Imf letter of intent, memorandum of economic and financial policies, and technical memorandum of understanding - aug 18

International Monetary Fund
Ukraine and the IMF
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IMF Completes First
Review Under Stand-
By Arrangement for
Ukraine and
Approves US$1.39
Billion Disbursement
August 29, 2014
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Ukraine: Letter of Intent, Memorandum of Economic and Financial
Policies, and Technical Memorandum of Understanding
August 18, 2014
The following item is a Letter of Intent of the government of Ukraine, which
describes the policies that Ukraine intends to implement in the context of its
request for financial support from the IMF. The document, which is the property
of Ukraine, is being made available on the IMF website by agreement with the
member as a service to users of the IMF website.

Letter of Intent
Kyiv, August 18, 2014
Ms. Christine Lagarde
Managing Director
International Monetary Fund
Washington DC, 20431
Dear Ms. Lagarde:
1. Our economic reform program aims at restoring macroeconomic stability, strengthening
economic governance and transparency, and generating sound and sustainable economic growth,
while protecting the most vulnerable. The attached Memorandum of Economic and Financial
Policies (MEFP) updates the MEFP of April 22, 2014 to account for recent macroeconomic
developments and introduce policy adjustments to continue the process of macroeconomic
stabilization.
2. The economy continues to adjust, but a number of challenges have emerged since the
inception of the program. The conflict in the East has intensified and is weighing heavily on
confidence and the economic outlook. A dispute between Naftogaz and Gazprom over gas import
prices, which has led to the cut of gas supplies by Gazprom, has added to the uncertainty. These
developments are affecting economic activity, fiscal revenue performance, and balance of payment
flows, making it difficult to meet the initial program targets for the months ahead.
3. We have been steadily implementing the policies under the program. All structural
benchmarks for this review have been implemented, although some of them with delay. Despite the
adverse impact of the continuing conflict in the Eastern part of the country on the economic
situation, we have met all but one of the performance criteria (PCs) for end-May. With joint efforts
of the NBU and the Ministry of Finance, we met the end-May PC on Net International Reserves (NIR).
Strict control of budget expenditure allowed us to meet the PC on the general government deficit.
However, since program approval, Naftogaz imported and stored more gas than initially assumed,
which, together with a more depreciated exchange rate, led to a wider Naftogaz deficit. In light of
this, the end-May PC on the combined general government/Naftogaz deficit was missed.
4. Similarly, we estimate that the end-July PCs on the general government deficit, guaranteed
debt, and net domestic assets (NDA) have been met. However, reflecting the developments
described above, the NIR and combined general government and Naftogaz deficit at end-July are
estimated to have been missed. We are taking corrective actions to boost our reserve position and

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to strengthen payment discipline and compliance, to partly offset these developments and ensure
that future targets will be met.
5. In light of the existing economic pressures, we have recalibrated the fiscal deficit and
international reserve paths targeted under the program, in a way that seeks to re-establish
macroeconomic stability while avoiding undue strains on economic and social outcomes.
6. We remain determined to employ all the necessary measures to stabilize the economy,
address structural weaknesses, and ensure sustainable growth. To ensure that the program remains
fully financed and not subject to financing risks stemming from settling past gas import bills with
Gazprom, we have set aside a substantial amount of funds to settle these bills, if and when such
payments need to be made. Looking ahead, we will proceed with the implementation of the energy
sector reform and restoration of the viability of Naftogaz finances. To this end, we will intensify our
actions to improve collection of both current and past gas bills and make sure Naftogaz gets its fair
share of customer payments in the heating sector. We are also committed to maintain a flexible
exchange rate and introduce inflation targeting after careful preparation. Fiscal consolidation will
continue, at a pace consistent with the economy’s recovery trajectory. Simultaneously, we will work
to preserve financial stability and continue strengthening our financial regulatory and supervisory
framework. Structural reforms to address corruption, improve the business climate, and enhance the
effectiveness of the judiciary will remain a key part of our reform agenda.
7. In light of our program implementation record, as well as the corrective actions put in place
to avoid slippages on the Naftogaz deficit, boost reserves, and support the revised program targets,
we request waivers of nonobservance of the end-July PCs on NIR and the combined general
government/Naftogaz deficit and waivers of applicability of the end-July PCs on the ceiling on cash
deficit of the general government, the ceiling on cumulative change in net domestic assets of the
NBU and the ceiling on public guaranteed debt,—since final data to assess these are not yet
available and we estimate they will have been met. On this basis, we also request the completion of
the first review of the program under the Stand-By Arrangement and the associated disbursement
of SDR 914.67 million. The domestic currency counterpart of Fund purchases in the amount of
SDR 650 million will be used to finance the budget deficit. Given the delay in completing the first
program review, we request the rephasing of disbursements under the Stand-By Arrangement. We
request that the third and fourth purchases originally linked to the second and third reviews be
consolidated and that the consolidated amount be made available in one purchase in mid-
December 2014 subject to the completion of the second review on the basis of the observance of
the end-September and continuous performance criteria.
2 INTERNATIONAL MONETARY FUND

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8. We remain confident that the policies described in the current and previous MEFP are
adequate to achieve the macroeconomic and financial objectives under the program. Nonetheless,
we stand ready to take additional measures should they be needed to meet these objectives and will
consult with the IMF, in accordance with the Fund’s policies, on any necessary revisions to the
policies contained in this letter and the attached MEFP. We will provide Fund staff with the data and
information it requests for the purpose of monitoring program implementation. Reaffirming
commitment to our policy of transparency, we consent to the IMF’s publication of this letter, the
attached MEFP, the Technical Memorandum of Understanding (TMU), and the accompanying
Executive Board documents.
INTERNATIONAL MONETARY FUND 3
Yours sincerely,
/s/ /s/
Petro Poroshenko
President
Arsenii Yatseniuk
Prime Minister
/s/ /s/
Oleksandr Shlapak
Minister of Finance
Valeria Gontareva
Governor
National Bank of Ukraine

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Memorandum of Economic and Financial Policies
I. Macroeconomic Framework
1. Economic activity has been weakening, and escalation of the conflict in the East adds
to the uncertainty. In 2014:Q1, GDP dropped by a mild 1.1 percent, but high-frequency indicators
point to a deepening recession. Although agricultural production is expanding, industrial production
and construction have continued to decline and retail trade growth has decelerated. Accordingly, we
revised our projections of the economic contraction in 2014 to -6.5 percent, from -5 percent
expected at the time of our program request. In 2015, after the economy has stabilized, a rebound
in exports, followed by private consumption and investment will lead to a modest recovery of
1 percent.
2. The current account deficit is shrinking fast, but the overall balance of payments is not
as good as expected. While measures introduced by the NBU and the arrival of international
financial assistance have reduced hryvnia volatility in April–July, recent intensification in security
tensions have led to renewed exchange rate pressures. As a result, the exchange rate depreciated by
about 55 percent by mid-August relative to end-2013. In light of this and the fall in domestic
demand, imports have contracted rapidly. The current account deficit is in turn improving at a rapid
pace and is now projected to reach 2.5 percent of GDP this year, compared to 4.4 percent at the
time of the program request. Rollover rates for banks and corporate entities during the first five
months of 2014 have been more robust than expected at the time of the program request. However,
this has been more than offset by weaker FDI and larger than anticipated outflows of foreign
currency from the banking system. On balance, these effects imply a lower than expected pace for
accumulation of reserves under the program (Table 2).
3. Consumer price inflation has accelerated, reflecting rapid pass-through from the
currency depreciation and increases in administered prices. The hryvnia exchange rate has been
weaker than initially foreseen. As a result, we expect inflation to reach 19 percent by end-2014. In
2015, inflation should decelerate to about 9 percent, driven by a successful implementation of our
stabilization policies.

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II. Revised Policies under the program
A. Exchange Rate and Monetary Policy
4. We remain committed to maintaining a flexible exchange rate. To this end:
a. We will facilitate the unobstructed functioning of the FX market, and will make all
regulations, rules, and procedures known and transparent to all market participants. We
have restored the temporarily suspended FX trading licenses to 22 banks in April–May 2014. We
will resist pressures to modify legislation to widen the NBU’s sanctioning powers with regard to
the FX and money market, as this would create uncertainty among market participants and
hamper the functioning of these markets.
b. We will gradually rescind existing restrictions and MCPs. In May, we phased out the
requirement to deposit hryvnia in a special account for several days before purchasing FX from
the market. Once market pressures stemming from the current security tensions subside, we will
formulate a plan for staged removal of the remaining restrictive measures, including exchange
restrictions and multiple currency practices.
5. We remain committed to the objectives of maintaining adequate international reserves
and controlling monetary aggregates. In light of the less favorable BOP flows, we have revised the
programmed NIR path (Table 2). To support the revised path, the NBU will accumulate at least
US$1 billion through market purchases by end-2014. In this regard, by purchasing at least
US$200 million, the NBU will achieve a level of NIR of at least US$7.675 billion as a prior action. To
save reserves, the NBU will seek to limit FX sales to the central government and Naftogaz to the
strictly necessary amounts factored into the program projections for 2014, and will not meet ad hoc
demands for FX coming from local governments and other entities. Instead, the NBU will advise
them to buy FX in the open market, as will Naftogaz—without restrictions—except for the one-off
programmed purchases specified in the TMU (Table C). On its side, the Ministry of Finance will seek
to roll over maturing domestic debt liabilities, both in hryvnia and FX by offering an appropriate
interest rate and an expanded range of maturities. These policies will be followed throughout the
program period. To secure achievement of NIR targets, the Debt Management Unit of the Ministry
of Finance and the NBU Monetary Policy Department will step up coordination of their operations
through the establishment of a high level coordinating committee. NBU liquidity provision and other
operations with its counterparties will be based on a policy framework and regulations that are
known and transparent to all market participants. To guide inflation expectations and enhance its

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ability to control its net domestic assets as needed, the NBU will maintain its effective policy rate
positive in real terms on a 12-month forward-looking basis.
6. We will continue preparations for adopting inflation targeting (IT) in line with a
detailed plan agreed with the IMF. To this end, we will prepare a strategy to reform the central
bank and monetary policy during both the transition phase and the steady state—when full-fledged
inflation targeting will be in place.
a. A new monetary policy framework is currently being prepared. This would mainly require an
increase in the NBU policy and operational independence, building internal capacity, and
establishing appropriate internal processes. Furthermore, the NBU will develop and use its own
inflation projections and will no longer be obliged to follow the projections developed by the
Ministry of Economy. To this end, the law on National Bank of Ukraine will be modified by
end-November 2014.
b. Starting in July 2014, we will begin implementing changes in the internal NBU structure.
Specifically, we will set up a Monetary Policy Committee (MPC), and ensure a clear
organizational and operational separation of the monetary policy formulation function in the
Economics Department from the monetary policy implementation function in the context of the
overall reorganization of the NBU structure based on the IMF TA Mission recommendations.
c. From July 2014 on, we will deploy a new communication strategy to convey to the public
how the NBU operates. The NBU will provide a clear public explanation of its monetary policy
and operations, following the best practices established by other central banks.
d. The practice of NBU making advanced profit transfers to the budget will be discontinued
from July 2014. The NBU will not transfer profits during the second half of 2014, after the
remaining amount of UAH 806 million from the 2013 profit will have been transferred. We will
discontinue the practice of overriding the profit distribution rules included in the NBU Law by
provisions in the annual Budget Laws and accordingly discontinue advance profit transfers from
the NBU to the budget during the current fiscal year. To this end, we will enact legal
amendments as needed.
e. Benefitting from the IMF technical assistance (TA), the NBU will move ahead with
adopting market instruments for interest rate management and control. As the outflow of
deposits from the banking system is bottoming out, since end-July the liquidity support will
mainly be focused at the standard monetary mechanisms and its cost will be closely linked to
the policy rate.

