Ukraine Special June 2020

Ukraine

Ukraine: Ukraine reaches staff-level agreement with the IMF in May

June 4, 2020

On 21 May, the IMF announced a staff-level agreement for an 18-month USD 5.0 billion loan to Ukraine under a Stand-By Arrangement (SBA) program. In the face of the Covid-19 crisis, this type of arrangement intends to deliver financial aid faster and with lighter conditionality than the previously discussed three-year Extended Fund Facility. The disbursement should enable the country to confidently pass through a period of hefty debt repayments, support financial aid measures to households and businesses hit by the pandemic, and unlock further support from international financial institutions (IFIs), including the World Bank and the EU.

Although the IMF’s executive board has yet to ratify the agreement, analysts see no further roadblocks ahead after the two major preconditions have been meet by President Zelensky’s government. First, the land reform ends a decades-long moratorium on the privatization of farm land, broadening the access of domestic and foreign investors to the agricultural sector, which accounts for over 10% of Ukraine’s GDP. Second, the banking sector resolution law cements the 2016 nationalization of PrivatBank, Ukraine’s biggest lender, thus keeping it away from Ukrainian oligarch Igor Kolomoisky, former owner of the bank.

Looking ahead, the economy is expected to be hit hard by the Covid-19 crisis, as businesses reel from plummeting domestic and foreign demand. Nevertheless, support from the IMF and other IFIs—with EUR 1.2 billion loan from the EU and EUR 1.0 billion from the World Bank reportedly in the works—should provide the government with sufficient leeway to ramp up fiscal spending. This should support businesses and households in order to ensure a smooth recovery once the crisis has passed. The uncertain length of the pandemic and an escalation of the armed conflict in the east of the country remain downside risks to the outlook, however.

Regarding the prospects of the Ukrainian economy, analysts at Goldman Sachs noted:

“Amid the COVID-19 shock, we expect the Ukrainian economy to contract by 3.8% this year, but our base case remains for a relatively strong recovery in the second half of 2020 and into 2021. In contrast to previous crisis episodes, we think that a number of factors will help partially mitigate the shock. For one, Ukraine now operates under a floating exchange rate regime that should help absorb the shock. Second, an increased share of agricultural goods in its export base, which we find to be less elastic to foreign demand growth, should contribute to greater resilience. Finally, significant terms-of-trade developments on the back of materially lower energy prices should provide a positive tailwind as the economy begins opening up.”

FocusEconomics Consensus forecasts panelists project the fiscal deficit to reach 6.9% of GDP in 2020, which is down 0.1 percentage points from last month’s forecasts. In 2021, they see the fiscal deficit coming down to 3.6% of GDP.


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