Overview

Country Context

Ukraine

2016

Population, million

42.6

GDP, current US$ billion

92.6

GDP per capita, current US$

2174

Life Expectancy at Birth, years

71.2

Ukraine has experienced acute political, security, and economic challenges during the past three years. Since the “Maidan” uprising in February 2014 that led to the ousting of the previous president, the country has witnessed several momentous events, including the outbreak of conflict in eastern Ukraine and presidential, parliamentary, and local elections.

The Government, which took office in April 2016, has committed to continuing previous reform efforts, and a government program and action plan covering a wide-ranging reform agenda was issued in May.

Key reforms undertaken since 2014 include: carrying out significant fiscal consolidation, moving to a flexible exchange rate, reforming energy tariffs and social assistance, making public procurement more transparent, simplifying business regulations, stabilizing and restructuring the banking sector, adopting a health reform package, and establishing anti-corruption agencies and asset disclosures for public officials, all the while contending with powerful vested interests that continue to oppose reforms.

Although all are important steps, more needs to be done in these and other areas. Going forward, Ukraine will need to advance reforms on multiple fronts to achieve sustainable recovery and shared prosperity.

Strategy

World Bank Portfolio

No. of projects: 8 IBRD investment operations, plus one guarantee

Total lending: US$2.5 billion, including US$148 million from the Clean Technology Fund (CTF)

Ukraine joined the World Bank in 1992. Over the 25 years of cooperation, the Bank’s commitments to the country have totaled over US$10 billion in about 70 projects and programs.

In March 2014, after receiving a request from the-then Ukrainian Government, the World Bank Group immediately announced its support for a reform agenda aiming to put the Ukrainian economy on a path to sustainability.  

The current International Bank for Reconstruction and Development (IBRD) portfolio consists of eight investment operations of roughly US$2.6 billion and one guarantee of US$500 million.

The World Bank recently completed a new Systematic Country Diagnostic for Ukraine and is currently preparing a new Country Partnership Framework, which is expected to be approved in 2017.

Key Engagement

Responding to the crisis in Ukraine, in March 2014, the World Bank Group announced that it would provide additional financial and technical support to the country.

Since 2014, the World Bank Group has supported the people of Ukraine through a series of two development policy loans (DPLs), seven new investments, and a guarantee of approximately US$5.5 billion aimed at improving critical public services, supporting reforms, and bolstering the private sector.

The World Bank has supported high-priority reform measures to address the key structural roots of the current economic crisis in Ukraine and to lay the foundation for inclusive and sustainable growth through two series of budget support operations:  the multi-sector DPL series (DPL -1, US$750 million approved in 2014, and DPL 2, US$500 million approved in 2015) and the Financial Sector (FS) DPL series (FSDPL -1, US$500 million approved in 2014, and FSDPL-2, US$500 million approved in 2015).

Reform measures supported by these four budget support operations promote good governance, transparency, and accountability in the public sector, as well as stability in the banking sector; a reduction in the cost of doing business; and the use of scarce public resources effectively to provide quality public services at a crucial time. These operations also support the authorities in continuing to reform an inefficient and inequitable housing subsidy system while protecting the poor from tariff increases by strengthening social assistance.

World Bank investment projects have focused and will continue to focus on improving basic public services, such as district heating, power, roads, water and sanitation, health, and social protection.

The Bank is also supporting Ukraine through policy advice and technical assistance in formulating and implementing comprehensive structural reforms. 

In addition to financing several ongoing private sector projects, the International Finance Corporation (IFC) is implementing a large advisory program in the country, working to simplify regulations, improve the investment climate and energy efficiency, boost the competiveness of local food producers, help open new markets, and increase access to finance.

Economy

Recent Economic Developments

The economy recovered modestly by 2.3% in 2016, with a bumper agriculture harvest leading to stronger growth of 4.8% in the fourth quarter. Decisive reforms in the face of unprecedented shocks in 2014 and 2015 helped to stabilize confidence. As a result, real GDP grew modestly by 2.3% in 2016 after contracting by a cumulative 16% in the previous two years. Signs of stronger growth of 4.8% year-on-year (y-o-y) emerged in the fourth quarter of 2016.

The recovery was supported by an abundant harvest, with agriculture growing by 6% in 2016 overall and 18.4% (y-o-y) in the fourth quarter. Other sectors experienced a pickup from low levels in 2016, with growth of 3.6% in manufacturing, 16.3% in construction, 4% in domestic trade, and 3% in transport. Fixed investment rebounded strongly by 20% from a low base, including manufacturing equipment and imported capital goods, pointing toward strengthened investor confidence.

However, the overall pace of recovery remains modest, as significant weaknesses remain in some parts of the services sector, including education, health, and financial services. Stronger recovery has also been held back by weak external demand and the continuing conflict in the eastern part of the country. Although a number of important reforms have advanced in recent months, a further acceleration in reforms is needed to boost investor confidence and bolster economic recovery.

After a significant increase in 2015, poverty is estimated to have moderated slightly in 2016. Disposable incomes contracted significantly in 2015 from the deep recession and high inflation. Moderate poverty (applying the World Bank’s national methodology for Ukraine) increased from 15% in 2014 to 22% in 2015, while the poverty rate (under US$5/day in 2005 purchasing power parity, or PPP) increased from 3.3% in 2014 to 5.8% in 2015.