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f. By mid 2015, we plan to have in place all technical prerequisites for IT. In particular, we will
implement a transparent policy framework based on controlling money-market interest rates
through open market operations using a key policy rate, supplemented by standing lending and
deposit facilities.
B. Financial Sector Policies
7. Despite the economic recession and political events in the Eastern provinces, the
banking system has remained resilient. All banks continue reporting capital adequacy ratios
above the regulatory minimum of 10 percent as of end-June, and NPL levels have remained at about
14–15 percent since last May. Demand for fresh NBU liquidity support has eased in recent weeks,
although 74 institutions are yet to reimburse NBU liquidity support. The Deposit Guarantee Fund
has taken over 15 mainly small banks and has begun the process of paying out the insured deposits.
8. We have already taken important steps towards maintaining banks’ resilience, as
envisaged in the program. Specifically, (i) we reached agreement with IMF and WB staff on the
terms of reference for the banks’ diagnostic studies and, on this basis, launched the studies for the
15 largest banks in May 2014; (ii) we have amended the DGF Law to enhance its legal and
operational capability to restructure banks; and (iii) the NBU and Ministry of Finance have agreed
with IMF and WB staff on the criteria for using public funds in recapitalizing or restructuring eligible
banks (structural benchmark for end-May, met with delay).
9. We will continue making progress towards strengthening financial stability with a
view to supporting economic growth. This will be achieved by:
Updating the regulatory and supervisory framework
10. We are working towards further enhancing our monitoring of banks. While the bank
diagnostics are being completed, the NBU’ supervisory teams are actively monitoring and analyzing
banking condition with the aim of identifying risks and banks in difficulties, classifying them in three
categories (banks under ordinary regime, problematic, and insolvent) to decide on the supervisory
strategy for each institution. Prudential supervision over problematic banks is performed on a daily
basis, and this analysis together with detailed information on specific institution (including liquidity
and cash flows analysis and quality and availability of collateral) is being reported to the NBU board
weekly and serve as basis for the Board decision on disbursement of funds for new liquidity support
or possible renewal of liquidity support loans. Importantly, with technical assistance from the IMF,
we will complete by end-November 2014 a review of the NBU tools to identify problem banks early,
by benchmarking them against best international practices. Finally, with the view to improve our

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analysis and monitoring of systemic risks, by end-October we will enhance our set of modeling
instruments for macro stress-testing.
Assessing financial resilience through bank diagnostics
11. We will continue implementing diagnostic studies of banks. By August 31, the NBU
board will complete the review of the results of the diagnostic studies performed by external
auditing firms on the largest fifteen banks and send letters to banks requiring recapitalization and
submission of restructuring plans as a result of these studies (after taking into consideration
recommendations provided by the Steering Committee responsible for controlling the quality of
bank diagnostics). On July 15, 2014, the diagnostic studies of the 20 next largest banks have begun.
By end-August, with technical assistance provided by IMF and WB, the NBU will prepare an outline
of a standardized restructuring plan and a set of criteria to assess the credibility and sustainability of
banks’ recapitalization and restructuring plans.
Restructuring and recapitalizing financial institutions in need
12. We are enhancing our preparedness to deal with eventual capital needs while
preserving financial stability. To this end, we are working on three fronts:
 Enhancing the DGF framework and financial position. We amended the DGF law to enhance
its legal and operational capability to resolve banks by making more explicit the conditions of its
access to public loans and direct recapitalization of the state in extreme circumstances. On
funding, the amendments also allow the DGF to issue securities and exchange them with
government securities to cover gaps between assets and liabilities that are being transferred
from insolvent to solvent institutions. Moreover, on July 10, 2014 a cabinet resolution has been
passed to rule on DGF funding activities. On the basis of estimates provided by the DGF and
reviewed by the NBU and the Ministry of Finance, the latter will lend the DGF sufficient resources
in line with the DGF Law to support its capability to pay out the insured deposits in the small
banks it has taken over. By end-September 2014, in close coordination with IMF and WB staff we
will issue the needed implementing by-laws to address new features introduced by the new DGF
law.
 Ensuring availability of contingent public funds. With the advice of the Fund and WB, we
have completed the criteria to use public funds to recapitalize and restructure systemically
important banks. As in 2014, the government will continue to seek authorization to provide
adequate public funds for this purpose in the 2015 budget.

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 Improving legal bank restructuring tools. In close consultation with IMF and WB staff, we will
submit by end-August draft legislation to Parliament to address legal weaknesses that may
impede the effective implementation of the banking strategy agreed in the current program.
 Enhancing coordination between NBU and DGF. On the basis of their recently revised
memorandum of understanding, the coordination between the two institutions has improved
significantly. NBU and DGF staff are monitoring closely not only banks deemed to be insolvent
but also problematic institutions.
13. We will continue to ensure proper governance in restructuring banks. We will take
action in three fronts:
 Monitoring state ownership in recapitalized banks. We are working towards establishing a
specialized unit to manage the state’s financial sector shareholdings by end-September 2014. To
this end, we will assess whether the current specialized division at the MoF, responsible for
managing corporate rights, needs to be reorganized, enhancing its organizational relevance
within the ministry, and provided with adequate budgetary resources to hire experienced staff. If
action is needed, we will adopt the necessary measures by end-September 2014. Furthermore,
while we believe the specialized division’ current terms of reference could serve as the basis to
define the relationship between banks and the Ministry of Finance and ensure no political
interference, by end-August 2014, in coordination with Fund staff, we will revise our existing
arrangement with the aim to identify any eventual deviation from international best practices.
 Ensuring that due investigation is initialed. The DGF has completed the filing of 112 potential
cases of wrongdoing in the banks under its temporary administration, mostly associated with
lack of control of bank assets and documentation. Furthermore, to enhance our work on
governance, we will ensure that the DGF, in line with existing legislation and consultation with
the IMF and WB staff, will complete by end-September 2014 terms of reference and an action
plan to arrange comprehensive legal due diligence by independent firms of banks under
temporary administration to identify whether wrongdoing or bad banking practices led the bank
into insolvency. The tender process for the selection of the firms responsible for the due
diligence of the first two cases of the action plan will be initiated by end-September 2014 with
the view to launch the two such investigations by end-November 2014.
 Managing the assets left in banks under liquidation. With technical assistance from the IMF
and WB, by end-November 2014 we will complete an assessment of options currently available
and strategy to dispose assets with the aim to identify areas that may deserve further

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enhancement and help to maximize recovery value. This assessment will also include tools
available to collect related party loans and means of cooperation from NBU (for example, NBU
would ensure that in assessing these borrowers’ creditworthiness the operating banks factor in
past due loans held by banks under liquidation and also ensure these exposures are reported to
the credit register set to be created at NBU). On this basis, we will amend the Law on banks and
banking.
Enhancing banks’ capacity to resolve bad loans
14. We remain fully committed to ensuring that banks have the tools and motivation to
successfully address their NPLs and proactively seek to prevent new ones. To this end, we are
working on four fronts:
 We will support the approval of legislation by end-September that would guide the
restructuring of foreign currency denominated mortgage loans serviced by struggling but still
performing borrowers without interfering in bilateral negotiations between borrowers and banks
(structural benchmark). To this end, we will amend the draft law already passed by Parliament
on first reading. This law will aim to: (i) protect the rights and interests of individuals that can
demonstrate to be in financial difficulties; (ii) target borrowers with loans that do not exceed
UAH 1 million as of end-December 2013 (about US$125,000) and who live in the mortgaged
properties; (iii) establish a voluntary process where eligible borrowers would apply to banks for
restructuring and can prove their difficult financial situation; (iv) guide banks to restructure loans
on the basis of the borrowers’ financial condition and capacity to pay. After considering
reasonable living expenses, the banks will make a proposal to borrowers that may include debt
conversion and interest and principal reduction; and (v) require banks to establish an
independent and credible panel under NBU monitoring to deal with customers’ complaints. This
process will also be guided by the Code of Conduct discussed below. Should a materially
different law be passed, the President will veto its enactment. Simultaneously, we will also lift the
moratorium on collateral foreclosure imposed in June as it will be replicated for eligible
borrowers by the procedures under the Code of Conduct.
 On the basis of NBU existing guidelines on loan in arrears and international best practice, with
technical assistance from the IMF, the NBU will issue a Code of Conduct by mid-September 2014
to guide negotiations between borrowers in difficulty and banks, establish debt restructuring
guidelines, and an appeal process. The Code will seek to induce fair and balanced negotiations
between banks and borrowers. The launch of such negotiations will lead to immediate standstill
on collateral foreclosure on residential property for eligible borrowers. The resulting agreements

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on debt workouts should aim to help borrowers in real need while maintaining a high level of
debt servicing discipline.
 Supporting the introduction of the Code of Conduct, we will seek to amend the Tax Code by
end-September 2014 to allow banks to deduct losses stemming from such debt workouts, while
borrowers should not be required to recognize income associated with interest, penalties, and
exchange rate differences stemming from debt restructuring.
 Going forward we also plan to enhance our current legal and regulatory framework associated
with out of court arrangements and insolvency law, and ensure banks’ readiness to deal with
troubled borrowers, with technical assistance from the IMF.
C. Fiscal Policy
15. The end-May general government deficit target was met, but pressures are emerging
in light of the deterioration of the security situation. Despite the positive effects of the measures
implemented under the program and the depreciation of the hryvnia, tax revenues have been
underperforming. Frontloading of the NBU profit transfer and expenditure restraint have helped
meet the end-May target for the budget deficit with a wide margin. However, some accumulation of
unpaid bills and reduction in VAT refunds could not be avoided. In addition, the deterioration of the
security situation in the East is contributing to the recent weakness in tax revenue performance and
creating upward pressures on military expenditure.
16. In light of the shocks facing the economy, we are recalibrating our general
government deficit path to maintain the targeted structural adjustment in the fiscal and
quasi-fiscal deficit. The recalibration aims at a larger structural fiscal adjustment of 2.6 percent of
GDP during 2014–16, compared to the original program target of 2 percent, to compensate for the
widening in Naftogaz’s deficit (see section D). Given the weaker economy and the one-off nature of
some of our military spending, this translates into headline general government deficits of
5.8 percent of GDP in 2014 (0.6 percent of GDP wider than envisaged at the time of the program
request), 3.9 percent of GDP in 2015 (0.3 percent of GDP tighter than originally envisaged), and
2.7 percent of GDP in 2016 (0.4 percent of GDP tighter than originally envisaged). Since Naftogaz’s
projected operational deficit for 2014 also needs to be revised upwards (see below), this will be
consistent with combined deficits of the general government and Naftogaz of 10.1 percent of GDP
in 2014, 5.8 percent of GDP in 2015, and 4.0 percent of GDP in 2016. Revised quantitative
performance criteria and indicative targets are set in Table 2.

