Press Release No. 04/62

"Parliamentary approval of the government's economic reform strategy and wide-ranging tax and pension reforms, progress in eliminating VAT refund arrears, and the strengthening of banking sector capitalization are particularly welcome steps. Looking forward, the government's plan to improve governance and enhance the business climate will be key to ensure that Ukraine sustains its medium-term growth potential.

"The 2004 budget will contribute to preserving macroeconomic stability, and the recent reductions in tax exemptions and sectoral VAT preferences, and in corporate and personal income tax rates are welcome. However, government spending should remain in line with the budget, in view of the uncertainty associated with the full impact of the reductions in tax rates.

"The National Bank of Ukraine's stewardship of monetary policy has contributed to subdued inflationary pressures. Rapid credit expansion poses a risk to financial sector stability and needs to be monitored closely. In this regard, the recent strengthening of the supervisory and prudential regulatory framework is welcome, though further steps deserve consideration.

"It is essential to strengthen the role of the private sector and business climate to foster economic growth and increase foreign direct investment. Continued improvements in governance, reform of the energy sector, and the adoption of a transparent privatization process will contribute to these objectives.

"Despite the positive macroeconomic performance and outlook, vulnerabilities remain, especially in the fiscal, financial, and external areas. Full implementation of the program is critical to sustain non-inflationary economic growth and improve living standards," Ms. Krueger said.

ANNEX

Background

Ukraine's macroeconomic performance has improved substantially since the 1998-99 financial crises. Real GDP grew by an estimated 9.3 percent in 2003, despite the poor grain harvest, completing the fourth year of Ukraine's strong economic recovery. The expansion was driven by an 18 percent increase in manufacturing, double-digit growth of transport services and domestic trade, as well as a sharp rebound in construction. The sustained economic recovery has been supported by the establishment of macroeconomic stability, in particular the maintenance of a prudent fiscal stance. Ukraine has regained access to international capital markets and there is no immediate balance of payment need.

The Main Program Objectives

Support sustained economic growth. The 2004 budget is based on a conservative projection of about 5 percent real GDP. To sustain economic growth over the medium term, the authorities aim to improve the investment climate by strengthening governance, reforming the tax system, strengthening the financial sector, and joining the WTO.

Keep inflation under control. The objective for 2004 is to reduce consumer price inflation to the mid-single digits. This is likely to require a tighter monetary policy and the maintenance of prudent fiscal policy, although the high volatility of food prices implies significant uncertainty about the CPI outlook.

Reduce vulnerabilities. Executing the 2004 budget and maintaining a low deficit thereafter will support the continued reduction in public debt ratios, providing a safety net for potential fiscal costs of future structural reforms or economic shocks. Addressing the financial problems of the energy sector will help reduce quasi-fiscal deficits and contingent liabilities. To reduce credit risk in the banking sector, the National Bank of Ukraine is strengthening prudential regulations and banking supervision with a view to discourage imprudent lending practices.

Ukraine joined the IMF on September 3, 1992; its quota is SDR 1.372 billion (about US$2.018 billion). Its outstanding use of IMF credit currently totals SDR 1.201 billion (about US$1.766 billion).