Via IMF (Den Internationale Valutafond)

IMF Staff Concludes Mission to Ukraine

September 27, 2019

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

An International Monetary Fund (IMF) mission, led by Ron van Rooden,
visited Kyiv during September 12-26, to hold discussions for the 2019
Article IV consultation with Ukraine. The mission also initiated
discussions on a new program that could be supported under the IMF’s
Extended Fund Facility (EFF). At the conclusion of the visit, Mr. van
Rooden made the following statement:

“The mission discussed the outlook and challenges for the Ukrainian economy
in the context of the 2019 Article IV consultation. Following the deep
economic crisis of 2014–15, the Ukrainian authorities have restored
macro-economic stability and growth has resumed. The economy is growing at
a pace of 2½–3½ percent. Sound fiscal and monetary policies and exchange
rate flexibility have resulted in a sharp reduction in Ukraine’s external
and internal imbalances. The overall fiscal deficit has been limited to
just above 2 percent of GDP in the last two years and is expected to remain
at the same level this year. The energy sector’s quasi-fiscal deficit has
been eliminated—a major accomplishment. Moreover, the current account
deficit has fallen to 3–3½ percent of GDP and reserves have recovered to
over US$20 billion. Decisive efforts to restructure the banking system have
been critical for economic stabilization and the resumption of growth.

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“Growth is too low, however, to noticeably close the income gap with
Ukraine’s neighbors. Per capita GDP (in PPP terms) in Ukraine is still very
low—just 20 percent of the EU average, the second lowest level of all
Central and Eastern European countries. Growth is held back by a weak
business environment—with shortcomings in the legal framework, pervasive
corruption, and large parts of the economy dominated by inefficient
state-owned enterprises or by oligarchs—deterring competition and
investment. A regional comparison shows that the most significant
differences in reform progress between Ukraine and its neighbors are in the
quality of the legal institutional framework. While there has been progress
in setting up new institutions to fight corruption, tangible results have
yet to be achieved. Because of the poor business environment, investment,
and notably foreign direct investment, has been much lower in Ukraine than
in other countries in the region. This lack of investment has limited
productivity growth (labor productivity amounts to less than 10 percent of
average productivity in EU countries), private sector job creation, and
improvements in living standards, despite Ukraine’s well-skilled labor
force. As a result, many workers seek job opportunities abroad.

“Higher, sustainable and inclusive growth is needed for incomes in Ukraine
to catch up to the levels seen in neighboring countries. This will depend
crucially on the implementation of ambitious reforms to support Ukraine’s
transition to a full-fledged market economy.
This is not an easy task and it has been a challenge in the past, when
stop-and-go policies resulted in the repeated buildup of large
imbalances and economic crises.

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“Economic policies will need to be focused on maintaining macro-economic
stability, while creating the conditions for achieving faster growth.
Macro-economic stability is a sine qua non for realizing faster
growth. This requires maintaining prudent fiscal policies to ensure debt
sustainability, while improving spending efficiency and outcomes—including
in health care and education—and supporting vulnerable households through a
well-targeted social safety net. It also means maintaining a cautious
monetary policy, aimed at further reducing inflation and building reserves
within a flexible exchange rate regime. And finally, it is crucial to
safeguard financial stability, while strengthening financial intermediation
and minimizing the cost to taxpayers from bank resolutions. Ensuring
central bank independence is essential for implementing these monetary and
financial sector policies.

“Lifting the economy to a higher growth path also requires accelerating
structural reforms. This includes most of all firmly establishing the rule
of law—including through judicial reform—and decisively tackling
corruption. Equally important are enhancing competition and opening up
markets—particularly in the energy and agricultural sectors—and reducing
the role of the state and oligarchs in the economy. Wage growth needs to be
consistent with improvements in labor productivity, to safeguard
competitiveness. With sustained reform implementation, Ukraine can become
more closely integrated with the European economy and its supply chains,
taking greater advantage also of the Deep and Comprehensive Free Trade
Agreement with the EU.

“Following this year’s elections, the authorities now have an opportunity
to advance much-needed reforms. They have set themselves the ambitious task
of transforming the economy and achieving stronger growth to improve living
standards of all Ukrainians, while safeguarding macro-economic stability,
and they have already secured passage of various pieces of reform
legislation. The authorities have requested a new IMF-supported program to
help them achieve these objectives, by providing an anchor for their
economic policies and helping to cover financing needs in the coming years.
The mission started discussions on a new 3-year arrangement that could be
supported under the IMF’s Extended Fund Facility. The mission has had
productive discussions on policies for a new program these last two weeks,
especially on fiscal and monetary policies, as well as key reform measures.
It also underscored the importance of central bank independence and
safeguarding financial stability, as well as the need to make every effort
to minimize the fiscal costs of bank resolutions. Discussions on the new
program will continue in the coming weeks.”

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IMF Communications Department

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: