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Country Brief 2006

Country brief 2006 Updated September 2006

*Most recent data available 2001-2005 More Ukraine data

Ukraine is a lower middle-income country with a gross national income per capita of US$1,520 in 2005 (GNI per capita, Atlas method). It is the second largest country in Europe and has a population of about 47 million people. The country’s administrative structure comprises 24 regions (oblasts) and one autonomous republic, Crimea, which became part of Soviet Ukraine in 1954. An estimated 68 percent of Ukrainians live in urban areas, with over three million inhabitants in the capital Kyiv, the largest city.

Ukraine joined the World Bank in September 1992.

The World Bank has assisted Ukraine in the design and implementation of economic reforms, by providing advice, analysis and lending.

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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.

Recent economic developments

Ukraine’s economic performance has been strong since 2000, and poverty has declined dramatically. GDP grew by more than 50 percent from 1999 to 2004. This, combined with a significant improvement in the country’s fiscal position, led to a dramatic decrease of the debt-to-GDP ratio.

The mix of a favorable exchange rate in the years following the 1998 financial crisis, rising world commodity prices and financial discipline after 1999 encouraged enterprise restructuring and increased capacity utilization. These factors went hand in hand with strong export growth and a current account surplus that reached a record high of 10.5 percent of GDP in 2004. Real demand for the national currency hryvnia has grown rapidly and the financial sector has expanded: bank assets have grown from 19 to over 50 percent of GDP since 1999.

More recently, economic growth has slowed. Growth rates fell from 12.1 percent in 2004 to 2.6 percent in 2005. The annualized growth rate through the first quarter of 2006 was 2.4 percent. A variety of factors are contributing to the slowdown. Growth in the capacity usage of traditional industries has slowed since 2003. After mid-2003 the terms of trade moved strongly in Ukraine’s favor, leading to the 2004 growth and current account surge. But with higher natural gas prices and lower international prices for metals, Ukraine’s main exports, the country’s terms of trade have been worsening.

Final sales of metals production, petrochemicals, agriculture, and construction have recently slowed. A gradual real appreciation of the hryvnia has contributed to the decline, as has a fall in investment demand following uncertainty about government policies and politics in general and cutbacks in 2005 and 2006 in public investment. In 2005, the current account surplus declined to 3.1 percent of GDP and may move into deficit in 2006.

But these negative trends do not capture the whole picture. There are positive signs of change in the economy that appear to be setting the stage for an improved quality of growth in terms of economic diversity and orientation. These signs include dramatically heightened investor interest, a surge in foreign direct investment (FDI), sale by financial industrial groups of subsidiaries and banks, continued growth of services, increases in light industrial production, and continued entry of new small and medium enterprises.

Challenges ahead

Although Ukraine has extensive human capital, natural resources, and industrial potential, it faces significant medium-term barriers to sustained growth, such as the following:

  • High energy intensity in Ukraine, which is perhaps the highest in the region—22 times more than Germany on a GDP basis, and 3.6 times higher than Germany on a purchasing power parity basis. Ukraine has the ability to significantly reduce its energy vulnerability. Among other things this requires urgent reform of its energy sector, including measures to promote energy efficiency and quicken and deepen the effort to create market-supporting institutions.
  • Lack of reforms in crucial sectors. Prospects for sustainable growth are undermined by slow progress in reforming crucial sectors, including energy, transportation, and education; and in institutional capacity and governance, particularly delays in passing modern corporate governance legislation and initiating judicial reform.
  • Quality of infrastructure. Infrastructure improvement requires significant investment, which in turn necessitates significant investment climate improvement.
  • Return of inflation and consumption-oriented fiscal policy are a source of increased concern due to the economic growth slowdown and higher energy prices.
  • HIV/AIDS and TB. Though poverty has fallen sharply and Millennium Development Goal targets on maternal and child mortality have been exceeded, the threat of tuberculosis (TB) and AIDS remains unabated. Ukraine has one of the worst HIV/AIDS and TB epidemics in the ECA region. Policies for prevention and treatment of HIV/AIDS, tuberculosis, and malaria are in place but are not effectively implemented due to inadequate national level coordination.
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World Bank Program

Program to date

Landmark Projects
More projects

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 2004-2007 Country Assistance Strategy (CAS) for Ukraine focuses on supporting the country's aspirations to join the European Union (EU). The CAS Progress Report, endorsed by the Board in July 2005, envisages continued Bank support to Ukraine’s “European Choice,” a set of guiding principles and values that will drive future institutional reform. The key aspects of the CAS are as follows:


The World Bank has successfully assisted the Government in setting up a Treasury function, modernizing Treasury operations, and upgrading the Government's capacity for fiscal management.
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  • A significant volume of resources are available to support Ukraine’s priorities. Under a base-case scenario, the Bank foresees lending in the range of US$1.8-2.4 billion over a four-year period, with half the lending dedicated to support policy reforms. Under the high-case scenario, additional lending of up to US$600 million would become available.
  • Policy-based lending will continue to be at the center of the program and focus on key policy and institutional reforms. The US$251 million first Development Policy Loan (DPL-1) approved on July 5, 2005 is at the core of the Bank program. Its main goal is to translate ambitious government objectives into results through a prioritized and sequenced course of policy actions and reforms.
  • Project-based lending will continue to support key sectors set out in the CAS, and will be adapted to respond to emerging government priorities and new opportunities. The Bank is likely to increase investment lending in infrastructure, reflecting strong demand in Ukraine. Opportunities will be reviewed in water and transport, in addition to long-standing engagement in the energy sector. The Bank will also assist the government in exploiting the significant potential benefits of the Kyoto Protocol, which came into force in February 2005. Finally, the Bank is reviewing how it could expand support for governance issues.
  • There is a strong pipeline of investment loans. In 2005-2006, the DPL-1 and two investment loans—the Social Assistance Systems Modernization Project and Access to Financial Services Project—were approved. In addition, a Methyl Bromide Phase-Out project, supported by the Global Environment Facility (GEF),  was negotiated in May 2006. Projects planned for the coming year will support export development, urban water infrastructure and power transmission.
  • In recent years, the Bank has produced extensive analytical and advisory work -- including a Public Finance Review; a Labor Study; a Poverty Assessment; and a Country Procurement Review Update. It has also produced a series of policy notes on the opportunities and challenges facing Ukraine. Future analytical areas will include advice on governance and public administration.

NB: Lending is per fiscal year, July 1-June 30

Active Portfolio by Sector as of June 2006
(US$ millions)

The Country Aggregate Report provides more lending data for Ukraine

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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

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