Statement by Ilkka Niemi at the meeting of May 20, 1999

International Bank for Reconstruction and Development International Development Association 87389 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-155 May 19, 1999 Statement by Ilkka Niemi Date of Meeting: May 20, 1999 Ukraine: Country Assistance Strategy Progress Report We welcome the opportunity to discuss the Progress Report on Ukraine's Country Assistance strategy. We commend staff for the comprehensive and candid assessment of the country developments since the last progress report in 1998. The Ukraine CAS Progress Report gives us a thorough and accurate picture of the situation in the country. The CAR findings also clearly prove that the implementation of the Country Assistance Strategy takes place in a difficult political and economic environment: a slow pace of reform, negative growth and increasing poverty. Progress has been achieved in certain areas. Macroeconomic stabilization and elimination of hyperinflation created necessary preconditions for an introduction of Ukraine's own currency in 1996, and up to the regional crisis a relatively stable exchange rate was maintained. But, the current economic situation- influenced to a large extent by the regional crisis, large fiscal imbalances and high debt service payments- remains fragile. Weak implementation capacity and lack of commitment to reforms have had a negative impact on development outcomes. The Bank's lending program should therefore continue to have triggers for macroeconomic stability, as well as for the status of the EFF program. Given the high share of "projects at risk" and the possible financial and political risks, we share the view that the Bank at this point-should exercise extreme caution in increasing its exposure in Ukraine. We agree that the role of ESW is important in the entire work of the Bank in Ukraine and that it should be systematically addressed as soon as possible. It is indeed true that the privatization program has been one of the successes of the economic reform in Ukraine. But, as also noted in the document, there are large deficiencies in the speed and scope of implementation, as well as quality improvements of management. As to progress with the transition to a market economy, fundamental market oriented principles have T:oj s document has a restricted distribution and may be used by recipients only in th.~ ~ ;>.>r7•]rTr,:lnce , .. - . official duties. Its contents may not other.x.:ise be disclosed \\ o f t hetr :·:h,~·t::: I · · ·~~~ B::mk authorization. generally not materialized, and a business-friendly environment for foreign investments does not yet exist. As a result, the per capita figure for FDI is only US$ 25 - far behind the other transition countries in the ECA region. Much more should be done in this area. Despite significant efforts, the social sectors are not part of the Bank's program, e.g., gender and age discrimination on the labor market remain issues of concern. Poverty has neither been alleviated nor reduced by the state welfare systems. Although institutional development has been achieved in certain areas, broader public administration reform measures are obviously very much needed. The difficult situation in Ukraine is not likely to change substantially in the foreseeable future. Signs of true reform commitment are presently not there.