KYIV, May 23, 2019 – Ukraine’s economy grew by 3.3 percent in 2018, supported by a good harvest and strong consumption growth from higher wages, pensions, and remittances, according to the World Bank’s latest Ukraine Economic Update. However, investor confidence has been held back by uneven reform progress, election-related uncertainties, and high borrowing costs, with growth of 2.7 percent projected in 2019.
“In order to accelerate economic growth, Ukraine needs swift progress on key unfinished reforms,” said Satu Kahkonen, World Bank Country Director for Belarus, Moldova and Ukraine. “This includes opening the agricultural land market, unbundling the energy sector, strengthening governance of state-owned banks, making progress on anticorruption, and safeguarding fiscal stability.”
If the key reforms progress swiftly, economic growth is projected to rise to 3.4 percent in 2020 and 3.8 percent in 2021. By contrast, if reforms do not progress, growth would fall below 2 percent as investor confidence deteriorates and macroeconomic vulnerabilities intensify.
Ukraine faces macroeconomic vulnerabilities from large public debt repayments obligations in 2019-2021 and pressures on current expenditures. This will require mobilizing adequate international financing and further strengthening public finances to meet the fiscal deficit target. Particularly important in this regard is affordable implementation of recent reforms in health, education, pensions, public administration, and social assistance. It will also be important to put in place a more equitable and growth-friendly tax system.
Tapping Ukraine’s growth potential …
According to the World Bank’s Special Focus Note on Ukraine’s growth potential, achieving strong growth for an extended period of time is critical for Ukraine to catch up with the income levels of neighboring European countries.
If the status quo and the growth rate of recent years continues, it will take Ukraine more than 50 years to reach the income levels of today’s Poland.
While Ukraine has made progress over the last five years in strengthening the foundations for sustainable growth, the economy continues to be constrained by unfinished reforms that lead to low productivity, over-reliance on commodity-based exports, limited foreign direct investment and global economic integration, and weak institutions.
Going forward, Ukraine’s key challenge is not to achieve high growth next year or for a few years, but rather to make economic growth faster, last longer, and kinder by giving equal opportunity to all.
Achieving higher and sustained economic growth will require progress on further critical reforms to boost productivity and investment, including in the following areas: rule of law and property rights protection; land reform; governance and supervision in the financial sector; competition in the gas sector; and logistics and connectivity to fully leverage external trade opportunities.