Ukraine: Reforms Helped to Stabilize Economy, but Continued and Faster Reforms are Key

Ukraine’s GDP to decline by 12 percent in 2015, but 1 percent growth is possible in 2016, projects World Bank

Kyiv, October 5, 2015 – Despite a few encouraging signs of economic stabilization seen in July and August 2015, in its new Ukraine Macroeconomic Update the World Bank projects real GDP to fall by 12 percent this year, down from an earlier projected 7.5 percent decline. The macroeconomic policy mix adopted by the authorities proved to be effective in mitigating a much more painful impact on the country’s economy, but the on-going conflict in the east has made stabilization more difficult. Coupled with an unfavorable global economic environment, it has led to a much sharper contraction in the economy.

Ukraine’s economic recovery depends on whether the authorities continue implementing much-needed macroeconomic and structural reforms, even as periodic flaring up of conflict adds to uncertainties. If reforms continue, a gradual recovery is possible starting from 2016. It is expected to be driven by net exports, capital investment and privatization.

“The Ukrainian authorities have taken many important steps to stabilize and reform the economy, but they represent only a meaningful start of the long and arduous reform process”, said Qimiao Fan, World Bank Country Director for Belarus, Moldova and Ukraine. “Continued and faster reforms will help lay the foundation for future growth and they are crucial for Ukraine’s survival.” 

Despite lower GDP growth in 2015, the country’s general fiscal and budget performance has so far been better than anticipated. The current account saw declining pressures and reached a balance earlier this year, but risks confronting Ukraine remain high. To guard against these risks, it is very important that authorities continue with flexible exchange rate regime and prudent fiscal policy. They need to redouble efforts at fighting corruption and improving governance. They need to continue reforms to reduce Naftogaz imbalances and strengthen the energy sector’s capacity. In addition, the authorities need to boost confidence in the banking system.

In the last 18 months alone, the World Bank Group has provided a total of more than US$4.1 billion in budget support, investments and private sector financing to Ukraine, including US$3.875 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$2.7 billion (of which about US$2 billion is undisbursed) through 9 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$9 billion for 45 projects and programs.