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Statement by the IMF Mission to Ukraine (Text)

July 06, 2012

Following is the text of the mission statement from the International Monetary Fund visit to Ukraine:

IMF Executive Board Concludes 2012 Article IV Consultation with Ukraine

On June 29, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ukraine.

Background

Ukraine had a strong economic recovery in 2010-11, following the deep recession ensuing from the 2008-09 global crisis. However, recovery is now slowing. Lower demand for Ukraine’s exports and slow credit growth are weighing on economic growth, which is projected at 3 percent this year. Inflation is projected to rise to 7.4 percent during the year, reflecting wage pressures and rising food prices. Weakening external demand is expected to widen the current account deficit to 6.5 percent of GDP.

Risks remain elevated in an uncertain global environment. A significant contraction in global demand, commodity price shocks, or deleveraging by European banks would pose risks to external stability given Ukraine’s high external financing requirements.

Following a 3.1 percent of GDP government deficit improvement in 2011, the fiscal position is now under pressure. Public debt fell from 41 to 36 percent in 2011 and pension reform improved medium-term fiscal prospects. This year, a supplementary budget has increased wage and pension expenditures and absent increased revenue collection to finance this, staff projects the general government deficit at 3¼ percent of GDP, compared to a target of 1.8 percent. The state-owned gas company’s deficit is projected to reach 2 percent of GDP this year, adding to the weight of the general government deficit on public finances.

The current tight monetary stance aims at addressing external risks and containing inflation. However, this combined with deleveraging by banks has constrained credit growth. Liquidity tightening as well as prudential and administrative measures have contributed to exchange rate stability.

Banking sector reforms have advanced although balance sheets remain week. The banking system appears well capitalized. Nonetheless, profitability is near zero, nonperforming loans remain high, and banks balance sheets remain exposed to currency movements. Measures have also been taken to deregulate the economy and to simplify the tax and customs codes that have the potential to improve the business environment.

Executive Board Assessment

Executive Directors welcomed the progress made by Ukraine since the 2008-09 crisis, including the rebound in growth, and the decline in inflation and in the general government deficit. Directors also commended the authorities’ efforts to advance several reforms, particularly the approval of the pension law and the new tax and customs codes. They noted, however, that the country faces lingering vulnerabilities due to low reserve cover, large external and fiscal funding needs, and the difficult external environment. Directors stressed the need for strengthened policies and reforms to reduce these vulnerabilities, build buffers for domestic and external stability, and improve mediumterm growth prospects.

Directors underscored that fiscal consolidation remains a priority. They welcomed the authorities’ determination to meet the 2012 deficit target and encouraged them to identify quickly contingency measures to safeguard against possible shortfalls. Over the medium term, continued efforts will be needed to strengthen public revenue, reform the public sector, and reorient spending towards growthenhancing priorities.

Directors stressed that a comprehensive reform of the energy sector is critical to reduce the strain on the budget and gain energy independence. They urged the authorities to gradually increase gas and heating tariffs and enhance payment compliance. Increases in domestic energy prices will be essential to bring supply and demand into balance, alongside increased investment in domestic energy production. Energy efficiency improvements and bettertargeted subsidies to protect the poorest should also be important components of the energy sector strategy.

Directors advised that monetary policy should focus more on price stability. They noted that a tighter monetary stance would be warranted if balance of payments or inflationary pressures intensify. Directors concurred that gradually increasing exchange rate flexibility would help mitigate external shocks, strengthen reserves, and preserve competitiveness. Increased flexibility should be supported by efforts to reduce balance sheet mismatches in the financial sector, along with fiscal, monetary and wage policies consistent with maintenance of price stability.

Directors welcomed the progress made in the banking sector. They urged the authorities to address the remaining weaknesses, notably the high level of nonperforming loans, low profitability, and currency mismatches, to allow the sector to fully support economic growth. Directors welcomed the plans to reduce banking system exposure to foreign exchange risks, including through limited sales to banks of foreign currency linked bonds issued by the government. More broadly, Directors encouraged the authorities to press ahead with their efforts to unwind crisis era policies.

Directors welcomed progress under the President’s Economic Reform Plan which aims at promoting growth, improving the business climate, and attracting investment. Achieving these objectives will require implementation of comprehensive structural reforms, including stronger governance and further privatization.

SOURCE: International Monetary Fund


To contact the reporter on this story:
Ainhoa Goyeneche in Washington at  agoyenechecu@bloomberg.net

To contact the editor responsible for this story:
Marco Babic at  mbabic@bloomberg.net




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