Tighter fiscal policy could boost Ukraine’s growth, says World Bank

2 Apr 13
More efficient public spending would help Ukraine to complete the ‘vast’ array of structural and economic reforms needed to jumpstart growth, according to the World Bank.

By Nick Mann | 2 April 2013

More efficient public spending would help Ukraine to complete the ‘vast’ array of structural and economic reforms needed to jumpstart growth, according to the World Bank.

In its latest economic update on the East European country, published today, the Bank noted that lower-than-forecast growth and inflation meant central budget revenues for the second half of 2012 had come in at UAH33bn lower than forecast.

This shortfall, which was equivalent to 2.5% of Ukraine’s gross domestic product, was accompanied by a hike in social spending equivalent to over 2% of GDP, which helped to push the country’s budget deficit up to 4.5% of GDP last year. This compares with 2.8% in 2011.

After falling into recession in the second half of 2012, the Ukrainian economy is expected to grow by just 1% this year as a result of continued weak external demand and uncertainty over the ‘sustainability’ of the economic policies being carried out by the government.

However, these growth prospects could improve if the country introduced a ‘tighter’ fiscal policy and more flexible exchange rate policy, the World Bank said.

‘On the fiscal front, efficiency of public spending could be improved through a reduction in fiscal and quasi-fiscal deficits in the gas and heating sectors and better targeted social assistance to reach the poorest segments of society,’ it explained.

‘Efficiency can also be improved through reform of the public investment management process – a prerequisite for effectively addressing infrastructure needs in Ukraine.’

Economic policy changes should be accompanied by structural reforms to boost long-term growth, it added. ‘The unfinished agenda in Ukraine is vast,’ the update said. ‘The main focus should be on improving the business climate to strengthen competitiveness, attract investment and create jobs to improve living standards.’

‘In this context it is important to continue reforms to strengthen the resilience of the financial sector to external shocks and improve financial intermediation.’

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