On December 2, Ceyla Pazarbasioglu, head of the International Monetary Fund’s mission to Ukraine, responded in writing to questions posed by Sacha Tessier-Stall and James Marson.

Ukraine’s economy was among the hardest-hit by the recession in Europe. Why?

Ukraine was one of the hardest hit countries in Europe because its economy was less diversified and less prepared than other countries in the region and elsewhere in the world to the large external shocks that resulted from the global crisis. That’s why Ukraine suffered one of the steepest drops in output and sharpest declines in the exchange rate.

Until the financial crisis hit the world economy in mid-2008, Ukraine was riding on the coattails of a global economy that had an insatiable demand for steel—a commodity that amounted to about 40 percent of the country's exports. The country was enjoying growth rates of 7-8 percent and the population benefited from generous incomes policies. Together with rising capital inflows, this fuelled an unprecedented credit and consumption boom—and a rising current account deficit. By 2008, the economy was overheating with inflation running at 25-30 percent, credit growth at 70 percent, wages rising by 30-40 percent, and the import bill growing by 50-60 percent.

At that time, the global crisis was beginning to take its toll on Ukraine’s economy and the plunge in demand and prices for steel and the sharp reversal of capital flows brought these trends to an abrupt end. With the economy already overheated, a hard landing was difficult to avoid.

Despite the dire straits in which the Ukrainian economy finds itself, the worst-case scenarios have not come to pass. Why?

The authorities’ economic program, which has been supported by the IMF, has been critical to help the country overcome the worst of the crisis while protecting social stability. Remember, the situation in Ukraine was grave. The economy was in freefall. Real GDP fell by 20 percent in the first quarter of this year. The program was designed to address key problems immediately, and in many ways it succeeded.

The banking sector has been stabilized, monetary policy has been broadly accommodative, automatic fiscal stabilizers have been at play, important bank resolution legislation has been enacted, and other key reform efforts are in the pipeline. These initiatives have certainly helped avert the worst; following through with these measures and implementing prudent fiscal policies will further stabilize the economy and return the country to sustainable growth.

Ukraine still has a long way to go, which is why it is crucial that sound policies are supported and implemented by all branches of the executive. The authorities’ strong consensus during the first months of the economic program helped instill confidence and optimism that Ukraine is on the path of recovery. A renewed political consensus on the way forward would certainly help restore this confidence.

The IMF has been assisting Ukraine for many years, but the country still has not pushed through key reforms. How can this be achieved?

As I mentioned earlier, some key reforms are in the pipeline, but building the necessary consensus for structural reforms can take time. In particular, reforms in key areas such as education, health, and pensions are like an investment - they require upfront financing and thus can be more successfully implemented at the stage of sustained recovery and better prospects, than during an economic freefall.

In some respects, the crisis has acted a catalyst for reform. The authorities understood the urgency and need for reforms and included in their economic program a number of structural measures aimed at restoring financial and economic stability. The program’s immediate priority was to restore confidence in the financial system, and good progress has been made on that front.

But it is true that further reforms are necessary to underpin macroeconomic stability over the medium-term, increase efficiency, and improve investment prospects. For instance, increased exchange rate flexibility would help to mitigate external shocks. Regarding fiscal policy, the deep recession has created large pressures on public finances, highlighting the need for short-term savings and reforms to shore up fiscal sustainability over the medium term. Progress has been made in preparing tax and pension reform plans and a national tax compliance plan has recently been enacted. However, implementation of these reforms and energy sector reforms needs to be accelerated going forward. Measures to improve the business environment and a number of sectoral reforms will also be needed to promote sustainable growth over the medium-term.

For any economic program in any given country—whether supported by the IMF with financial assistance or not—it is paramount that the authorities own the program. In other words, they must plan, design, and implement the economic measures. We—the IMF—are ready to discuss and advise on the measures, drawing on our expertise from past crises, from other countries, and from across regions. Our experience has shown that strong ownership of an economic program instills confidence in the authorities’ competence and ability to achieve economic stability and growth.

