Ukraine: First Review Under the Extended Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Ukraine

EXECUTIVE SUMMARY The economy is still fragile, but signs of stabilization are emerging. The escalation of the conflict in the East and the sharp depreciation of the hryvnia in early 2015 deepened the recession in 2015:Q1, raised inflation, and eroded further bank balance sheets. In recent months, however, signs of stabilization have been emerging. The balance of payments is in line with the program and the exchange rate has stabilized, retail hryvnia deposits are gradually increasing, the budget deficit is very low, and the pace of economic decline is moderating. The authorities have made a strong start in implementing the program. All performance criteria (PCs) for end-March 2015 and, based on preliminary information, all PCs for end-June were met. Eight benchmarks were completed, albeit four of them with a delay and two were converted into prior actions for this review. Discussions with creditors have made progress towards a debt operation that would restore fiscal sustainability. The engagement has intensified recently with direct negotiations with the ad hoc creditor committee on the authorities' restructuring proposal. The two sides reported further steps forward in their discussions and reiterated their common objective to finalize the terms of the debt operation as soon as possible. Policy discussions focused on strengthening macroeconomic stability and sustaining progress in structural reforms. Supporting policies in the period ahead aim to: (i) continue the current prudent monetary policy, maintain exchange rate flexibility, and improve banks' financial health; (ii) strengthen public finances, via fiscal consolidation and Naftogaz's reform, while revamping the social safety net; and (iii) advance structural reforms, specifically the anti-corruption framework and judicial system, overhaul the State- Owned Enterprise (SOE) sector, and improve business climate. In view of the authorities' performance under the program, their policy commitments for the period ahead, and progress toward a debt operation in line with its stated objectives, staff recommends the completion of the first review. The purchase released upon completion of the review would be in the amount equivalent to SDR 1,182.1 million.