Ukraine: Request for Stand-by Arrangement—Press Release; Staff Report; and Statement by the Executive Director for Ukraine

Request for Stand-by Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Ukraine

Abstract

Request for Stand-by Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Ukraine

Introduction

1. Over the last five years, the Ukrainian authorities had been able to maintain macro-economic stability and restart growth. Following the deep economic crisis of 2014–15, growth resumed in 2016 and gradually picked up pace. Sound fiscal and monetary policies resulted in a sharp reduction in Ukraine’s external and internal imbalances. Public debt was put on a downward path and international reserves recovered. Macro-economic policies remained on track during the 2019 election year, anchored by the SBA approved in late 2018.

2. Efforts to create a more dynamic and competitive economy fell short of expectations, however. Despite some initial successes under recent IMF-supported programs, reforms increasingly faced resistance from vested interests, and court rulings undermined reform progress, especially in tackling corruption and financial sector reforms. As a result, investment, and notably foreign direct investment, continued to be held back by a difficult business environment, and growth was too low to noticeably close the income gap with Ukraine’s peers.

3. The political transition in 2019 provided the authorities with a mandate and opportunity to address the obstacles to growth and advance major economic reforms. President Zelenskyi was swept into power on an anti-establishment and anti-corruption platform. The president’s party, Servant of the People, obtained an unprecedented absolute majority in parliament.

4. However, the humanitarian and economic crisis stemming from the COVID-19 pandemic, has created obstacles on Ukraine’s road toward stronger inclusive growth. Protecting lives and livelihoods has shifted to a first order policy priority. With global uncertainty running high and containment measures depressing global and domestic demand, and in the presence of severe market dislocations and sharp declines in investment and remittances, conditions were no longer favorable for pushing forward much-needed reforms in competition, market functioning, and particularly around the divestment of state interests in economic activity.

5. In this context, the authorities are requesting a new 18-month SBA that aims at providing financial support and ensuring that the much weaker economic environment does not lead to an unwinding of recent gains. This succeeds the 14-month SBA that was approved in December 2018, which focused on maintaining stability during the election year. The new program aims to provide balance of payments and budget support, consolidating achievements to date, and moving forward on a critical subset of macro-critical measures to reduce key vulnerabilities and ensure that Ukraine is well-poised to return to growth and resume broader reform efforts when the crisis ends (see ¶11).

6. Risks are very large. The program’s baseline assumptions are conservative, and assume sizable shocks to growth and an erosion of buffers, followed by a very gradual recovery as the economy is re-opened later this year. The policy responses supported under the program are appropriate, with existing policy space augmented by a sizable (about US$8 billion in total) increase in external financing. However, the uncertainty about the severity and length of the global downturn is exceptionally high, as are estimates about the magnitude of the cyclical and structural impact of the crisis, both globally and in Ukraine. Moreover, uncertainty over the degree of balance sheet damage and emergence of further macro-financial pressures pose added risks. In addition, in the current stressed political environment sound policy responses could lose out to populism, and, in the absence of a strong focus on sustaining an anti-corruption and judicial reform agenda, the power of the state to insulate resources from the control of vested interests may weaken. The conflict in the eastern part of Ukraine continues to weigh on the outlook.

Economic Developments and Outlook

A. Impressive Gains in Macro-Stabilization Prior to the COVID-19 Crisis

7. Growth had continued through early 2020. Following a sharp contraction in 2014–15, growth resumed and gradually picked up pace from just over 2 percent in 2016 to 3¼ percent in 2019. The recovery was broad-based, with last year’s acceleration driven by a record agricultural harvest and strong domestic consumption (Figure 1 and Tables 16).

Figure 1.
Figure 1.

Ukraine: Real Sector Indicators

Citation: IMF Staff Country Reports 2020, 197; 10.5089/9781513547015.002.A001

Table 1.

Ukraine: Selected Economic and Social Indicators, 2018–2025

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Sources: Ukrainian authorities; World Bank, World Development Indicators; and IMF staff estimates.

Data based on SNA 2008, exclude Crimea and Sevastopol.

The general government includes the central and local governments and the social funds.

Table 2.

Ukraine: General Government Finances, 2018–2025 1/

(Billions of Ukrainian Hryvnia)

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Sources: Ministry of Finance; National Bank of Ukraine; and IMF staff estimates and projections.

National methodology, cash basis.

Includes the unallocated portion of expenditures from the COVID fund.

Domestic bonds have been adjusted to reflect discrepancy between the above-the-line and the below-the-line deficits.

Advanced pension payments and part of the NBU profit transfer are considered one-off operations.

Table 2.

Ukraine: General Government Finances, 2018–2025 1/ (concluded)

(Percent of GDP)

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Sources: Ministry of Finance; National Bank of Ukraine; and IMF staff estimates and projections.

National methodology, cash basis.

Scaled as a percent of 2020 GDP.

Includes the unallocated portion of expenditures from the COVID fund.

Domestic bonds have been adjusted to reflect discrepancy between the above-the-line and the below-the-line deficits.

Advanced pension payments and part of the NBU profit transfer are considered one-off operations.

Table 3.

Ukraine: Balance of Payments, 2018–2025 1/

(Billions of U.S. dollars, unless otherwise indicated)

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Sources: National Bank of Ukraine; and IMF staff estimates and projections.

Based on BPM6.

Official capital transfers are reported below the line.

Includes banks’ debt for equity operations.

Table 4.

Ukraine: Gross External Financing Requirement, 2018–2025

(Billions of U.S. dollars)

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Sources: National Bank of Ukraine; and IMF staff estimates and projections.

Reflects changes in banks’, corporates’, and households’ gross foreign assets as well as

The IMF composite measure is calculated as a weighted sum of short-term debt, other portfolio and investment liabilities, broad money, and exports. Official reserves are recommended to be in the range of 100–150 percent of the appropriate measure.

Table 5.

Ukraine: Monetary Accounts, 2018–2025

(Billions of Ukrainian hryvnia unless otherwise noted)

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Sources: National Bank of Ukraine; and IMF staff estimates and projections.

Includes claims for recapitalization of banks.

Deflated by CPI (eop), at current exchange rates, year-on-year percent change.