The International Monetary Fund's 2008 exceptional access stand-by arrangement (SBA) for Ukraine met some short-term goals but made little progress in meeting medium-term objective: there was no major shift in policy making and politically motivated economic considerations continue to drive policy making in Ukraine, according to IMF experts.
"The key lesson from the [evaluation of exceptional access under the 2008 SBA] review is the importance of ownership and governance, but there are no clear-cut answers on how to achieve this in Ukraine," reads a report published by the IMF on Friday.
The report notes that due to the 2008 SBA program, Ukraine’s banking system stabilized, the current account adjusted quickly, social arrears and sovereign default were avoided, and a gradual economic recovery started from the middle of 2009.
However, the IMF experts claim that efforts to tackle the underlying structural and institutional weaknesses stalled. "Bank resolution remained incomplete, the exchange rate regime returned to pre-crisis practices, the energy sector remained largely unreformed with quasi-fiscal deficits widening, and legal and governance reform fell short of objectives," reads the report.
According to the report, four signatories of the program (the Ukrainian president, the premier, the finance minister and the central bank’s governor), many prior actions, and close IMF involvement – including through significant technical assistance – were only partially successful.
The IMF says that less front-loading of the program may have provided a better incentive structure but would have to be balanced against the need to stem a sharp confidence crisis. "Clearly, the program faced a trade-off between lending into a risky environment – though it appropriately took a range of measures to enhance ownership – and the need to reestablish confidence with the help of a large and front-loaded financing package. Given the achievement of its main short-term goals of crisis management, it is difficult to argue against this decision, even if it was associated with weak policy implementation and unaddressed structural vulnerabilities," reads the report.
As reported, the IMF in autumn 2008 decided to disburse about $17 billion to Ukraine under the Stand-By Arrangement (SBA). Under the 2008 SBA, Ukraine received only three tranches worth almost $11 billion. The first $4.5 billion tranche was given to the National Bank of Ukraine (NBU) in November 2008. The IMF’s second tranche – worth about $3 billion – was extended in May 2009, with those funds being split between the NBU and the government of then Prime Minister Yulia Tymoshenko. The third tranche (worth $3.5 billion) was provided in August 2009 and was at the disposal of the Tymoshenko government alone and used on the fulfillment of the budget and the purchase of natural gas.
The allocation of the fourth tranche, worth $3.8 billion, was scheduled for November 2009 following the third review of the IMF’s cooperation program with Ukraine. The IMF mission ended its work in Kyiv late in October 2009, but did not issue a positive statement on the completion of the review. The IMF said repeatedly that it expected a consolidated position from the Ukrainian authorities in the question of implementing anti-crisis measures and the adoption of the national budget for 2010.
After the Ukrainian government received the third tranche, it also spent about $2.1 billion through the conversion of Special Drawing Rights (SDR) allocated by the IMF as part of a general allocation of SDRs among all the IMF member countries.
After the presidential election and government reshuffles in Ukraine, the 2008 Stand-By Arrangement was suspended, and the IMF decided to renew its loan partnership with Ukraine in the summer of 2010 through a new stand-by program worth SDR 10 billion (about $15.6 billion). In late July 2010, Kyiv received the first tranche of SDR 1.25 billion under the new program. The IMF decided in December 2010 to allocate a second tranche worth SDR 1 billion.
The program foresaw future quarterly allocation of eight more tranches starting from the middle of March 2011 in case of further successful cooperation.
However, an IMF mission that worked in Kyiv in March 2011 could not recommend to the IMF Executive Board that it approve a new tranche for Ukraine. The IMF had expected Ukraine to approve pension reform and settle the problem of low prices of natural gas for households.
On Nov. 4, an IMF mission released an announcement after its work in Kyiv from Oct. 25 to Nov. 3, according to which the mission had taken a pause to carry out additional technical work. Discussions of economic policy in Ukraine are expected to begin again soon.
Ukrainian Deputy Prime Minister and Social Policy Minister Sergiy Tigipko and Finance Minister Fedir Yaroshenko early in November 2011 went to Washington, D.C., in the United States, to hold talks with the IMF, the outcome of which has not been made public.
Ukrainian Prime Minister Mykola Azarov said on November 4 that Ukraine would start working with the IMF on adjusting the cooperation program for after the completion of talks with Russia on natural gas prices, which is expected to happen in November 2011.
Ukraine’s government said that due to the delay in the financing, two tranches of the stand-by loan could be combined, which would help replenish the NBU foreign exchange reserves with about $3 billion.
