Ukraine Needs Faster Growth of 4 Percent or More

Ukraine Needs Faster Growth of 4 Percent or More

Ukraine Needs Faster Growth of 4 Percent or More

The FINANCIAL -- Ukraine’s economy grew by 2.4 percent in the first half of 2017, following growth of 2.3 percent in 2016, according to the World Bank’s latest Ukraine Economic Update.

While the resumption of growth is a positive development, this is a weak recovery since it follows a cumulative 16 percent contraction in 2014 and 2015.

“2 percent is not enough,” said Satu Kahkonen, World Bank Country Director for Belarus, Moldova and Ukraine. “Faster growth at 4 percent or more is needed to improve living standards for the population that continues to hurt from the economic crisis of 2014-2015. This will require progress on an ambitious package of reforms, including in land markets, the financial sector, anticorruption, and privatization, to stimulate investment and productivity.”

Economic growth is projected at 2 percent in 2017, given the unfinished structural reform agenda.

The fiscal deficit is projected to widen to 3.5 percent of GDP in 2017 due to higher public sector wages and spending on social programs. Mitigating macroeconomic vulnerabilities by reducing the fiscal deficit to 2.5 percent of GDP in 2018 will require adopting pension reform, improving targeting of housing utility subsidies, and implementing education and health reform in a manner that improves the quality of services while reducing the wage bill.

Ukraine needs a systematic fiscal consolidation effort, or it will have to rely on ad hoc revenue measures and expenditure cuts, which would undermine debt sustainability, growth prospects, and the quality of social services.

Reforming land markets for agricultural growth

According to the World Bank’s Special Focus Note on reforming land markets, the moratorium on agricultural land sales, along with weaknesses in the transparency of land rights and transactions, are major impediments to attracting investment and unlocking productivity in Ukraine’s agriculture sector.

Without the ability to purchase land, farmers have a lower incentive to undertake productivity enhancing investments, and also cannot use land as collateral to secure financing from banks. Small and medium producers are particularly affected by the lack of access to financing.

Investment in agriculture has also been held back by the lack of transparency. This includes errors in the cadaster and registry, the lack of registration of sales and lease prices, and low registration of state land.

Land reform is critical to improve living standards for the Ukrainian people, by driving higher economic growth and incomes for the population, and improving the returns on land for millions of small landholders.

The Government has taken important first steps by declaring land reform a priority, beginning work on improving transparency, exploring mechanisms to facilitate access to finance for farmers, and discussing design principles of a draft land turnover law with stakeholders.

It is critical that the work on strengthening transparency and access to finance is completed and that a draft land turnover law is expeditiously submitted to Parliament for approval so that the moratorium can be lifted on January 1, 2018.

Background

Since May 2014, the World Bank Group has provided a total of more than US$5 billion to Ukraine (including 4 development policy loans, 7 investment operations and 1 guarantee) from the International Bank for Reconstruction and Development (IBRD).

The World Bank’s current investment project portfolio in Ukraine amounts to about US$2.5 billion. Investments support improving basic public services that directly benefit ordinary people in areas such as water supply, sanitation, heating, power, roads, social protection and healthcare, as well as private sector development. Since Ukraine joined the World Bank in 1992, the Bank’s commitments to the country have totaled over US$12 billion in about 70 projects and programs.