Ukraine: 2013 Article IV Consultation and First Post-Program Monitoring-Staff Report; Press Release; and Statement by the Executive Director for Ukraine

KEY ISSUESContext: Weak external demand and inconsistent macroeconomic policies havecontributed to a prolonged economic recession. A combination of an effectively peggedexchange rate, loose fiscal policy, and sizable quasi-fiscal losses in the energy sector haspushed the fiscal and external current account deficits to very high levels. A gradualdepletion of international reserves and other buffers is making the economy particularlyvulnerable to external shocks.Outlook and risks: A modest economic recovery should commence in late 2013.However, a difficult business climate and impaired external competitiveness areweighing on the medium-term outlook. The current policy mix is not sustainable as itgenerates large imbalances and depresses growth. The risk of a costly market-forcedadjustment is high.Main policy recommendations:? Allow the exchange rate to adjust to its equilibrium level and increase its flexibility.Accelerate preparations for the introduction of inflation targeting.? Strengthen the financial system’s resilience to shocks, including by developingcomprehensive contingency plans to cover potential capital and liquidity shortfalls undervarious scenarios.? Curtail the fiscal deficit through a reform-based current expenditure consolidation andthe cancelation of unaffordable tax cuts.? Reduce the quasi-fiscal losses in the energy sector by increasing the very low householdgas and heating tariffs in the context of a comprehensive energy sector reform plan,while protecting the most vulnerable households.? Launch broad structural and governance reforms to improve the business climate andboost sustainable growth.