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17. Notwithstanding the loosening of the 2014 general government deficit target,
meeting the revised objective requires continuing spending restraint and additional policy
measures. First, we will maintain the expenditure policies described in the MEFP dated April 22—
including refraining from discretionary wage, pension, and social assistance hikes as well as
completing the significant cuts in administrative civil service staff (27,000 staff) to correct for an
unaffordable expansion in previous years. Second, we will offset a UAH 9.7 billion increase in military
and reconstruction spending planned in 2014 by reducing spending on goods and services,
transfers, subsidies, and other expenditure by the same amount, including by locking in savings
from the first half of the year. Third, we will implement additional revenue measures yielding
UAH 5½ billion in the remainder of the year to partly compensate for the revenue shortfall driven by
the deterioration of security in the East. To this end, in addition to the recently adopted tax on
deposit interest income, we will extend the VAT exemption on grain exports from October to the
end of 2014 and eliminate VAT exemptions for the wood-processing industry. A new supplementary
budget reflecting these policy adjustments will be passed as a prior action.
18. Over the medium-term, we are aiming at a gradual expenditure-based fiscal
consolidation to build confidence and reduce imbalances. High levels of public spending relative
to GDP call for an expenditure-led consolidation. We plan to implement a number of structural fiscal
measures needed to meet our consolidation targets for 2015–16 and create fiscal space for
growth-enhancing fiscal spending. Specifically:
 In 2015, we will continue our efforts to put expenditure on sustainable footing by further
structural fiscal reforms while keeping discretionary spending in check. After a freeze in 2014, we
plan to index public sector wages to expected inflation, while reducing the number of
employees in the budgetary sector by 3 percent to limit the wage bill to 10.2 percent of GDP.
Similarly, we will aim to maintain the purchasing power of pensions unchanged in real terms and
target overall Pension Fund spending of 15.2 percent of GDP. Energy-saving measures and strict
expenditure control will allow us to reduce spending on goods and services to 6.2 percent of
GDP. These policies will allow us to expand public investment by almost half to 2 percent of GDP
to support growth and cover reconstruction costs in the East.
 Building on the advice of the IMF technical assistance mission on expenditure rationalization, we
will review by end-September 2014 the education spending and develop measures needed to
enhance cost-efficiency in the sector, including by (i) exploring the possibility of raising class and
school sizes toward the average European levels; and (ii) reducing excessive staffing on the basis
of performance reviews. From July 1, 2015 we will also increase the teaching load of primary and
secondary school teachers from 18 to 20 hours, followed by a further increase to 22 hours from

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July 1, 2016. In addition, by end-September 2014 we will prepare a plan to introduce
means-testing in providing benefits to students in secondary schools while protecting
vulnerable groups as per our current plans.
 We have already begun to reform privileged pensions. From May 1, 2014, we reduced the
replacement ratio used for calculating such pensions in the civil service from 80 to 70 percent
and expanded the base of the pension to include the average wage of the last 5 years (as
opposed to the last 2 years before). By end-September, we will prepare and present to IMF staff
a plan of measures and legislative proposals to restrict eligibility for privileged pensions and
reduce their cost over time. Specifically, we will keep privileged pensions at their current nominal
levels until end-2015, except for inflation indexation of pensions that are at the subsistence
minimum, and consider closing some of these systems for new entrants as part of the reform.
The plan will also include expanding taxation of high-income pensioners in 2015. All these
measures are expected to save the budget ¼ percent of GDP.
19. Notwithstanding the priority given to the reduction in government spending in the
years ahead, revenue reforms will also be necessary to achieve our fiscal objectives.
 Drawing on recommendations of the recent FAD TA mission on tax administration, we will
submit a law to Parliament by September 1, 2014 to be passed by end-October 2014 that will:
a. Eliminate discretion for large taxpayers to choose a tax office to manage their tax affairs and
transfer all taxpayers meeting large taxpayer criteria to the Large Taxpayer Office;
b. Review the management of the largest debtors to the budget and assign the cases to a
centralized and separate function starting from January 1, 2015.
 We will improve detection of under-declared wages, a pervasive problem, through
strengthening risk-based assessment of taxpayers. To this end, we will assign the responsibility
for improving compliance with payroll and PIT taxation to one deputy head in each local tax
inspectorate. This person will lead the work to identify high-risk taxpayers—based on a set of
indicators including a suspiciously high share of employees receiving minimum wage—and
communicate this information to the tax police. Moreover, we will change the internal
procedures of the fiscal service to enable the use of tax returns for identification of under-declared
wages.
 After discussion within government and with the private sector, we will prepare by
end-September 2014 a proposal for the reform of VAT in the agricultural sector in view of

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bringing the VAT treatment of this sector closer to the general VAT regime (structural
benchmark). In this context, in consultation with producers we will reduce the VAT exemptions
for agriculture in 2015. We are discussing with agricultural producers the most appropriate form
of taxation taking into account the recommendations of IMF and World Bank technical
assistance missions and the needs of the sector.
D. Energy Sector Policy
20. Higher-than-planned gas imports and exchange rate depreciation have led to
a sharper-than-expected deterioration of the Naftogaz deficit. Naftogaz has imported and put
in storage more gas than assumed at the time of the program request, which, together with the
more depreciated exchange rate, has led to a wider deficit. Accordingly, and notwithstanding our
full commitment to improve collections across all customer groups to ensure that future targets are
met, we have had to revise the 2014 combined general government/Naftogaz deficit target upward,
based on a projected deficit for Naftogaz of 4.3 percent of GDP versus 3.3 percent targeted earlier.
In addition to the impact of the higher deficit, the company will need more support from the
government than expected at the time of the program request (an additional 3.5 percent of GDP in
2014) to offset large shortfalls in the collection of past receivables due to inability of heating
companies and some industrial companies to pay their bills. We are taking measures to address this
problem (¶23).
21. A gas price dispute with Gazprom led to accumulation of payment arrears in 2014:Q2,
interruption of gas supplies in June, and an arbitration process under way in Stockholm.
Naftogaz has cleared its arrears for January–March 2014, leaving arrears for gas delivered in
November and December 2013 outstanding. However, as the gas price is in dispute since April,
Naftogaz did not pay for imported gas in April–June. Despite intensive negotiations, a solution was
not found, and Gazprom stopped gas deliveries to Ukraine on June 16, 2014. Both companies filed
arbitration claims, with Naftogaz claiming overpayment of US$6 billion for 2010–13 as a result of the
gas prices charged by Gazprom then; the arbitrator’s decision may affect the amount of arrears
outstanding from 2013. More generally, Naftogaz is asking for revisions to the 2009 contract to
reflect current economic conditions on the gas market and in Ukraine.
22. We have made several important steps towards reforming the energy sector.
 Household gas and heating tariffs were raised effective May 1 and July 1, 2014; industrial gas
tariffs were adjusted in April and May to reflect exchange rate changes. The utility regulator

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NURC remains committed to keeping the share flowing to Naftogaz constant rather that
reducing it for the benefit of transportation and distribution companies.
 The new targeted social assistance scheme to offset the tariff increases for low income
households became operational on July 1. Between the new and the existing schemes, about
27 percent of the population will receive assistance to cope with the energy bills.
 The audit company BDO was selected to conduct the quarterly cash flow audits of Naftogaz
accounts and prepared the end-May cash flow audit on July 8 (a structural benchmark for
end-June, met with delay).
 The process of making mandatory distribution accounts in the district heating sector fully
operational is under way. These distribution accounts are critical for increasing the share of
revenues channeled to Naftogaz from district heating companies once they collect revenues
from consumers. The law on the creation of distribution accounts has been passed (a structural
benchmark for end-June) and the Cabinet of Ministers resolution was published in early July.
District heating companies are expected to open special bank accounts where households will
deposit their bill payments within one month from the publication of the resolution. We expect
that by the start of the heating season, the distribution accounts will be channeling to Naftogaz
funds commensurate with the share of the gas price in the heating tariffs.
 In addition, as part of the reform in the energy sector, on June 4, 2014, we reiterated our
objective to restructure Naftogaz by establishing separate companies that will perform the
transit and storage of natural gas. This unbundling would put Ukraine in compliance with the
Third Package of the Energy Community Treaty and would help attract investors for the
modernization and operation of the gas transport system. In the coming months Parliament is
expected to consider a number of legislative amendments to put this process into its
implementation stage. A working group consisting of the European Commission and the World
Bank is working with Naftogaz and the Ministry of Fuel and Energy in reforming the gas sector.
23. Going forward, we remain committed to our energy sector reform strategy:
a. In 2014, the main objective will be to contain Naftogaz’s deficit to 4.3 percent of GDP. We
will reduce it to 1.9 percent of GDP in 2015 and aim to eliminate it by 2018.
b. To ensure that the program is not subject to financing risks stemming from settling past
gas import bills with Gazprom, we have earmarked a substantial amount of funds for this
purpose. Specifically, after the completion of Naftogaz’s recapitalization procedure, the

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company will deposit US$3.1 billion in a restricted account with the NBU (prior action).
Naftogaz will make payments out of this account only with the agreement of the Ministry of
Finance and the NBU for the purpose of settling gas bills with Gazprom upon a decision by the
arbitrator in the dispute with Gazprom or if out of court settlement between Naftogaz and
Gazprom is reached. In the event the funds in the account exceed the amounts needed to pay
Gazprom under the arbitrator’s decision or the settlement between the two companies, the
funds will be used to pay for gas imports going forward.
c. In response to the developments noted above, the government will step up its financial
support to Naftogaz. In addition to the budget allocation of UAH 33 billion already put in
place, Naftogaz will need UAH 82 billion to finance its deficit and its debt payment obligations.
To this aim we amended the 2014 budget on July 31 to provide additional funds for Naftogaz
recapitalization in the amount of UAH 70 billion, including UAH 7.3 billion to cover cancellation
of arrears to Naftogaz related to tariff differences. In addition to enhancing its collection efforts,
Naftogaz is in the process of rolling over domestic debt obligations coming due this year.
d. We will continue to adjust on a quarterly basis gas prices to industrial and budget
consumers in line with the actual gas imports costs, taking into account new gas import
prices and exchange rate movements.
e. We will strengthen our efforts to collect Naftogaz receivables from clients, which is critical
for improving Naftogaz finances. To this end we have set up a working group involving the
Ministry of Energy, Naftogaz, and the Ministry of Finance to review existing
Naftogaz receivables and develop by end-August 2014 a monthly collection plan for
September 2014–December 2015 (structural benchmark). The plan will have targets by
customer category to maximize the collection of arrears and make sure that customers remain
current with their bills. A department within Naftogaz will be tasked with assessing the stock of
accounts receivable that are truly collectible, soliciting bill payments from collectible accounts,
assessing the accounts on which a haircut is warranted in order to ensure at least a portion of
the funds flows to Naftogaz, and blocking bank accounts and pursuing asset seizure if
repayment or a plan for repayment is not agreed with customers. We will identify the necessary
legal changes to remove obstacles, if any, to these collection methods by end-August 2014 and
propose the necessary legislation amendments by September 15. Furthermore, Naftogaz will
publish on its website the list of entities (private and public) with overdue bills payable for gas
delivered to them. The list will be updated on a monthly basis.

