Karazin Kharkiv National University Ukraine : Economic situation and IMF support

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1. Karazin Kharkiv National University Ukraine : Economic situation and IMF support
2. Background: How did we get here?An IMF
3. A largely inadequate policy mix in previous
4. Growth well below potential since a tepid
5. Impact of the conflict and its intensification
6. Direct impact
7. Gradual depletion of reserves reflected imbalances and the impact of the conflict
8. Moving from a Stand By Arrangement to
9. Exceptional BoP pressures High probability that public
10. Exceptional access in perspective
11. IMF program part of a larger financing package
12. Exchange rate and monetary policiesFinancial sector stabilization and reformFiscal adjustmentEnergy sector reformStructural reforms5 key areas
13. Maintain a flexible exchange rate to restore
14. Inflation rose sharply in March-April, as a result of pass-through factors and has declined since
15. Enhanced revenues and collectionsElimination of fraudulent tax
16. Fiscal adjustment
17. Increased gas and heating tariffs over time
18. Energy tariff increase
19. National Anti Corruption BureauAML and asset disclosureImprovement
20. Low competitiveness and unfavorable business climate
21. Ongoing current account adjustmentEpisodes of exchange rate
22. Real wages declined sharply, although consumer confidence has moderately rebounded
23. Hryvnia deposits are rising while the decline in FX deposits is slowing
24. Credit to households has stabilized at a lower level
25. The agreement with committee of creditors:Haircut of
26. Three objectives for the debt operationReduce annual
27. Extension or worsening in geopolitical tensionsTensions in
28. A critical and challenging reform program for
29. More information atThe IMF Resident Representative Office in Ukraine Websitehttp://www.imf.org/external/country/UKR/rr/index.htm Thank you!
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Background: How did we get here?An IMF supported reform programChallenges and risks: going forwardEconomic outlook of Ukraine

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Karazin Kharkiv National University Ukraine : Economic situation and IMF support

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Слайд 1Karazin Kharkiv National University Ukraine: Economic situation and IMF support
Jerome Vacher
IMF

Resident Representative in Ukraine

Kharkiv, September 3, 2015

Karazin Kharkiv National University Ukraine: Economic situation and IMF supportJerome VacherIMF Resident Representative in UkraineKharkiv, September 3,

Слайд 2
Background: How did we get here?
An IMF supported reform program
Challenges

and risks: going forward

Economic outlook of Ukraine

Слайд 3A largely inadequate policy mix in previous years:
Large fiscal and

quasi fiscal deficit
Absent any adjustment and based on budget

adopted in Jan. 2014 combined deficit ＞12 percent of GDP
Fixed exchange rate
Large current account deficit
Low level of reserves

Background: Years of unsustainable macroeconomic policies…

A largely inadequate policy mix in previous years:Large fiscal and quasi fiscal deficit Absent any adjustment and

Слайд 4Growth well below potential since a tepid recovery from the

2008-2009 crisis
Pervasive corruption
Poor business environment
Lack of FDI
Productivity lags
Lack of

commitment on significant economic reforms

Background: Lack of structural reforms

Growth well below potential since a tepid recovery from the 2008-2009 crisis Pervasive corruptionPoor business environmentLack of

Слайд 5Impact of the conflict and its intensification in the summer

of 2014:
Direct impact:
Real sector (industrial production, export, import)
Fiscal (revenues, expenditures)
Financial

sector and demand for Fx
Most important: impact on confidence (domestic, external)

Strong commitment to new policies but impact of the conflict

Impact of the conflict and its intensification in the summer of 2014:Direct impact:Real sector (industrial production, export,

Слайд 6Direct impact

Слайд 7Gradual depletion of reserves reflected imbalances and the impact of

the conflict

Слайд 8Moving from a Stand By Arrangement to an Extended Fund

Facility:
4 year arrangement (instead of 2 years)
Longer repayment period
Focus

on structural reforms
Frontloaded:
1st tranche: 5 bn USD (of which 2.7 bn USD in budget support)
2nd tranche: 1.7bn USD
Total expected for 2015: 10 bn USD

A new IMF supported program

Moving from a Stand By Arrangement to an Extended Fund Facility:4 year arrangement (instead of 2 years)Longer

Слайд 9
Exceptional BoP pressures
High probability that public debt is sustainable

in the medium term
Prospects of gaining or regaining market access
Strong

prospect of success of policy program (adjustment plans, institutional and political capacity)

Exceptional access criteria

Exceptional BoP pressures High probability that public debt is sustainable in the medium termProspects of gaining or

Слайд 10Exceptional access in perspective

Слайд 11IMF program part of a larger financing package

Слайд 12
Exchange rate and monetary policies
Financial sector stabilization and reform
Fiscal adjustment
Energy

sector reform
Structural reforms

5 key areas

Exchange rate and monetary policiesFinancial sector stabilization and reformFiscal adjustmentEnergy sector reformStructural reforms5 key areas

Слайд 13
Maintain a flexible exchange rate to restore competitiveness and foster

accumulation of reserves
Focus monetary policy on domestic price stability
Prepare to

move to inflation targeting

Fx and monetary policies

Maintain a flexible exchange rate to restore competitiveness and foster accumulation of reservesFocus monetary policy on domestic

Слайд 14Inflation rose sharply in March-April, as a result of pass-through

factors and has declined since

Слайд 15Enhanced revenues and collections
Elimination of fraudulent tax evasion schemes
Higher excises,

