Country Brief

Economy

Developments since independence

Following a referendum, Ukraine declared its independence on August 24, 1991. The independent country had to develop a new economic path and build new social and political systems. Over time the country embraced the need for fundamental reform. During the 1990s, however, implementation of structural economic reforms was limited.

In the second half of the 1990s, the Government maintained macroeconomic stability but proceeded slowly with restructuring and gave limited incentives for private sector development. As a result, by the end of 1999, official GDP in real terms dropped to 40 percent of its 1990 level and poverty increased sharply, with 30 percent of the population living below the poverty line. Since then a robust recovery has taken Ukraine within three quarters of its pre-transition GDP level and reduced poverty to around 8 percent.

Recent economic developments

Growth in 2000-2007 averaged 7.5 percent, and per capita incomes in US$, according to the Atlas method, increased from US$700 in 2000 to US$1950 in 2006. With this performance Ukraine has exceeded earlier expectations and in recent years become an increasingly attractive market for investors, despite continuing to lag in structural reforms.

Two factors contributed to this phase of economic “recovery”. First, the financial stabilization and introduction of economic reforms in 2000 effectively hardened budget constraints, bolstered confidence in the Government’s macroeconomic management and in the country’s fledgling financial sector, and created the legal and institutional basis for market-based exchange. Second, the real exchange rate depreciation, following the 1998 financial crisis in Russia and the availability of ample spare capacity in Ukrainian industry, created conditions where the returns on investment and entrepreneurial initiative were unusually high. Both factors together shifted the incentive structure towards formal economic relations and away from the rent-seeking predominant in the 1990s. The result was the emergence of Ukraine’s particular brand of capitalism built on strong domestic financial industrial groups, which originated thanks to close and often non-transparent links to political power brokers, but which were increasingly acting as the motors of economic recovery and growth.

Ukraine’s economy may thus be more resilient and robust than had earlier been anticipated. As GDP has recovered to only three quarters of its 1991 level, there would appear to be ample additional spare capacity that with some additional investment could easily be brought on stream. Ukraine’s low effectiveness in using its existing assets (both physical and human) is at the same time an opportunity for entrepreneurs that promises high returns even when the business climate remains far from perfect, as long as there is macroeconomic stability and sufficient certainty about property rights.

While growth prior to 2004 was export-led, since 2005, domestic demand has been the main driver. This has led to deterioration of the current account from a 10.6 percent of GDP surplus in 2004 to a 1.5 percent of GDP deficit in 2006. Such a massive turn-around in the savings-investment balance has raised concerns that Ukraine may be pursuing unsustainable macroeconomic policies and needs a combination of fiscal tightening and greater exchange rate flexibility to allow external balance to be restored.

The widening current account deficit is easily financed by private capital inflows. In 2006, Ukraine attracted a total of US$14 billion in net debt inflows, in addition to US$5.2 billion in FDI, together amounting to 18 percent of GDP. Some of this money is flight capital returning from abroad and thus reflects the fact that Ukraine is now using some of the savings it accumulated in earlier years. Indeed, given Ukraine’s investment needs in order to achieve income convergence, an excess of investment over domestic savings and the corresponding inflow of foreign capital is warranted. Ukraine’s fixed investment to GDP ratio is estimated at 24 percent for 2006, which is still too low to allow incomes to converge quickly to European levels.

Fiscal policy has been restrained in aggregate but the composition of spending remains biased towards consumption and transfers. Fiscal deficits have declined from 4.4 percent of GDP in 2004 to 1.3 percent of GDP in 2006, staying well below budget projections. While public consumption expenditures as a share of GDP have increased significantly since 2004, as wage and pension payments were hiked, tax revenue has been equally buoyant, boosted by improved collections, the tightening of tax loopholes and strong import-related Value-Added Tax (VAT) performance.

Annual Real GDP growth (%)

(Source: State Statistics Committee)             

Challenges ahead

Although Ukraine has extensive human capital, natural resources, and industrial potential, it faces significant medium-term barriers to sustained growth. On September 30, 2007, the Ukrainian people elected a new parliament. The World Bank has prepared a set of Policy Recommendations to a new Government addressing the main strategic challenges facing the new administration: (i) improving competitiveness and the investment climate, (ii) modernizing public infrastructure, (iii) strengthening economic and public governance and (iv) improving the quality of public services.

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World Bank Program

Program to date

The World Bank has assisted Ukraine's transition to a market economy since the country joined the institution in 1992. It helped monetize public budget transactions, significantly reduce barter payments, and improve overall financial and payment discipline. It also helped the country phase out collective farms, eliminate state ownership of land, and legally protect property rights. The Bank played an important role in advancing banking and financial sector reform and improving the business environment.

The World Bank is working to improve primary health care by establishing new family medicine centers. It is also helping the country adopt HIV/AIDS prevention programs in various regions. Social security is now better targeted, and outreach services have been expanded to include the old and disabled. To improve governance, the World Bank is encouraging civil society participation and helping give citizens’ groups a voice. In addition, it has helped the country increase the production of environmentally clean energy.

