World Economy

Ukraine Striving for Macroeconomic Stability

Ukraine Striving for Macroeconomic Stability Ukraine Striving for Macroeconomic Stability

For the last year and a half, Ukraine has suffered from twin crises: Russia’s aggression, which resulted in the illegal annexation of Crimea and invasion of Donbas; and a severe economic recession.

Last year saw the GDP fall 6.8%, which continued throughout this year, resulting in an IMF forecast of a 11.0% decline in 2015, Natalie Jaresko, Minister of Finance of Ukraine, told Emerging Markets.

“In the first half of 2015, inflation was painfully high at 60%, and our currency became extremely volatile. At one point the hryvnia had depreciated by almost 70% year-on-year. By March 2015, our central bank’s reserves of foreign currency were depleted to little more than a month of import coverage, or just $5 billion, and we were at the brink of a serious financial crisis—all the while fighting a war to protect our sovereignty, territorial integrity and European choice. Ukraine was at a precipice.”

In order to restore and ensure macroeconomic stability, Ukraine has taken a number of decisive measures, she said.

By introducing strict budgetary discipline, the government has managed to reduce the country’s budget deficit to 4.1% of GDP in 2015, and “we are committed to reducing it further to 3.7% in 2016”, she said.

  Cleaning Banking Sector

 This is quite an achievement considering Ukraine has had to increase defense spending to 5% of GDP as a result of the devastating war conducted on the territory. “We raised additional revenue through improvements in tax collection and by closing various loopholes that previously allowed some vested interests to avoid paying taxes.”

The central bank cleaned up the banking sector to reduce systemic risks and 58 out of 180 of the weakest banks were removed from the financial system. Related party transactions that weakened the banking system over the past years have been identified and are now subject to criminal investigation if they have led to the insolvency of a bank, she said.

In March, the country successfully negotiated a $17.5 billion four-year Extended Fund Facility program with the IMF. This is the largest program per capita the IMF has ever designed.

By continuing to meet the agreed structural benchmarks, the government has already received two tranches totaling $6.7 billion.

The immediate impact of the first tranche of $5 billion doubled the foreign currency reserves restoring stability and credibility to the financial system. The receipt of a tranche of up to $1.7 billion is expected before the end of this year.

Further, based on continued reforms and meeting all commitments, Ukraine secured bilateral financial support from the US, Canada, the EU, Germany, Japan and others.