Qimiao Fan, World Bank Country Director for Belarus, Moldova, and Ukraine, talks about the World Bank Group’s support to Ukraine.
A previous Q&A is available here.
Qimiao Fan, World Bank Country Director for Belarus, Moldova, and Ukraine Kiev, Ukraine
Qimiao Fan, World Bank Country Director for Belarus, Moldova, and Ukraine, talks about the World Bank Group’s support to Ukraine.
A previous Q&A is available here.
Question: The Board approved a US$500 million DPL in August 2015. How is this money being spent?
Qimiao Fan: The Development Policy Loans (DPL) are direct budget support to the Government of Ukraine to support their reform program. Once reform measures agreed with the World Bank are fulfilled, the World Bank disburses money directly into the budget.
The series of Multi-sector Development Policy Loans, the second of which in the amount of US$500 was approved by the Board on August 25, aims to: (i) promote good governance, transparency, and accountability in the public sector; (ii) strengthen the regulatory framework and reduce the cost of doing business; and (iii) reform inefficient and inequitable utility subsidies while protecting the poor.
Q: On February 12, the World Bank announced US$2 billion for Ukraine in 2015. Is this all new money? Does it come on top of US$3.5 billion the World Bank Group committed in 2014?
The US$2 billion announced by the World Bank for Ukraine in 2015 is being provided in new lending projects and programs through a mix of financing instruments, including significant budget support for reforms as well as investment projects to support service delivery in the areas such as health and public infrastructure.
In 2014, the World Bank Group committed up to US$3.5 billion for Ukraine, and provided approximately US$2.9 billion through 7 projects, including US$1.25 billion in budget support. Due to delays in appointing the government after the parliamentary elections of October, and lack of progress in key reforms, some of the lending was postponed. The projects are now being delivered in 2015 and are included in the US$2 billion support announced by the Bank for 2015.
Q: What new operations has the Bank planned in 2015?
In addition to the US$500 million DPL just approved, on March 4, 2015, the World Bank’s Board of Executive Directors approved a US$214.73 million IBRD loan for the Serving People, Improving Health Project which aims at improving the quality of health services in selected Oblasts in the country, with a special focus on primary and secondary prevention of cardiovascular diseases and cancer, and enhancing efficiency of the healthcare system in Ukraine.
Looking ahead, there are the following projects in the pipeline in 2015:
Q: What is the Bank’s economic forecast for Ukraine? When do we expect the renewal of economic growth in Ukraine?
Ukraine is facing unprecedented challenges – a major economic crisis set against the backdrop of an escalating conflict in the east.
Faced with large fiscal and external imbalances, the authorities embarked on a major macroeconomic adjustment. Sharp currency devaluation – after the fixed exchange rate was abandoned in March – combined with fiscal consolidation triggered significant decline in consumption and investment. The escalating conflict has led to serious economic disruptions in the industrialized east and undermined investor and consumer confidence. Real GDP is estimated to have fallen by around 6.8 percent in 2014.
The economic contraction will continue in 2015 due to the ongoing macroeconomic adjustment and the conflict in the east. The economy should gradually pick up over 2016-2017 if the conflict is resolved and the authorities continue to implement macroeconomic and structural reforms.
Q: Does the economic forecast include Crimea?
Crimea’s portion in the country's GDP is small at 3% of the total. It has been a net recipient of funding from the central budget and its role in the economy is small. Given the difficulties in collecting data from the region, the Ukrainian Statistic Committee excludes Crimea from official statistics and has also adjusted historical data accordingly.
Q: In your view, how do you assess the current speed of reforms in Ukraine’s economy? What are the priority reforms in Ukraine?
The authorities have undertaken key reforms in several areas including: improving transparency and reducing corruption, reforming energy tariffs and social assistance, undertaking business deregulation, stabilizing the banking sector, etc. These are important steps but these are just the beginning. More needs to be done in these areas and in others.
In terms of priority, energy and banking sector reforms are critical while business deregulation comes a close third. Energy sector reforms are important because they will help contain fiscal deficit, reduce corruption, and improve energy efficiency and security. Banking sector reforms are important as a healthy system is essential for financing recovery. Business deregulation is important for removing impediments for private enterprise and growth. Cutting across all these areas is the urgent need to continue and accelerate the fight against corruption.
Q: In your view, do you see understanding of urgency and political will for reforms among the authorities, particularly the leadership?
The best way to judge commitment to reforms would be actual actions – not rhetoric. The authorities have undertaken a significant number of reforms including those supported by our DPLs but the remaining agenda is huge as the authorities try to deal with large macroeconomic imbalances that were accumulated in the past because of poor macroeconomic management and lack of structural reforms under an on-going conflict in the east that makes stabilization difficult. What is critical is that the authorities continue to resist the temptations of populism, particularly during a pre-election season, fight vested interests and stay focused on the needed reforms. It is equally important that the authorities demonstrate unity in their resolves and communicate clearly and with one voice the need for, and results of, reforms.
Q: What does Ukraine need to do to stabilize the country’s banking system?
The authorities have made significant progress during the past year in stabilizing the banking system and implementing needed reforms to create a healthier and more viable system. The NBU is focused on ensuring the adequate capital adequacy of the largest banks in the country, and resolving those that are unable to adequately recapitalize their banks. The NBU has also increased the quality of banking supervision and has closed 54 problematic banks since January, 2014. At the same time, the Deposit Guarantee Fund, DGF, has been strengthened to ensure that it has the capacity to ensure that a large majority of households are fully reimbursed in the case of bank failures
The authorities have also put in place a program to help resume sustainable financial intermediation in the medium to longer-term. The primary focus of this program is to decrease the level of related-party lending in the system. To this end, new legal and regulatory changes have been introduced that have greatly increased its ability to identify and increase the accountability of owners for violations, including criminal charges. The NBU will now use the revised legal and regulatory framework to conduct a review of the level of related-party lending in the banks operating in Ukraine, with the aim to reduce the levels in the overall banking system. In addition, measures are being taken to enhance supervision, increase coordination among financial safety net providers, and reduce the level of NPLs.
