Ukraine declared its independence from the Soviet Union in August 1991. Its land mass is the largest in Europe after the European part of Russia, and its population of 52 million ranks fourth in Europe. The present administrative structure of the country comprises 24 regions (oblasts). In addition, the Crimea, which became part of Soviet Ukraine in 1954, is an autonomous republic. Kiev, the capital, is the largest Ukrainian city with 3 million inhabitants. About 68 percent of Ukrainians live in urban areas. Ukraine has a well educated, highly skilled labor force. Its soil is very rich with agriculture accounting for about 20 percent of GDP. As the "bread basket" of the former Soviet Union (FSU), Ukraine accounted for about one-quarter of Soviet grain production, one-fifth of its meat and dairy output, and more than one-half of its sugarbeet production. Ukraine is also endowed with a good mineral resource base (coal and iron) and diversified industries (a! roun d 46 percent of GDP). Moreover, Ukraine has a fairly well developed infrastructure which provides a good basis for growth.
GNP per capita was estimated at US$1,632 in 1995, down from US$2,636 in 1991. However, these official figures may overstate the fall in output since the informal economy has been expanding beyond the reach of government regulations and taxes.
Ukraine’s economic conditions, already difficult at the time of independence, worsened dramatically until mid-1994. The break up of the Soviet Union implied a huge terms of trade loss for Ukraine, as it faced large price increases for its energy imports. The value of imports of energy products rose from around 10 percent of total imports to 44 percent of total imports in 1994. This import shock complicated the already difficult task of transition. Inflation, which had reached unprecedented levels in the past few years was at a peak of 4,500 percent in 1993--the highest for a country not at war.
In July 1994, former prime minister and state enterprise manager Leonid Kuchma was elected President of Ukraine, and a new team of reformers he appointed drafted a comprehensive economic reform program. In October 1994, with the parliament’s backing, Ukraine began to lay the foundations for macroeconomic stabilization and structural reforms, supported by the World Bank and the International Monetary Fund's (IMF) Systemic Transformation Facility. Under the government’s program, fiscal policy has been tightened to prevent the cash deficit from exceeding 3.5 percent of GDP. Monetary policy has also been tighter in order to reduce inflation and to increase foreign reserves by about US$600 million.
On the structural reform front, the government took several bold actions to liberalize domestic prices, and foreign exchange and trade regimes. It lifted most price controls, unified the exchange rate, eliminated most export quotas, reduced subsidies on bread and on public utilities sharply, and adjusted imported energy prices to full cost recovery levels.
The pace of privatization, which had been slow until 1995, has been accelerated since. To facilitate privatization, the government has simplified procedures for mass privatization, launched an extensive public information campaign, and initiated the distribution of paper certificates. Financial sector reform, which is critical to enforcing financial discipline and efficient credit allocation, is also being initiated.
The reforms’ initial results are very encouraging. Inflation has fallen sharply, from monthly rates of nearly 20 percent in early 1995 to less than 3 percent in April 1996. The impact of trade liberalization on export performance has started to be felt with the nearly 20 percent rise in the volume of exports to Western markets in 1995, which more than offset the fall in trade with other republics of the FSU. However, overall economic activity is still declining, although at a slower rate. After falling by more than 23 percent in 1994, real GDP dropped 12 percent in 1995 and 10 percent (on an annual basis) in the first quarter of 1996. Again, the data does not account for the expansion of the informal sector, which is estimated at 40 percent of the overall economy.
The government is aware that a strong reform program needs to be sustained to achieve economic growth and poverty reduction. To achieve these goals, the government’s latest reform agenda contains the following four key elements: promoting efficient private sector activity; ensuring the social sustainability of transition; restructuring the public sector and state regulation mechanisms; and ensuring sustainable development in keeping with the environment.
The government is committed to an ambitious program of mass privatization of medium- and large-scale enterprises and now plans to have a cumulative total of 5,000 enterprises privatized with 70 percent private shareholding by early 1997. In addition, the government took pioneering action during 1995 to create an adequate legal and institutional structure for capital markets operation and supervision with the creation of a securities and stock market commission. Banking sector reforms were also undertaken. In order to encourage the growth of commercial banks, the former state banks were corporatized and partially privatized, and the tax burden on banks was reduced to 30 percent of profits, same as for enterprises. Also bank accounting systems are being modernized.
In addition, the government is also moving toward providing more effective social protection. It has recently introduced a means-tested housing subsidy and is studying options for reforming the pension system as well as undertaking reforms in the education and health sectors.
Nowhere is changing the role of the state as crucial as in the energy sector. The government’s initiatives include promoting high priority investments that increase the security and reliability of energy supplies in a cost-effective manner. The coal sector provides one-third of the country’s energy needs and employs nearly a million workers; however, it is in a deep crisis with coal output falling by about 50 percent between 1990 and 1995. The government has adopted a comprehensive reform program for the sector which would include liberalizing coal markets, establishing new corporatized entities by combining economically viable coal mines; and providing social protection to displaced workers due to the closure of inefficient mines.
The government is also deeply concerned about the environment. It has taken important steps to address nuclear safety, industrial and municipal pollution, water quality and natural resource management.
Ukraine and the World Bank
Since Ukraine joined the Bank in September 1992, the Bank has been helping to facilitate the country’s transition to a market-based economy. The government's stabilization program has been supported by the Bank through lending, policy dialogue, and assistance in resource mobilization and aid coordination. Bank lending is designed to help expand the role of the private sector by fostering privatization, establishing a prosperous business environment, developing the financial sector, and mobilizing resources for the private sector.
In June 1993, a US$27 million loan to strengthen government institutions in support of economic reforms was the first Bank operation in Ukraine. In December 1994, the Bank approved a US$500 million rehabilitation loan in support of President Kuchma’s reform program to help stabilize and restore growth to the Ukrainian economy.
In March 1995, the Bank organized the first Consultative Group for Ukraine in Paris generating broad-based support from the international community for Ukraine’s reform efforts.
Since that time, the Bank’s program in Ukraine has been steadily expanded. Bank projects in Ukraine include a US$114 million loan approved in April 1995 to help rehabilitate hydropower plants and improve power system control in the country, and a US$32 million loan approved in May 1995 to improve agricultural productivity and boost agricultural exports through private production of high quality commercial seed.
In March 1996, the Bank approved US$17 million loan for a Housing Project that will help develop the housing market and meet people’s housing needs. In May 1996, a US$15.8 million was approved for a Coal Pilot Project aimed at helping to restructure Ukraine’s inefficient coal industry while mitigating the social and environmental consequences arising from mine closures. In June 1996, the Bank approved a US$310 million Enterprise Development Adjustment Loan to support trade and price liberalization, privatization, capital markets development and post-privatization restructuring programs.
More recently, in September 1996, a US$2.6 million loan was approved to help finance a Social Protection Support Project; and in October 1996, a US$317 million loan in support of a Electricity Market Development Project and a US$300 million Agricultural Sector Adjustment Loan were also approved.
To date, Bank commitments total over US$1.6 billion for 10 projects. October 1996
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