with its regional peers and lift per capita income levels that have declined to among the lowest in the region.

Abstract

Following the 2014-15 crisis, the economy is growing again and tight fiscal and monetary policies have greatly reduced internal and external imbalances. Inflation has been successfully brought down and reserves-while still being relatively low-have doubled to US$15 billion. The pace of the recovery, however, has been modest, and faster growth is needed if Ukraine is to catch up with its regional peers and lift per capita income levels that have declined to among the lowest in the region.

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Ukraine’s economic program under the Extended Fund Facility (EFF). The completion of this review enables the disbursement of SDR 734.05 million (about US$1.00 billion), which would bring total disbursements under the arrangement to SDR 6,178.26 million (about US$8.38 billion).

The Executive Board today also concluded the 2016 Article IV consultation with Ukraine. A respective press release will be issued separately.

Ukraine’s four-year SDR 12.348 billion (about US$17.5 billion at the time of approval of the arrangement) EFF was approved on March 11, 2015 (see Press Release No. 15/107) to support the government’s economic program, which aims to put the economy on the path to recovery, restore external sustainability, strengthen public finances, maintain financial stability, and support economic growth by advancing structural and governance reforms, while protecting the most vulnerable.

Following the Executive Board’s discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:

“The Ukrainian economy is showing welcome signs of recovery. Growth is returning, inflation has been brought down, and international reserves have doubled. This progress owes much to the authorities’ decisive policy actions, including sound macroeconomic policies. The recent stabilization provides a promising basis for further growth.

“To achieve faster, sustainable growth, needed to lift incomes and enable Ukraine to catch up with its regional peers, structural reforms to improve the business environment and attract investment need to be accelerated. A start needs to be made with privatization and developing a market for agricultural land. Corruption needs to be tackled decisively. Despite the creation of new anticorruption institutions, concrete results have yet to be achieved.

“Notwithstanding the large fiscal adjustment, public debt remains high. The urgency of structural fiscal reforms to ensure medium-term sustainability has increased, as pressures to raise wages and pensions are building. Ukraine cannot afford to delay comprehensive pension reform much longer, including by raising the effective retirement age. Sustained efforts are also needed to improve revenue administration and advance public administration reform.

“The National Bank of Ukraine (NBU) has skillfully managed monetary policy during a very challenging period. It will be important to safeguard the NBU’s independence and for monetary policy to remain focused on containing inflation and rebuilding international reserves within a flexible exchange rate regime. This will also make room for the gradual removal of remaining administrative measures.

“Impressive progress has been made in rehabilitating the banking system, but efforts need to continue to restore banks’ soundness and reinforce their ability to support growth. The recent nationalization of Ukraine’s largest bank was an important step to safeguard financial stability, but must now be followed by firm efforts to ensure repayment of loans to minimize the cost to taxpayers. The recapitalization of other banks and the unwinding of related-party exposures need to be completed.

“Ukraine’s international partners have provided substantial financial and technical support to the authorities’ efforts to strengthen the economy, and their continued assistance remains important for the success of the program. Good-faith efforts to resolve the remaining sovereign arrears must continue.”

Ukraine: 2016 Article IV Consultation and third review under the Extended Arrangement, Requests for a Waiver of Non-Observance of a Performance Criterion, Waiver of Applicability, Rephasing of Access and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Ukraine
Author: International Monetary Fund. European Dept.