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f. We will continue to pursue our objectives of restructuring Naftogaz and attracting new
investments in the gas sector. We will amend relevant laws so as to allow FDI in companies
operating in the gas transport and storage business. Furthermore, the statutes for the creation
of two independent companies out of a Naftogaz subsidiary that will handle gas transport and
storage services will be developed. Once these companies are operational, the procedures for
setting tariffs for gas transport and storage will also be changed to reflect international best
practice.
E. Governance, Transparency and the Business Climate
24. Strengthening governance and the transparency of government operations and
improving the business climate remain key reform priorities. We have conducted jointly with
Fund experts a diagnostic study (structural benchmark for July 15) to identify major areas for
reforms. Based on the recommendations of the diagnostic study we will:
a. Improve governance and AML/CFT framework. To this end we will:
 Submit to Parliament by September 1, 2014 (structural benchmark) and adopt by end-
October, 2014 (structural benchmark) enabling legislation for the establishment of an
independent anti-corruption agency with broad investigative powers. The agency will
detect and investigate corruption offences and acts of the laundering of proceeds of corruption
among high-level officials, as well as other corruption offences that constitute a particular
danger to society and including those reflecting allegations received through a public
hotline. The agency will prepare semi-annual public reports of its activities, including summary
and data on its investigations and their outcomes. The agency will have powers of asset recovery
(freezing, seizing and executing confiscation orders of assets) related to its own investigations. In
particular, we will ensure that the agency will be: (i) operationally and institutionally independent
from any external influence guaranteed and realized; (ii) accountable and transparent;
(iii) adequately resourced in terms of budget, staffing and expertise; and (iv) able to obtain all
relevant information domestically and to engage in international cooperation with regard to its
area of competency. Institutional and operational independence from any external influence will
be guaranteed and realized, in particular, through appropriate procedures for appointment;
term limits and dismissal of the head of the agency; the power to recruit and dismiss its own
staff; special procedures for budgetary allocations; and competitive remuneration for the head
and staff of the agency. Prosecuting authorities will designate prosecutors to be in charge of
prosecuting the cases under the jurisdiction of the agency; they will report to the Prosecutor
General. Going forward, we will also implement reforms to strengthen the income and asset

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declaration, verification, and publication framework as it applies to high-level pubic officials. We
will discuss this area of reforms with Fund staff at the time of subsequent reviews.
 Submit to Parliament by September 1, 2014 (structural benchmark) and adopt by
end-October, 2014 (structural benchmark) amendments to the AML law and the criminal
code that will introduce key elements of the FATF standard to support the government’s
anti-corruption effort. The key elements are as follows: (i) financial institutions will be required
to conduct enhanced due diligence on business relationships with domestic politically exposed
persons; (ii) the laundering of the proceeds of tax crimes will be criminalized and made a
predicate offence to money laundering; (iii) the respective provisions of the Criminal Code of
Ukraine pertaining to illicit enrichment will be brought in line with the UN Anticorruption
Convention; (iv) financial institutions will be allowed to end a business relationship with a
customer when institutions are unable to perform customer due diligence requirements; and
(v) pecuniary administrative sanctions for non-compliance with AML requirements are effective,
proportionate, and dissuasive.
b. Streamline the regulatory framework pertaining to economic activity. To this end:
 As a prior action for the review, the government will take a formal decision to establish by
end-August an authorized body accountable to the Cabinet of Ministers to coordinate the
effort to simplify regulations. The head of the body will report directly to the Prime Minister to
ensure adequate high-level coordination (both within the government and among government,
civil society and business) as well as effective monitoring and reporting of progress toward
regulatory simplification.
 The government will adopt by end-October an action plan to streamline, simplify and
clarify the legislative and regulatory frameworks governing economic activity (structural
benchmark). The plan will be prepared by the coordinating body. Individual ministries and
agencies will provide their input to the action plan based on their areas of competency. We will
involve the business community and the civil society in a public consultative process. The action
plan will include a census of existing legislative and regulatory requirements and specify those
that will be eliminated, streamlined, simplified or clarified, with appropriate prioritization in
terms of substantive impact and timelines. We will publish quarterly reports indicating the
progress made on the action plan.
25. Strengthen the effectiveness of the judiciary to ensure the enforcement of commercial
claims. Our reform agenda is based on four broad objectives: (i) enhancing judicial independence,

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(ii) ensuring institutional integrity, (iii) streamlining organization and procedure, and
(iv) strengthening post-court enforcement. We will develop, in consultation with Fund staff, specifics
and timeline for reforms in these areas at the time of subsequent reviews. In the meantime, to lay
the ground work, the relevant judicial entities (the State Judicial Administration and the High Council
of Judges) and the State Enforcement Service have undertaken to conduct and complete by
September 1, 2014, in consultation with IMF staff, reports on the following: (i) the number and
processing time of court cases and post-court enforcement cases; (ii) the current court fee system
(with revenue streams per jurisdiction) with proposals for changing court fees in line with cross-country
developments; and (iii) the internal supervision system over judges and enforcement agents.
26. Other steps to improve governance, transparency and fairness include: (i) preparing, in
consultation with the IMF and other international partners, a strategy by end-September 2014 and
an implementation plan by end-November 2014 for strengthening tax compliance of high income
earners and those with foreign assets; and (ii) continuing to address delays and weak transparency
in granting VAT refunds, a long-standing problem that has given rise to governance issues.
Regarding the VAT refunds, we remain committed to the specific measures outlined in MEFP of
April 22, 2014. In particular, in order to step up VAT refunds, particularly those provided through the
automated mechanism, we will reconsider the eligibility rule based on the level of average wages
and will enhance the risk-based audit system. Appropriate amendments to the Tax Code will be
introduced to this effect by end-October, following the recommendations of working groups
established at the Ministry of Finance and involving representatives of the business community.
Consistent with the Tax Code, the practice of requesting CIT advance payments in exchange for VAT
refunds will be also prohibited—the State Tax Service will issue instructions to all tax offices to
confirm this by end-July 2014.
III. Safeguards
27. We will ensure that adequate safeguards are in place. To this end, we will implement the
recommendations of the IMF safeguards mission completed in May 2014 to improve the NBU
governance and financial autonomy.
a. The NBU will prepare in consultation with Fund staff draft legislative amendments to the NBU Law
(structural benchmark for end-December 2014). These will (i) strengthen the decision-making
and oversight mandate of the Council; (ii) transform the Board into a smaller Executive
Committee, composed of the Governor and Deputy Governors that would be charged with the
residual powers of the NBU, which are powers not explicitly assigned to the Council or the
Governor; (iii) strengthen the personal autonomy of Council members and Deputy Governors by
enhancing appointment procedures and mitigating conflicts of interest through developing a

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Code of Conduct; and (iv) authorize the Council to establish special reserves before the profit
distribution rules kick in.
b. We will strengthen internal controls of the NBU. On May 8, 2014, the government and the NBU
signed an Agreement concerning the servicing of future financial obligations related to the
budget support under the current program and provided a copy of this Agreement to the Fund.
We will resume the quarterly data audits introduced during the 2008 Fund-supported program
and communicate the results to the Fund within six weeks of each test date. By October 2014
the NBU will establish a senior level Credit Committee to oversee the liquidity lending
operations. In addition, the NBU will, in the medium term, shift the origination and management
of these operations to a function outside of banking supervision.
c. The government will settle its obligations to the NBU which were accumulated (starting from
February 2014) as the National Bank repaid out of its reserves the government obligations
coming due to the IMF. These obligations covered by the NBU originated from budget support
disbursements in the context of the 2010 SBA arrangement with the Fund. While repaying these
obligations in full and on schedule, the NBU did not receive the corresponding payments from
the Ministry of Finance (SDR 913 million in total). As per the Agreement signed between Ministry
of Finance and the NBU in June 2014, the government will fully reimburse the NBU by end-2014.
IV. Program Monitoring
28. Program implementation will be monitored through prior actions, quarterly reviews,
quantitative performance criteria and indicative targets, and structural benchmarks. The
second review is now set for mid-December 2014 based on end-September 2014 quantitative
targets and taking into consideration structural benchmarks through end-October 2014. For all
reviews, quantitative performance criteria will include: a ceiling on the cash deficit of the general
government; a ceiling on the combined deficits of the general government and Naftogaz; a ceiling
on publicly guaranteed debt; a floor on cumulative change in the NIR; a ceiling on cumulative
change in the NBU’s NDA; and non-accumulation of external debt payments arrears by the general
government. The prior actions and structural benchmarks are set out in Table 1. The quantitative
targets for target dates through end-December 2014, along with a continuous quantitative
performance criterion are set out in Table 2. The understandings between the Ukrainian authorities
and IMF staff regarding the quantitative performance criteria and the structural measures described
in this memorandum are further specified in the Technical Memorandum of Understanding (TMU)
attached to this memorandum.

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Table 1. Ukraine: Prior Actions and Structural Benchmarks
Prior actions Status Completion date
Parliament will pass a supplementary budget, reflecting: (i) the new tax
Met July 31, 2014
policy and expenditure measures (¶17) and (ii) the funds necessary to
recapitalize Naftogaz (¶23).
The NBU will achieve a level of NIR of at least US$7.675 billion by
accumulating at least US$200 million through market purchases (¶5).
After the completion of Naftogaz’s recapitalization procedure, the
company will deposit US$3.1 billion in a restricted account with the
NBU (¶23).
The government will take a formal decision to establish by end-August
an authorized body accountable to the Cabinet of Ministers to
coordinate the effort to simplify regulations (¶24).
Structural benchmarks Status Completion date
To strengthen payment discipline for the heating sector, Parliament
Met June 30, 2014
will pass legislation that will make distribution accounts fully
operational and mandatory for utility payments.
If existing fit and proper shareholders are unwilling or incapable of
recapitalizing in full a weak bank, public funds could be used to bring
it back into solvency, according to strict criteria. Government and the
NBU will reach agreement with IMF staff on these criteria.
Met with
delay on
July 4, 2014
May 31, 2014
To provide an accurate picture of Naftogaz finances, Naftogaz will
launch a tender by April 3 to conduct audits of Naftogaz operations,
led by an external auditor. The auditor will be in place within 60 days
of the tender. The results of the audits will be shared with the IMF
within 30 days of each period, initially on a monthly basis beginning
with data for end-May 2014, and then on a quarterly basis for
end-September data forward.
Met with
delay on
July 8, 2014
June 30, 2014 and
then monthly
through October;
then quarterly
Complete a comprehensive diagnostic study in close consultation with
IMF staff that will cover the anti-corruption framework, the design and
implementation of key laws and regulations that may have impact on
business climate, the effectiveness of the judiciary, and tax
administration, as described in ¶24.
Met July 15, 2014
Complete diagnostic studies and review of business plans for the
15 largest banks.
Met July 31, 2014
The government should be prepared to manage its financial sector
shareholdings in the event that it is called on to use public funds—and
to this end, a specialized unit will be set up at the Finance Ministry.
In progress September 30, 2014
After discussion within government and with the private sector, we will
prepare a proposal for the reform of VAT in agriculture with a view to
bringing the regime in this sector closer to the general VAT regime.
In progress September 30, 2014

