Reforms in exchange for financial stability

The new Ukrainian government is barraged with reminders about the necessity of structural reforms in the economy. At the close of the last week, one of Ukraine’s principal international financial partners, the World Bank, also had its say.

In their recommendations on the development of the economy, the bank’s experts remarked that the reforms were necessary to overcome the results of the world financial crisis as soon as possible and to remove the structural weaknesses of the Ukrainian economy.

More details about which factors will become defining for Ukraine’s economic well-being in 2010, and how we can reinforce the potentially strong aspects of the domestic economy, were disclosed by Martin RAISER, World Bank Country Director for Ukraine, Belarus, and Moldova, in an interview he has gi-ven to The Day.

Some experts believe that the new economic crisis is unavoidable. When do you think the second wave of the financial trouble is due in Ukraine?

“Our economists maintain that in 2010, the economic growth in the world will make 2.7 percent of GDP, and in 2011, 3.2 percent. However, the growth index of the world economy is very unevenly distributed in different regions of the planet. Thus, in Europe and central Asia (where Ukraine also belongs. – Author), the expected rates of economic growth are the slowest. Yet we hope that in 2010, Ukraine will see the resumption of the economic growth.”

Which factors will become defining for the development of the Ukrainian economy in 2010?

“The main factor, in my opinion, will lie in the resoluteness and depth of the reforms implemented by the government. The world economy will, too, influence the recovery of the Ukrainian one. Yet the decisive role will still be played by the domestic factor.”

What is your economic forecast for Ukraine for this year?

“The World Bank proceeds from the budget in making forecasts. However, Ukraine has only now started debating this issue.”

During the financial crisis, the management of economy called for tough, fast, and radical approaches. What methods should a government be furnished with in order to revive a post-crisis economy?

“We recommend the government to focus on three main priorities for the reconstruction of the post-crisis economy. The first is a realistic budget. The second is a clear and articulate message to the investors, to the effect that Ukraine is going to move towards the improvement of its investment climate. And the third one is the completion of restructuring of the banking sector.”

The nation’s further economic well-being will greatly depend on the continued financial cooperation with international financial organizations. The other day, Ukraine’s Prime Minister Mykola Azarov declared that he would propose to the World Bank to review the conditions of our cooperation. What do you think he meant?

“We used to quite fruitfully cooperate with Azarov when he was the World Bank executive for Ukraine (in Yanukovych’s government). At that time, we had good cooperation, just like with the rest of the governments. We hope it will continue.

“I would like to remind you that the World Bank has an entire toolkit for cooperation with Ukraine. The first of the tools is budget support via policy development loans. The second is expert advice and recommendations, and the third one, investment loans for infrastructure projects.

“We hope that with the advent of the new administration, the efficacy of the use of financial resources, allocated by the Bank for investment projects, will increase. Now, there are many investment projects financed by the World Bank where only a proportion of the funds is being put to use.”

What are the figures?

“A World Bank loan is normally given for a term of five years. A successful realization of a project requires that 20 percent of the allotted funds be disbursed yearly. However, at present, virtually none of the investment projects in Ukraine is doing that. We expect that in 2010, no more than 10 to 15 percent of the funds for investment projects will be drawn.”

Is the World Bank prepared to grant Ukraine funds to cover the budget deficit?

“It is too early to go into concrete detail. However, I could make some comment already at this stage. The World Bank is not going to grant any money for budget support, unless Ukraine renews cooperation with the IMF. Besides, development policy loans are allotted for economic reforms.

“If the World Bank sees any real progress in economic reform, it will guarantee financial support. That is to say, the World Bank will grant budget support, provided there is some progress in the energy, fiscal, and banking spheres, and in state purchases.”

The Ukrainian economy is marked by many monopolies, and the crisis only made them stronger. Can such a system qualify as a market economy?

“Ukraine is still in the process of transition from planned to market economy. Similar processes are under way in other European countries. This is a normal situation. In my opinion, another thing matters — highlighting key priorities for overcoming the challenges caused by the crisis. In this, we will help the government with our recommendations.”

In his inaugural speech, Viktor Yanukovych said that many problems were due to the fact that Ukraine, instead of heading towards the 21st century post-industrial society, opted for the primary accumulation of capital, i.e., the so-called “wild capitalism.” Are we still “wild”?

“In my view, Ukraine’s problem is in a very close relation between the business and the power. It really blocks the development of sound competition. Many nations stick to a thesis that it takes ‘good connections’ to run an efficient business. However, in Ukraine it is especially important.

“On the one hand, the power must set rules and see that they are followed, and the business has to operate within the framework of these rules. That is to say, business and power have to be at ‘an arm’s length.’ If this worldwide principle worked in Ukraine, the competition would improve, the number of investors would go up, while corruption would decrease.”

How do you think this distance has changed over the last five years?

“I believe Ukraine has made little progress in separating power and business. In 2004–05, I was not yet working in Ukraine. However, I can say that over these five years, Ukraine’s policy in this respect did not live up to people’s expectations, and they feel very disappointed.”

The World Bank recommends the new government to resort to a number of reforms (pension reform, abolition of VAT payment reliefs, increasing the cost of municipal services, etc.) Won’t such methods of express revival of the economy prove a shock for society and cause even more distrust in the power?

“The suggested reforms should necessarily be accompanied by serious measures to protect the poorest strata of the population. And this is what I particularly emphasize: without the protection of the poorest elements of the population, the economic reforms will not bring the desirable result.

“Now Ukrainians begin to arrive at the understanding of the fact that the budget alone cannot finance all the programs and expenditure existing before the crisis, because the public revenues have considerably shrunk. It is up to the government and the politicians to explain to the population the essence of the economic reforms and their necessity and importance for further strengthening of Ukraine’s economy.

“Society must understand that only radical reforms (with a properly organized system of protection of the most economically disadvantaged strata of the population) will remove Ukraine’s structural weaknesses and make it stronger. In my opinion, Ukraine has to launch urgent economic reforms in order to avoid bitter disappointments in the next five years.”

Is it reasonable to continue spending state resources on “latent” support given to certain sectors of the economy?

“Both the world and Ukrainian experience show that this is not a particularly successful idea. When a state subsidy is allocated to support an enterprise, 60 percent of the money ends up in the pockets of the enterprise’s administration. The workers get very little. If you want to help the workers, do it directly.

“Our analysis shows that Ukraine spends 2.5 percent of its GDP on welfare payments to low-income groups. This index is comparable to that of the Western countries, but who gets this money in Ukraine? Even half of the budget funds allocated for welfare payments does not reach the poorest Ukrainians. In my view, if at least 20 percent of the poorest population received this aid, there would be no poverty in Ukraine.”

Do you think the banking sphere is past the worst trial by the crisis?

“In 2009, the banking strategy worked well, but it is not yet completed. If it remains unfinished, the banking sector will be very vulnerable.”

It has been a year since the banks virtually stopped extending credits to businesses and population. What steps would you recommend to the National Bank of Ukraine and the government in order to have money finally injected into the real economy?

“I think it is not right to use the NBU reserves and balance for the direct crediting of the economy. To renew crediting, Ukraine has to pass a realistic budget, improve the transparency of the banking system, and win the trust of the population back. The last item is especially important: when depositors trust the banks again, the money for crediting will come back. Naturally, this is not a very fast process, but there is no other way.”