The Executive Board of the International Monetary Fund (IMF) today completed the first review of Ukraine’s performance under an economic program supported by a Stand-By Arrangement (SBA). The completion of this review enables the disbursement of SDR 914.67 million (about US$1.39 billion), which would bring total disbursements under the arrangement to SDR 2.97 billion (about US$4.51 billion).

Overall, economic policies have generally been implemented as agreed in the program, as the Ukrainian authorities have persisted in taking difficult measures despite the volatile political situation. However, the conflict in the eastern part of the country is taking its toll on the economy and society, and compensatory measures will be critical to achieve key program targets agreed for 2014 and beyond. The program remains highly challenging and continues to hinge crucially on the assumption that the conflict will subside in the coming months.

In completing the review, the Executive Board approved waivers of nonobservance of performance criteria related to international reserve accumulation and the cash deficit of the general government on the basis of corrective actions taken. The Board also approved waivers of applicability of performance criteria related to the cash deficit of the general government, the cumulative change in net domestic assets of the central bank and publicly guaranteed debt. In addition, in light of the slight delay in completing the first review of the program, the Board approved the authorities’ request for merging the remaining two reviews scheduled for 2014, while keeping the total financing under the arrangement unchanged.

Ukraine’s two-year SDR 10.97 billion (about US$16.67 billion) SBA was approved on April 30, 2014 (see Press Release No. 14/189) to support the government’s economic program, which aims to restore macroeconomic stability, strengthen economic governance and transparency, and launch sound and sustainable economic growth while protecting the vulnerable groups.

Following the Executive Board discussion, Ms. Christine Lagarde, IMF Managing Director and Chair, stated:

“The Ukrainian authorities have firmly implemented policies to stabilize the economy and revive growth. This strong policy record despite the much worse-than-expected environment is encouraging in light of the implementation problems that derailed previous programs and thus augurs well for the authorities’ ability to keep the program on track. However, the escalating conflict in the East and ongoing geopolitical tensions have weighed heavily on the economy and society, causing a deeper recession and deviations from program targets in the short term, in particular on the central bank’s net international reserves and the budget and Naftogaz deficits.

“To compensate for these deviations, the authorities have committed to a strong policy package. Specifically, they will (i) take steps to accumulate international reserves, (ii) tighten the fiscal stance in 2015–16 relative to the initial program targets, and (iii) step up efforts to put Naftogaz on a sound financial footing by improving bill collections and adjusting energy prices as needed.

“The authorities recognize the importance of maintaining exchange rate flexibility and refocusing monetary policy on price stability. They will remove administrative exchange restrictions and controls gradually at a pace consistent with macroeconomic and financial stability.

“The financial sector reform program has proceeded as scheduled. The regulatory and supervisory framework is being enhanced, bank diagnostics are on track, and the capacity of the Deposit Guarantee Fund to fulfill its mandate is being strengthened. Efforts also continue to strengthen banks’ capacity to resolve bad loans, including incentive schemes for voluntary debt restructuring.

“The authorities remain committed to fiscal consolidation. They have adopted a supplementary budget to meet the revised deficit target. Efforts in this regard will focus on spending restraint and fiscal reforms to reverse the debt dynamics, while improving social safety nets. In addition, after a temporary increase in the Naftogaz deficit, the authorities are taking steps to return to the programmed deficit reduction path already in 2015.

“The authorities intend to press ahead with critical structural reforms to address governance issues and improve the business climate. Work continues on the establishment of a strong anti-corruption agency, enhancing the anti-money laundering framework, and simplifying the regulatory environment.

“Downside risks to the program remain very high. The program success hinges on a timely resolution of the conflict in the East, as well as on the authorities’ strong policy performance and adherence to the planned reforms. The authorities’ program continues to be an appropriate response to the existing challenges and constraints. Financial and technical assistance from the international community in support of Ukraine reform efforts are indispensable for achieving macroeconomic stabilization and reviving growth.”