Social Security Contribution reform
Closing of VAT loopholes, in particular in

agriculture
Revenue administration reform
Pension reform

Fiscal adjustment

Enhanced revenues and collectionsElimination of fraudulent tax evasion schemesHigher excises, Social Security Contribution reformClosing of VAT loopholes,

Слайд 16Fiscal adjustment

Слайд 17Increased gas and heating tariffs over time towards cost recovery
Accompanied

by enhanced sustainable social assistance measures to mitigate the impact

on the poorest (shift of subsidies directly to households that need it)
Improvements in governance and transparency
Strengthening of payment discipline

Energy sector reform

Increased gas and heating tariffs over time towards cost recoveryAccompanied by enhanced sustainable social assistance measures to

Слайд 18Energy tariff increase

Слайд 19
National Anti Corruption Bureau
AML and asset disclosure
Improvement of the business

climate and deregulation
Effectiveness of the judiciary
Reform of state owned enterprises

Governance

and the business climate

National Anti Corruption BureauAML and asset disclosureImprovement of the business climate and deregulationEffectiveness of the judiciaryReform of

Слайд 20Low competitiveness and unfavorable business climate

Слайд 21Ongoing current account adjustment
Episodes of exchange rate volatility and lack

of confidence in the banking system
Security developments continuing to drive

market volatility
Pressure on household incomes and corporate restructurings
Tentative signs of stabilization: industrial production, real GDP bottoming out

Ongoing developments

Ongoing current account adjustmentEpisodes of exchange rate volatility and lack of confidence in the banking systemSecurity developments

Слайд 22Real wages declined sharply, although consumer confidence has moderately rebounded

Слайд 23Hryvnia deposits are rising while the decline in FX deposits

is slowing

Слайд 24Credit to households has stabilized at a lower level

Слайд 25The agreement with committee of creditors:
Haircut of 20% on sovereign

and guaranteed debt
Interest rate slightly higher – 7.75% and current

7.2%
Maturity extensions
Value recovery instrument

An important milestone in debt operation has been reached

The agreement with committee of creditors:Haircut of 20% on sovereign and guaranteed debtInterest rate slightly higher –

Слайд 26
Three objectives for the debt operation
Reduce annual post-program gross financing

needs
Place public debt on a downward path
Provide targeted external debt

service relief

The agreement satisfies the three objectives for the debt operation set by the IMF

Three objectives for the debt operationReduce annual post-program gross financing needsPlace public debt on a downward pathProvide

Слайд 27Extension or worsening in geopolitical tensions
Tensions in the East and

relations with Russia
Financial sector risks
Program ownership, domestic politics and policy

slippages
Financing

However, risks remain on the downside

Extension or worsening in geopolitical tensionsTensions in the East and relations with RussiaFinancial sector risksProgram ownership, domestic

Слайд 28A critical and challenging reform program for Ukraine: rebuilding confidence

and institutions
Commitment, program ownership and maintaining the reform momentum will

continue to be key
Support of reforms by the international community also fundamental
Crisis should be used as a unique opportunity to reform
Return to growth might be slower, important to show short term decisive gains (e.g. anti-corruption) and medium term path to the population.

Conclusions

A critical and challenging reform program for Ukraine: rebuilding confidence and institutionsCommitment, program ownership and maintaining the

Слайд 29
More information at
The IMF Resident Representative Office in Ukraine

Website
http://www.imf.org/external/country/UKR/rr/index.htm

Thank you!

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Karazin Kharkiv National University Ukraine : Economic situation and IMF support

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Слайд 1Karazin Kharkiv National University Ukraine: Economic situation and IMF supportJerome VacherIMF

Resident Representative in UkraineKharkiv, September 3, 2015

Слайд 2Background: How did we get here?An IMF supported reform programChallenges

and risks: going forwardEconomic outlook of Ukraine

Слайд 3A largely inadequate policy mix in previous years:Large fiscal and

quasi fiscal deficit Absent any adjustment and based on budget

Слайд 4Growth well below potential since a tepid recovery from the

2008-2009 crisis Pervasive corruptionPoor business environmentLack of FDIProductivity lagsLack of

Слайд 5Impact of the conflict and its intensification in the summer

of 2014:Direct impact:Real sector (industrial production, export, import)Fiscal (revenues, expenditures)Financial

Слайд 6Direct impact

Слайд 7Gradual depletion of reserves reflected imbalances and the impact of

the conflict

Слайд 8Moving from a Stand By Arrangement to an Extended Fund

Facility:4 year arrangement (instead of 2 years)Longer repayment period Focus

Слайд 9Exceptional BoP pressures High probability that public debt is sustainable

in the medium termProspects of gaining or regaining market accessStrong

Слайд 10Exceptional access in perspective

Слайд 11IMF program part of a larger financing package

Слайд 12Exchange rate and monetary policiesFinancial sector stabilization and reformFiscal adjustmentEnergy

sector reformStructural reforms5 key areas

Слайд 13Maintain a flexible exchange rate to restore competitiveness and foster

accumulation of reservesFocus monetary policy on domestic price stabilityPrepare to

Слайд 14Inflation rose sharply in March-April, as a result of pass-through

factors and has declined since

Слайд 15Enhanced revenues and collectionsElimination of fraudulent tax evasion schemesHigher excises,

Social Security Contribution reformClosing of VAT loopholes, in particular in