World Bank Vice President: Ukraine’s key challenge is to achieve sustained economic growth lasting over an extended period.

Interview with World Bank Regional Vice President for Europe and Central Asia Anna Bjerde for the Interfax-Ukraine News Agency

Text: Dmytro Koshovyy

Anna Bjerde, World Bank Vice President for Europe and Central Asia, is in Kyiv on her first official visit to Ukraine from September 12 to September 15, 2021.

During her visit, Ms. Bjerde will meet with Prime Minister Denys Shmyhal and other members of the government of Ukraine.

Ms. Bjerde will also meet with representatives of Ukraine’s academia, as well as counterparts from international financial institutions and partner development organizations.

During her trip, Ms. Bjerde will also visit a private farm to familiarize herself with the implementation of land reform supported by the World Bank.

Ms. Bjerde, a Swedish national, became World Bank Vice President for Europe and Central Asia on May 1st, 2020. In this position, she leads the World Bank’s strategic, analytical, operational and knowledge work in the region.

Learn more: https://www.worldbank.org/en/about/people/a/anna-bjerde

- The Government has identified "growth points" – the priority sectors (technological production, energy security, safety of life, transport / infrastructure and "City of Masters" / development of local, unique industries) to support and promote and now expects for investment of USD 1 billion to get additional 1-2% of economic growth. What is your view on the potential of such an approach?

- I welcome the fact that policy makers have identified priority areas and recognized the need to mobilize investment. Ukraine needs faster, more sustained, and more sustainable growth that raises the welfare of all Ukrainians. So, I believe that the government’s focus on enhancing the quality of future growth (less volatile, greener, more resilient, inclusive and job-creating) is well-taken. We feel that efforts to strengthen social resilience and inclusion through investing in and protecting people are very much needed.

However, I want to highlight one important aspect that has not been much highlighted in the Government plans – the importance of human capital. The sum of a population’s education, skills, experience, innovativeness and health is, according to research, the most important resource for sustainable economic growth—it is the glue that brings together the other factors of production, including physical capital or infrastructure. The developmental impacts of inadequate human capital are severe. Without adequate human capital, additional investment in physical capital might not give expected dividends.

- Does Ukraine make the best use of the $90 million of support provided under the COVID-19 Emergency Response and Vaccination in Ukraine Project ? Are the rates of vaccination in Ukraine satisfactory; are they comparable with the neighbors in the ECA region? What can be done to accelerate the pace of vaccination?

- Through the $90 million COVID-19 Emergency Response and Vaccination Project, which was signed in May 2021, the World Bank provides Ukraine with resources to procure vaccines and invest in the vaccine cold chain, as well as to reimburse vaccine providers (through National Health Services of Ukraine) for vaccinations. The World Bank’s aim is to help the Government of Ukraine to ensure that all Ukrainians, but especially those at most risk of COVID-19 infection and severe disease, get vaccinated. The good news is that Ukraine has used the resources from the World Bank to procure needed vaccines. But unfortunately, administering the vaccines still needs progress: Ukraine has one of the lowest vaccination rates in Europe: as of September 10, only 14.3% of the population have had at least one dose; just 11.5% are fully vaccinated. Compare this to your neighbors – full vaccination in Poland covers 50% of the population; in Slovakia 40%; and Turkey 47%; next door, Moldova has over 21% fully vaccinated. In particular, more attention and effort are needed to reach older people (above 60 years), whose vaccination rate lags the national average even though they are most vulnerable to severe COVID-19 disease. The World Bank stands ready to support Ukraine with further financing and the best global advice to support its COVID-19 vaccination effort.

- In Ukraine, there is an ongoing debate on the health care reform, which has been affected by the COVID situation. What are the current World Bank's recommendations on the point, including the experience of other countries in the region?

