Ukraine faced a severe triple crisis in late 2008. Vulnerabilities had built up for years along several dimensions, but were masked by strong catch up growth and terms-of-trade windfalls. Tumbling steel prices and global demand as well as capital outflows triggered a balance of payments crisis, which also eroded confidence in the currency and the banking system. Despite low public debt levels, a fiscal crisis rapidly emerged on the back of a sharply contracting economy, the realization of contingent liabilities, and the lack of market access.
Ukraine was the third country to receive exceptional access support in early November 2008 under a front-loaded 24-month Stand-By Arrangement. The key program objectives were stabilizing the banking system and facilitating adjustment of the economy. As fiscal gaps emerged, and in view of the existing room under the programmed NIR targets, purchases were used for budget support, which proved critical, together with the currency counterpart obtained from a sale of the 2009 SDR allocation.
Accounting for the difficult circumstances—the need for quick action, little ownership, and weak governance and institutions—the program was overall well designed, however with compromises, for example regarding bank resolution, reflecting the program environment. Although structural conditionality was originally streamlined, reviews relied on an increasing number of prior actions in an attempt to enhance authorities’ ownership and to address the emerging structural issues. Policy cornerstones of the program were measures to stem the banking crisis, a flexible exchange rate, and a significant degree of flexibility in fiscal policy.
Program implementation was difficult against the backdrop of sharp political divisions and weak institutional capacity. Only two of the envisaged eight reviews were completed. The program went off track in autumn 2009, as commitment vanished ahead of the January 2010 presidential elections and fiscal policy diverged further from the program. Nevertheless, the Fund remained closely engaged with the authorities.
Achievement of program objectives was mixed, with core short-term objectives largely met but little progress toward meeting medium-term objectives. The banking system stabilized, the current account adjusted quickly, social arrears and sovereign default were avoided, and a gradual economic recovery started from mid-2009. However, no major shift in policy making occurred and political economy considerations continue to drive policy making in Ukraine.
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. The fiscal costs of the crisis and larger deficits to cushion the downturn have put large strains on Ukraine’s public finances. The key lesson from the EPE review is the importance of ownership and governance but there are no clear-cut answers on how to achieve this in Ukraine. Four signatories of the program, many prior actions, and close IMF involvement—including through significant technical assistance—were only partially successful. Less front-loading of the program may have provided a stronger incentive to follow through with policies but would have to be balanced against the need to secure confidence and adequate financing.
International Monetary Found. Published: November 18, 2011.Series:Country Report No. 11/325. Subject(s): Ukraine
