Overview

Severe shocks, combined with a backlog of structural reforms, resulted in a serious economic crisis in 2014-2015. The economy has been hit by unprecedented double shocks from the conflict in the east of Ukraine and a considerably weaker external environment, including lower global commodity prices.

Real GDP contracted by 6.8 percent in 2014 and by a further 10 percent in 2015. The currency depreciated sharply in 2014-15, while the consolidated fiscal deficit, including Naftogaz, reached 10.1 percent of GDP in 2014 and public and guaranteed debt spiked to 82 percent of GDP in 2015. The banking sector experienced deposit outflows, rising levels of nonperforming loans, and large numbers of bank failures.

Decisive reforms have helped to stabilize the economy, reduce large imbalances, and cushion the impact of the shocks on the population. Key reforms adopted with the support of the international community included: moving to a flexible exchange rate; undertaking significant fiscal consolidation; reforming energy tariffs and strengthening the social safety net system; stabilizing the banking sector by putting in place the framework to resolve and recapitalize banks and strengthen supervision; streamlining the business environment; making public procurement more transparent; putting in place external verification of financial disclosures.

As a result of the reforms, the economy has begun to stabilize, with real GDP contracting by only 1.4 percent y/y in the fourth quarter of 2015, compared to 16 percent y/y in the first half of 2015. Furthermore, large imbalances have been reduced, with the general government deficit, including Naftogaz, reduced to 2 percent of GDP in 2015. The banking system is being cleaned up as 75 weak or nontransparent institutions have been sent for resolution.

Economic prospects remain weak and the fiscal outlook remains challenging, raising the urgency of reforms to unlock growth and manage medium term imbalances. The global economic environment remains weak, the conflict in the East continues despite de-escalation, and a large backlog of reforms remains. As a result, a very gradual economic recovery is expected, with growth of 1-2 percent in 2016 and 2-3 percent in 2017.

This raises the urgency of reforms to unlock growth and productivity through more effective public investment and a more competitive market structure.  Furthermore, meeting the fiscal deficit target of 3 percent of GDP in 2016 will prove challenging, particularly in light of the payroll tax rate cut from 40 to 22 percent in 2016.

Estimates suggest that short term revenue losses could amount to 3 percent of GDP. This raises the urgency of addressing the medium term structural fiscal pressures, including broadening the tax base, strengthening tax administration, and rationalizing current expenditures (including pensions and the large public sector footprint).

Poverty is estimated to have increased in 2015, raising the urgency more effective service delivery to improve labor market outcomes and promote shared prosperity. Disposable incomes have contracted significantly from the deep recession, with real wages down by 13 percent y/y in December 2015.

The poverty rate (under US$5/day in 2005 PPP) is estimated to have increased from 3.3 percent in 2014 to 5.8 percent in 2015, while moderate poverty (WB national methodology for Ukraine) is estimated to have increased from 15.2 percent in 2014 to 22.2 percent in 2015.

Going forward, fiscal consolidation will require restraint on growth of public-sector wages, pensions, and other social programs, which will affect household purchasing power across the income distribution. More effective service delivery can not only reduce expenditure pressures, but also improve labor market outcomes, while improving targeting of social transfers can also help better support incomes of the poor and bottom 40 percent.

Reform Priorities    

Ukraine will need to simultaneously advance reforms on multiple fronts to achieve sustainable recovery and shared prosperity going forward. As the economy has begun to stabilize and large imbalances have been reduced at least for the short term, Ukraine now needs to also address the deeper structural bottlenecks and governance challenges that have constrained sustainable development for the last decade and half.

First, safeguarding macroeconomic stability by addressing the largest sources of macroeconomic risk in the medium term is important. This is important in light of the difficult external environment and persisting vulnerabilities, and will require implementing tax and pension reform, continuing reforms in the financial sector, and strengthening public financial management.

Second, Ukraine will need to unlock productivity, support growth, and create jobs. This will require investing in infrastructure by improving public investment management; reforming and investing in the important energy, transport, and agriculture sectors; dismantling the oligarchical production structure, enhancing competition, improving the business climate, and tapping the EU market; more effective land management; and building the critical anticorruption and justice institutions.

Third, Ukraine will need to provide more targeted and effective services to the population. This will not only reduce expenditure pressures, but also result in tangible improvements in the quality of life for the population, improve labor market outcomes, ensure that the benefits of recovery are broadly shared by more effectively supporting the incomes of the poor and bottom 40 percent. This will require reforming health care financing; optimizing the school network and enhancing skills of the workforce; effective decentralization of service delivery; and improved targeting of social assistance.

Last Updated: Jun 02, 2016

The World Bank's Country Partnership Strategy (CPS) for Ukraine for 2012-2016, endorsed by the World Bank's Board of Directors in February 2012, is targeting implementation issues by aiming to strengthen the relationships between the state, citizens and business.