- The World Bank’s recent report on Ukraine’s health care reform shows that, overall, it is moving in the right direction, with important progress in critical areas intended to improve the quality and efficiency of healthcare. The COVID-19 pandemic has certainly tested the resilience of the health system, as it has in all countries, and revealed weaknesses – including in disease surveillance and in ICU care. At the same time, it has revealed strengths. For example, the recent health financing reforms – which adhere to the principle that “money follows the patient” – provided a mechanism for the Ministry of Health and the National Health Service of Ukraine to quickly expand the guaranteed service package to include COVID-19 services (such as testing, treatment and vaccination) and pay for their provision through accredited providers, according to the needs of the population and taking into account the actual capacity of providers. This helped to roll out the COVID-19 testing program, strengthen emergency medical services, provide additional ICU beds with the equipment and oxygen needed for COVID-19 treatment, and enable more providers to do vaccinations. The World Bank’s Serving People Improving Health project has provided $57 million to support COVID-19 treatment and with the balance of its $350 million financing, we will continue to support the modernization of Ukraine’s hospital network, right-sizing of care at the appropriate level, and hospital payment reform – all of which are critical to achieving a health system that delivers quality care in a financially sustainable way.

- What are the conditions for Ukraine to receive $350 million of the 2nd tranche of DPL? When would this money be available for Ukraine if the conditions are met?

- We at the World Bank are proud to have supported Ukraine in its efforts to build a better future, and we remain supportive to these efforts. The prospects for a second DPO are conditional on maintaining adequate macroeconomic framework and adoption of necessary legislation establishing a proper institutional framework needed for functioning of the recently opened land market, especially the passage of the law establishing a Partial Credit Guarantee Fund that helps small and medium farmers get access to financing.

A landmark decision to open the land market has been made, but more needs to be done to take full advantage of opportunities offered by Ukraine’s agriculture sector, including by facilitating access to credit for small farmers. For example, the law on establishing a Partial Credit Guarantee Fund (PCG) to provide access to finance to small farmers is yet to be passed and has been delayed.

A successful implementation of land reform offers an important opportunity to boost Ukraine’s future economic growth potential.

- What is your assessment of the current situation with corporate governance in Ukraine? Is it possible to consider that the corporate governance situation is back to normal and the participation of independent experts in the nomination committee and the work of the committee in general is back to regular?

- Unfortunately, compared to most other countries, the direct participation of the state in the economy in Ukraine remains excessive and restricts the role of market forces in the economy. There are some 3,500 companies owned by the state—most of them loss-making—in sectors from machine building to hotels. It is clear that Ukraine needs fewer SOEs and those that remain must be better managed.

In recent years, notable successes were achieved in adopting legislation and strengthening systems regulating SOEs. The first round of corporate governance reforms has been successfully implemented at state-owned banks. And, in the energy sector, Naftogaz was unbundled in 2020. The electricity sector is also now being gradually liberalized. Tariffs have increased and reforms are expected to support investment in aging electricity-producing and transmission infrastructure. Investments in renewable energy are also on the rise.

At the same time, the implementation of corporate governance practices is lagging and, in some instances, have back-tracked – for example, only nine SOEs have appointed supervisory boards under the new guidelines. SOE ownership and oversight remains dispersed among 96 ministries and agencies, complicating further reform implementation. As a result, SOEs continue to be exposed to undue political influence, non-competitive practices in the selection of key management positions, opaque remuneration systems for senior personnel, and ineffective control and accountability mechanisms.

Hence, it is important that management functions of SOE supervisory boards and their members remain free of interference and they are given the space to do their job. We also urge that the National Bank of Ukraine maintains its role as an independent overseer of the banking sector. The World Bank Group has supported reforms to improve the governance of SOEs and SOBs in Ukraine in the past and will remain steadfast and consistent in our advice that progress in this area cannot and should not be reversed.

We all know that more is needed to improve corporate governance at several SOEs, including through final passage of a new law on corporate governance at state-owned enterprises and implementation of its requirements in practice.

