Statement by Pieter Stek at the meeting of May 20, 1999

' ! 87385 ,I Intem::nionJ.l Fina. nce Corroracio;: ?\.L!Itilatcral Investment GuJro.ntcc .-\?er C\ FOR OFFICIAL l,SE O'iLY EDS99-151 May 19, 1999 Statement by Pieter Stek, Executive Director Date of Meeting: May 20, 1999 Ukraine - Country Assistance Strategy Progress Report As I am travelling, I would like to share my Ukrainian Authorities' view with you as well as my own perspective on the proposed Country Assistance Strategy Progress report for Ukraine in writing. Let me stress that my Ukrainian authorities highly praise the Bank as a reliable partner in their development efforts. Through all the period since accession, Ukraine has relied on the Bank as a source of knowledge and institution-building and as a financial partner. My authorities appreciate the candid diagnosis of the economic situation in Ukraine as well as the open discussion of the problems that the country faces in the short and medium term. The recent innovative approach to the preparation of the Country Economic Memorandum, which was done largely by Ukrainian specialists, gave a significant boost to the country's sense of" ownership" of the Bank's program. Thorough analysis of the "Macroeconomic Prospects" chapter of the CAS PR document not only gave the Government food for thought, but also suggested a set of immediate measures to embrace "Reform Scenario" as the only acceptable one. The choice of the "Reform" scenario has been evidenced by reform measures already undertaken or planned that are consistent with the Bank's program, as well as with the IMF EFF program. Ukraine remains committed to their implementation and expects timely financial support for its reform efforts in return. The Ukrainian Government is concerned by the delays of the Bank's project effectiveness due to the cumbersome institutional arrangements between legislative and executive branches. It uses all available political instruments to resolve this problem and the recently approved Framework agreement for the effectiveness of World Bank Grants is one of the examples of the work that is being done. The Ukrainian Government shares the frustration of not reaching the goal of the 1996 CAS - -------------·- l -~: . ... ,, ' ,-"'\ _;,,_ -- the achievement of productive growth and reduction of poverty. The previous year was supposed to be the first year of growth for the Ukrainian economy. The first 6 months of 1998 have shown a degree of stabilization of the real sector of the economy, including some increase of GOP and industrial production. But the world financial crisis and developments in Russia have undermined this and put enormous strain on the fragile financial situation in Ukraine. The national currency- hryvnya, was devalued by 5.4% in August and 51.1% in September of 1998. Only due to the efforts of the Government and the National Bank of Ukraine, with support from the IMF and the World Bank, was Ukraine able to neutralize the worst damaging effects of the crisis. Structural reforms are at the core of the Government's agenda and were supported by the 1996 CAS. Recently significant progress has been made in some of the structural reforms, including the raising of communal tariffs for heating, water supply, sewage, rent, and public transportation to full cost recovery levels. The privatization program, although impeded by political difficulties, is proceeding as scheduled. From 1992 to 1999 the overall number of privatized public and communal property units exceeded 62 300. The non public sector now employs more than 3.7 million people (24.4% of total labor force). Non public enterprises in the industry outnumber the public ones by the factor of 2. 7 and for the volume of production by 1. 7 times. In cooperation with the World Bank, Ukraine has identified additional steps to expedite progress with large-scale privatization, to fully privatize (100 percent of shares) additional grain elevators, and to reduce substantially the licensing requirements for enterprises. The Ukrainian Authorities are fully aware of the obstacles that the remnants of the previous bureaucratic system present. That is why recent joint work with the Bank, as well as the IMF program, is aimed at the administrative reform and deregulation of the economy. In the area of public administration reform, plans for restructuring the Ministry of Finance and Ministry of Economy have been developed with the assistance of the World Bank and other donor agencies. A seminar, with World Bank participation, will be held within the Ministry of Finance to explain the objectives and modalities of the reforms and further seminars are intended. In addition, the Government has formulated a timetable for the reform of the Apparat of the Cabinet of Ministers. Ukraine will continue to work with the World Bank to develop further the reform strategy in this area and counts on support through the planned adjustment operations. Despite political and institutional difficulties the Government has continued with the reform of the energy sector. Althoug~ the results might be considered mixed, this sector presents an example of productive cooperation of the Government, IFI's and bilateral donors. Ukraine has carried out reforms in the coal and electricity sectors and collection rates for electricity have improved recently following a decision to cut off non-paying consumers. The Government continues to examine proposals for expanding the role of the private sector in the activities of the energy sector. A number of initiatives are also underway to enhance the transparency of operations, specifically via the publication of gas auction results and other transactions in the sector. It is clear that, without external support, especially without Bank financial assistance, the reforms in the sector would have been much slower. The Ukrainian Government remains concerned about the social impact of the prolonged existence of a large stock of arrears of social payments. Within the framework of the IMF program the Government is now planning to implement a complex of fiscal measures that will permit a more rapid clearance of these arrears. As is rightly stated in the CAS Progress Report, largely due to the external shocks, the pressures on Ukraine's financial sector have increased. Ukraine is closely working with the Bank and the IMF to improve the overall financial sector framework. With their assistance, formal restructuring programs including time-bound performance objectives have been developed for each of the seven large banks for which diagnostic studies were conducted. Over the next few months the National Bank of Ukraine will be taking a number of steps, consistent with the recommendations of the IMF and the World Bank, to strengthen existing prudential regulations and to enhance the capacity of the NBU to implement its supervisory responsibilities. The NBU will persist in its efforts to gain parliamentary approval of the NBU Law that will provide for implementation of prudent monetary policies. Furthermore, the draft Law on Banks and Banking Activity will shortly be submitted to the Verkhovna Rada. The external environment Ukraine is facing remains difficult. The economy continues to suffer from the impact of generally weak commodity prices for the country's major exports, particularly metals, while demand in the region remains depressed, due to the continuing difficulties in Russia. More recently, the crisis in Kosovo has resulted in a disruption to shipping services on the Danube and forced the diversion of trade to alternative transportation corridors. According to Government estimates Ukraine is losing 1.2 million dollars every day because of the conflict. This year Ukraine faces many challenges. The market reform agenda will be put to the test at the October Presidential elections. Let me express the hope that the new CAS for Ukraine which is expected in FYOO will build upon lessons learned and expand World Bank cooperation with Ukraine. Ukraine on its part agrees that significant progress needs to be achieved in the areas of administrative reform, enterprise deregulation and large-scale privatization. In my view a greater sense of shared responsibility between all branches of the Government is a precondition for fundamental progress.