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OPINION June 28, 2022

A Dynamic, Competitive Private Sector and an EU Orientation Should Be the Driving Force in Ukraine’s Recovery

– Yesterday, the World Bank approved a new Development Policy Loan for Ukraine with a significant sum, $1.5 billion. How fast these money will come to Ukraine and what are the priorities of this loan? 

– The loan approved on 7 June – the Public Expenditures for Administrative Capacity Endurance in Ukraine (or PEACE in Ukraine) – is not a Development Policy Loan, but one that finances core government expenditures so that the government can continue to operate and provide services to the people of Ukraine. In its current version, the World Bank undertakes to reimburse the government for all salaries of core civil servants as well as salaries of educators every month (beginning in March, after the war began, until at least the end of the year), so long as the salaries are actually paid in full. So, after an initial big reimbursement for the March-May period, the remaining amount will be paid month-by-month on the basis of proof of actual expenditures. All of this will help Ukraine preserve and protect the capacity of the government and help in ensuring that this strong government capacity is preserved for economic recovery. 

– What types of financial assistance can Ukraine expect from the World Bank Group in 2022 and 2023? What additional amount can be received through the Bank’s Trust Fund? Could the Bank participate in covering Ukraine’s sectoral deficits, for example, in the electricity and gas sectors?

– Given the acute financing needs for the central budget, The World Bank is now concentrating on helping provide fast and immediate assistance – which in turn can help the population, especially the most vulnerable. First, very soon we will disburse a further $100 mln to help internally displaced people. We are continuing, within our existing projects, to help in the health sector, infrastructure and energy. We are also exploring with other bilateral development partners (such as Italy, Japan and the United States), who are very interested in adding to the PEACE loan and financing other types of verifiable budget expenditures; the specific items are not yet agreed, but will certainly include additional payments to internally displaced persons and other vulnerable groups in Ukraine. Our sister organization, IFC, who works with the private sector, is helping with guarantees to promote trade and agriculture. 

– On what conditions, in your opinion, should financial assistance be provided to Ukraine during the war and after it, for the reconstruction of the country? How strict should they be? How to avoid the formation of Ukraine’s debt overhang, because according to the World Bank forecast only this year its debt will increase from 50.7% of GDP to 90.7% of GDP?

– Ukraine right now needs enormous resources every month to keep the economy functioning during the war – the government’s estimate, which we broadly endorse, is around $5 billion a month (or $35 bn from now until the end of 2022). Clearly, getting sufficient resources is the most important challenge – but the cost of these resources also matters, exactly because Ukraine will need to service these increasing debts in the future. 

So the best way for partners to support Ukraine is through grants – which is most prominently being done by the US. Since grants of sufficient magnitude are not easily available, the next best option are loans that are quite concessional, with low interest rates and longer maturities – such as from the World Bank and other IFIs. Some countries, such as the UK, Netherlands, Sweden, Lithuania, Latvia and Denmark, have innovatively helped increase the volume of such cheap loans to Ukraine, by issuing guarantees to the World Bank and other IFIs. 

– In early April, the WB forecasted a decline in Ukraine's economy this year by 45,1% with inflation of 15% and its recovery in 2023 year by only 2,1%. How much has this forecast changed as of now?

– Our 2022 GDP projection is still unchanged (authorities currently have 44 percent GDP decline in 2022). But our estimate of the medium-term recovery is now at risk due to the prolonged war, with active combat still continuing in parts of Ukraine. So the impact on the GDP is coming from the relatively large area with active war, while the remaining part of Ukraine is suffering from shelling with corresponding damage to infrastructure, assets and thus livelihoods and jobs. And unfortunately, the probability that the war can last beyond 2022 is now higher. 

There is another risk to the broader economy. Inflation pressures are growing – due to the need to cover some part of fiscal needs during March- May via Central Bank monetization and financing from domestic banks and depreciation expectations, together with decreased supply of essential goods. Thus, inflation is now expected to increase further – and can reach 20 percent in December (vs 15 percent in our April projections). 

International partners have recognized the fiscal challenges and have already committed around $20 bn of financing to help Ukraine. Despite these significant commitments, the timing of its disbursement will remain critical in order to address Ukraine’s ongoing needs.  

– What is the current World Bank's assessment of Ukraine's losses from the war? How fast can the economy of Ukraine and the level of poverty of its population return to the pre-war level? Under what conditions?

– At the end of March, we estimated damages to infrastructure and structures to be around $60 bn, which was close to the estimates being provided on a continuing basis by the Kyiv School of Economics, which is using World Bank methodology. By now, the direct physical damages are well over $100 bn. If you additionally account for the economic losses that companies and individuals have undergone because of the war, the damages rise to two or three times that amount. Together with the government of Ukraine and the European Union, the World Bank will come up with a broader “Damage and Needs Assessment” by late summer.

Catching up to pre-war levels of the economy will not, unfortunately, be quick or easy. Ukraine will need rapid economic growth – far higher than the average of 3 percent a year that we saw in the pre-war era. A simple way to think about this is the “rule of 70” – the number of years it takes a country to double its GDP is 70 divided by the rate of growth. So at 3% growth, Ukraine would take 22 years to double its economy. But if Ukraine can achieve a consistent 7% growth, it will need just 10 years.

– In your opinion, what economic steps would help Ukraine better adapt to the war-caused situation? For example, should the state increase or decrease its expenditures? Should tariffs be fixed or subsidies increased?

