Ukraine - Financial Sector Structural Adjustment Loan

 ICRR 11405 Report Number : ICRR11405 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 12/23/2002 PROJ ID : P040560 Appraisal Actual Project Name : Financial Sector Structural Project Costs 300 260 Adjustment Loan US$M ) (US$M) Country : Ukraine Loan/ Loan US$M ) 300 /Credit (US$M) 260 Sector (s): Board: FSP - Banking Cofinancing (83%), Central government US$M ) (US$M) administration (17%) L/C Number : L4391 Board Approval 98 FY ) (FY) Partners involved : Closing Date 12/31/1999 02/15/2001 Prepared by : Reviewed by : Group Manager : Group : S. Ramachandran Jorge Garcia-Garcia Kyle Peters OEDCR 2. Project Objectives and Components a. Objectives The FSSAL's objectives were to: 1. support the balance of payments and budget financing needs for 1998-99 2. strengthen the financial sector as one component for private sector development 3. mitigate the direct budgetary costs of financial sector reforms 4. provide a framework guiding technical assistance from other donors . b. Components The FSSAL was to be disbursed in three tranches : the first expected to be in March 1998, the second in December 1998, and the third in June 1999. The loan's three main components had several sub -components each. They were: 1. Improvements in banking laws 2. Improved banking regulations, including better accounting 3. Restructuring problem banks, including the large Savings Bank c. Comments on Project Cost, Financing and Dates The FSSAL was approved after the Russian defaults and followed two $ 300m Sector Adjustment Loans to Ukraine in 1996 (Agriculture and coal). The FSSAL accompanied the Fund's Stand -By Arrangement and the planned Extended Fund Facility and was supported by the technical assistance included in the second Enterprise Development Adjustment Loan. A Financial Services Project was expected to follow the FSSAL, but this did not happen. The financial sector reforms were based on sector work (the Financial Sector Review) completed in 1995, and updated subsequently. 3. Achievement of Relevant Objectives: The FSSAL attained its objectives . The Bank's $260m disbursement (after the third tranche was reduced ) helped the country maintain macro-economic stability. The first tranche was disbursed in September 1998 and the second in September 1999 (the associated conditions were demanding ), but the third tranche was delayed until 2001 and restructured because three of the six associated conditions were not met . One was the law on banking (the other two related to deposit insurance and the Savings Bank restructuring where there were no substantive disagreements with the Bank), which was almost ready and was considered crucial to resolve Bank Ukraine's situation . Since preparations had begun on a Programmatic Adjustment Loan, the Board approved the reduction of the FSSAL's third tranche from $100m to $60, and move the conditions on deposit insurance and the Savings Bank to the PAL that was approved in spring 2001. Specifically, by the loan's components, 1. The central bank (NBU) law passed in mid-1999 confirmed its powers, although the NBU's supervisory council could compromise its autonomy (other articles mitigate the danger in the Bank's view ). The banking law was passed at the end of 2000 and although the deposit insurance law was not passed before the loan closed, it was approved in September 2001. A Presidential Decree established a Deposit Insurance Fund in 1998, and the law of September 2001 (after the FSAL closed) will govern its operations. 2. International accounting standards were introduced in all banks, and loan classification and provisioning have improved. Banking supervision is headed now by an NBU Vice -Governor, and USAID and EU-Tacis funded technical assistance has helped improve on -site examination. All commercial banks are examined annually under the CAMEL system. Licensing criteria have improved . 3. The agricultural bank (Bank Ukraine) was not in compliance and is being liquidated, and Savings Bank is operating under a modified forbearance regime . The NBU's large bank unit is working with the Savings Bank managers to rationalize its branch network and to resolve bad debts . 4. Significant Outcomes/Impacts: Banks are being put on a sound footing, and the reforms are headed in the right direction . The loan helped establish the central bank as an effective banking regulator, and improvements in the commercial banks are well underway . 5. Significant Shortcomings (including non-compliance with safeguard policies): The poor coordination between the central bank and other government bodies wasted efforts, and the Financial Sector Policy Board was established at the end of 2000 to avoid this. The Savings Bank restructuring has been disappointing partly because the government still sits on the bank's supervisory council, thereby politicizing some decisions. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Highly Likely Highly Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE: NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. 7. Lessons of Broad Applicability: 1 Loans based on sound sector work are more likely to succeed even in a difficult economic and political environment. 2. The shared view within the government is needed for reforms to succeed . 8. Assessment Recommended? Yes No 9. Comments on Quality of ICR: An excellent description of the situation in banks and how the loan dealt with it . It would have been helpful to have a short description of the macro -economic outcomes, especially since financing the balance of payments and budget deficit was an objective of the loan .