- How does the World Bank perceive the Government's decision to reduce the electricity tariff for the households that consume less than 250 kWh per month, to 1.44 UAH /kWh? Do you think this is a reversal of the reform? Can this decision affect the WB's policy towards Ukraine?

- The World Bank has been supporting Ukraine in managing the trade-offs between financial sustainability of the sector, underpinned by cost-reflecting tariffs, and protecting the poor. The Bank assisted the government in improving the housing and utilities subsidies (HUS) program, which allowed significant reduction of the pressures linked to the need to increase energy prices due to gas price hikes and other factors. With the move to monetization of the subsidies, the HUS program became much more transparent, with reduced leakages to non-poor consumers and strengthened incentives for beneficiaries to improve energy efficiency. In addition, the World Bank supported expansion of the guaranteed minimum income (GMI) program, which is a well-targeted way to support the poor.

But I would like to stress the importance of implementing a cost-recovery trajectory for the power sector. This is particularly relevant considering the current financial deficit in the sector, partly due to high feed-in tariffs for renewable energy plants. Based on World Bank analysis, the household electricity tariff should be gradually increased to reach a level reflecting cost. We welcomed the Government’s earlier decision to remove the preferential pricing for consumption up to 100 kWh per month. The recent decision to revert the reform and reduce the electricity tariff for the households that consume less than 250 kWh per month could jeopardize the financial recovery of the sector, which is further weakened by the COVID pandemic. Furthermore, electricity price for the residential sector has been traditionally subsidized at the expense of the price for the commercial and industrial consumers. Despite electricity tariff increases in 2015 and 2017, the cross-subsidies were not discontinued as planned, and the recently expanded tariff cap for households could lead to increased cross-subsidies, with potential negative impacts for the international competitiveness of Ukraine’s energy-intensive industries. Furthermore, attracting investment to the sector will be very difficult and the drain on Ukraine’s public resources due to continued subsidies will hamper development in critical areas such as in human capital, which I spoke about earlier.

International experience in tariff reforms shows that protecting the poor is as important as meeting the cost recovery and efficiency objectives. Therefore, cost recovery reforms need to be complemented by social assistance programs that protect the poor against income shocks resulting from raised tariffs. Ukraine already has experience in implementing well-functioning programs for energy subsidies as well as a minimum income program. Adjusting these instruments would allow Ukraine to meet all the tariff reform objectives. The Bank stands ready to support the Government to address this sensitive issue.

- What is your assessment of the start of land reform in Ukraine? The Verkhovna Rada proposes to reduce from January 1, 2024 the maximum area of land allowed for purchase by Ukrainian citizens and legal entities from 10,000 hectares to 500 hectares, and to introduce a number of restrictions to prevent the concentration of land in one hand. How do you think these novelties can affect the land market? Would these suggestions, if approved, signal about "curtailing" the reform for you?

- We believe that the opening of the land market in Ukraine on July 1 is a historic milestone that has great potential to improve the welfare of farmers and all Ukrainians. We expect benefits for landowners from increased land values and lease prices, for farmers through access to credit, and for local communities through increased local revenue, better land use planning, and improved protection of environmentally sensitive areas. I would like to congratulate the President and the authorities for undertaking this long overdue step.

There is a lot, however, that still needs to be done. The remaining laws and regulations on land have to be passed expeditiously, and implementation carefully monitored to assess the extent to which expected benefits materialize (and corrective action must be taken if needed). Specifically, three priority steps are urgently needed: First, to ensure that credit is made quickly available to small and medium farmers, Rada needs to expeditiously adopt the law establishing a partial credit guarantee agency; in the meantime, a bridging program will need to make credit available to those who need it. Second, a transparent monitoring system has to be established to report publicly, and in real time, the number, volume, and prices of land transactions. And third, to block fraudulent transactions, there needs to be full data interoperability between the land registry and the land cadaster. It would also be good for the Cabinet to approve and oversee implementation of the land reform implementation strategy from the Ministry of Agrarian Policy and Food, which incorporates these and other steps, to ensure that the reform lives up to its potential.

