IMF indicates economic collapse of Ukraine
Monitoring Desk: International Monitoring Fund (IMF) has confirmed that Ukraine economy has almost collapsed due to geopolitical tensions, deepening economic crisis, Intensification of the conflict in the East and escalation of the gas dispute with Gazprom. Reports indicates that Ukraine faces $19B financing gap in 2015 if fighting continues.
IMF that has a soft corner for Ukraine after pro-west government was installed in Kiev through riots confirmed that annual inflation accelerated from 0.5 percent in 2013 to 12.6 percent in July 2014, mainly due to the sharp depreciation of the Hryvnia and hikes in administratively regulated tariffs. IMF released loans to Ukraine on the recommendations of United States and European Union in April-June. Now IMF fears that nothing is going well in Ukrainian economy and says that the deterioration in the economic outlook, fiscal and quasi-fiscal pressures, and heightened balance of payment difficulties are putting the initial program targets in jeopardy
Since the beginning of the year, the Hryvnia has depreciated by more than 60 percent. Nonetheless, inflationary pressures are contained because of low aggregate demand and a persistent negative output gap.
The exchange rate pass-through affected both core and non-core inflation. Non-core components were the biggest contributors to the headline CPI acceleration. Prices of non-processed food were up by 11.2 percent (y-o-y) mainly due to limited supply of some products and an increase in the price of imported food products. Fuel prices increased by 42.6 percent (y-o-y), mainly due to the depreciation of the currency.
Second-round effects of fuel price inflation will push consumer prices more broadly, including because of rising transportation costs. Administratively regulated prices accelerated by 17.3 percent following the increase in tariffs under the Fund supported program.
IMF report published today says that these developments have affected confidence, balance of payment flows, economic activity, and budget execution. The banking sector has had to cope with larger-than-anticipated deposit outflows, and the exchange rate has depreciated more than expected at the time of the program request.
The deterioration in the economic outlook, fiscal and quasi-fiscal pressures, and heightened balance of payment difficulties are putting the initial program targets in jeopardy. Two end-July PCs are estimated to have been missed; and the end-2014 targets are out of reach. All continuous PCs were met. Discussions focused on the appropriate policy response to these short-term pressures and on reforms to support sustained growth. There was agreement that the policy effort should focus on compensatory measures to meet key program objectives, while allowing some temporary deviations from the initial targets. In particular, the NBU will limit the decline in reserves through market purchases; the government will take additional fiscal measures to keep public finances sustainable; and Naftogaz will strengthen current and past gas bills collection. Discussions also focused on reforms aimed at modernizing the monetary policy framework, preserving financial stability, addressing governance issues and improving the business climate.
Nonetheless, risks loom large. The program hinges crucially on the assumption that the conflict will begin to subside in the coming months. Should active fighting continue well beyond that, the small buffers under the revised baseline would be quickly exhausted, requiring a new strategy, including additional external financing. A further heightening of geopolitical tensions could also have significant economic consequences. Domestically, policymaking may become more difficult in case of early elections. Strong policy performance and adherence to the planned reforms is therefore critical.
Staff supports the authorities’ request for completion of the first review and the waivers for nonobservance and applicability of performance criteria. The purchase released upon completion of the review would be in the amount of SDR 0.914 billion, of which SDR 0.650 billion will be used to finance the budget deficit.