How would you assess Ukraine’s cooperation with the IMF during the crisis? What have been the major successes and failures?

We have had a very good working relationship with the government, the National Bank, and the Presidential Secretariat. Oftentimes we are dealing with difficult issues, but we are in a constant and constructive dialogue with the authorities and thus far we have been able to reach a consensus on the key policies under the program. This consensus has helped the country overcome the worst of the crisis while protecting social stability, a major success in this context.

But as I have mentioned, when the political consensus among the authorities is waning—which seems to have been the case in Ukraine recently—discussions stall and progress slows down. This can delay the implementation of the policies that are required to get Ukraine out of the crisis. That’s why strong commitment by all policymakers is absolutely crucial, especially in times of crisis.

What has been the main obstacle to effective cooperation between Ukraine and the IMF? What has been the effect of the presidential election campaign on Ukraine-IMF cooperation?

Again, one word—ownership. For any economic program to be successful, there must be a minimum level of consensus. When the economic program was designed a year ago, there was a broad consensus in Ukraine on the underlying policies. All branches of executive authority, civil society, and even the opposition expressed strong support for this program. The severity of the situation had the effect of really focusing minds on what needed to be done.

But the pressure of events and political developments in the run up to the Presidential election means that consensus is now much harder to achieve. Without this, it will be much more difficult to improve the economy.

Is Ukraine emerging from the recession? If so, how would you assess the IMF’s role in helping this happen? If not, why not?

Ukraine is indeed gradually emerging from the recession. Just look at the latest trends. The contraction in retail sales has slowed down and industrial production has already started to pick up, albeit from a very depressed level. In fact, real GDP statistics indicate that the deep recession bottomed out in the first quarter.

As noted, the authorities’ program has been instrumental in stabilizing an extremely difficult economic situation. In support of this, the IMF provided financial assistance to serve as a temporary buffer to avoid severe hardship for the population and further strain on the economy. At the same time, we have offered policy advice and expertise drawing on our long institutional experience with other countries and regions.

In the end, however, prudent and credible policy implementation will be key to returning the country to sustainable growth and prosperity.

What are the principal risks to Ukraine’s economic recovery over the coming year? Over the next 5 years?

Of course, a lot depends on the global economy. But domestic factors are just as important. Ukraine is still in a highly fragile position. The policies under the program have stopped the bleeding, but recovery will take a long time. Lingering uncertainty is damaging for confidence and could derail recovery.

We do believe that the policy measures pledged by the authorities under the program are the right ones to secure Ukraine’s economic recovery, and improve the living standards of the Ukrainian people.

Once the immediate goal of restoring financial and economic stability is achieved, the authorities will need to pay more attention to boosting medium and long-term growth prospects. So, risks to the medium-term outlook relate to the authorities’ ability to sustain the reform effort and continue to implement sound economic policies.

What are the key concrete reforms the president and government must push through after the election?

Reforms that underpin fiscal sustainability over the medium-term, such as tax and pensions reforms, will be important. Energy sector reforms will also need to be moved forward to improve the transparency of the sector, reduce subsidies, and establish financially viable entities. That, of course, includes Naftohaz which needs to be put on a sound financial footing to reduce the weight of gas subsidies on the budget—and thus, on the taxpayer.

How do you see Ukraine-IMF cooperation evolving over the next 5 years?

The immediate priority will remain securing Ukraine’s economic and financial stabilization and planting the seeds for a sustainable economic recovery. As one of the IMF’s 186 member countries, Ukraine will continue to have a close relationship with the IMF. As all our member countries, Ukraine is part of the Fund’s regular analysis of economic developments in the country, the region, and worldwide. Furthermore, Ukraine receives substantial technical assistance in banking sector, monetary policy and tax administration and policies. The Fund will continue to support the country in its strive to boost medium and long-term growth prospects in whichever way the Ukraine authorities chose this support.