Ukraine - Country assistance strategy public information notice

Report No. PIN44 Ukraine: CAS Public Information Notice World Bank Board Discusses Ukraine's Country Assistance Strategy On September 12, 2000, the World Bank's Executive Directors discussed the World Bank Group's Country Assistance Strategy for Ukraine covering the Period end- 2000 to mid-2003. Country Context Despite the great prospects that Ukraine promised at the beginning of the 1990s, and the undeniable successes in nation-building in a difficult environment, the period since independence was marked with disappointments from the economic and social points of view. Growth has returned to the country only this year, after a decade long decline in overall economic activity reduced GDP by some 60 percent below its 1991 value, pushed almost 25 percent of the population into poverty, and caused other social indicators to move in the wrong direction. The stabilization and economic reform program launched in the mid-1990s, supported by the Bank and the Fund, succeeded in controlling inflation, but macroeconomic environment remained fragile due to weak underlying fiscal fundamentals and the lack of structural reforms. These poor economic and social outcomes are due in part to the lack of pro- development institutions, and to the still limited, voice of civil society. Transaction costs remain very high because of anti-competitive practices and corruption; in addition, property rights have not been adequately defined or protected. The state apparatus lacks a strategic focus and continues to micro- manage the economy. In this environment, the logical choice is rent-seeking, thereby putting private productive investment at a disadvantage. Bank Group Strategy The current World Bank Group Country Assistance Strategy for Ukraine comes at a time of opportunity. Following his re-election last November, President Kuchma appointed a Prime Minister and a cabinet with strong pro-reform orientation. In addition, parliamentary factions coalesced into a pro-Presidential majority, which approved a strong budget for 2000 and endorsed the pro-reform Government reform program. Beyond solving short term financial issues, it has become increasingly clear that the problems faced by Ukraine are of a long-term nature, linked to the historic lack of pro-development institutions. To achieve environmentally sustainable economic growth and poverty reduction, Ukraine needs to face up to the challenges of ensuring good governance, transparency and accountability in the public sector; and developing inclusive, market-oriented institutions. The proposed strategy builds on the lessons learnt from the past Bank efforts to assist the economic and social transition in Ukraine during the 1990s. These lessons are: (a) True government ownership and adequate capacity to deliver reforms are crucial for the success of the program; (b) Disjoint sectoral adjustment operations are not well suited to address cross-sectoral institutional and governance issues, or prevent backtracking and reform reversals; and (c) Adequate institutional capacity in key government agencies and support of key stakeholders, including the parliament and the civil society, are needed to assure sustainability of reform initiatives. The proposed Country Assistance Strategy for Ukraine for the period FY01-03 will assist the implementation of the Government program by directly addressing the institution-building challenges faced by Ukraine both the demand side (civil society) and supply side (Government capacity). The strategy seeks to move Ukraine closer to European Union standards, fostering environmentally sustainable development. Priorities for Bank Assistance The proposed strategy for FY01-03 envisages IBRD lending of up to US$1.8 billion  for the three-year period, and a number of non-lending activities aimed at increasing the voice of civil society, enhancing pro-development institutions, and facilitating the attainment of results on the ground. The bulk of lending activities would materialize only if progress in meeting agreed benchmarks in better governance is verified. The main vehicle for this assistance would consist of a series of Programmatic Adjustment Lending operations. These would be based on a common three-year vision of progress in establishing better institutions. The operations will focus on cross-cutting issues of financial discipline, regulatory reform, protection of property rights, public sector accountability and social sustainability (inclusiveness). With satisfactory progress of the core reform program, sectoral investment/TA and adjustment operations will follow in critical sectors such as agriculture, health and education, environment, and municipal finance. If progress was not to occur, the program would be reduced to a low case focused on building demand for good institutions. Lending (of up to US$461 million) and non-lending activities would have to meet two crucial tests: First, they would have to demonstrably help civil society increase its voice for better government and social services provision. Second, they would have to be sufficiently shielded from possible paralysis at the center of government so as to stand a good chance of success---even under less-than-favorable conditions. Increased IFC Direct Investments. Complementing this approach, IFC will aggressively pursue investment operations in cooperation with international and Ukrainian private partners. These are more likely to arise as the business environment continues to improve. In addition, IFC will continue its current technical assistance activities. Selectivity and Partnerships. The program capitalizes on the Bank's comparative advantages and maximize synergies with other donors and international financial institutions. Accordingly, the strategy expands assistance to social sectors building on recent encouraging openings and the government's stated priorities. Likewise, the Bank will curtail investments in infrastructure or in small-scale energy plant rehabilitation, beyond completing projects in advanced stage of preparation. As the Bank reaches a better understanding of the incentive systems faced by public agents, it would support their review and modernization in a systemic way through lending operations. This strategy has been discussed with all partners in development and all stages of the CAS development process have been made public on the internet. - 2 -