Last year saw our GDP fall 6.8%, which continued throughout this year, resulting in an IMF forecast of a 11.0% decline in 2015. 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 $5bn, 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.
Budget discipline
By introducing strict budgetary discipline, our government has managed to reduce our budget deficit to 4.1% of GDP in 2015, and we are committed to reducing it further to 3.7% in 2016. This is quite an achievement considering Ukraine has had to increase defence spending to 5% of GDP as a result of the devastating war conducted on our 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.
In March, we successfully negotiated a $17.5bn four year Extended Fund Facility (EFF) programme with the IMF. This is the largest programme per capita the IMF has ever designed. By continuing to meet the agreed structural benchmarks, we have already received two tranches totalling $6.7bn. The immediate impact of the first tranche of $5bn doubled our foreign currency reserves restoring stability and credibility to our financial system. The receipt of a tranche of up to $1.7bn is expected before the end 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. For example, a loan guarantee agreement with the US allowed us to issue bonds worth $1bn on
international markets. In May, we signed the memorandum of understanding and loan agreement with the EU, providing an additional €1.8bn in funding through 2016.
In August, we successfully reached an agreement with the ad hoc committee of our international creditors to restructure $18bn of sovereign and sovereign-guaranteed debt. The agreement includes a 20% debt reduction, saving Ukraine up to $3.8bn. This “haircut” is historic as, for the last 15 years, countries that
restructured without a default have not obtained a debt reduction, with the exception of the very specific cases of St Kitts & Nevis, Belize, and Greece. The Ukrainian deal also includes a four year postponement of our principal payments, and a value recovery instrument.
Solvency issues
This agreement, which meets the EFF targets, will allow Ukraine to resolve both its liquidity and solvency issues and is supported by the IMF, the G7, and has been approved by the Ukrainian Parliament with a comfortable two thirds majority.
This deal means less of the government’s scarce financial resources will be spent servicing high debt levels taken on by previous governments and more will be available for critical social spending, national defence and creating the conditions needed to attract investment and stimulate growth.
In addition to these measures, our government has undertaken a series of far reaching reforms, fully supported by the IMF, World Bank, and G7 members, in order to fundamentally change the way business is done in the country. We are clamping down on corruption and fraud, overhauling our taxation system, slashing bureaucratic red tape, cancelling numerous useless permits and licences, reforming our judiciary, and rolling out a wide ranging privatisation programme.These reforms reflect our government’s total commitment to creating a business and investor friendly environment.
Indicators are showing our efforts are starting to pay off. The reserves of the National Bank of Ukraine are rising with levels of $12.6bn now matching those of October 2014. In recent months, we have begun running a current account surplus. Inflation is declining and is predicted to fall to 12% next year. Direct investments are increasing, and predicted to rise to $3.5bn next year. World Bank and IMF latest predictions point to Ukraine returning to growth for the first time in three years, with a growth rate of 2% in 2016.
Ukraine has not fully emerged from its economic crisis, but the signs on the road to recovery are encouraging. We are confident that our sweeping reforms will transform Ukraine into an attractive and competitive investment destination, bringing prosperity to our citizens.
Natalie Jaresko is Minister of Finance of Ukraine