Smile and wave

The Executive Board of the International Monetary Fund (IMF) approved a two-year Stand-By Arrangement (SBA) for SDR 11 billion (about US$16.4 billion) to help the authorities restore financial and economic stability and strengthen confidence. The SBA request entails exceptional access to IMF resources equivalent to 802 percent of Ukraine's quota in the Fund, and was approved under the Fund's fast-track Emergency Financing Mechanism. Today's approval enables the immediate disbursement of SDR 3 billion (about US$4.5 billion).

The International Monetary Fund expects post-crisis economic recovery in Ukraine to start in mid-2009.

This is stated in the memorandum of economic and financial policy that the Cabinet of Ministers, the National Bank of Ukraine, and the International Monetary Fund agreed.

According to the document, the IMF expects the Ukrainian economy to gradually recover in the medium-term future and expects the recovery to start sometime in the second half of 2009.

The Cabinet of Ministers, the National Bank of Ukraine, and the International Monetary Fund expect the GDP growth rate in Ukraine to reach 5-6% by mid-2010.

The authors of the memorandum expect the inflation rate in Ukraine to fall below 10% by the end of 2010 and stand at 5-7% from 2011.

Moreover, the Cabinet of Ministers, the National Bank of Ukraine, and the International Monetary Fund expect Ukraine’s current-account deficit to fall to 1-2% of the GDP in 2009 and the National Bank of Ukraine’s currency reserves to remain practically unchanged from the current level.

“Ukraine's economy has grown very rapidly since 2000, expanding by more than 7 percent on average. Initially, this reflected the utilization of large excess capacity and increased productivity supported by a series of structural reforms. Since 2005, growth has been propelled by real domestic demand, namely a credit boom driven by strong capital inflows as well as incomes policies that redistributed large terms-of-trade gains to the population.

By mid-2008, the economy was overheating. Credit growth exceeded 70 percent, CPI inflation exceeded 30 percent, wage growth settled in the 30-40 percent range, a buoyant property market pushed valuations to high levels, and imports surged at an annual rate of 50-60 percent. The current account deficit reached 7 percent of GDP in the second quarter of 2008,” the document says.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, issued the statement about main points of the adopted program.

“The authorities' program aims at restoring confidence in Ukraine's macroeconomic and financial stability by addressing the financial sector problems, facilitating adjustment to potentially large external shocks, and reducing inflation. The program is designed to respond flexibly to economic developments.

The program is based on projections that assume a global recession and continued deleveraging in international credit markets in 2009, implying a recession in Ukraine with deteriorating exports, limited external financing and a credit crunch. The projected impact on output—a 3 percent decline—is consistent with Ukraine's experience under similar circumstances in 2004-05. Under the program, inflation is expected to decrease to 17 percent by end-2009 from the projected 25.5 percent this year. The current account would compress to a deficit level of about 2 percent of GDP from the mid-2008 level of 7 percent.

Assuming a global recovery in the second half of 2009, the Ukrainian economy could be back at its estimated potential growth rate of 5-6 percent by 2011 with inflation at 5-7 percent by late 2011.Current account deficits are projected to remain small in 2010, in light of the weak economy, and to be moderate thereafter, allowing reserves to rise.

The key measures to achieve the objectives of the program focus on the following areas:

Monetary and Exchange Rate Policy

The program supports the implementation of a flexible exchange rate regime to help Ukraine better absorb the external shocks it now faces. Base money will be the near-term anchor for monetary policy until an inflation targeting regime can be implemented. The independence of the NBU will be strengthened, and in the near term, monetary policy will be tightened to help achieve the 2009 inflation objective of 17 percent. The program envisages eliminating exchange rate controls as soon as possible, and measures to improve the operation of the foreign exchange market, including cancellation of the foreign exchange transactions tax and a more transparent intervention policy.

Financial Sector Policy

The authorities intend to prepare a comprehensive bank resolution strategy that will include the resolution of problem banks and the recapitalization of viable banks to cushion the real economy from a potential credit crunch. The authorities have already resolved the sixth largest bank, Prominvest Bank, through a sale to a strategic investor.

The program further proposes to ensure that viable banks have access to liquidity; increase deposit insurance coverage to Hrv150,000 (about €20,000) from the current Hrv50,000, which will cover 99 percent of individual accounts; and strengthen the monitoring of banks, including through enhanced cross-border supervisory cooperation.

Fiscal Policy

The authorities will adopt a prudent fiscal stance while accounting for the need for recession-related social expenditures, including higher funding for unemployment insurance and targeted income support. Under the program, the deficit would not exceed 1 percent of GDP in 2008, and in 2009, the general government budget would be balanced (excluding bank recapitalization costs). Even with the substantial increase of 0.8 percent of GDP social spending during the recession, these fiscal targets are deemed attainable. However, given the uncertainties on economic prospects and the availability of financing, the authorities are prepared to adjust the targets as needed. To achieve their fiscal targets, the authorities are determined to correct the pricing policies in the energy sector and pursue a more balanced incomes policy by adjusting the minimum wage, pension, and social transfer increases in line with the projected inflation in 2009. These measures will help guard against higher inflation and depreciation. Ukraine has an adequate social safety net in place to protect the vulnerable against adjustment policies, which the authorities are prepared to expand should the need arise.

Ukraine joined the IMF as a member on September 3, 1992. Its quota is SDR 1,372 million (about US$2,049 million).

According to the Memorandum, it is a two-year agreement, and by 2011 Ukraine will have to return the sum exceeding the gold and currency reserves we have (now about 32 billion USD). If the loan is prolonged, the pay back will increase.

And another interesting point is that since 2005 Ukraine has been following the principle voiced by Viktor Yushchenko: in the future - without debts.” This amazing fact is stated on the web site of Foreign Ministry. Good principle. Sound. Unfortunately nobody gives money for its professing.