Ukraine
DOCUMENT
MASTER FILES ROOM C-525
OF INTERNATIONAL MONETARY AND NOT FOR PUBLIC USE
FUND
0451 EBS/96/118 CONFIDENTIAL
July
17, 1996
To:
Members of the Executive
From:
The Secretary
Subject:
Ukraine
on the first tentatively
Attached for consideration by the Executive Directors is a paper review under the stand-by arrangement for Ukraine, which is scheduled for discussion on Wednesday, July 31, 1996.
- First
Board
Review Under
the Stand-Bv
Arrangement
Mr. Lenain (ext. 34069) or Mr. J. Dunn (ext. 36260) is available to answer technical or factual questions relating to this paper prior to the Board discussion. Unless the Documents Preparation Section (ext. 36760) is otherwise the document will be transmitted, in accordance with the procedures notified, approved by the Executive Board and with the appropriate deletions, to the European Bank for Reconstruction and Development (EBRD), the European for Economic Cooperation and Development Commission (EC), and the Organisation (OECD), following its consideration by the Executive Board.
Att:
(1)
Other Distribution: Department Heads-
CONFIDENTIAL
INTERNATIONAL MONETARYFUND UKRAINE First
Review Under
Prepared (In
by the European
Consultation
Approved
the Stand-By
with
II
Reviewing
by John Odling-Smee July I.
Arrangement Department Departments)
and Thomas Leddy
16, 1996
Introduction
A staff team I/ visited Kiev over the period June lo-21 to conduct discussions for the first review under the stand-by arrangement. The Ukrainian team was led by Prime Minister Lazarenko, and included the Governor of the National Bank of Ukraine (NBU), Mr. Youshchenko; the Deputy Prime Minister for the Economy, Mr. Shpek; the Deputy Prime Minister for Economic Reforms, Mr. Pynzenyk; and the Minister of Finance, Mr. Koronevsky. The review focused on the assessment of compliance with the end-May performance criteria and the discussion of financial policies for the second half of 1996. Ukraine has so far made three purchases under the stand-by arrangement for a total of SDR 201 million (20 percent of quota): upon Board approval, and after observance of the end-April and end-May performance criteria The fourth purchase is subject, inter alia, to completion of the (Table 1). first review and to observance of the end-June performance criteria. II.
Recent
Developments
Monthly inflation fell to 2.4 percent in April, 0.7 percent in May, and 0.1 percent in June-- in part due to the seasonal decline of food prices--but also as a-result of lower price pressures 'in the overall economy (Table 2 and Chart A). The exchange rate strengthened markedly during the second quarter following substantial capital inflows, and despite the interventions of the NBU. After having reached a peak of Krb 191,000 per U.S. dollar in I/ The mission comprised Messrs. Knob1 (head), Lenain, Cornelius, Ghosh (all EU2), MacArthur (PDR), and Orsmond (FAD). Messrs. Justice Sundakov (Kiev resident office), and Ms. Anand (IBRD) also participated the discussions.
Dunn, and in
- 2 -
the karbovanets appreciated to Krb 178,600 per U.S. dollar at the mid-March, Although the karbovanets has appreciated end of June (Chart B). substantially in real terms, dollar wages remain well below neighboring countries of Ukraine (Chart C). Interest rates fell sharply in early July: the NBU lowered its refinance rate from 50 percent to 40 percent; the average yield for three-month treasury bills fell from 106 percent (established at auction in early June) to 74 percent (Charts D and E). u The first quarter saw a decline in real GDP of 10.7 percent (relative to the first quarter of 1995), with industrial production falling by 4 percent, construction by 50 percent, and transportation by 30 percent. The dramatic declines in construction and transportation indicate that most of the fall in output is attributable to the severe winter. Reflecting this weak output performance during the first quarter, and low expected agricultural output due to drought conditions, the authorities are now expecting real GDP to decline by 8 percent in 1996, compared to a decline of 2 percent in the initial projection. ZX/ The current account deficit reached USSO. billion in the first of 1996, slightly more than expected, as a result of the high level imports. The deficit for 1996 is now projected to be USS1.4 billion (USS1.2 billion in the initial program), with the increase expected financed by additional private capital inflows. III.
Performance
Under
the
quarter of gas in 1996 to be
Program
All end-April and end-May performance criteria and indicative targets and preliminary information indicates that all end-June were observed, performance criteria were observed. The indicative ceiling on NBU credit to the budget is estimated to have been exceeded by Krb 15 trillion at the end of June as a result of delays in the drawings of certain foreign credits; other indicative targets were observed. Virtually all structural benchmarks were complied with. 1.
Monetarv
policy
Base money grew by just 11 percent between January and May, compared to 13 percent targeted under the program (Tables 3 and 4). In June, faced with substantial capital inflows, the authorities responded with a combination of exchange rate appreciation, exchange market interventions, and interest rate u All interest rates quoted are not compounded. 2/ Despite the downward revision of real GDP, nominal GDP for 1996 is now projected to be Krb 8,686 trillion, compared to Krb 7,472 trillion in the initial program. The difference reflects (i) an'increase in fourth quarter 1995 GDP of 11 percent (corresponding mainly to a revision of the deflator); (ii) the larger expected decline of real GDP in 1996; and (iii) actual GDP data for the first quarter of 1996.
- 2a CHART A UKRAINE
Money, Prices, and Gross Reserves 43%’ ,,.. ‘.
