Ukraine: Economy has Stabilized, but Renewed Reform Momentum is Critical to Improve Economic Prospects

September 22, 2016

The economy grew by 0.8 percent in the first half of 2016, but significant recovery has not yet taken hold, while fiscal and external vulnerabilities remain significant

Kyiv, September 22, 2016 – The economy has stabilized in 2016, but significant economic recovery and growth have not yet taken hold due to limited reform momentum, weak external demand, and the continuing conflict, according to the World Bank’s latest Ukraine Economic Update. Real GDP recovered very slightly (growing by 0.8 percent) in the first half of 2016, compared to a contraction of 16 percent in the first half of 2015.

A gradual economic recovery by 1 percent in 2016 and 2 percent in 2017 is projected. Poverty is estimated to have increased significantly in 2015 and is projected to remain elevated through 2018 due to the gradual recovery of economic activity, real wages, and jobs.

“In addition to some noteworthy reforms implemented in recent months, deeper structural reforms to bolster investor confidence and productivity are needed to raise economic growth to 3-4 percent in the medium term,” said Satu Kahkonen, World Bank Country Director for Belarus, Moldova and Ukraine.  “Such reforms are all the more important in light of headwinds from the global economic environment and the conflict in the East of Ukraine.”

While large fiscal imbalances were reduced in 2015, the fiscal outlook remains challenging, with the general government deficit, including Naftogaz, projected at 4 percent of GDP in 2016. Gradually reducing public debt while supporting economic development will require a systematic fiscal consolidation effort grounded in structural reforms.

Without such a systematic fiscal consolidation effort, Ukraine will need to rely on more ad hoc revenues measures and expenditure cuts, along with more domestic borrowing, which would undermine debt sustainability and development outcomes.

Structural reform priorities…

According to the World Bank’s Special Focus Note on reforms, moving from economic stabilization to sustained recovery and shared prosperity for the population will require addressing longstanding structural challenges including macroeconomic imbalances, weak productivity growth, and ineffective social services.

Safeguarding macroeconomic stability will require addressing the largest sources of fiscal risk. This includes broadening the tax base, reforming the pension system, managing quasi-fiscal liabilities and addressing financial sector vulnerabilities.

Unlocking productivity will require more effective public investment, creating a level playing field for the private sector, reforming land governance, and facilitating trade.

Providing more effective services and targeted assistance to the population will require health financing reform, effective decentralization, and improved targeting of social assistance.

Tackling corruption and improving governance are central priorities on the road toward sustained recovery and shared prosperity for the population.

Since May 2014, the World Bank Group has provided a total of more than US$4.4 billion to Ukraine (including 4 development policy loans and 6 investment loans) from the International Bank for Reconstruction and Development (IBRD). In 2015 alone, IBRD approved 2 investment operations and two development policy operations amounting to a total of US$1.775 billion.

The World Bank’s current investment project portfolio in Ukraine amounts to about US$2.8 billion.  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$10 billion in about 70 projects and programs.

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