On the proposed restrictions, international experience suggests that measures such as administrative restrictions on land size can be easily circumvented by determined operators. So, it is best to address the underlying institutions. The thresholds included in the turnover law passed by Rada last year reflect a carefully considered compromise, so any changes to them should only be considered if evidence from the first phase of market opening indicates a need for doing so and more appropriate options are not available.

- The Economic Security Strategy of Ukraine until 2025 provides for the creation of a three-tier pension system, however without increasing the burden on the salary fund and with increasing of revenues to the budget of the Pension Fund of Ukraine. Do you think the implementation of such a model would be effective? What are the benefits and the risks?

- Pensions in Ukraine remain low and our projections show that if nothing is changed, they will continue declining relative to wage income. Reform is needed. But reforming the system is a complex technical task, which needs to carefully consider interests of different generations. The World Bank has deep global experience in this area, and we see that international experiences of systemic reforms are quite diverse, and success depends on very careful and well-thought-through approaches. We have seen countries in the neighborhood where reforms that implemented a fully funded pillar did not meet expectations or were even reversed.

Our advice to Ukrainian policymakers has been to not be hasty and to plan carefully, so that this reform opportunity is not wasted. Implementation of a well-functioning funded pension pillar requires detailed and collaborative technical work in both policy and implementation, as well as close coordination with other reforms in the financial sector, fiscal system, and social protection.

It is also important to recognize that solutions to the adequacy of pension benefits are needed today, but the funded pillar is a long-term solution that will take decades to fully mature before anyone sees its benefits. We know that the Government has addressed adequacy by introducing age-related supplements to the main pension benefit -- but in an ad hoc manner, without a proper legal framework or long-term fiscal planning. We believe that comprehensive reform, holistically addressing issues in different parts of the pension system, is needed. The World Bank will be happy to extend our assistance and global expertise in this area.

- What do you see as the optimal solution to the problem of the Pension Fund deficit in the implementation of the fully funded tier of the pension system?

- We should remember the lessons from 2016: the reduction in the social contribution rate by half in that year cost Ukraine in a number of ways: lack of proper pension indexation, reduction in new benefits, and a perpetuation of the problem of the Pension Fund deficit. Further cuts in the social contribution is likely to push the Pension Fund further into deficit and reduce the capacity of the government to pay decent pensions today. We believe that introduction of the funded pillar should not be done at the expense of today’s pensioners or future taxpayers. Therefore, if there is a decision to proceed with the funded pensions, there should be an open and transparent discussion in the society about financing such a new instrument.

This could, for instance, be through some form of cost-sharing between employer, employee, and the government – without affecting the current revenues of the Pension Fund. Another important solution is to re-examine the expenditures of Ukraine’s Pension Fund, where various state benefits and guarantees (not the purely pension obligations) are expanding; in fact, consolidating various cash benefits and supplements financed from the general budget into a clean and universal program of basic pensions that would supplement the main insurance scheme could largely resolve challenges around the Pension Fund deficit.

- The Economic Security Strategy of Ukraine states its goal – 6% of GDP annually growth. What is your assessment of the chances of such growth rates in the next 2-3 years? What reforms need to be accelerated for achieve the 6% rate?

- Ukraine’s key challenge is not to achieve a spurt of high growth in the next 2-3 years, but rather to achieve sustained economic growth lasting over an extended period. In recent decades, Ukraine has in fact gone through several episodes of high growth, but mostly due to favorable external conditions rather than the institutional strength of the economy.

Sustaining significant growth—high growth over a decade or two—is challenging, yet not impossible. Experience from other countries – including your neighbor Poland – demonstrates that sustained growth does not happen spontaneously. First, it requires a long-term commitment by political leaders, a commitment pursued with patience, perseverance, and pragmatism. Second, the speed of growth is primarily determined by the ability to mobilize productive investment (public and private). In this context, the post-covid-19 recovery provides opportunities to mobilize new investment to meet future challenges of climate change, increasing digitalization and deepening trade and economic ties with the EU. Third, a robust private sector is needed to sustain high economic growth rates.

