Ukraine: Economic Stabilization Signs Emerging, But Delay in Reforms Will Undermine Recovery and Adversely Affect the Population

April 1, 2016

Ukraine’s GDP declined by almost 10 percent in 2015, but progress on reforms would enable a gradual recovery and growth of 1 percent in 2016, projects the World Bank

Kyiv, April 1, 2016 – After a sharp contraction in economic activity in 2015, initial signs of stabilization are beginning to emerge, according to the World Bank’s latest Ukraine Economic Update. Unprecedented shocks from the conflict in the East and lower global commodity prices, along with considerable fiscal and external adjustment, have led to a contraction of real GDP by almost 10 percent in 2015. At the same time, de-escalation of the conflict since September 2015 and reforms have contributed to stabilizing confidence. However, the current political uncertainty poses a serious risk to continued reforms and economic recovery in Ukraine.

Reforms on multiple fronts are crucial to achieve sustainable recovery and growth in 2016 and beyond,” said Qimiao Fan, World Bank Country Director for Belarus, Moldova and Ukraine. Delay or reversal of reforms will undermine economic recovery and lead to negative social consequences.”

A gradual economic recovery by 1 percent in 2016 and 2 percent in 2017 is projected, contingent on reform progress and no further escalation of the conflict. Poverty is estimated to have increased in 2015 and is projected to remain elevated through 2018 in light of the gradual recovery of economic activity, real wages, and jobs.

The general government deficit, including Naftogaz, was reduced to 2 percent of GDP in 2015, thanks to tight controls on spending, gas tariff increases, and lower prices of imported gas. However, the fiscal outlook remains challenging, particularly in light of the recent cut in social security contribution rate.

In light of the significant external risks and persisting vulnerabilities, safeguarding macroeconomic stability remains critical. This will require reforms to continue fiscal consolidation and strengthen the financial sector as well as a flexible exchange rate. Furthermore, supporting economic recovery and growth going forward will require improving productivity by investing in infrastructure, streamlining the business environment, and tapping trade opportunities. Ukraine will also need to provide more effective services to the population to ensure that the benefits of recovery are broadly shared.

Special focus on pension reform:

According to a special focus note on pension reform released with the Ukraine Economic Update, the current pension system provides benefits that are too small and for too many people, which undermines fiscal stability and social adequacy.

Pension levels for the majority of beneficiaries are very low, with the average old age pension only about US$2 a day at the prevailing market exchange rate.

The pension system represents a major fiscal vulnerability, accounting for expenditures of 13.4 percent of GDP in 2015, including a host of categorical benefits and the minimum subsistence top-up, which also undermine incentives to contribute,” said Qimiao Fan, World Bank Country Director for Belarus, Moldova and Ukraine. The recent cut in the social contribution rate adds to fiscal vulnerabilities and raises the urgency of pension reform.”

In the last 20 months alone, the World Bank Group has provided a total of US$4.7 billion in budget support, investments and private sector financing to Ukraine, including US$4.435 billion from the International Bank for Reconstruction and Development (IBRD), of which US$2.25 billion was delivered in fast-disbursing budget support, and US$250 million from the International Finance Corporation (IFC), the Bank’s private sector arm.

The World Bank’s current investment project portfolio in Ukraine amounts to US$3.1 billion (of which about US$2.1 billion is undisbursed) through 10 projects. Most of these investments support improving basic public services that directly benefit ordinary people in areas such as water supply, sanitation, heating, power, roads, social protection and healthcare, as well as private sector development. Since Ukraine joined the World Bank in 1992, the Bank’s commitments to the country have totaled over US$12 billion for over 70 projects and programs.

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