Statement by Ruth Bachmayer at the meeting of September 12, 2000

87460 International Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS2000-336 September 11, 2000 07:20:58 PM Statement by Ruth Bachmayer Date of Meeting: September 12, 2000 Ukraine : Country Assistance Strategy 1. I congratulate management and the team for this candid analysis of the past economic, structural and social developments in Ukraine. This experience and knowledge provide the most realistic and sensible starting point for the design of the Bank’s strategy to assist the country to overcome the legacy of the “lost decade” and to establish a solid basis for social and economic progress in the years ahead. Ukraine’s disappointing experience so far with its transition process calls for full awareness of what went wrong. Based on this knowledge, an innovative strategy must be built, to break the vicious circle of systemic weaknesses and to bring about a fresh start for the country. This is in my view, what this CAS document is very much about. The bottom- up-pressure low case program aims to strengthen civil society as an important driver of development; the base case program which builds upon bottom-up developments aims to create and stabilize the public sector system. This is an interesting and meaningful approach under the given social and economic circumstances in Ukraine. 2. The Ukraine CAS has also implications which go far beyond the country-specific case. With its programmatic lending approach it directly relates, in my view, to our efforts to find appropriate strategies and instruments for the so-called middle income countries. It therefore deserves much attention. 3. The document acknowledges implicitly that Bank advice to the GoU had not been the best for the last couple of years. With hindsight it is difficult to fully understand why since 1997 $ 1bn. had been disbursed, knowing that capacities, institutions and governance were obviously too weak to make always proper use of these financial flows. I, therefore, very much appreciate the basic concept of this new CAS to enter more cautiously and less generously in the next CAS period and to start with supporting the systemic development of a conscious and more pro-active basis in the society. One of the most important lessons to draw from Ukraine’s past development and its relationship with the Bank is, however, that all lending has to have an extremely strong linkage to measurable performance and that it must be sure that all progress achieved is irreversible. 4. The base-case scenario which provides the real way-out option is heavily based on programmatic adjustment lending (PAL). Given the experience with the country so far, as very candidly mentioned and taken account of in the chapter on risks, it is very challenging to define PAL performance benchmarks which reliably reflect government performance with respect to results on the ground and their long-term sustainability. Although I acknowledge that adjustment-type lending may be the strongest and most appropriate incentive to pull the country out of its comprehensive difficulties, one always has to keep in mind that Ukraine is a country with a poor track record of governance, implementation and institutional capacities. On the other hand, the Bank has to offer Ukraine a bold and attractive package to support policy and institutional reform. At the same time it has to signal its strong insistence on the fulfillment of agreed conditions and benchmarks. However, in my view, some of the benchmarks related to programmatic adjustment lending (Annex B9) may be rather soft, because "qualitative" by nature, rather than quantitative. We hope that especially survey results do not leave too much leeway for interpretation (or even bargaining?). From the CAS document it is also not clear to me, what the minimum conditions for each of the PAL tranches will be. As the result of earlier CAS periods show, reforms only of easier areas had been implemented. This would be a wrong dynamic for PALs. We would have liked to see a clearer and more reliable picture in Annex 9 on what the Bank requires from the GoU for each consecutive loan tranche. 5. In view of the more flexible PAL approach, the fact of fungibility, financial management and partner coordination deserve special attention. I very much appreciate the Bank’s attention on this issue: what is described on pages 29 and 30 about upgrading of necessary capacities, setting up a tracking mechanism producing a public expenditure review and coordinating with other donors are key prerequisites for making programmatic lending work effectively. 6. Coming to more specific issues which are dealt with in the CAS: a. Agriculture: I assume that the incidence of absolute poverty is particularly high in rural areas and that, furthermore, a large part of the population depends on agriculture. The CAS contains little on directly poverty-related activities and it starts with rural finance and farm restructuring only in 2003 and only under the base case scenario. In our view, this part of the CAS should be implemented as early as possible, not least for food security reasons. The planned enhancement of property rights in agriculture through abolition of Kolhozes has to be preceded or accompanied by the necessary legislation and administration and implemented under full transparency. b. Private sector development: The improvement of the business environment plays a very important role in development. Like a functioning civil society, the private sector exerts bottom-up pressure on governments to improve legal, regulatory, institutional, financial market and labor market conditions. Therefore, improvement of the framework conditions should be one of the priorities of the CAS, not least to complement respective IFC on the ground efforts. Many of the reform steps are related to the base case PAL, a scenario the occurance of which may not materialize. We encourage Management to start to work with the authorities as early as possible on PSD related reforms. c. Pension reform: The introduction of a three-pillar pension system is announced in Annex 9. Although I am convinced that, like in almost all transition countries this issue is of great importance for social and budgetary reasons, I wonder whether the financial market is developed enough and the degree of reliability and confidence in it high enough to reflect on a three pillar system. 7. In conclusion, we have the impression from the CAS document that the support concept for the next three years is well reflected and innovative and that it takes into account the less successful experience of the past. We appreciate the strong collaboration with other donors who together seem to provide a well coordinated program to support Ukraine. The country's positive development and economic growth would also have a very beneficial effect on the greater region which Ukraine is part of. We wish Ukraine every success in taking advantage of this window of opportunity.