Friday, October 3

Presenter
Jerôme Vacher, IMF Resident Representative, Ukraine

Summary
As part of a recent IMF course on Financial Programming and Policies, Mr. Jerôme Vacher, the IMF’s Resident Representative in Ukraine, delivered an open lecture at the Joint Vienna Institute on Ukraine and the IMF. He discussed recent economic developments, aspects of the new IMF-supported program, and challenges ahead.

In April 2014, the IMF’s Executive Board approved a 2-year Stand-By Arrangement (SBA), providing Ukraine with substantial IMF support to implement an ambitious reform agenda. This agenda is aimed at addressing large fiscal and current account deficits, and Ukraine’s growth performance below potential since the crisis in 2008–09 that resulted, among other factors, from unsustainable macroeconomic policies. In particular, the exchange rate policy lacked credibility, in part reflecting an inadequate policy mix, which contributed to a gradual depletion of international reserves. To address these challenges, Mr. Vacher explained that the new Fund-supported program focused on five key policy areas: (1) exchange rate and monetary policy; (2) financial sector stabilization and reform; (3) fiscal adjustment; (4) energy sector reform; and (5) other structural reforms.

Mr. Vacher explained the authorities’ plans to maintain exchange rate flexibility to restore competitiveness and accumulate international reserves; they are also aiming at keeping domestic prices stable and are preparing to move to inflation targeting.  The financial sector stabilization program is geared at building confidence in the domestic financial system, including through stress tests and recapitalization, improved financial regulation, supervision and bank resolution procedures. The fiscal reform agenda calls for a number of measures to restrain expenditures, carefully calibrated to minimize their contractionary impact while helping restore confidence in the public finances.

On energy, Mr. Vacher emphasized the fact that Ukraine is among the most energy-intensive countries in the world. Thus, the measures targeting the energy sector would help reduce the fiscal burden by increasing gas and heating tariffs, improving governance and transparency of Naftogaz, Ukraine’s national gas company, and make energy usage more efficient. The reforms would be accompanied by enhanced social assistance to mitigate the impact of tariff increases on the most vulnerable.

In discussing structural reforms in general, Mr. Vacher noted the authorities’ recognition of the need to fight corruption and their plan to establish an anticorruption bureau. Other reforms will be directed to improving tax administration and the business environment.

During a lively Q&A session that followed the lecture, the audience inquired about how the reforms and the new IMF program are to fare considering the current political risks and the substantial cost of adjustment. Mr. Vacher acknowledged that macroeconomic risks were tilted to the downside but was encouraged by the authorities’ strong commitment to implement reforms and also noted the commitment of the international community to support the implementation of a comprehensive reform agenda in Ukraine.

Asel Isakova, Junior Economist, JVI