Executive Summary:

1. Military actions in Ukraine’s East have intensified during the last few weeks. Members of the OSCE monitoring mission reported that truce violations during this past weeks were the highest since last fall. Armed units on both sides reported rising number of fatalities as the conflict is worsening.
2. This long military conflict in Eastern Ukraine is now receiving closer attention by Western powers, which are concerned about the possibility that Russia or its proxies may also invade other countries, particularly in the Baltics, or further enter into Ukraine.  In July, the European Union and the USA made a decision to continue sanctions against the Russian Federation until it fully implements the requirements of the Minsk-2 agreement.
3. Although the pace of reforms is still slow, the newly appointed government is already accelerating the implementation of reforms. In particular, the government is giving renew impetus to its fight against corruption. Recently, there have been a number of arrests and investigations over government officials’ corrupt practices.
4. High-frequency data for May 2016 confirmed that Ukraine’s economic situation is continuing its recovery though at a slow and uneven pace.  In May manufacturing output increased by 2.5% yoy, the fourth month in a row with positive growth rates on a year-over-year basis. But mining activities declined by 3.5% yoy in May.  During the month, other economic activities also showed recovery. In particular, the construction sector expended by 5.5% yoy, with residential buildings leading with a growth rate of 8.2% yoy. Output in the agricultural sector showed a small increase of 0.1% yoy in May and 2.1% you in June 2016.
5. Due to better tax collections and decelerating growth of fiscal expenditures, the consolidated budget deficit decreased to UAH 3.8 billion for the January-May period, or about 0.3% of period GDP.
6. The overall growth of consumer prices further decelerated to 7.5% yoy in May from 9.8% yoy reported in April. Prices of all major groups of consumer goods and services saw deceleration in growth.  
7. The UAH/USD exchange rate continued to gradually appreciate in May-June thanks to seasonal factors and improvement in export revenues because of increased prices for traditional Ukrainian products on world markets.
8. National currency bank deposits continued to expand at a moderate pace, while foreign exchange deposits returned to decline in May. Bank lending showed similar trends to those observed for deposits -  national currency credits posted  moderate growth, while foreign currency loans continued to decline. Further deceleration of consumer inflation and stabilization of the exchange rate were the major reasons for the third consecutive decrease in the policy rate (from 18% to 16.5%) by the NBU.
9. In May 2016 the current account showed a surplus of USD 403 million.  This surplus helped reduce the current account deficit of January-May 2016 to USD 424 million (or 1.4% of period GDP). This positive result in May 2016 was due to improvements in trade for goods and services that brought near equilibrium to these accounts, while primary and secondary foreign income generated positive balances amounting to USD 357 million in May. The current account in May 2016 was partly offset by financial outflows of USD 41 million.  Nevertheless, the overall balance of payments showed a surplus of USD 374 million in May, which brought international reserves to USD 13.5 billion as of the beginning of June (3.5 months of imports).
10. The IMF mission that visited Kyiv in May/June concluded that Ukraine has made considerable progress in restoring macroeconomic stability, but that additional structural and institutional reforms are required to turn the recent recovery into sustainable growth. The IMF is still waiting for government action on these matters. The government expects to receive a partial disbursement in August with another large disbursement by the end of the year.  If the IMF proceeds with its program, in addition to about USD 1.0 billion from the IMF, Ukraine will be able to secure an additional USD 2.3 billion in financial aid from other multilateral and bilateral institutions.
    
    The complete June 2016 analytical report, including several interesting and important color charts and graphs, can be found in the in a PDF format by following the link: UKRAINE MONTHLY MACROECONOMIC REPORT (JUNE 2016)