Executive Summary:

1. With the participation of Ukraine, France, Germany and Russia, a Normandy-Four Meeting was held in Berlin on October 19, with disappointing results. Russia insisted that the so-called “Donetsk and Luhansk People’s Republics” should hold elections and send their representatives to the Ukrainian Parliament. Moreover, Russia insisted that these quasi-republics should be granted high levels of autonomy, including the right to block any decision concerning Ukraine’s foreign policies. These proposals are unacceptable to the other parties.
2. Ukrainian authorities have now been able to finalize the first stage of its electronic declaration system. Around 100,000 government officials submitted their declarations by the end of October. These declarations, which are now publicly available through the internet, include personal assets and incomes. The next stage is the examination of this information by the National Anticorruption Agency to determine whether these assets were obtained legally and what actions will need to be pursued.
3. Monthly data released by the State Statistics Service show that the economy continued its recovery during September, with agricultural output increasing by 2.6% yoy, and industrial output by 2.0% yoy. Furthermore, during January-September, construction output increased by 13.2% yoy, cargo transport by 1.0% yoy, passenger transportation by 4.6% yoy, wholesale trade by 5.8% yoy and retail trade by 3.3% yoy. These positive developments were supported by a growth in real wages of 15.4% yoy in September.
4. During September, an acceleration of growth in state budget expenditures, and a decline in state budget revenues, led to an expansion in the January-September state fiscal deficit to UAH 63.4 billion. As the fiscal budget of local governments was in balance in September, the monthly state budget deficit was transferred to the January-September consolidated budget deficit, expanding it to UAH 31.7 billion (about 1.7% of period GDP).
5. The year-over-year rate of price inflation decelerated in September, returning to the level observed in July (7.9% yoy). As a result, inflation for 2016 is not likely to exceed 12%.
6. The UAH/USD exchange rate appreciated in October at a slow pace. Inflows of USD to Ukraine increased thanks to agriculture exports. At the same time, Naftogaz secured foreign exchange resources to purchase natural gas from international markets, which removed the depreciatory pressure on the Hryvnia. As a result, the exchange rate moved to 25.6 USAH/USD
7. Thanks to a surplus in the financial account that covered the deficit in the current account, as of October 2016, the level of international reserves amounted to USD 15.6 billion (about 3.9 months of future imports.)

Political and Reform Developments

With the participation of Ukraine, France, Germany and Russia, a Normandy-Four Meeting was held in Berlin on October 19. The meeting was another attempt by Ukraine and its Western partners to stop Russian-supported aggression on its Eastern territory. The conflict has already killed more than 9,600 people since 2014. The outcome of the meeting is disappointing. Russia continued to argue that it is not a part of the conflict and Ukraine should resolve the conflict internally. Nevertheless, Moscow insisted that the so-called “Donetsk and Luhansk People’s Republics” should hold elections and send their representatives to the Ukrainian Parliament. Moreover, Russia insisted that these quasi-republics be granted high levels of autonomy, including the right to block any decision concerning the foreign policies of Ukraine. These proposals are unacceptable to the Ukrainian government. Ukraine maintains its original position that the first step is for Ukraine to regain complete control of its Eastern border.  Only after will it hold elections that could be free from military and other pressures. Furthermore, the Ukrainian government is not prepared to grant any region veto power over its foreign policy. All participants of the meeting agreed to continue talks in the future.  However, the date of the next meeting was not announced.

In a meantime, despite the ceasefire agreement reached in Minsk, Russian backed separatists continue their attacks against the Ukrainian army. In October, according to the Ukrainian Ministry of, the number of shots from the separatists increased by around 40% compared with the previous month. In several days during October, the daily number of shots against the Ukrainian army reached around 50.

Ukrainian authorities have now been able to finalize the first stage of its electronic declaration system. Around 100,000 government officials had submitted their declarations by the end of October. These declarations are publicly available through the Internet, including personal assets and income. Despite the general positive public attitude towards increased transparency, many Ukrainians expressed surprise about the large size of the declared assets. For instance, the total cash holding declared by Verhovna Rada members (419 deputies) is about USD 500 million. Moreover, many Ukrainian members of Parliament declared a large number of expensive luxury items, such as watches, art and antique collections, exotic items such as ownership of churches and holy relics, etc. The next stage is the examination of this information by the National Anticorruption Agency to determine whether these assets were obtained legally. The Agency expects to start these actions in January 2017 and finalize them by April. In case the investigations of the Agency discover legal violations, the corresponding cases would be transferred to the Anticorruption Court. However, the process of forming Anticorruption Courts has not yet been finalized, which is a necessary step to ensure that the cases will be properly handled.

In October 2016, the prime minister announced the plan of the Cabinet of Ministers to increase the minimum wage by 120% from its current level. The main government justification for such a step is the belief that it should decrease the size of the shadow economy, which today might be as high as 50%. On the other hand, the implementation of this decision might significantly increase fiscal budget expenditures, since the state wage schedule is fully related to the minimum wage. Moreover, some analysts have estimated that it might cause a hike in the level of unemployment in the country of around 5 p.p. to 15% (based on ILO methodology).

At the beginning of November, the IMF mission arrived in Ukraine to hold Article IV consultations and to carry out the third review of the IMF Extended Fund Facility Program.  The IMF will evaluate the progress made in accordance with the memorandum of understanding within the framework of the Program. According to IMF statements, special attention will be paid to structural reforms and the new draft budget law.  The government expects to receive a tranche release by the end of this year.

To read the whole report please open the PDF file in attachment 
LINK: UKRAINE_MONTHLY_ECONOMIC_REPORT_OCTOBER_2016_PDF.pdf