Statement by Michael Marek at the Board meeting of May 21, 1998

International Bank for Reconstruction and Development 87309 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-228 May 21, 1998 Board Meeting of May 21, 1998 Statement by Michael Marek UKRAINE: Country Assistance Strategy – Progress Report 1. We strongly support the Bank's interim strategy for this year of basing lending decisions on credible efforts by Ukraine to address fiscal problems and accelerate structural reforms. It is important that the GOU understand that the Bank is prepared to support Ukrainian reform efforts with substantial amounts of assistance but only if Ukraine implements the needed reform measures. While many Bank loans to Ukraine remain stalled, we firmly believe the solution is not to weaken conditionality. Growth-promoting reform in the face of continued economic contraction is increasingly urgent. 2. The target amount - $800 million to $1 billion annually - for Bank support under the scenario of major progress on reform appears appropriate in light of Ukraine's need for structural reform assistance. While the Bank correctly highlights the risks of such lending given Ukraine's fiscal difficulties and political environment, the potential rewards resulting from successful implementation of broad IMF and Bank programs are also great. 3. Given Ukraine's weak track record in using World Bank assistance, we welcome the Bank's emphasis on front-loading of key policy reforms for adjustment lending. This up-front conditionality, and the Bank's linkage to the IMF program, will help mitigate risks. We encourage the Bank to continue to make explicit to the GOU all of the steps needed to activate individual Bank adjustment loans. 4. We support the Bank's priorities for structural reforms - fiscal reform, public sector restructuring, deregulation, financial sector reform, privatization, energy and agriculture sector reforms, and social sector reforms. While this is a lengthy list of priority items, each can make a critical contribution to Ukraine's economy, and it appears that the Bank has the resources to make a difference in  2 each of these assuming actions taken are commensurate with the assistance. 5. We have a few questions and comments about specific elements of the CAS program. We agree with the CAS report’s emphasis on public sector restructuring, which is addressed in the Public Sector Adjustment loan and Public Resource Management loan. We would be interested in hearing more details from staff about the proposed Adaptable Program Loan, which the Bank considers to be "critical" to the success of the public sector program. The two components of this loan mentioned in the document -- tax administration and statistics functions -- are important for GOU institution building. Does the Bank propose a large technical assistance program in these areas? 6. We also welcome the Bank's support for deregulation and small business development, which we view as important steps to advance sustainable growth. The report (paragraph 14) indicates that the Bank's PARL, PRNE, and EDAL 11 all include measures to support these efforts. Could staff specify how these loans will support deregulation policies? What are the prospects for Rada approval of the pre-export guarantee facility and the commercial sea-launch guarantee? 7. Concerning financial sector reform, the CAS report (paragraph 12) implies that the new central bank law is still working its way through the Rada. Is this correct? We understood that the draft law was mired in the Rada and that the Bank and NBU were not pressing for passage because it now includes some debilitating clauses. Will the FSAL succeed without passage of an adequate NBU law? 8. On agriculture, staff notes the limited progress in such important areas as land reform and privatization. Does the current Agriculture SECAL include appropriate conditions to advance reforms in these areas? We have continued to hear complaints from Western companies about local authorities commandeering grain as payment for loans for inputs. Does the Bank plan other programs to help address such problems and other remaining agriculture reform issues? We expect the Bank to work with the GOU on an anti-corruption strategy, as corruption undermines economic efficiency and inhibits private sector investment. 9. On the energy sector, what progress has been made on implementing the financial recovery plan, which would allow the electricity market loan and other power sector loans to move forward? 10. Finally, we commend staff for a credible and prudent interim strategy and agree with the conclusion that Ukraine presents an  3 opportunity for the Bank to be proactive, if there is demonstrated action on implementing reforms.