In 2016, real household incomes are estimated to have benefited from stabilization in consumer prices and the modest resumption of economic growth. Inflation slowed to 12.4% in 2016 from 43.3% at end-2015 due to exchange rate stabilization and prudent monetary policy, while real wages increased 11.6% (y-o-y) in December 2016. However, labor market conditions remained weak, with unemployment at 9.9% in the first three quarters of 2016.

The fiscal deficit increased in 2016 due to lower social security contributions (SSCs), but the increase in the deficit was less than projected due to expenditure restraint and the stronger performance of other tax revenues. The fiscal deficit (excluding Naftogaz) was 2.2% of GDP in 2016, up from 1.2% in 2015 but lower than previously projected. Total government revenues declined by 11% in real terms in 2016, in large part due to the cut in the SSC rate.

SSC revenues declined from 9.6% of GDP in 2015 to 5.5% in 2016—smaller than total pension spending of 10.8% of GDP. The resulting pension fund deficit of 5% of GDP has become a major fiscal vulnerability. On the other hand, other key tax revenues performed better than planned due to the pickup in economic activity in 2016. Revenues from value-added tax (VAT), personal income tax (PIT), and corporate income tax (CIT) increased by 7.6, 13.1, and 25.7%, respectively, in real terms. The authorities also implemented expenditure restraint measures in 2016. Pensions spending declined 21.8% in real terms due to continued limited indexation (and advance payment of January 2016 pensions in December 2015), while spending on goods and services declined by 9%.

Capital expenditures increased due to greater resources at the local level through decentralization, while social assistance spending increased due to a further increase in coverage of the housing and utilities subsidies (HUS) program. The Naftogaz deficit was reduced to zero in 2016 from 1% in 2015. Public and guaranteed debt increased to 81% of GDP due to the recapitalization of PrivatBank in December 2016.

The current account deficit widened to 3.8% of GDP in 2016 due to an increase in imports of intermediate and investment goods. Despite a significant reduction of imports of gas and other minerals, the merchandise trade deficit doubled in 2016 due to the increase in intermediate and investment goods imports. Higher foreign direct investment (FDI) inflows—mainly related to bank recapitalization—were sufficient to cover the current account deficit in 2016. International reserves grew to US$15.5 billion—equal to 3.4 months of imports.

Economic Outlook

The outlook for economic growth remains modest due to significant external and internal headwinds, but renewed reform momentum could support higher growth going forward. Significant obstacles remain to accelerating reforms in a complex political environment.

In addition, the conflict in the east of Ukraine has escalated since end-January 2017. The coal and trade blockade on the uncontrolled areas in Donbas is expected to negatively impact two key sectors: steel production and electricity generation.

On the positive side, there are encouraging signs of progress in a number of important reform areas, and the recovery should also benefit from improving terms of trade.

Growth is projected at 2% in 2017 and 3.5% in 2018. This projection assumes no resolution in the trade blockade before the end of the year, with reduced exports of steel, disruptions in electricity generation, and the diversification of coal supplies and higher exports of iron ore over time.

Growth of 4% or more in the medium term will require accelerating the implementation of politically difficult reforms to address longstanding structural challenges. Reforms to boost private sector competitiveness, together with the real depreciation of recent years, should help support exports, while reforms to create fiscal space can unlock public investment and improvements in the banking sector can permit a gradual resumption of lending.

The outlook is subject to risks, including an escalation of the conflict, further deterioration in the external environment, and difficulty in advancing reforms in a complex political environment.

Project Spotlight

The World Bank contributes to the improvement of Ukraine’s social assistance system for low-income families through the Social Safety Nets Modernization Project. This Project tackles several key areas: expanding and assisting in financing the Guaranteed Minimum Income (GMI) program, improving the Housing and Utilities Subsidy, streamlining oversight and control procedures, continuing administrative modernization, and supporting the deinstitutionalization of children.

Over the past two years, the Project has directly cofinanced the expansion of the GMI program to increase the number of beneficiaries from 200,000 to 300,000 families, which now amounts to over 1 million people. It has also simplified the eligibility criteria, to be introduced in 2017, to boost the program’s targeting accuracy.

The Project has also supported the implementation of activation services for GMI beneficiaries and internally displaced persons (IDPs) to promote the transition of work-able beneficiaries from benefits to employment. Provision of activation services will start in 2017 as a pilot in three regions. It is expected that 4,000 individuals will benefit from activation measures in these pilots. The national rollout of the activation pilot is planned for 2019.

As part of the Project, most energy-related assistance and privileges have been consolidated into one single program—the Housing and Utilities Subsidy, or HUS. The Project supported an unprecedented scale-up of HUS during the increase in energy tariffs. This massive scale-up from 1 million to 5.5 million households in 2015 managed to cushion the shock of increased prices and facilitate the political acceptability of the new energy prices. This was achieved through a number of major steps to simplify the application process and its administration.

Reducing error and fraud in the social assistance system, known in Ukraine as the verification process, is another area of assistance. As a result of system control improvements, in the third year of Project implementation, the authorities can expect to see annual savings ranging from 0.1 to 0.2% of GDP.

Progress has also been made in the deinstitutionalization of childcare. The transformation of children’s residential institutions and the provision of family-based care to support orphans, children deprived of parental care, children with disabilities, and vulnerable families in the city of Kyiv and Kyiv Oblast (region) have been launched. It is expected that 15 residential institutions in these two regions will be transformed and 2,500 children will be placed in family-based care.


LENDING

Ukraine: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

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