Thus, to achieve lasting growth would require reforms that shift the role of the state from directly participating in economic activities towards providing conducive conditions for the private sector to flourish. Ukraine’s longer-term prospects of private sector-led growth hinge on reforms to address bottlenecks to investment and to safeguard macroeconomic sustainability.

While the successful implementation of key reforms related to land markets, banking, de-monopolization, and concession projects should enhance the environment for private investment, major challenges remain. Key among these are weak rule of law, contract enforcement and systemic corruption. Judicial reform is still in the early stages, so the timely implementation of recent laws adopted will be critical.

- What are the new joint projects, the World Bank and Ukraine are working on? Which of them would be launched in 2022?

- Our aim is to help support Ukraine’s development in all key sectors. The World Bank works on public sector projects, and our sister organization, IFC, works with the private sector.

For the World Bank, our key focus areas over the next year will be to support Ukraine’s sustainable recovery from the COVID crisis, by supporting the reforms and investments that are central to ensuring a ‘green’ recovery. An immediate priority would be to provide additional resources needed by Ukraine to support further vaccination of the population against COVID-19.

On the medium-term growth agenda, we will continue to work with the Government, including through budget support for reforms, on land reform followed by comprehensive support for the agricultural sector. We will also be working with Ukraine on key infrastructure projects, including on urban mobility, on modernizing and increasing the efficiency and financial sustainability of Ukrainian Railways, and on improving safety in Ukraine’s roads and highways.

Another key focus area will be the energy transition. We hope to work on supporting Ukraine in the policy reforms and investments needed to meet its climate goals. One aspect of decarbonization will be helping Ukraine synchronize its power sector with the European grid, including through improving the efficiency of the natural gas Transmission System Operator (TSO) and strengthening its technical capacity and institutional context. We will also work to improve efficiency in energy consumption, reduce GHG emissions and air pollutants at the municipal level in Ukraine. We will look forward to working with Ukraine to support its transition away from dependence on coal. In this regard, we welcome Ukraine’s updated Nationally Determined Contribution (NDC) for COP26 with more ambitious emission reductions targeted for 2030.

- Is the pace of reforms in Ukraine comparable to the transformation pace in other countries in the region? Some time ago, the World Bank estimated in half a century the time in which Ukraine can catch up with Poland in terms of development? What are the current estimates?

- Indeed, at the current pace of growth, it will take Ukraine 50 years to attain the current levels of income of Poland. This is driven by today’s slow growth rates, but initial conditions also matter. About a half of the current income gap between Ukraine and Poland is explained by the delay in the start of reforms in Ukraine, which resulted in the economic collapse at the beginning of the transition lasting longer. Ukraine experienced 10 years of accumulated contraction during the first decade of the transition, compared to just 3.8 for Central-Southern European and Baltic countries.

But the challenge going forward is that even today, Ukraine’s economic transition to a full-fledged market economy remains incomplete. One manifestation of that is the still large presence of the state, as I described before. Another is the weakness of Ukraine’s institutions, marked by the challenges around rule of law.

But let me be frank - it can be easy to grow frustrated with the pace of reform in Ukraine or the lost opportunities in the past. Two steps forward followed often by one—and sometimes two—steps back can lead to pessimism.

But I am an optimist. Over the last five years, the scale of Ukraine’s challenges has been enormous. We also must be realistic about the forces resisting progress. Despite that, much has been accomplished. What I appreciate about Ukraine is that despite its challenges, it is ambitious about the future that it can craft for itself. The World Bank looks forward to supporting Ukraine in that ambition, and to both challenge and support our counterparts to take the steps needed to fully realize that ambition.

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