UKRAINE'S ECONOMIC OUTLOOK IS GRIM

Ukraine's outlook for 2015 is grim. The military conflict between the government and pro-Russia separatist rebels has had a devastating impact on the country and a resolution seems far off. Since the onset of the conflict the economy has entered into a downward spiral as it has faced sharp contractions in economic activity coupled with skyrocketing inflation. Serious damage has been inflicted to Ukraine's industrial heartland in the east of the country. Luhansk and Donetsk normally account for 16% of Ukraine's GDP, supply 95% of its coal and produce a big chunck of exports. The crisis has made investors reluctant to hve their money anywhere near Ukraine. As investors have pulled money out of Ukraine, the hryvnia has tumbled and lost almost half of its value against the dollar. That makes imports more expensive, but worst of all a weak hryvnia makes it more difficult for Ukraine to repay the $ 14 billion worth of foreign debt due before the end of 2016. The Central Bank's reserves have fallen below US$ 10 billion and Ukraine's main exports (food, minerals and metals) are all facing reduced demand and falling prices, which is contributing to the deteriorating outlook. Agriculture is suffering because farmers cannot afford to buy inputs from abroad.

The government budget for 2015, which was passed on 29 December 2014, reflects these new realities that Ukraine is facing. The budget was drafted on the assumption of 13 % inflation and an economic contraction of 4.3% for 2015. Moreover, the budget includes many economic reforms that were agreed upon as a contingency of the IMF's bailout programme, including new tax legislation and increased duties on imports. Additionally notable changes include a drastic increase in military spending and large cuts to social spending. A mandatory review of the budget will be conducted before 15 February 2015, following meetings with Ukraine's international creditors to allow for additional reforms if required.

Creditors

1. European Union: On 4 December 2014, the European Commission on behalf of the EU, disbursed € 500 million to Ukraine. Prior to this disbursement, three disbursements under the Macro Financial Assistance (MFA) instrument were made in 2014: € 100 million on 20 May 2014, € 500 million on 17 June 2014 and € 260 million on 12 November 2014. The final disbursement of € 250 million is expected to be made by spring 2015, provided that Ukraine shows satisfactory progress with the accompanying reforms. The objective of the MFA programme is to support Ukraine financially while encouraging important structural reforms aimed at improving governance, delivering sustainable economic growth and supporting legislative harmonisation with the EU. Specifically the MFA supports reforms in the areas of public finance management and anti-corruption, trade and taxation, the energy sector and the financial sector. MFA is an exceptional EU crisis-response instrument, available to the EU's neighbouring partner countries experiencing severe balance of payments problems. It is complementary to the assistance provided by the International Monetary Fund (IMD) and other donors in the context of the stabilisation and reform programme launched by the beneficiary country. On 29 January 2015, the Ukrainian government sealed an emergency loan of € 1.8 billion from the European Union as the country looks to stave off the threat of bankruptcy but it is estimated Kiev faces a shortfall of as much as € 13 billion. The loan will be linked to structural reform in Ukraine, most notably in strengthening the governance, strengthening the state institutions, fighting against corruption. Ukraine will have to sign a commitment to pursue reforms before the first part of the loans can be disbursed.
2. International Monetary Fund (IMF): The International Monetary Fund has its own rescue package for Ukraine, worth some 15 billion euros which is also conditional on economic and fiscal reforms.
3. United States of America (USA): The U.S. has pledged $ 2 billion in additional loan guarantees for Ukraine.