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Independence Square in Kiev, Ukraine
In its Ukraine Economic Update, the bank there were some signs of stabilisation, but that current political infighting and uncertainty poses a serious risk to recovery and the pension system needs an overhaul.
Qimiao Fan, World Bank country director for Belarus, Moldova and Ukraine, said that a delay or reversal of the multiple reforms needed for sustainable recovery and growth in 2016 and beyond would undermine progress and lead to negative social consequences.
Currently, the bank forecasts a gradual recovery to 1% growth in 2016 and 2% in 2017, contingent on reform progress and no further escalation of the conflict between the government and pro-Russian separatists.
The general government deficit, including that stemming from troubled state energy company Naftogaz, was reduced to 2% last year. Poverty however, which increased in 2015, is projected to remain elevated through until 2018.
The bank said safeguarding these small gains in stability will be crucial and recommended reforms towards further belt-tightening, a stronger financial sector and a more flexible exchange rate.
The pension system is of particular concern, the bank said. It currently provides too-small benefits for too many people, undermining fiscal stability.
The average old age pension amounts to just $2 a day at the current market exchange rate, and across the board, for the majority of beneficiaries, pensions are inadequate.
Pension expenditures amounted to 13.4% of GDP, representing a “major fiscal vulnerability”, explained Fan. The system undermines incentives to contribute and the urgency of reform is hastened by a recent cut in the social contribution rate, he added.
In the last 20 months, the World Bank has provided a total of $4.7bn to Ukraine, including $2.25bn of quickly disbursed budget support. The country is also in the midst of a four-year, $17.5bn International Monetary Fund bailout programme, and also relies on European Union and UK support.
Ukraine’s economy was plunged into recession following protests that resulted in the ousting of pro-Russian president Viktor Yanukovych, subsequent attempts to sever structural ties with Russia and conflict with pro-Russian separatists who oppose this pivot towards Europe.
The new administration, elected on a reform mandate, has come under fire for the slow pace of reform and continued allegations of corruption within government, which at one point threatened the continuity of IMF support.
Recent progress on anti-corruption overhauls has led the EU to consider visa-free travel for Ukrainians.
However Ukraine’s creditors have made clear that wide-ranging reforms, including strengthening of the public finances and public services, will be needed to get the economy back on track.