– To achieve the sort of growth rate needed for recovery, Ukraine will need to reinvent its economy to one that is led by a dynamic, competitive private sector and an EU orientation. It will need to take measures – on investment climate, rule of law, justice and logistics infrastructure – to attract large amounts of foreign private capital and technical expertise. The model here is what Western Europe was able to do after World War II with the help of the Marshall Plan – where modernizing their economies was as or more important than the large grants from the US.

So the state expenditures will play a big part – for essential infrastructure, for essential services, for education and health, for social protection, and of course for defense and security. Because of this, the state will also need to collect sufficient revenues to do all this. But public spending by itself will not be enough for recovery and growth – a major role for the state will be to set the conditions (that go much beyond tax rebates or special subsidies) to help all Ukraine’s competitive private sector flourish. 

– What are your suggestions for the current Ukraine’s social safety nets sector? Does it worth for Ukraine to establish Universal Basic Income system? How should the government build its financial relations with refugees, who left the country?

– Ukraine’s social safety net system, including pensions and the Guaranteed Minimum Income program - as well as the new benefit program to support internally displaced persons (IDPs) - provides important financial protection to the population during the economic disruption caused by the war. The system will soon come under pressure, though – a pressure that will worsen the longer the war endures. Our own estimates show that the household losses from the income shock and higher cost-of-living will be around 25 percent of the household budget. Poverty, under the worst-case scenario, may reach as high as 58 percent in 2023. This will push millions more people onto social assistance. 

Although the government budget is under fiscal strain, sweeping social expenditure cuts should be avoided since they would have catastrophic consequences for beneficiaries of these social safety net programs. This is why the Bank has been supporting, and will continue to support, the Guaranteed Minimum Income program (including through a new $50 million disbursement). As I mentioned earlier, the World Bank will also provide nearly $100 million in reallocated lending to support the IDP program during the period of martial law. The government is also to be commended for its impressive leveraging of the existing digital Diya platform to allow new cash transfers to be paid to IDPs within just eight days, reaching 3.5 million beneficiaries within a month. 

– What wartime solutions for the medical sector, education and science does the World Bank offer?

– The war is having a devastating impact on health and education in Ukraine and is expected to affect generations to come. The most obvious effects on health are immediate, in the form of thousands of conflict-related deaths and injuries. Less visible is the illness caused, and worsened, by people not being able to access care for acute and chronic conditions. In education, due to the combination of COVID-related and war-related school closures, Ukrainian children have been out of school for more than a year. This will imply huge learning losses, whose consequences will impact future employment and income, with estimated future earnings losses of more than 10 percent per year per student.

While the war still rages, the health system will need to focus on meeting emergency medical needs related to war-related injuries, but also ensure continuation of other essential health services, including for COVID, and for chronic conditions (like hypertension and diabetes), so that long-term population health is not jeopardized. This is why World Bank projects are continuing to support both the procurement of emergency medical equipment and also the financing of the Program of Medical Guarantees. Expansion of services to address the mental health impact of the war is also needed. While providing education during war is difficult, a very promising approach it to use on-line, phone-based, or in-person tutoring can happen anywhere and is both effective and cost-effective. Tutoring could be an important complementary to the classes provided by the All-Ukrainian Online School platform.  Through payments through the PEACE project to cover a share of teachers’ salaries, the World Bank is helping to ensure continuity of education for all Ukrainian students, no matter where they are located. 

– The concept of “RebuildUkraine” was recently presented. It stipulates that while the reconstruction plan must be framed by Ukraine itself, its implementation should be led through the “Ukraine Reconstruction Platform”. In Ukraine, there is a discussion about the effectiveness of this format: they say that a significant part of the funds will go to the bureaucracy instead of financing real projects. Could the “RebuildUkraine” concept be effective? How centralized should the funding process be? What role will the World Bank play?

– Ukraine’s reconstruction, as mentioned earlier, will need efforts from everyone – Ukrainian authorities (and yes, the bureaucracy), Ukrainian farmers, entrepreneurs, those in digital tech industry, heavy industry, banking, retail … 

Key to this process is for the state to provide the essential expenditures and framework for recovery – in terms of basic services, protection of the population, proper regulation and competition policy (that is not too onerous and not too light), security and justice. Improving services and rebuilding institutions not cheap, and it will require significant resources for the state. A lot of that will come from abroad – especially if Ukraine commits itself to build institutions as good as those in the EU to prepare for accession. However, the state also has to enable the private sector to be able to flourish – and that means not just the big industrialists, but also the average Ukrainian farmer or small businessperson. And for this, what will be needed is not just money, but expertise, regulations that are fair and easy to navigate, and attention to ensuring that everyone has equal opportunity to succeed.

The World Bank will play a strong role in helping the Ukrainian authorities in achieving this vision –through our own finances, but also through coordinating with other development partners so that we can all complement each other to get the most resources to the best uses in Ukraine (as we are already doing today for the period of wartime relief). But as important will be our global expertise across all economic sectors, which we hope to share with and work hand-in-hand with Ukrainian authorities to help rebuild the Ukraine of the future.  

– The World Bank has repeatedly claimed the risks of deepening poverty and hunger in many low-income countries due to the war in Ukraine. What is the World Bank Group doing to unblock food exports from Ukraine?

– The cheapest and fastest way to get grain and oilseeds out of Ukraine is through the Black Sea. This needs work in the diplomatic and political areas to unblock these routes. While these are not our area of expertise, we encourage and support these efforts. Meanwhile, we are working to enhance the overland exports of grain, by working with Ukrainian railways and the European Union on how to increase the flow of grain exports through EU countries. Since this will not be able to get all the grain out, IFC and we are also working to see whether we can help farmers obtain better forms of temporary storage for the grain so that it does not spoil before it can get exported or consumed.