Ukraine will see 2.7 percent economic growth through 2019, World Bank experts have said, but reforms in key sectors of the economy are still needed in order to maintain sustainable economic growth.
Satu Kahkonen, the World Bank country director for Moldova, Belarus and Ukraine, said during the bank’s annual briefing on Ukraine’s economic perspectives, held in Kyiv, that to maintain its economic growth Ukraine still needed to take a number of steps.
- Lift the moratorium on land sales, by which farmland in Ukraine can’t be sold to private investors.
- Unbundle the state-owned gas monopoly Naftogaz.
- Obtain a resolution on non-performing loans in state-owned banks.
- Complete much-needed judicial reform and create a fair and transparent court system.
Economic forecast
Ukraine’s gross domestic product, the sum of all goods and services produced in a country in a calendar year, grew by 3.3 percent in 2018, but will decrease to 2.7 percent growth in 2019.
That growth, according to the World Bank, will eventually recover – to 3.4 percent in 2020 and 3.8 percent in 2021.
Overall positive numbers seen in 2018 were primarily caused by a 7.8 percent jump in agricultural output due to a record high grain harvest, adding to that an 8.9 percent increase in consumption, which was caused by higher pensions and wages, said Olena Bilan, chief economist at Ukraine’s leading private equity firm Dragon Capital.
A 14.3 percent increase in investment helped.
However, in 2018, manufacturing and transport services increased by a fraction – 0.6 percent and 1.1 percent respectively, said Faruk Khan, the World Bank’s lead economist.
Higher borrowing costs and a worse global macroeconomic outlook, together with agricultural output growth decelerating in 2019, is the main reason behind this year’s slower growth of Ukraine’s economy, said Khan.
At the same time, Ukraine needs $11 billion or approximately 8 percent of gross domestic product, to repay public debt and to cover the fiscal deficit in 2019, which places an additional burden on the country’s economy.
Needed reforms
Ukraine’s nominal GDP in 2018 reached $131 billion, compared to $586 billion in nominal GDP of Poland, a neighboring country with a similar population.
According to the World Bank, with its current economic growth, Ukraine will need around 50 years to catch up with Poland’s economy. A number of reforms are recommended by the World Bank to accelerate Ukraine’s economic growth and maintain it in the foreseeable future. Khan says Ukraine needs a 7 percent yearly growth to become a high-income country in the future.
Among the primary recommendations is to lift the land moratorium which would attract investors in Ukraine’s agricultural sector. The moratorium on the selling of farmland was introduced in 2001, with the notion that the ban would be lifted as soon as a new Land Code of Ukraine was adopted. But the moratorium has been regularly extended ever since. On Dec. 20, 2018 the parliament prolonged the moratorium until 2020.
The World Bank mentioned a resolution on non-performing loans. According to Khan, over 50 percent of loans in state-owned banks: Privatbank, Oschadbank, and UkrEximbank, are non-performing – meaning they are never going to be repaid.
On Oct. 18, 2018, the parliament passed the new Code of Bankruptcy Procedures. The new law’s purpose is to render bankruptcy procedures more transparent and efficient as well as to present a new legal concept in the Ukrainian legal framework.
It should also have a positive impact on the Ukrainian debt market and provide better protection for creditors’ rights.
Another key issue halting Ukrainian economic growth is the lack of a fair and transparent judicial system. According to Kahkonen, corruption surrounding Ukrainian courts still scares away potential investors.
Judicial reform and a battle against corruption has been promised by Ukrainian politicians from the country’s ruling elite, yet little to no progress has been made over the past years.
Ukraine’s judicial reform has collapsed, members of Public Integrity Council, the judiciary’s civil society watchdog, said at a news briefing on Nov. 6. Under said reform, the qualification assessment of judges was to have reformed the judiciary through the firing of corrupt, dishonest and incompetent judges.
Unbundling Naftogaz
A separate topic brought up during the World Bank briefing was the unbundling of Naftogaz. According to Kahkonen, this is needed to comply with European Union’s Third Energy Package which Ukraine signed off on while signing the association agreement with the EU in 2014.
The unbundling process is meant to separate state-owned gas monopoly Naftogaz from Ukraine’s gas transit system which would open Ukraine’s energy market to potential investors. While the processes itself must be completed by 2020, currently Ukraine’s government and Naftogaz are far from coming to terms in the process.
Ukraine has been in the process of liberalizing the energy market since 2017 with proposed energy reform that would provide households with the right to choose from whom to buy electricity was voted on in parliament. The new rules are set to start from July 1.
However, according to a number of experts the reform was executed poorly and left the market highly monopolized.
Answering a question from journalists on whether the World Bank supports the energy reform, Kahkonen reassured the public of the need to implement it, but added that the reform needs to be postponed by a year to work out all the flaws.
“If reforms stall, we will see economic growth slowing down and the living standards of Ukrainians suffer,” summed up Kahkonen.