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Table 1. Ukraine: Prior Actions and Structural Benchmarks (concluded)
Structural benchmarks Status Completion date
Prepare a monthly collection plan for Naftogaz’s receivables for
September 2014–December 2015, with targets by customer group.
New SB End-August, 2014
Parliament will adopt a law to facilitate NPL resolution and help
prevent new NPLs, as described in ¶14.
New SB End-September, 2014
Submit to Parliament draft law for the establishment of an
independent anti-corruption agency with broad investigative powers
New SB September 1, 2014
Adopt enabling legislation for the establishment of an independent
anti-corruption agency with broad investigative powers.
New SB End-October, 2014
Submit to Parliament amendments to the AML law and the criminal
code that will introduce key elements of the FATF standard to support
the government’s anti-corruption effort.
New SB September 1, 2014
Adopt amendments to the AML law and the criminal code that will
introduce key elements of the FATF standard to support the
government’s anti-corruption effort.
The government will adopt an action plan to eliminate, streamline,
simplify and clarify the legislative and regulatory frameworks
governing economic activity.
The NBU will prepare draft legislative amendments to the NBU Law to
strengthen the governance and autonomy framework of the NBU, in
line with the recommendations of the safeguards assessment mission.
New SB End-December, 2014

Table 2. Ukraine: Quantitative Program Targets and Projected Performance 1/
(End of period; millions of Ukrainian hryvnias, unless otherwise indicated)
March
2014
May July September
December
PC Adj. PC PC Adj. PC Est. IT PC IT PC
I. Quantitative performance criteria
Ceiling on the cash deficit of the general government (- implies a surplus) 2/ 4,732 31,000 25,211 5,193 47,500 36,252 34,000 59,000 64,000 78,000 88,000
Ceiling on the cash deficit of the general government and Naftogaz (- implies a surplus) 2/ 4,685 44,700 10,371 14,791 69,200 3,895 48,700 94,800 130,305 128,500 153,349
Floor on cumulative change in net international reserves (in millions of U.S. dollars) 3/ 4/ 10,998 -1,273 849.0 849.0 1,096 311 -223 266 -3,780 -687 -3,755
Ceiling on cumulative change in net domestic assets of the NBU 3/ 4/ 208,588 36,383 14,523 4,611 21,292 39,379 31,082 29,685 83,638 51,527 104,349
Ceiling on publicly guaranteed debt 2/ 0 25,000 0 25,000 0 25,000 25,000 25,000 25,000
II. Continuous performance criterion
Non-accumulation of new external debt payments arrears by the general government 2/ 0 0 0 0 0 0 0 0 0
III. Indicative Targets
Ceiling on cumulative change in base money 3/ 329,061 22,438 13,912 33,303 38,503 28,645 32,593 42,233 44,003 63,211
Ceiling on net accumulation of VAT refund arrears 5/ 8,545 0 2,150 0 -2,500 -5,000 -5,000 -10,695
IV. Memorandum Items
External project financing 2/ 317 2,800 414 5,000 1,300 15,500 2,300 31,400 4,700
NBU loans to DGF and operations with Government bonds issued for DGF financing or banks
0 0 0 0 5,200 0 5,200 15,000 28,700
recapitalization 3/
Government bonds issued for banks recapitalization and DGF financing 3/ 0 0 0 0 0 0 0 15,000 23,500
Stock of budgetary arrears on social payments 2/ 0 0 21 0 0 0 0 0 0
Programmed disbursements of international assistance except IMF (millions of U.S. dollars) 3/ 4/ 29 1,150 1,898 4,746 2,587 5,786 5,544 6,286 6,826
Percent of it applied to adjustment … 100 100 100 100 75 100 75 100
Naftogaz purchases of foreign exchange from the NBU for the purposes and in the event of paying gas
supply bills and repaying currently disputed arrears to Gazprom as well as the Eurobond issue maturing in
September 2014 (millions of US dollars) 3/
813 2,160 786 2,160 786 3,830 5,556 4,830 6,935
NBU purchases of T-bonds Issued by Government for Naftogaz recapitalization 3/ 11,100 23,662 10,000 23,662 12,900 41,956 75,100 52,911 104,400
Financing by multilateral institutions and official bilateral creditors disbursed to Naftogaz for investment
0 0 0 0 0 0 0 0 0
projects 2/
Net transfers made by Gazprom (advance transit fee) 2/ 0 0 0 0 0 0 0 0 0
Estimated arrears to Gazprom for gas imports (millions of U.S. dollars) 6/ 7/ 2,238 0 2,449 0 4,469 0 4,469 0 0
Ceiling on bonds issued to pay VAT refund arrears (VAT bonds) 2/ 0 16,700 0 16,700 5,800 16,700 16,700 16,700 16,700
Program exchange rate, Hryvnia per U.S. dollar 10.9546 10.9546 10.9546 10.9546 10.9546 10.9546 10.9546 10.9546 10.9546
Sources: Ukrainian authorities; and IMF staff estimates and projections.
1/ Definitions and adjustors are specified in the Technical Memorandum of Understanding (TMU).
2/ Targets and projections are cumulative flows from end-December, 2013. Data for March are flows from end-December, 2013.
3/ Targets and projections are cumulative flows from April 1, 2014. Data for March are stocks as of end-March, 2014.
4/ Calculated using program exchange rates specified in the TMU.
5/ Data for March is a stock as of the end of the month. The flows for May and July are cumulative from end-March 2014. Targets for September and December are cumulative flows from end-May 2014.
6/ Naftogaz is currently disputing the arrears to Gazprom. The estimates of potential liabilities arising from such disputed arrears are provided solely for the purpose of accounting for program financing and risk assessment
considerations.
7/ Arrears stock data for end-March, end-May, end-July include arrears for gas imports in 2013 and for imports up to end-March 2014, end-April, and end-June respectively. Arrears for end-September program targets are the
sum of unpaid bills from January 2014 (US$3.759 billion).
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Technical Memorandum of Understanding
August 18, 2014
1. This Technical Memorandum of Understanding (TMU) replaces the TMU of April 22, 2014
and sets out the understandings between the Ukrainian authorities and IMF staff regarding the
definitions of the variables subject to quantitative targets (performance criteria and indicative
targets) for the economic program supported under the Stand-By Arrangement, as described in the
authorities’ Letter of Intent (LOI) dated August 18, 2014 and the attached Memorandum of
Economic and Financial Policies (MEFP). It also describes the methods to be used in assessing the
program performance and the information requirements to ensure adequate monitoring of the
targets. As is standard under all Fund arrangements, we will consult with the Fund before modifying
measures contained in the LOI, or adopting new measures that would deviate from the goals of the
program, and provide the Fund with the necessary information for program monitoring.
2. The quantitative performance criteria are shown in Table 2 of the MEFP. The definitions of
these quantitative targets and the adjustment mechanisms are described in Section I below. Prior
actions and structural benchmarks are listed in Table 1 of the MEFP, with corresponding definitions
in Section I below. The official exchange rate is defined in Section II. Reporting requirements are
specified in Section III.
3. For the purposes of the program, all exchange rates used to evaluate reserve levels and
monetary aggregates are (i) the official exchange rate of the Ukrainian hryvnia to the U.S. dollar of
10.9546 set by the NBU as of March 31, 2014, and (ii) reference exchange rates of foreign currencies
reported by the European Central Bank (ECB) on its web site as of March 28, 2014, which the NBU
used to set official exchange rates of hryvnia to those currencies. In particular, the Swiss Franc is
valued at 0.8857 per dollar, the Euro is valued at 1.3759 dollars, Pound Sterling is valued
at1.6633 dollars, Australian dollar is valued at 0.9243 U.S. dollars, and the Japanese yen is valued at
102.41 per dollar. The accounting exchange rate for the SDR will be 0.647773 per dollar. Official gold
holdings were valued at 1,295.75 dollars per fine ounce. These program exchange rates are kept
fixed over the program period. Therefore, the program exchange rate differs from the actual
exchange rate set in the foreign exchange market. Furthermore, setting a program exchange rate for
the purpose of computing monetary aggregates does not imply that there is any target exchange
rate for policy purposes.
4. For the purpose of the program, gross domestic product is compiled as per the System of
National Accounts 1993 (SNA’93). The State Statistics Service has indicated that they plan to change
to the System of National Accounts 2008 and discontinue the series based on SNA’93 at some point
in 2014. We will reach agreement with the Fund before making any modifications in GDP
compilation used for purposes of the program.

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I. Quantitative Performance Criteria, Indicative Ceilings, and Continuous
Performance Criteria
A. Floor on Cumulative Change in Net International Reserves
(Performance Criterion)
Definition
5. Net international reserves (NIR) of the NBU are defined as the dollar value of the difference
between usable gross international reserve assets and reserve-related liabilities to nonresidents,
evaluated at program exchange rates.
6. Usable gross international reserves comprise all readily available claims on nonresidents
denominated in convertible foreign currencies, consistent with the Balance of Payments Manual
(Fifth Edition) and the Special Data Dissemination Standard (SDDS) (Table A, item 1). Excluded from
usable reserves, inter alia, are:
 any assets denominated in foreign currencies held at, or which are claims on, domestic
institutions (i.e., institutions headquartered domestically, but located either domestically or
abroad, or institutions headquartered abroad, but located domestically). Also excluded are all
foreign currency claims of the NBU on domestic banks, and NBU deposits held at the Interbank
Foreign Currency Exchange Market and domestic banks for trading purposes;
 any precious metals or metal deposits, other than monetary gold and gold deposits, held by the
NBU;
 any assets that correspond to claims of commercial banks in foreign currency on the NBU and
any reserves assets that are: (i) encumbered; or (ii) pledged as collateral (in so far as not already
included in foreign liabilities, or excluded from reserve assets); or (iii) frozen; and
 any reserve assets that are not readily available for intervention in the foreign exchange market,
inter alia, because of lack of quality or lack of liquidity that limits marketability at the book price.
7. For the purpose of this program, reserve-related liabilities comprise:
 all short-term liabilities of the NBU vis-à-vis nonresidents with an original maturity of one year
or less;
 the stock of IMF credit outstanding;

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 the nominal value of all derivative positions1 (including swaps, options, forwards, and futures) of
the NBU and general government, implying the sale of foreign currency or other reserve assets
against domestic currency; and
 all foreign exchange liabilities of the NBU to resident entities (e.g., claims in foreign exchange of
domestic banks, and NBU credits in foreign exchange from domestic market) excluding foreign
exchange liabilities to the general government, or related to deposit guarantees.
Table A. Components of Net International Reserves
Type of Foreign Reserve Asset or Liability2
NBU Balance Sheet and
memorandum Accounts
1.
International reserves
Monetary gold
Foreign exchange in cash
Demand deposits at foreign banks
Short-term time deposits at foreign banks
Long-term deposits at foreign banksSDR holdings and Reserve
Position in the IMF
Securities issued by nonresidents
Settlement of foreign securities
1100, 1107
1011, 1017
1201, 1202,
1211,
1212
IMF, Finance Department3
1300, 1305, 1307, 1308, minus 1306
2746, minus 4746
2.
Short-term liabilities to nonresidents (in convertible currencies)
Correspondent accounts of nonresident banks
Short-term deposits of nonresident banks
Operations with nonresident customersUse of IMF credit
3201
3211
3230, 3232, 3233IMF, Finance
Department
1 This refers to the notional value of the commitments, not the market value.
2 The definitions used in this technical memorandum will be adjusted to reflect any changes in accounting
classifications introduced during the period of the program. The definitions of the foreign accounts here correspond
to the system of accounts in existence on March 31, 2014. The authorities will inform the staff before introducing any
change to the Charts of Accounts of the NBU and the Commercial Banks, and changes in the reporting forms.
3 Before receiving the monthly data from the IMF’s Finance Department, these components will be calculated on the
basis of preliminary data from the NBU and memorandum accounts.

