The International Monetary Fund has released a 111-page economic report on Ukraine, after signing off on a 14-month lending program to Ukraine worth $3.9 billion if the nation meets its promises of fiscal responsibility, privatization and strengthened rule of law.
Ukraine already received $1.4 billion on Dec. 18, with two more stabilizing transfers being released after the completion of semi-annual reviews on May 15 and Nov. 15.
The aim is to decrease public debt, now at 65 percent of gross domestic product; reduce inflation, from 10 percent in 2018 to 7 percent in 2019; keep a flexible exchange rate; and strengthen the banking system, now burdened by a loan portfolio that is 55 percent deadbeat; among other aims.
The report gives a fresh analysis of Ukraine’s economy and projects the country’s development for the next five years.
Unmet expectations
Most of IMF’s expectations are still not met.
“Efforts to create a more dynamic, open, and competitive economy have fallen short of expectations, and the economy still faces important challenges,” the report reads. Only three reviews of the 15 originally planned economic benchmarks have been completed under IMF’s so-called Extended Fund Facility program, signed in 2015.
The IMF has worsened Ukraine’s gross domestic product growth forecast to 2.7 percent in 2019, from the initial 3.3 percent. The growth rate is still too low to recover the losses during the crisis, caused by Russia’s war against Ukraine and the country’s internal corruption. Unless substantial reforms are done, it will hardly exceed 3 percent in the coming years, the report states.
Ukraine has also been attracting little foreign direct investment. With the already modest $2.3 billion in FDI in 2017 the number dropped to $1.7 billion in 2018. And IMF’s forecast for FDI in 2019 is even worse — $1.6 billion.
“Investment, particularly foreign direct investment, is held back by a difficult business environment, while large numbers of worker(s) seek job opportunities abroad as economic growth is too low for incomes to noticeably close the gap with regional peers,” the report says.
Positive results
However, Ukraine’s inflation rate will slow down, dropping slightly under 7 percent from 10.9 percent by the end of 2019, due to the continuation of a tight monetary policy and the decreasing domestic hryvnia demand, according to IMF forecasts.
“Monetary policy aims to reduce inflation and rebuild international reserves within a flexible exchange rate regime. Safeguarding central bank independence will be crucial in this regard,” the report reads.
The country’s inflation peaked in 2017 at 16.5 percent as a result of food price shocks as well as the increase in wages and pensions, according to the report.
The country also succeeded in reducing its debt ratio. The total external debt decreased in the past couple of years — from 122.5 percent of Ukraine’s GDP in 2016 to 95.5 percent in 2018.
Ukraine’s current public and publicly guaranteed debt equates to 65.2 percent of the country’s GDP, or $82.5 billion, while in 2016 the number was much higher — 81.2 percent.
The overall fiscal deficit which reached 10 percent of GDP in 2014 declined to 2.5 percent of GDP in 2018. It will further decline to 2.3 percent of GDP in 2019, IMF forecasts.
Risks and delays
Despite the few positive trends, IMF sees serious risks for Ukraine to sustain stable growth. External risks include possible deterioration in Ukraine’s terms of trade, as well as a worsening global market sentiment toward emerging markets, which may impede Ukraine’s access to international capital markets.
The report mentions political risks, including Ukraine’s presidential elections in March and fall parliamentary elections, which might play a vital role in Ukraine’s economic outlook.
“With increasing polarization in the run-up to the elections, the authorities’ ability to implement the program could weaken. The conflict in the eastern part of the country remains a key vulnerability,” the IMF wrote.
Ukraine also suffers from major delays and uneven progress in structural reforms, which lead to frequent IMF program interruptions and Ukraine’s fading battle against corruption.
“No cases of high-level corruption have so far been adjudicated, deepening the public perception that not much has effectively changed,” the report reads.
The restructuring of the inefficient public sector is still incomplete, even after a new legal framework was adopted to launch the privatization process of thousands of inefficient state-owned enterprises, to ensure property rights, and improve the business environment.
Ukraine still must open up its markets to create competitive gas and agricultural land markets, IMF said.
Social policy
IMF expects Ukraine’s unemployment to decrease each year. By the end of 2019 the number of Ukrainians without a job will equal to 8.6 percent, or 3.2 million people, of the country’s work force, whereas by 2023 the country will see unemployment drop to 6.6 percent.
Nominal wages are projected to increase substantially, however inflation will affect real wages to increase by only 7.4 percent in 2019 and later by an average of 4 percent each year up until 2023.
The country is expected to increase its tax revenues by 75 percent in the next five years, with numbers rising from Hr 1.2 trillion ($43 billion) to around Hr 2.1 trillion ($75 billion) by 2023.
The government is projected to double its spending on social programs by 2023. The increasing amount of retirees will force the government to spend Hr 613 billion ($22 billion) on pensions by 2023, compared to the Hr 345 billion ($12 billion) spent in 2018. However, according to the IMF, Ukraine will continue to spend slightly more than 10 percent of GDP on pensions which is close to the European average. Nonetheless, the gap between the country’s expenditure and revenue will only increase reaching more than 5 percent of GDP by 2022.
Government promises
Before receiving the financial package from the IMF, Ukraine’s government promised to follow through particular reforms in a statement the IMF attached within its report. Here are some of the main points.
The Ukrainian government will:
• Limit its budget deficit to 2.3 percent of GDP in 2019
• Refrain from policies that would be inconsistent with the IMF program’s objectives such as: granting any tax amnesty, introducing new tax exemptions or privileges as well as reducing or altering corporate income taxation; instead, it will cooperate with the IMF on how to improve taxes
• Provide IMF staff with data and information it requests for program monitoring
• Maintain a cautious monetary policy to further reduce inflation and rebuild reserves as well as revive sound bank lending
• Fully commit to having an independent central bank
• Bring inflation down to below 7 percent by the end of this year and within the NBU’s target range of 5 percent in 2020
• Provide the NBU with enhanced daily and monthly cash flow projections to improve liquidity forecasting through the Finance Ministry
• Limit the general government budget deficit to no more than 2.25 percent of GDP in 2019
• Strengthen its fiscal framework to improve credibility and predictability of fiscal policies
• Create modern and efficient tax and customs administrations; this includes a transparent recruitment process by the end of April
• Increase the Finance Ministry’s role in oversight of tax and customs administrations as well as develop detailed reporting requirements for the administrations
• Ensure that the wholesale price for gas supplied to households and for heating will be adjusted to 80 percent of the base market price on May 1
• Simplify and accelerate procedures for obtaining permits for the exploration and development of gas fields through transparent tenders
• Further strengthen the banking system including the transparency of state-owned banks
• Bring the Deposit Guarantee fund back into solvency by the end of December; by the end of March DGF will put on sale assets worth at least Hr 20 billion
• Ensure the independence and integrity of anti-corruption institutions and tackle high-level corruption
• Start the sale of five large state-owned enterprises in the first half of 2019 — Centrenergo, Coal Company Krasnolymanska, Indar, and President Hotel Kiev — and will actually sell at least 500 small state-owned companies and assets by the end of April
• Reduce time for land allocation, simplify access to geological information
• Prepare a transparent agricultural land market