MASTER FILES ROOM C-525
OF INTERNATIONAL MONETARY AND NOT FOR PUBLIC USE
FUND
0451 EBS/96/118 CONFIDENTIAL
July
17, 1996
To:
Members of the Executive
From:
The Secretary
Subject:
Ukraine
on the first tentatively
Attached for consideration by the Executive Directors is a paper review under the stand-by arrangement for Ukraine, which is scheduled for discussion on Wednesday, July 31, 1996.
- First
Board
Review Under
the Stand-Bv
Arrangement
Mr. Lenain (ext. 34069) or Mr. J. Dunn (ext. 36260) is available to answer technical or factual questions relating to this paper prior to the Board discussion. Unless the Documents Preparation Section (ext. 36760) is otherwise the document will be transmitted, in accordance with the procedures notified, approved by the Executive Board and with the appropriate deletions, to the European Bank for Reconstruction and Development (EBRD), the European for Economic Cooperation and Development Commission (EC), and the Organisation (OECD), following its consideration by the Executive Board.
Att:
(1)
Other Distribution: Department Heads-
CONFIDENTIAL
INTERNATIONAL MONETARYFUND UKRAINE First
Review Under
Prepared (In
by the European
Consultation
Approved
the Stand-By
with
II
Reviewing
by John Odling-Smee July I.
Arrangement Department Departments)
and Thomas Leddy
16, 1996
Introduction
A staff team I/ visited Kiev over the period June lo-21 to conduct discussions for the first review under the stand-by arrangement. The Ukrainian team was led by Prime Minister Lazarenko, and included the Governor of the National Bank of Ukraine (NBU), Mr. Youshchenko; the Deputy Prime Minister for the Economy, Mr. Shpek; the Deputy Prime Minister for Economic Reforms, Mr. Pynzenyk; and the Minister of Finance, Mr. Koronevsky. The review focused on the assessment of compliance with the end-May performance criteria and the discussion of financial policies for the second half of 1996. Ukraine has so far made three purchases under the stand-by arrangement for a total of SDR 201 million (20 percent of quota): upon Board approval, and after observance of the end-April and end-May performance criteria The fourth purchase is subject, inter alia, to completion of the (Table 1). first review and to observance of the end-June performance criteria. II.
Recent
Developments
Monthly inflation fell to 2.4 percent in April, 0.7 percent in May, and 0.1 percent in June-- in part due to the seasonal decline of food prices--but also as a-result of lower price pressures 'in the overall economy (Table 2 and Chart A). The exchange rate strengthened markedly during the second quarter following substantial capital inflows, and despite the interventions of the NBU. After having reached a peak of Krb 191,000 per U.S. dollar in I/ The mission comprised Messrs. Knob1 (head), Lenain, Cornelius, Ghosh (all EU2), MacArthur (PDR), and Orsmond (FAD). Messrs. Justice Sundakov (Kiev resident office), and Ms. Anand (IBRD) also participated the discussions.
Dunn, and in
- 2 -
the karbovanets appreciated to Krb 178,600 per U.S. dollar at the mid-March, Although the karbovanets has appreciated end of June (Chart B). substantially in real terms, dollar wages remain well below neighboring countries of Ukraine (Chart C). Interest rates fell sharply in early July: the NBU lowered its refinance rate from 50 percent to 40 percent; the average yield for three-month treasury bills fell from 106 percent (established at auction in early June) to 74 percent (Charts D and E). u The first quarter saw a decline in real GDP of 10.7 percent (relative to the first quarter of 1995), with industrial production falling by 4 percent, construction by 50 percent, and transportation by 30 percent. The dramatic declines in construction and transportation indicate that most of the fall in output is attributable to the severe winter. Reflecting this weak output performance during the first quarter, and low expected agricultural output due to drought conditions, the authorities are now expecting real GDP to decline by 8 percent in 1996, compared to a decline of 2 percent in the initial projection. ZX/ The current account deficit reached USSO. billion in the first of 1996, slightly more than expected, as a result of the high level imports. The deficit for 1996 is now projected to be USS1.4 billion (USS1.2 billion in the initial program), with the increase expected financed by additional private capital inflows. III.
Performance
Under
the
quarter of gas in 1996 to be
Program
All end-April and end-May performance criteria and indicative targets and preliminary information indicates that all end-June were observed, performance criteria were observed. The indicative ceiling on NBU credit to the budget is estimated to have been exceeded by Krb 15 trillion at the end of June as a result of delays in the drawings of certain foreign credits; other indicative targets were observed. Virtually all structural benchmarks were complied with. 1.
Monetarv
policy
Base money grew by just 11 percent between January and May, compared to 13 percent targeted under the program (Tables 3 and 4). In June, faced with substantial capital inflows, the authorities responded with a combination of exchange rate appreciation, exchange market interventions, and interest rate u All interest rates quoted are not compounded. 2/ Despite the downward revision of real GDP, nominal GDP for 1996 is now projected to be Krb 8,686 trillion, compared to Krb 7,472 trillion in the initial program. The difference reflects (i) an'increase in fourth quarter 1995 GDP of 11 percent (corresponding mainly to a revision of the deflator); (ii) the larger expected decline of real GDP in 1996; and (iii) actual GDP data for the first quarter of 1996.
- 2a CHART A UKRAINE
Money, Prices, and Gross Reserves 43%’ ,,.. ‘.
