SPOTLIGHT

IMF Support for Ukraine

On March 11, 2015, the IMF Executive Board approved a four-year, $17.5 billion Extended Fund Facility (EFF) arrangement for Ukraine, with immediate disbursement of about $5 billion.

IMF Managing Director Christine Lagarde Says Executive Board Approves US$17.01 Billion Program for Ukraine

The program has challenging goals: to put the economy on the path to recovery, restore external sustainability, strengthen public finances, support economic growth by advancing structural and governance reforms, and protect the country’s most vulnerable citizens.

After independence in 1991, Ukraine entered into several IMF-supported programs—including after the 2008 financial crisis—but none achieved the objective of prompting sustained reform. The 2010 program ended unsuccessfully, and Ukraine’s macroeconomic problems intensified. Wages and production costs rose, but productivity did not. Eventually competitiveness slipped so much that the economy stopped growing and exports stagnated.

Rapid deterioration in 2014

The new government that took office in February 2014 embarked on a program to secure macroeconomic and financial stability. However, the situation deteriorated rapidly after the armed conflict in the East intensified. In the fourth quarter of 2014, GDP contracted 14.8 percent from the year before, and additional financing needs surged. The foreign exchange market was destabilized, and banks came under stress.

The government responded with a more ambitious and comprehensive program supported by substantial new financing from the international community, including the IMF. The first step of the new IMF-supported program is to stabilize Ukraine’s finances. It covers Ukraine’s external financing needs, estimated at about $40 billion over 2015–18, along with other international assistance and a debt-restructuring operation. The country’s official reserves are expected to triple to about $18 billion by end-2015. Subdued by a tight monetary stance, inflation should recede toward single digits by early 2017.

Tackling deficits, protecting the vulnerable

In addition, lower deficits can help to reduce financing needs and public debt. This includes raising energy tariffs to restrain the state-owned gas monopoly’s quasi-fiscal deficit. To protect the most vulnerable from the impact of these measures and build support for the reforms, total spending on social assistance programs is targeted to reach 4.1 percent of GDP in 2015, an increase of 30 percent from 2014, with assistance for energy bills rising fourfold.

The next step is to revive growth by restoring competitiveness, starting with a flexible exchange rate. In addition, the banking system is to be brought back to health with recapitalization and liquidation efforts so that credit growth can resume.

Addressing corruption and vested interests

Equally important, decisive measures are to be taken to address structural impediments preventing sustained growth that can raise living standards to that of Ukraine’s neighbors, including deregulation and reform of tax administration, transparency, improvements in public financial management, and reforms of state-owned enterprises. Finally, corruption is targeted with strengthened legislation, measures to enhance the effectiveness of the judiciary, and steps to curb the potentially distorting influence of vested interests in Ukraine.

The Ukrainian authorities have made determined efforts in recent months to address deep-rooted problems and make a break from the unsustainable policies of the past. The IMF and the international community are supporting Ukraine’s pursuit of its reform program.