Approves US$15.15 Billion Stand-By Arrangement (15/10/2010)

The global economic financial crisis hit Ukraine hard in late 2008 and 2009. As a major steel exporter and borrower in international markets, Ukraine’s economy was severely hit by the decline in demand for steel products and reduced access to capital markets—the impact of which was magnified by pre-existing economic and financial vulnerabilities. Confidence in the currency and the banks waned, causing a system-wide run on deposits; real GDP collapsed, along with domestic demand; and falling fiscal revenues strained public finances.

Notwithstanding the toll of the crisis on Ukraine’s economy, the 2008 program managed to restore macroeconomic and financial stability. The sharp adjustment was to an extent unavoidable given the large pre-existing imbalances. However, measures to restore banking system confidence helped stabilize deposits and exchange rate pressures eased over time. By mid-2009, an incipient recovery was under way.

Against a difficult economic environment and a complex political situation, the program eventually went off track as policies weakened and reforms stalled in the run up to the Presidential elections.

Program Summary

Key objectives of the authorities’ program are to consolidate public finances, restore banking system soundness, and develop a more robust monetary policy framework. To help achieve this, the government will implement reforms and institutional changes, including tax and expenditure policies, pension and energy sector reforms, and measures to strengthen central bank independence and rehabilitate the banking system. Strict adherence to these policies will help deepen market access, facilitating exit from Fund financial support.

The economic reform program aims to support the authorities’ agenda in four key areas:

• Restore confidence and fiscal sustainability by reducing the general government deficit to 3.5 percent of GDP in 2011 and 2.5 percent in 2012 and setting public debt firmly on a downward path below 35 percent by 2015;

• Initiate reforms to modernize the gas sector and eliminate Naftogaz’s deficit starting from 2011, including through gas tariff increases and a price mechanism that depoliticizes price setting of public utilities. A new gas law adopted in early July will improve efficiency through unbundling production, transit, and distribution to end-users, and allowing new entrants and investment into the domestic gas sector;

• Restore and safeguard banks’ soundness through completion of recapitalization plans by end-2010 and strengthened supervision, and;

• Develop a more robust monetary policy framework focused on domestic price stability under a flexible exchange rate regime to be implemented by a more independent National Bank of Ukraine.