Statement by Joaquim Carvalho at the Board meeting of May 21, 1998

International Bank for Reconstruction and Development 87304 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-224 May 20, 1998 Board Meeting of May 21, 1998 Statement by Jaoquim Carvalho Ukraine: Country Assistance Strategy- progress Report We are grateful to staff for this candid assessment of the implementation of the Bank Group’s Country Assistance Strategy for Ukraine. The brevity of the progress report has not denied us valuable insight into recent developments in the economy since we discussed the full CAS at the Board in June 1996. On the whole, we are pleased to note that the country has made substantial progress in the areas of macroeconomic stabilization, privatization, and trade liberalization. Nevertheless, the Ukrainian authorities still face the challenge of poverty reduction and sustainable economic growth. The progress made by the government in implementing its ambitious mass privatization program is impressive, with more than 8,500 medium- sized and large enterprises transferring 70 percent of their shares to private owners. With the Bank’s assistance, the government has also put in place new banking regulations and restructured the agriculture sector, while also reviewing the legal and regulatory framework with a view to reducing the barriers to private sector development. We welcome the increase in IFC activity in Ukraine, especially its assistance in the design and implementation of the country’s privatization program, and its post-privatization support to the newly privatized enterprises. The document rightly recognizes the need for a sound banking system that is capable of mobilizing and allocating financial resources more efficiently in order to develop a vibrant private sector. We, therefore, commend the Bank Group’s role in the development of Ukraine’s financial sector. However, the government’s performance record in the social sector and social assistance has not been encouraging. We are concerned that at a time when Ukrainians are experiencing an increase in poverty levels and a deterioration in the quality of health and education, budgetary allocations to these sectors are shrinking as a result of the current difficult fiscal position. We would like to see the Bank working more closely with the government to address this issue, especially in designing appropriate mechanisms that will ensure the effective provision of social services. The importance of education, health and social safety nets for sustainable development and economic growth cannot be overstated. In this connection, we welcome the proposed Social Protection Support Loan, which is expected to assist the agencies involved in the provision of services to the poor.  2 With respect to the restructuring of the public sector, a great deal of progress has been made by the Bank in helping Ukraine improve its institutional capacity in the area of public finance management and in supporting reforms being undertaken in the energy and infrastructure sectors. However, the country’s capacity limitations cannot be addressed effectively through one or two projects alone. The Bank should, therefore, continue its assistance in this area through a more comprehensive, long-term approach. Institutional reform and public education in market economies are an important means of building consensus for reform, especially in public sector management, deregulation and legal reform. We, therefore, welcome the high level of non-lending services provided by the Bank and the intensive policy dialogue it has maintained with the government and civil society in order to mobilize support for the economic reform process. In particular, EDI has played an active role in helping government functionaries and other stakeholders understand market economies. On portfolio performance, we are pleased to note the improvement in the overall performance of the Bank’s portfolio in Ukraine. There is, however, the need to address the weak institutional capacity, especially in the areas of Bank policies and procurement procedures. More importantly, efforts should be made to ensure government ownership of the projects. The Resident Mission should also be given more responsibility in the area of supervision and monitoring of project implementation. Finally, we endorse the Bank’s assistance program for the next one-year, before the preparation of the full CAS. We also support the Kiev District Heating Improvement project accompanying this CAS, which aims to increase efficiency in the supply of energy. We wish the Ukrainian authorities success in their second generation of reforms as the country moves towards a market economy.