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Adjustment mechanism
 The NIR targets will be adjusted upward (downward) by the full amount of the cumulative excess
(shortfall) in program disbursements relative to the baseline projection (Table B). Program
disbursements are defined as external disbursements (excluding project financing
disbursements) from official multilateral creditors (World Bank, European Commission, European
Investment Bank, and European Bank for Reconstruction and Development), official bilateral
creditors (net), and external bond placements that are usable for the financing of the central
government budget.
 NIR targets will be adjusted upward by the full amount of the cumulative shortfall in Naftogaz
purchases of foreign exchange from the NBU for the purposes and in the event of paying gas
supply bills and repaying currently disputed arrears to Gazprom (including by depositing funds
in a restricted account) as well as the Eurobond issue maturing in September 2014 relative to the
baseline projection (Table C). 4
 NIR targets will be adjusted upward by the full amount of the cumulative shortfall in
government purchases of foreign exchange from the NBU for the purpose and in the event of
early repayment of government-guaranteed part of the maturing external loan to Naftogaz (in
case this loan is repaid ahead of schedule). The upward adjustment of the NIR target will be
capped to US$500 million.
4 Naftogaz is currently disputing the arrears to Gazprom. The estimates of potential liabilities arising from such
disputed arrears are provided solely for the purpose of accounting for program financing and risk assessment
considerations.

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Table B. Eurobond Placements and Disbursements from IFIs and Official Sources: Projections
for NIR/NDA Adjustment
(Cumulative flows from end-March 2014, millions of US dollars at program exchange rate)
Eurobond
placement
World Bank EU EBRD EIB
Others
(Canada,
Japan)
Total
End- May 2014 1000 760.6 137.6 0 0 0 1,898.2
End-July 2014 1,000 761 826 0 0 0 2,587
End-September
2014
3,000 1,261 1,183 0 0 100 5,544
End-December
2014
3,000 1,511 2,215 0 0 100 6,826
Table C. Naftogaz Purchases of Foreign Exchange from NBU: Projections for NIR/NDA
Adjustment
(Cumulative flows from end-March 2014)
Naftogaz purchases of foreign exchange from the
NBU for the purposes and in the event of paying
gas supply bills and repaying currently disputed
arrears to Gazprom as well as the Eurobond issue
maturing in September 2014 (millions of U.S.
dollars) 5
NBU purchases of T-bonds
issued by Government for
Naftogaz recapitalization
(millions of hryvnia)
End-May 2014 786.4 10,000
End-July 2014 786.4 12,900
End-September 2014 5,556 75,100
End-December 2014 6,935 104,400
5 As the arrears and their size are currently disputed the estimates are tentative and provided for program financing
and risks assessment purposes only.

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B. Ceiling on Cumulative Change in Net Domestic Assets of the NBU
Definition
8. Net domestic assets (NDA) of the NBU are defined as the difference between the monetary
base (as defined below) and the NIR of Ukraine (as defined above). For the purpose of computing
the NDA target, the NIR is valued at the program exchange rate defined in paragraph 3 and
expressed in hryvnia.
 Consistent with the NIR target adjustment mechanism (as defined above), NDA targets will be
adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in program
disbursements relative to the baseline projection (Table B) and evaluated at the program
exchange rate.
adjusted downward by the full amount of the cumulative shortfall in NBU purchases of T-bonds
issued by Government for Naftogaz recapitalization for the purposes and in the event of paying
gas supply bills and repaying currently disputed arrears to Gazprom 6 (including by depositing
funds in a restricted account) as well as the Eurobond issue maturing in September 2014 relative
to the baseline projection (Table C).
adjusted downward by the hryvnia equivalent of the full amount of the cumulative shortfall in
government purchases of foreign exchange from the NBU for the purpose of repaying
government-guaranteed part of the maturing external loan to Naftogaz (in case this loan is
repaid ahead of schedule). The downward adjustment of the NIR target will be capped to
hryvnia equivalent of US$500 million, calculated using the program exchange rate defined in
paragraph 3.
 NDA targets will be adjusted upward by the full amount of the cumulative excess in the total
amount of NBU loans to the Deposit Guarantee Fund (DGF) as well as total amount of NBU
purchases of government bonds issued for the purposes of DGF financing, and NBU purchases
of government bonds issued (up to a limit of UAH 15 billion) for bank recapitalization, relative to
the baseline projection (Table D).
6 See footnote 4.

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Table D. NBU Loans to DGF and Operations with Government Bonds Issued for DGF Financing
or Banks Recapitalization: Projections for NDA/Monetary Base Adjustment
(Cumulative flows from end-March 2014, millions of hryvnia)
NBU operations with Government
bonds issued for DGF financing
and banks recapitalization
NBU loans to DGF Total
End-May 2014 0.0 0.0 0.0
End-July 2014 0.0 5,200 5,200
End-September
2014
0.0 5,200 5,200
End-December
2014
23,500 5,200 28,700
C. Ceiling on Cumulative Change in Monetary Base of the NBU (Base Money)
(Indicative Target)
Definition
9. The NBU’s monetary base comprises domestic currency outside banks and banks' reserves,
including cash in vault of commercial banks,7 and funds of customers at the NBU. Currency outside
banks is defined as: Currency—banknotes and coins—(NBU accounts 3000 (net)+3001 (net)-3007A-
3009A-1001A-1004A-1007A-1008A-1009A) minus cash in vault at deposit money banks (DMBs)
(DMB accounts 1001A:1005A, and 1007A). Banks’ reserves are defined as: cash in vault at deposit
money banks (DMB accounts 1001A:1005A, and 1007A) plus DMB correspondent account deposits
at the NBU in hryvnia (NBU liabilities accounts 3200, 3203, 3204, and 3206) plus funds of customers
at the NBU in hryvnia (NBU liabilities accounts of groups 3238, 3250, 4731, 4732, 4735, 4736, 4738,
4739, and 4750), plus accrued interest on time deposits of DMBs in national currency (NBU accounts
3208L), plus accrued interest on client’s current accounts in national currency.
7 The definitions set out here will be modified to include any other accounts that may be identified or created in the
future in connection with domestic currency issue and the deposit money banks' deposits at the NBU.
8 Includes accounts of following sectors: 2 – other financial intermediaries and other financial organizations;
6 – regional and local authorities; 7 – government non-financial corporations; 8 – private and foreign-controlled non-financial
corporations; 9 – non-commercial organizations serving households.

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 Consistent with the NDA target adjustment mechanism (as defined above), monetary base
targets will be adjusted upward by the full amount of the cumulative excess in the total amount
of NBU loans to the Deposit Guarantee Fund (DGF) as well as total amount of NBU purchases of
government bonds issued for the purposes of DGF financing or banks recapitalization (up to a
limit of UAH 15 billion for purposes of recapitalization), relative to the baseline projection (Table
D), and evaluated at the program exchange rate if provided in foreign exchange.
D. Ceiling on Cash Deficit of the General Government
Definition
10. The general government comprises the central (state) government, including the Road Fund
(UkrAvtoDor), all local governments, and all extra budgetary funds, including the Pension,
Unemployment Insurance, Temporary Disability Insurance, Occupational Injury and Disease
Insurance Funds. The budget of the general government comprises: (i) the state budget; (ii) all local
government budgets; and (iii), if not already included in (i), the budgets of the extra budgetary funds
listed above, as well as any other extra budgetary funds included in the monetary statistics compiled
by the NBU. The government will inform the IMF staff of the creation or any pending reclassification
of any new funds, programs, or entities, immediately. The cash deficit of the general government is
measured by means of net financing flows as:
 total net treasury bill sales9 (in hryvnias and foreign currency) as measured by the information
kept in the NBU registry of treasury bill sales (net treasury bill sales are defined as the
cumulative total funds realized from the sales of treasury bills at the primary auction and
Government securities issued for recapitalization of banks and SOEs, less the cumulative total
redemption of principal on treasury bills), excluding bonds issued to recapitalize Naftogaz10 and
other SOEs, banks and DGF; plus
 other net domestic banking system credit to general government as measured by the monetary
statistics provided by the NBU (this consists of all non-treasury-bill financing in either domestic
or foreign currency extended to the general government by banks less the change in all
9 From here on, treasury bills are defined as all treasury securities (including long term instruments or treasury
bonds).
10 These are included in the calculation of Naftogaz’ cash deficit when they are used (as collateral for a loan, or as an
outright sale) by the latter to obtain financing.

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government deposits in the banking system) as well as any other financing extended by entities
not reflected by the monetary statistics provided by the NBU; plus
 total receipts from privatization received by the State Property Fund and local governments
(including the change in the stock of refundable participation deposits); plus
 the difference between disbursements and amortization on any bond issued by the general
government or the NBU to nonresidents for purposes of financing the deficit of the general
government; plus
 the difference between disbursements of foreign credits to the general government (including
project loans on-lent to public enterprises) and the amortization of foreign credits by the
general government (including on lent project loans); plus
 the net sales of SDR allocation in the SDR department; plus
 the net change in general government deposits in nonresident banks, or other nonresident
institutions; plus
 net proceeds from any promissory note or other financial instruments issued by the general
government.
11. For the purposes of measuring the deficit of the general government, all flows to/from the
budget in foreign currency (including from the issuance of foreign currency denominated domestic
financial instruments) will be accounted in hryvnias at the official exchange rate established as of the
date of the transaction.
 The ceiling on the cash deficit of the general government is subject to an automatic adjuster
based on deviations of external project financing (defined as disbursements from bilateral and
multilateral creditors to the consolidated general government for specific project expenditure)
from program projections (Table E). Specifically, if the cumulative proceeds from external project
financing (in hryvnia evaluated at actual exchange rates):
a) exceed program projections, the ceiling on the consolidated general government deficit will be
adjusted upward by 100 percent of the excess in external project financing; and

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b) fall short of program projections, the ceiling on the consolidated general government deficit will
be adjusted downward by 100 percent of the shortfall in external project financing.
Table E. External Financing of General Government Projects—Adjustment
Cumulative flows from January 1, 2014 In millions of hryvnia
External project financing (technical assumption for the adjuster purpose)
End-May 2014
414
End-July 2014
1,300
End-September 2014
2,300
End-December 2014
4,700
 The ceilings on the cash deficit of the general government at end-May, end-July, end-
September, and end-December 2014 are subject to an automatic adjuster corresponding to the
full amount of NBU purchases of government bonds issued for the purposes of DGF financing
(excluding subsequent interest payments on the securities or other instruments issued). These
ceilings are also subject to an automatic adjuster corresponding to the amount of NBU
purchases of government bonds issued for the purposes of banks recapitalization and DGF
financing, up to a cumulative maximum of UAH 23.5 billion in 2014. The test date ceilings on the
cash deficit of the general government for 2015 will be adjusted upward by any amount of the
UAH 23.5 billion bank recapitalization and DGF financing ceiling under the program that is not
used in 2014.
 The ceiling on the cash deficit of the general government is subject to an automatic adjuster on
the stock of budgetary arrears on social payments. Budgetary arrears on social payments
comprise all arrears of the consolidated budget on wages, pensions, and social benefits owed by
the Pension Fund, and the central or local governments. Budgetary arrears are defined as
payments not made thirty days after they are due. Wages are defined to comprise all forms of
remuneration for work performed for standard and overtime work. Pension obligations of the
Pension Fund comprise all pension benefits and other obligations of the Pension Fund.
 The ceilings on the cash deficit of the general government at end-May, end-July, end-
September, and end-December 2014 are subject to an automatic upward adjustment for the full
amount of bonds used to pay VAT refund arrears (VAT bonds) accumulated before
January 1, 2014, and will be limited to no more than UAH 16.7 billion cumulatively during 2014.
No such bonds will be issued in 2015 or later, and therefore there is no such adjustment for the

