The mission of the International Monetary Fund (IMF) has begun to discuss a new three-year Extended Fund Facility for Ukraine and, following a two-week work in Kyiv, announced plans to continue the discussion in the coming weeks.
“Discussions on the new program will continue in the coming weeks,” chief of the mission Ron van Rooden has stated.
“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,” according to the statement posted on the IMF’s website.
“The current account deficit has fallen to 3–3.5 percent of GDP and reserves have recovered to over $20 billion. Sound fiscal and monetary policies and exchange rate flexibility have resulted in a sharp reduction in Ukraine’s external and internal imbalances. Decisive efforts to restructure the banking system have been critical for economic stabilization and the resumption of growth,” the expert said.
“Growth is too low, however, to noticeably close the income gap with Ukraine’s neighbors. Per capita GDP in Ukraine is still very low – just 20 percent of the EU average, the second-lowest level of all Central and Eastern European countries,” he stated.
“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,” the IMF mission chief stated … While there has been progress in setting up new institutions to fight corruption, tangible results have yet to be achieved. 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,” according to the document.
“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. 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,” the report says.
“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,” the expert said.
“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,” the report states.
“Following this year’s elections, the authorities now have an opportunity to advance much-needed reforms,” Rooden said.
“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,” according to the statement.
