Ukraine's Economy is Recovering Modestly Despite Significant Headwinds

April 4, 2017

Economic growth is projected at 2 percent in 2017, but reforms are needed to boost growth to 4 percent in 2018-19 and address significant fiscal and external vulnerabilities

Kyiv, April 4, 2017 – Ukraine’s economy grew modestly by 2.3 percent in 2016 after 16 percent cumulative contraction in the previous two years, according to the World Bank’s latest Ukraine Economic Update. Fixed investment rebounded by 20 percent in 2016, pointing towards strengthening investor confidence, while a bumper agriculture harvest led to stronger growth of 4.8 percent in the fourth quarter.

“The economy is recovering modestly, but accelerating reforms can help to boost growth in the medium term, address macroeconomic vulnerabilities, and improve the well-being of the population,” said Satu Kahkonen, World Bank Country Director for Belarus, Moldova and Ukraine. “Reforming the pension system, land markets, and health care are critical now given the growing headwinds from the conflict in the east of Ukraine.”

Economic growth is projected at 2 percent in 2017, given the weak global environment and the coal and trade blockade with Donbas that is expected to negatively impact two key sectors—steel production and electricity generation. Reforms to boost investor confidence and private sector competitiveness can help raise growth to 4 percent in the medium term.

The fiscal deficit widened to 2.2 percent of GDP in 2016 due to lower social security contributions, and fiscal pressures are expected to persist in 2017 due to the increase in the minimum wage. A systematic fiscal consolidation effort grounded in the reform of pensions, education, health, and social assistance is needed to gradually reduce the fiscal deficit and public debt.

Without such a systematic fiscal consolidation effort, Ukraine will need to rely on ad hoc revenue measures and expenditure cuts, which would undermine debt sustainability, growth prospects, and the quality of social services.

Reforming health care for better service delivery and prosperity of the population

According to the World Bank’s Special Focus Note on reforming health care, Ukraine’s spends more on health (7.6 percent of GDP, including public and out of pocket private spending) than other countries at a similar income level, but health outcomes are remarkably poor. Life expectancy is about 71 years, about 10 years less than the European average.

The current health budget is skewed toward financing inpatient care and hospital beds, which distorts incentives for better patient treatment. Ukraine has 40 percent more hospital beds per capita than the EU average, while the average length of inpatient stay is 11.6 days compared to 8.6 days in the EU.

The current financing mechanism also crowds out resources for outpatient facilities, primary care, and disease prevention, which are much needed in light of Ukraine’s disease burden.

The health reform in Ukraine needs to embrace a number of major shifts: (i) from in-patient curative to preventive health care; (ii) from input-based to output-based financing; and (iii) from informal out of pocket payments to a new transparent health benefit package.

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).

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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Dmytro Derkatch
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