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other test dates. The ceiling on the cash deficit of the general government at all other 2014 test
dates will be automatically adjusted downward by VAT refund arrears accumulated in excess of
ceilings defined in Section E from January 1, 2014.
 The ceilings on the cash deficit of the general government at end-July, end-September, and
end-December 2014 are subject to an upward adjustment for the full amount of Government
repaying government-guaranteed part of an external loan to Naftogaz, in case this loan is repaid
ahead of schedule and the repayment is recorded as above-the-line transaction. The adjustment
will be equal to the actually repaid amount in US$ terms capped at US$500 million, and
recalculated in hryvnia at the actual exchange rate at the time of repayment.
E. Ceiling on VAT Refund Arrears
(Indicative Target)
12. The ceiling on net accumulation of VAT refund arrears is set to UAH 5.3 billion at end-
July 2014, UAH 2.8 billion at end-September 2014, and UAH 0 billion at end-December 2014. The
stock of VAT refund arrears is defined as those claims that have not been settled (through a cash
refund, netting out against obligations of taxpayers, payment with a government bond (VAT bond)
or an official decision to reject the claim) within a specified time period after the VAT refund claim
has been submitted to the State Fiscal Service (SFS). In 2014, this time period is 74 days, allowing for
verification of the validity and payment processing of claims. According to this definition, the stock
of VAT refund arrears as of December 31, 2013 was UAH 16.7 billion and UAH 18.3 billion as of
March 31, 2014.
F. Ceiling on Cash Deficit of the General Government and Naftogaz
Definition
13. The cash deficit of the General Government and Naftogaz is the cash deficit of the General
Government as defined above plus the cash deficit of Naftogaz.
14. Naftogaz is defined as the national joint stock company “Naftogaz of Ukraine.” The cash
deficit of Naftogaz is measured from below the line as:
 net domestic banking system credit to the company (this consists of all financing in either
domestic or foreign currency extended to the company by banks less the change in company
deposits in the banking system); plus

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 the difference between disbursements of private foreign loans to Naftogaz (including private
placements) and the amortization of private foreign loans (including private placements) ; plus
 the difference between disbursements of official foreign credits to Naftogaz (including project
loans) and the amortization of official foreign credits (including project loans); plus
 the disbursements of trade credits from Gazprom to import gas; plus
 the difference between disbursements and amortization on any bonds issued by Naftogaz; plus
 the net change in deposits of Naftogaz in nonresident banks, or other nonresident institutions;
plus
 net proceeds from any promissory note or other financial instruments issued by Naftogaz; plus
 net receipts from sale of financial assets (including recapitalization or other form of treasury
securities issued to Naftogaz, irrespective of their issuance date); plus
 any other forms of financing of the company not identified above.
15. For the purposes of measuring the deficit of Naftogaz, all flows in foreign currency will be
accounted in hryvnias at the official exchange rate as of the date of the transaction. When there are
arrears outstanding as of the test date, the official exchange rate on the test date will apply to their
valuation.
 The ceiling on the cash deficit of the general government and Naftogaz will be adjusted upward
by the amount of financing by multilateral institutions and official bilateral creditors disbursed to
Naftogaz for investment projects.
 The ceiling on the cash deficit of the general government and Naftogaz will be adjusted
downward by the net transfers made by Gazprom (advance transit fee). These transfers are
measured on a cumulative basis from the beginning of each calendar year.
 The ceiling on the cash deficit of the general government and Naftogaz will be adjusted
downward by the cumulative amount of net arrears to Gazprom in 2014. 11 Gas imports bills are
11 See footnote 4.

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considered arrears the day after their payment is due (7th day of the subsequent month of
imports). The arrears for imported gas will be valued at the gas price agreed between Naftogaz
and Gazprom if such an agreement is reached, or based on the Stockholm Arbitration ruling. In
the absence of an agreed gas price, or the price determined based on the Stockholm Arbitration
ruling, a program accounting price will apply to arrears valuation. This price is used for
accounting purpose only, and does not constitute an expression of a view by Fund staff on what
the gas price should be.
G. Ceiling on Non-Accumulation of New External Debt Payments Arrears by the
General Government
(Continuous Performance Criterion)
Definition
16. For the purposes of the program, an external debt payment arrear will be defined as a
payment by the general government, which has not been made within seven days after falling due
(including grace period, if any). The performance criterion will apply on a continuous basis
throughout the program period.
H. Ceiling on Publicly Guaranteed Debt
Definition
17. The ceiling on publicly guaranteed debt will apply to the amount of guarantees issued
in 2014 by the central (state) government. The official exchange rate will apply to all non-UAH
denominated debt. New state guarantees in 2014 will amount to no more than UAH 25 billion.
I. Other Continuous Performance Criteria
18. During the period of the Stand-By Arrangement, Ukraine will not (i) impose or intensify
restrictions on the making of payments and transfers for current international transactions; (ii)
introduce or modify multiple currency practices; (iii) conclude bilateral payments agreements that
are inconsistent with Article VIII; and (iv) impose or intensify import restrictions for balance of
payments reasons.

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II. Official Exchange Rate
Determination of the official exchange rate
19. The NBU will, on a daily basis, set the official rate calculated as a weighted average of rates
on the same day’s interbank market transactions. NBU will make public its official exchange rate by
no later than 16:00 of the day for which it is set.
III. Reporting Requirements
A. National Bank of Ukraine
20. The NBU will continue to provide to the IMF on a monthly basis, no later than the 25th day
of the following month, an aggregate balance sheet for the NBU and a consolidated balance sheet
for the deposit money banks.
21. The NBU will provide to the IMF, on a weekly basis, with daily data the stock of net and
gross international reserves, at both actual and program exchange rates. In addition, it will provide
on a weekly and monthly basis, no later than the 25th of the following month, the full breakdown of
NBU accounts included in net international reserves (defined in Table A above).
22. The NBU will provide the IMF on a daily basis with information on official foreign exchange
interventions. In this context, it will also provide the results of any foreign exchange auctions.
23. The NBU will provide the IMF on a daily basis with information on balances held in the
analytical accounts 2900 “Accounts payable per transactions for the foreign exchange, banking and
precious metals purchase and sale on behalf of banks’ clients”.
24. The NBU will continue to provide on its web site the daily holdings of treasury bills at
primary market prices, at current exchange rates. The NBU will provide information on daily holdings
of treasury bills broken down by type of holders (including state-owned banks and private banks) at
primary market prices at the rate fixed on the day of auction information on t-bills sales, including in
the foreign exchange, from the beginning of the year at the official rate as of the date of placement,
as well as the t-bills in circulation, by principal debt outstanding at the official exchange rate as of
the date of placement (OP-2); reports on each treasury bill auction; and provide to the IMF the
monthly report on treasury bills, in the format agreed with the IMF staff.
25. The NBU will provide information on daily transactions (volumes and yields) on the
secondary market treasury bills (including over the counter transactions).

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26. The NBU will provide to the IMF, on a daily basis, the information on the banks’ claims on
the loans provided and liabilities in the format agreed with the IMF staff.
27. The NBU will keep providing to the IMF, on a monthly basis, general information on the NBU
financing (as well as the refinancing) of the banks of Ukraine, and on the operations of mopping up
(absorption) of the liquidity from the banking system (including through the CDs issuance) in the
format agreed with the IMF staff. It will also provide, on a weekly basis, bank-by-bank information
on the Ukrainian banking system’s debt on credits received from the NBU.
28. The NBU will provide to the IMF, on a quarterly basis but not later than 30 days after the
expiration of the reporting quarter, the report on the banking sector financial stability indicators in
the format agreed with the IMF staff.
29. Every 10 days, the NBU will continue to provide the IMF with the operational monetary
survey of the NBU, including any additional information that is needed for the IMF staff to monitor
monetary policy and developments in the banking sector.
30. The NBU will provide to the IMF, on a monthly basis, the net domestic assets data based on
the monthly balance sheets within three weeks following the end of the month.
31. The NBU will continue to provide to the IMF the daily operational balance sheets of the NBU
and commercial banks on a daily basis according to standard reporting forms, including detailed
information on loans of the banking sector provided to the general government, with detailed
breakdown of this information by indebtedness of the central (state) government and local budgets,
including in national and foreign currency, by loan and by security, as well as the information on the
balances of the funds of the Government held at the NBU, in particular, the balances of the Single
Treasury Account denominated in the national currency (account 3240 A) and the funds of the State
Treasury denominated in foreign currency (account 3513 A).
32. The NBU will provide to the IMF, on a monthly basis, projections for external payments
falling due in the next twelve months. The data on actual settlement of external obligations,
reflecting separately principal and interest payments as well as actual outturns for both the public
and private sectors, shall be provided on a quarterly basis, within 80 days following the end of the
quarter.
33. The NBU will provide to the IMF, on a quarterly basis, the stock of short- and long-term
external debt (including arrears) for both public and private sectors.

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34. The NBU will provide to the IMF on a daily basis aggregated data on main currency flows,
including government foreign receipts and payments by currencies as well as currency breakdown of
interbank market operations. The NBU will continue to provide daily information on exchange
market transactions including the exchange rate.
35. The NBU will provide to the IMF reports N 381.25; 381.26 with information on reserve
requirements.
36. The NBU will provide the IMF, on a two weekly basis, with daily data on the total financing
(including refinancing) issued by the NBU to commercial banks, broken down by types of
instrument, maturity (average weighted), interest rate as well as transactions to absorb liquidity from
the banking system.
37. The NBU will provide the IMF on a two weekly basis, in an agreed format, data for the entire
banking sector as well as on a bank-by-bank basis for Group I and Group II banks on total assets
and liabilities; risk weighted assets (for ratio H2 calculation); capital adequacy ratios for normative
and regulatory capital (Tier I and Tier II); deposits (maturity, currency, and type of depositor); loans
(local currency, foreign exchange, provided to corporates and households, broken down by I, II, III,
IV and V category); provisions for all loans (classified by types of loans); foreign exchange net open
position; banks portfolio of government (domestic government bonds) and other debt securities;
mandatory reserve requirement and assets held at the NBU.
38. The NBU will once a month inform the IMF any regulatory and supervisory measures against
banks violating the NBU regulations on capital adequacy, liquidity ration, large exposures, and
connected lending, as well as about decisions on declaring a bank as problem or insolvent.
39. The NBU will continue to provide on a monthly basis, no later than 25 days after the end of
the month, banking system monitoring indicators in an agreed format. This includes inter alia data
on nonperforming loans (III, IV and V category).
40. The NBU will continue to provide detailed quarterly balance of payments data in electronic
format within 80 days after the end of the quarter.
41. The NBU will provide data on credit to nongovernment units that are guaranteed by the
NBU on a monthly basis no later than 25 days after the end of the month.

