The agreement signed with the IMF should compel the State to better control spending, but wages, welfare and defense spending is likely to remain high. Moreover, debt servicing costs are rising because of higher interest rates and the depreciation of the hryvnia (70% of the debt is denominated in foreign currency). Tax receipts (75% of total revenues) are projected to rise, thanks to the modest economic recovery, the impact of higher taxes (on tobacco, alcohol, fuel) and to measures aimed at widening the tax base. The deficit is expected to narrow slightly. The government will, however, have to continue supporting the gas company Naftogas, weakened by accumulated arrears owed to its Russian supplier, Gazprom. The public debt is expected to be above 90% of GDP in 2017, maintaining a high risk of sovereign default.
Good agricultural harvests, the absence of another drop in the price for export products (cereals, fertilizer, steel products) and a slightly more favorable evolution of demand on some export markets (Russia, EU), could prevent another current account deficit. The slight increase in imports will, however, limit improvement in the balance.
Outflows of capital, associated notably with the repayment of maturing external debt (more than one billion USD in 2017), are projected to remain higher than incoming flows, impeded by uncertainties of developments in the political situation and the conflict in the east of the country.
The depreciation of the hryvnia (-8% against the dollar between January and November 2016) is therefore expected to continue, by how much depends, in particular, on the pace of reforms and developments of the situation in the eastern regions.
The level of foreign exchange reserves is low (around 3 months of imports). With access to the capital markets almost non-existent, the country depends heavily on international aid. The IMF released the third tranche (USD 1 billion) of its program in September 2016, a year late, because of the slow pace of reform. Payment of the fourth tranche is subject to the adoption by parliament of the 2017 budget.
The banking system is very fragile, inadequately capitalized with 30% of loans being non-performing. On December 2016, the government nationalized the country’s largest bank, PrivatBank, facing serious liquidity problems.