  • The first pillar focuses on improving public services, enhancing sustainability and efficiency of public finances, and promoting a more transparent and accountable use of public resources.
  • The second pillar focuses on improvements in the business climate and the promotion of domestic and foreign investments, as well as competitiveness and job creation.

The Strategy aims to deliver concrete results and help the government build trust. The Strategy is based on a careful diagnostic of underlying risks, both technical and governance related and an analysis of past experience.

The current investment lending portfolio includes 10 operations for a total amount of US$ 3.1 billion. Since Ukraine joined the World Bank in 1992, Bank commitments to the country totaling about US$12 billion for over 70 projects and programs.

The Bank is currently assessing the current Strategy implementation results and conducting Systemic Country Diagnostic to inform the new Country Partnership Framework. 

From the renovation of 756 local welfare offices and the modernization of the Dnipro hydropower cascade to the rehabilitation of the Kyiv-Kharkiv M3 road, the World Bank is supporting concrete development results for the people of Ukraine.

Highlights of Bank projects include:

Expanding the Ukrainian Power Transmission Grid
Ukraine has one of the largest power transmission systems in Europe, and one of the oldest. Over two thirds of the country's almost 30,000 km of transmission lines and 132 substations have exceeded their expected lifespan. Working with the World Bank, the state-owned UkrEnergo is modernizing its assets to make its grid transmit more power while wasting less in the process.

Under the project, UkrEnergo will rehabilitate seven substations in various regions of the country, helping to reduce energy losses by about 33 GWh per year and decreasing maintenance and repair costs by about US$ 800,000 a year. Since a typical 25-story office building consumes 5 GWh per year, the savings are equal to the power used by seven skyscrapers in a large city.

If modernization in the energy sector succeeds, Ukraine's electricity grid will be a reliable part of the European grid. That will give Ukraine more opportunities to have income from Western European markets, where the price of electricity is higher than in Ukraine.

Safer and Cleaner Power from Ukraine’s Hydroelectric Plants
Hydroelectric stations provide electricity, drinking water, and protect millions of people from possible floods. For that reason, most hydropower stations in Ukraine have been built in densely populated areas, with each reservoir holding millions of cubic meters of water that needs to be controlled.

Unfortunately, not all dams are adequately maintained. With support from the World Bank's Hydropower Rehabilitation Project, UkrHydroEnergo, which manages the Ukrainian power grid, is increasing the safety and efficiency of its hydroelectric plants, as well as their capacity. The state-owned company operates nine hydroelectric stations on the Dnieper and Dniester rivers with a total capacity of 3,900 megawatts.

Working closely with ecologists, plant engineers regulate the levels of water in reservoirs, since every artificial lake provides drinking water to thousands of cities and villages, and is also used for irrigation—both in Ukraine, and in neighboring Moldova. When modernized, the hydropower stations will significantly improve their reputation as green and renewable energy sources, with low levels of greenhouse gas emissions.

Efficiency is important, too. About 50 new turbines have been replaced at nine hydroelectric plants.

Kiev: Bringing an Ancient City into the Future
One of the oldest cities in Eastern Europe, Kiev was founded on one of the ancient world's most important trade routes, running from the Baltic region south to what is now Turkey. Kiev's leaders hope to use the city's historic culture and stately old buildings to invigorate its future. The idea is to build a new modern city on top of an ancient one, bringing the best of both together.

Supported by the World Bank with a grant from the Cities Alliance and their partners, the Kiev City Development Strategy aims to make Kiev a livable, healthy city with ample green space by reducing traffic and congestion, building bike routes and promoting energy efficiency. Urban leaders also want to attract new businesses and encourage young workers to invest in the city. And since Ukraine allows visa-free entrance for citizens of both Europe and the Commonwealth of Independent States, the city could become an ideal destination for international businesses and organizations.

Another part of the city strategy focuses on raising public and private investments in health care, and promoting healthy living. A long-term goal is to increase longevity of the Ukrainian people by at least 10 years.

Ukraine's Social Safety Net Works Better to Serve the Neediest
The Ukrainian social safety net is going through radical changes in order to better serve beneficiaries. In 2006, Ukraine's Government, with the assistance from the World Bank, started to modernize the system by training staff at 756 local welfare offices and equipping them with modern computer systems.

The guiding principle is the one-stop-shop. Individuals can get all the benefits they qualify for in a single application and by providing one package of documents. At their first visit to a welfare office, applicants are informed of all the documents they will need to collect. Once they have filled out and handed in the paperwork, they receive their benefits from the local welfare office within 10 days.

This new business model has been developed and implemented in nearly all of the 756 local welfare offices in the country. Over 90 percent of welfare offices have been refurbished and modernized. Better management information systems have reduced the time needed to process new applications for benefits from over four hours to under two, allowing staff to process more benefits every month.


LENDING

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

*Amounts include IBRD and IDA commitments