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42. The NBU will inform IMF staff if the Treasury does not pay interest or principal on domestic
government bonds due to the NBU, deposit money banks, or nonbank entities and individuals. In
such case, the NBU will provide information on outstanding interest and principal payments.
43. The NBU will inform IMF staff of any changes to reserve requirements for deposit money
banks.
44. The NBU will communicate (electronically) to the IMF staff any changes in the accounting
and valuation principles applicable to the balance-sheet data and will notify the staff before
introducing any changes to the Charts of Accounts and reporting forms of both the NBU and the
commercial banks.
45. The NBU Internal Audit Department will continue to provide an assurance report to the
Fund, no later than six weeks after each test date, confirming that: (i) the monetary data are in
accordance with program definitions and have been verified and reconciled to accounting records;
and (ii) that there have been no changes to the chart of accounts or valuation methods that would
impact the data reporting.
46. The NBU will continue to provide the Fund with a copy of the annual management letter
from the external auditor within six weeks of completion of each audit. As required under the Fund's
safeguard policy, this will remain in effect for the duration of the arrangement and for as long as
credit remains outstanding.
B. Ministry of Finance
47. The Ministry of Finance will provide the IMF with the monthly consolidated balances (end-month)
of other non-general government entities, including SOEs, holding accounts at the Treasury
no later than 25 days after the end of the month.
48. The Treasury will continue to provide to the IMF reports on: daily operational budget
execution indicators, daily inflow of borrowed funds (by currency of issuance) to the state budget
and expenditures related to debt service (interest payments and principals), weekly balances of
Treasury cash flow (outturn and forecast) , including data on government foreign exchange deposits,
in a format agreed with IMF staff ,10-day basis data on revenue of the state, local government, and
consolidated budgets, monthly data on funds, deposited with the Single Treasury Account, on the
registration accounts of the entities which are not included to the state sector, information on the
stock of public entities in account #3712 within the Single Treasury Account, on inflow to the State

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budget from placing Treasury or any other liabilities to households in foreign and domestic currency
and their redemption.
49. The Treasury will continue to provide to the IMF in electronic form monthly and quarterly
treasury reports, no later than 25 and 35 days after the end of the period respectively. The Treasury
will continue to provide to the IMF in electronic form the final fiscal accounts at the end of each
fiscal year, no later than March of the following year. Inter alia, these reports will provide
expenditure data by programs and key spending units, as well as based on standard functional and
economic classifications. In addition, quarterly reports will contain standard information on budget
expenses to cover called government guarantees.
50. The Ministry of Finance will report monthly data on the public wage bill in line with the
template agreed with the IMF staff. It will also provide monthly reports on the borrowing
(disbursements, interests and amortization) of UrkAvtoDor in line with the format agreed with IMF
staff. The Ministry of Finance will report to the IMF on a monthly basis, no later than 15 days after
the end of the month, the cash deficit of the general government, with details on budget execution
data for privatization receipts of the state and local governments; disbursements of external credits
(including budget support and project loans for on-lending) to the consolidated budget and
amortization of external debt by the consolidated budget; net domestic borrowing of the general
government, including net t-bill issuance, issuance of other government debt instruments, and
change in government deposits. The Ministry of Finance will report to the IMF on a monthly basis
information on municipal borrowing and amortization of debt in format agreed with IMF staff.
51. The Ministry of Finance will report to the IMF on a monthly basis, no later than 15 days after
the end of the month, the cash deficit of the general government, with details on budget execution
data for privatization receipts of the state and local governments; disbursements of external credits
(including budget support and project loans for on-lending) to the consolidated budget and
amortization of external debt by the consolidated budget; net domestic borrowing of the general
government, including net t-bill issuance, issuance of other government debt instruments, and
change in government deposits.
52. The Ministry of Finance will provide data on the stock of all budgetary arrears on a monthly
basis, no more than 25 days after the end of the month, including separate line items for wages,
pensions, social benefits, energy, communal services, and all other arrears on goods and services.
The Treasury will report monthly data on accounts payable for state and local budgets (economic
and functional classification).

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53. The Ministry of Finance will provide monthly information, no later than 25 days after the end
of each month, on the amounts and terms of all external debt contracted or guaranteed by the
central government.
54. The Ministry of Finance will provide to the IMF in electronic form on a monthly basis, no
later than 25 days after the end of the month, (a) data on the outstanding stock of domestic and
external debt of the state and local budgets (including general and special funds), (b) the standard
files planned and actual external debt disbursement, amortization, and interest payments (including
general and special funds), broken down in detail by creditor categories as agreed with Fund staff,
and (c) the report on external debt amortization and interest payments by days and currencies. The
Ministry of Finance will also report the accumulation of any budgetary arrears on external and
domestic debt service.
55. The Ministry of Finance will provide to the IMF monthly debt (domestic and external)
amortization schedules updated on a weekly basis.
56. The Ministry of Finance will provide data on external and domestic credit to key budgetary
spending units as well as nongovernment units (including Naftogaz, State Mortgage Institution,
Deposit Guarantee Fund and Agrarian Fund) that is guaranteed by the government (amount of
sovereign guarantees extended by executive resolutions and actually effectuated; total amount of
outstanding guarantees and list of their recipients) on a monthly basis no later than 25 days after
the end of the month.
57. The Ministry of Finance will provide data on the approved budgets and quarterly operational
data (daily for the Pension Fund only) on the revenue, expenditures, and arrears, and balance sheets
of the Pension Fund (detailed data on the breakdown of revenues and expenditure by main
categories are expected for this Fund), Social Insurance Fund, Employment Fund (detailed data on
the breakdown of revenues and expenditure by main categories are expected for this Fund),
Occupational Accident and Sickness Insurance Fund, and any other extra budgetary funds managed
at the state level no later than 50 days after the end of each quarter (each month in case of the
Pension Fund). Any within-year amendments to the budgets of these funds will be reported within a
week after their approval. The Ministry of Finance will also report the annual financial statement
including the final fiscal accounts of those funds at the end of each fiscal year, no later than April of
the following year.
58. The Ministry of Finance will report semi-annual data on the number of employees of
budgetary institutions financed from the central (state) and local budgets, starting from

UKRAINE
January 2010. After any public sector wage increase, the Ministry of Finance will provide an estimate
of its costs for the current and two subsequent fiscal years, for the state and local government
budgets.
59. The Ministry of Finance will provide, no later than 15 days after the end of each month,
monthly data on the budgetary costs associated with the recapitalization of banks and SOEs. This
cost includes the upfront impact on the cash deficit of the general government of the
recapitalization of banks and SOEs as well as the costs associated with the payment of interests.
60. The Ministry of Finance will provide monthly data on their expenditure plans (ROSPIS) for
state budget.
61. The State Fiscal Service (SFS) and, where applicable, State Customs Service (SCS) will provide
monthly data, no later than 25 days after the end of the month, on tax arrears, inclusive of deferred
payments, interest and penalties outstanding, in the following format:
Beginning Stock
Netting
out
during
month
I. DEFER
RALS
DURING
MONTH
Write-
-offs
(arrears
written
off during
month)
Collection
s of
outstandin
g debt at
beginning
of month
New
Arrears (tax
liabilities
becoming
overdue
during
month)
Ending
Stock
Total Principal Interest Penalties
Tax
arrears
62. The SFS will continue to provide on a quarterly basis, no later than two months after the end
of the quarter, a listing of all tax exemptions granted, specifying the beneficiary the exemption
provided, the duration, and the estimated subsequent revenue loss for the current fiscal year.
63. The SFS will continue to provide monthly information, no later than 25 days after the end of
the month, on VAT refunds in the following format: (i) beginning stock of refund requests; (ii) refund
requests paid in cash; (iii) refunds netted out against obligations of the taxpayer; (iv) denied
requests; (v) new refund requests; (vi) end-of-period stock of requests; and (vii) stock of VAT refund
arrears according to the definition in paragraph 11 (unsettled VAT refund claims submitted to the
SFS more than 74 days before the end-of-period.

UKRAINE
64. The SFS will continue to provide monthly reports 1.P0 on actual tax revenue and 1.P6 on tax
arrears, no later than 25 days after the end of each month.
65. After each amendment of the state budget, the Ministry of Finance will provide data on
revenue plans (ROSPIS) for state and local budgets.
C. Ministry of Economy, Ministry of Energy and Coal Industry, Ministry of Housing
and Municipal Economy of Ukraine, NURC and NERC
66. The Ministry of Economy will provide quarterly information on actual levels of communal
service tariffs in all regions for major services (heating, water supply, sewage and rent) and their level
of cost recovery. In addition, the Ministry of Economy, the Ministry of Housing and Municipal
Economy of Ukraine, and the National Energy Regulatory Commission will provide the methodology
underlying the tariff calculations for full cost recovery, including heating and gas.
67. For each month, no later than the 25th of the following month, the government (based on
information by the Ministry of Energy and Coal Industry, the Ministry of Economy, SFS/SCS, MoF,
NERC, and Naftogaz) will provide IMF staff with information in electronic form (in an agreed format
defined as “Ukraine: The Financial Position of Gas Sector”) on financial indicators in the gas and
heating sectors, including prices and volumes of domestically produced (by production entity) and
imported (by sources of imports) gas, sales, tariffs, arrears, payments to the budget, subsidies, and
debt. On a monthly basis, Naftogaz will provide to IMF staff updated information on the Company’s
financial liabilities, with a schedule of loan-by-loan interest and principal payments.
68. For each month, no later than the 25th of the following month, the Ministry of Energy and
Coal Industry (based on information by Naftogaz) will provide IMF staff with information “in
electronic form (in an agreed format) on the cash flows and deficit of the company, as defined
above. This report will break down the total cash outlays for gas imports from Gazprom by month in
a separate table mutually agreed with IMF staff. This report is subjected to auditing by a reputable
external auditor, first on a monthly and then on a quarterly basis, as set out in the MEFP.
Coal Industry (based on information by Naftogaz) will provide IMF staff with information in
electronic form in an agreed format on the domestic gas used by Naftogaz for sales to households,
heating utilities, budget institutions, and industries, including gas produced by SC
“Ukrgasvydobuvannya,” SJSC “Chornomornaftogas,” and OJSC “Ukrnafta”.

UKRAINE
70. For each quarter, no later than the 25th of the following month, the Ministry of Housing and
Municipal Economy will provide IMF staff with information of the quantity of heating energy meters
installed at a building-level measured also as a ratio to the applicable buildings.
Coal Industry (based on information by Naftogaz) will provide IMF staff with information in
electronic form on the amount of Naftogaz arrears to domestic suppliers including Naftogaz
subsidiaries, Ukrtransgas, Ukrgas vydobuvannya, Ukrnafta, Chornomornaftogas 90 days after they
are due.
72. The Ministry of Energy and Coal Industry (based on information by Naftogaz) will report on
a weekly basis data on Naftogaz daily market purchases of foreign exchange.
D. State Statistics Service
73. The State Statistics Service and Naftogaz will provide to the IMF, on a monthly basis, no later
than 45 days after the end of the month, data on prices, volumes, and payments (payments data
provided by Naftogaz) for imported and exported oil and natural gas by country of origin and
destination.
74. In case of any revisions of gross domestic products the State Statistics Service will provide to
the IMF revised quarterly data on gross domestic product (nominal, real, deflator) and their
components (economic activities, expenditure, income), no later than 10 days after any revisions
have been made.

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