Since the inception of the World Bank program in the country, 33 projects for a total amount of US$4.5 billion have been approved by theBank’s Board of Directors. In fiscal year 2006, commitments to the country amounted to US$500 million, bringing the overall commitment level for active projects to over US$858 million.

Going forward

The World Bank’s 2008-2011 Country Partnership Strategy for Ukraine was approved in December 2007.

The Strategy proposes a lending range of US$ 2-6 billion over four years, with annual lending levels modulated by a series of performance benchmarks, including progress in structural reforms, macroeconomic stability and improvements in the implementation of existing World Bank loans. In addition, the International Finance Corporate will continue to invest significant resources to support the private sector in Ukraine.

Analytical and advisory services will be a growing and central component of the new Strategy. This includes research into specific development challenges of Ukraine but also hands-on advice and technical assistance, including through IFC’s expanded advisory services.

The new Strategy builds on an analysis of Ukraine’s key development challenges. To sustain growth into the future, the CPS argues, Ukraine will need to: (i) improve its international competitiveness, (ii) reform its public finances and the public sector to improve the quality of public services and ensure all Ukrainians benefit from economic growth, and (iii) tackle weaknesses in public and private sector governance.

In response to the first, the CPS proposes investments in public sector infrastructure (in particular transport and energy efficiency), advisory services and advocacy work to improve the business climate, technical assistance and access to credit lines to strengthen the financial sector, and global knowledge sharing to promote innovation and technology adoption. To help Ukraine improve the quality of public services and better meet the expectations of its population, the CPS argues that Ukraine needs to spend better not more and therefore focuses on improvements in the efficiency of public spending and public financial management more generally. The Strategy also foresees the continuation of financial assistance in support of economic reforms through the Development Policy Loan program, expected to provide budget financing in the range of US$400-600 annually.

Governance and Anti-Corruption efforts will cut across the CPS. But the document acknowledges that there is presently no political consensus on how to improve governance and reduce corruption through government leadership. It therefore emphasizes the importance of strengthening the demand for good governance by working with a broad group of stakeholders.

World Bank Lending to Ukraine

(NB: Lending is per fiscal year, July 1–June 30)

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Contact Information

The World Bank Office

1, Dniprovsky Uzviz
Kyiv 01010, Ukraine
Tel: (380 44) 490-6671
Fax: ((380 44) 490-6670
Email: ukraine@worldbank.org
Website: www.worldbank.org.ua

Strategy

We are pleased to present the draft of the new Country Partnership Strategy for Ukraine for 2008-2011.

During consultations held in Ukraine in the last few months, the members of the Bank's team working on Ukraine presented and discussed the outlines of the new CPS with representatives of Ukrainian NGOs, professional associations, private sector, mass media, and various interest groups. 

We were particularly impressed by the quality of the contributions made by many participants of consultations. The feedback and information that we received during these meetings are helping us design the roadmap that will direct the Bank's work in Ukraine during the next four years.

We want to take this opportunity to thank those who took part in the consultations and those who took the time to share with us their comments and views.

While presenting the draft of the Strategy we would encourage you to provide your comments and feedback on the draft CPS.

We hope that continuous dialogue will become a very useful tool in our efforts to adapt our assistance to the priorities that the Government and the people of Ukraine have set for themselves.

Download: Country Partnership Strategy for Ukraine for 2008-2011

Partnerships

The World Bank works in close coordination with members of the Ukranian government, civil society, community leaders, and other international donor organizations for providing the most effective assistance to the country. 

The following chart highlights some of the priority areas and the organizations the World Bank coordinates with to improve development in Ukraine.

Ukraine's Membership

When did Ukraine join the World Bank?

Ukraine joined the World Bank in 1992.

How are countries represented at the World Bank?

The World Bank is managed by representatives from each of its member countries. The two governing bodies that make all major policy decisions are the Board of Governors and the Board of Executive Directors.

The World Bank currently has 24 Executive Directors based in Washington, D.C. The Articles of Agreement provides that five of these directors represent the member countries having the largest number of shares. These countries are: France, Germany, Japan, the United Kingdom, and the United States.

The other 19 Executive Directors represent the remaining countries. Each Executive Director is elected by a country or group of countries every two years.

Learn more:

  Complete list of World Bank Executive Directors for each country.

  How representatives to the World Bank are selected

  The Executive Director’s Office

  World Bank’s Board of Executive Directors

How many shares has Ukraine subscribed to?

Ukraine has subscribed to US$ 1,090.8 million shares, which is .69 percent of the total amount subscribed. 

How many votes does Ukraine have?

Ukraine has 11,158 votes, which is .69 percent of the total number of votes.

More about voting shares for each country

How can I learn about decisions being made at the World Bank?

The Board Calendar contains the work program for the Board of Executive Directors. 

More information