Ukraine: Major increase in the current account deficit
Overview:
The current account deficit in Ukraine is widening sharply. This is partly due to the increased price of Russian gas imports which have become a major domestic political issue. The capital account remains in surplus. However, FX reserves have remained stable so far this year compared to the sharp increase seen in 2010 because of deteriorating BoP trends. Moreover, the IMF program has gone off track and Ukraine has not received any disbursements so far this year. The situation is not critical but worthy of concern. The authorities appear unwilling to push through another domestic gas price meaning a restart of the IMF program will be difficult. The exchange rate appears more fixed than floating. There are questions about whether this is optimal and how far this current exchange rate is sustainable medium-term.