Ukraine: Letter of Inten
Kyiv, July 21, 2015
Ms. Christine Lagarde
International Monetary Fund
Washington, DC 20431
Dear Ms. Lagarde:
1. In the attached update to the Memorandum of Economic and Financial Policies (MEFP) from February 27, 2015, we confirm our commitment to the policies and objectives of the economic program supported by an IMF arrangement under the Extended Fund Facility (EFF). We also describe progress and further policy steps toward meeting these objectives.
2. Notwithstanding the exceptionally difficult situation in Ukraine—with the unresolved conflict in the East—we have made steadfast efforts to implement policies under the EFF-supported program reflecting our strong commitment to economic adjustment and reforms. Following the significant economic contraction in 2015:Q1, there are signs that economic stability is gradually taking hold. The foreign exchange market has remained broadly stable in the last few months. Our official reserves, although still very low, have increased considerably following disbursements from official creditors and the NBU’s foreign currency purchases from the market. We have taken bold measures to advance much needed reforms, including in the energy sector, by adopting a new gas sector law and increased gas and central heating retail prices by 285 percent and 67 percent, respectively. These are important first steps toward reaching cost recovery based on international market prices and thus eliminating the large losses in the state-owned gas company Naftogaz, whileat the same time increasing significant allocations for social assistance programs. Budget outturn for 2015:Q1 was stronger than expected owing mainly to large VAT revenue driven by the higher-than expected exchange rate depreciation and inflation. Banks’ local currency deposits are growing again, although the FX deposit outflows continue, which remains a key concern.
3. Our actions ensured that all performance criteria (PC) for end-March, the continuous PC, and most structural benchmarks due through June 2015 were met, albeit some with a delay. We have also met the end-June PCs (preliminary data is reported in Table 2, with final data to be provided before the date of the Board meeting). We passed the necessary legislation to strengthen collections of Naftogaz receivables prior to the completion of the review. We also passed important legislation that strengthens the NBU independence and governance arrangements.
4. Our efforts now focus on restoring macroeconomic stability and setting the stage for robust and inclusive growth so critical for the Ukrainian people. This includes actions to improve competitiveness and the business climate through far-reaching structural reforms, rehabilitate thebanking system, and restore sustainable external and fiscal positions.
5. Despite our strong efforts, the debt restructuring process is advancing more slowly than expected. Constructive discussions with holders of the state-owned Ukreximbank's US$1.5 billion Eurobonds led to the completion of a consensual reprofiling of those notes on July 8. Separately, state-owned Oschadbank launched on July 6 a consent solicitation for a reprofiling of its US$1.2 billion Eurobonds with the backing of an ad hoc committee holding a majority of the notes. These reprofiling operations are fully in line with the debt operation targets under the EFFsupported program. We are also making steady progress on the broader sovereign debt restructuring with the objective of concluding an agreement as soon as possible (as noted in the joint statements with the Ad Hoc Creditor Committee on July 1 and 15). We remain determined to complete the debt operation in line with its stated program objectives.
6. On the basis of steps that we have already taken and commitments under the program, we request completion of the first review, and a disbursement in the amount of SDR 1,182.1 million.
7. We believe that the policies set forth in the attached MEFP are adequate to achieve the macroeconomic and financial objectives of the program, but we will take any additional measures that may be appropriate for this purpose. We will consult with the IMF on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultation. We will provide IMF staff with the data and information it requests for the purpose of monitoring program implementation. Reaffirming commitment to our policy of transparency, we consent to the IMF’s publication of this letter, the MEFP, the Technical Memorandum of Understanding (TMU), and the accompanying Executive Board documents.
Minister of Finance
Governor, National Bank of Ukraine