Ukraine cannot manage spending all the allocated loans in time

Ukraine expects the next tranche from the IMF to stabilize the economic situation. Meanwhile, a representative of our second largest international lender – the World Bank, says that the funding approved by the board of directors is being spent too slowly in our country. What is the reason? Who is holding up the disbursement of the World Bank’s funds in Ukraine? Which reforms of Yatseniuk’s government hit the mark, and which didn’t? This and much more – in an exclusive interview to The Day by Qimiao Fan, World Bank Country Director for Ukraine.

What is your evaluation of the World Bank’s work in Ukraine in 2015?

“We are satisfied with our work in Ukraine, as well as with the opportunity to help the country at this difficult time. Over the past 18 months, the World Bank has approved projects totaling 4.6 billion dollars. The WB is the second largest Ukraine’s donor after the IMF. We support the policy of major structural reforms and we continue to invest in the private sector. But, to be honest, working in Ukraine is a challenge. We would like to see a much better implementation of our projects in Ukraine.”

Do you mean the use of loans provided by the World Bank?

“Yes, I mean the implementation of our investment projects. There are several factors that interfere with it. First, the macroeconomic situation is not yet completely stabilized. Second, the conflict in eastern Ukraine has not been resolved yet. Third, there is an unstable political situation, due to which ministers and their deputies are being replaced frequently. Many issues lack consistency. We are not satisfied with the pace in which the projects funded by us are implemented.

“The bank has an active credit portfolio of 10 projects – totaling 3 billion dollars, of which 2.3 billion dollars have not been spent still – that is, they are useless. That’s too bad, because the money should improve water supply and sewerage, central heating, sewage networks, health care, social assistance, electricity transfer, and hydropower plants. All these projects are extremely necessary for Ukraine to improve the lives of ordinary citizens. Thus, I would really like to see the money, allocated by the board of bank’s directors, going into the Ukrainian economy as fast as possible.”

Could the difficult political situation within the country be the reason the money does not reach Ukraine?

“It’s more an issue of governmental management than politics. Processes and procedures are very complex. One more factor is the personal interest of public officials involved in a project. There is a significant difference in the behavior of people responsible for the project at the regional level and in the ministry.

“And yet there are more factors that hinder the spending of WB’s money.

“First, frequent replacements within the government make it difficult to use these funds for procurement and recruitment for the projects, for paying the salaries.

“Second, due to the unstable macroeconomic situation and the devaluation of the currency, contractors often fail to meet their obligations.

“Third, the approval process for hiring staff is very complicated. All this requires extra time for the projects’ implementation and causes delays in their funding.”

And were the economic reforms by Arsenii Yatseniuk’s government successful?

“In the past two years, Ukraine has faced unprecedented challenges, both external and internal. In such circumstances, it is difficult to carry out reforms. Although in recent years the country has been working towards the implementation of many important reforms. But it is clear that of these reforms too few were implemented. There should have been much more of them. We have only begun to see the signs of economic improvement. Due to political instability in the country there is a risk of recession. Politicians need to get together and carry out reforms.”

Which reforms have been successful, and which turned out an obvious failure?

“The government has taken the right course in several areas. For example, one of the most successful cases was the reform of the banking sector. There were positive developments in the improvement of taxation. Also, worth noting are the government’s achievements in restructuring of the foreign debt. Other important reform was the one in the energy sector, particularly in the consumption of natural gas – nobody liked the increase of utility tariffs, but it was absolutely necessary to stabilize the economy. This also reduced opportunities for corruption in the gas sector. Bringing the gas prices for households to market levels has reduced the possibility of public money appropriation by utility oligarchs. The market is now free from intermediaries, and this is an important step in fighting corruption. Before that, the relationship between Naftohaz and Gazprom was a major source of corruption. Thanks to this reform the situation has changed.

“The list of successful reforms includes public infrastructure, deregulation, and improved targeting of welfare programs.

“But, in general, Ukraine is failing the fight against corruption. To avoid this, the government should: a) speed up their efforts to create and launch state anti-corruption institutions, such as NABU; b) strengthen the prosecution of corrupt officials. Ukraine has all the necessary tools to combat corruption successfully, but the progress is insufficient. Therefore, the fight against corruption must be a priority for the Cabinet in 2016.

“There is no progress in reforms of the judiciary system and protection of investors’ property rights (including intellectual property). As a result, we observe raiding and corruption within different parts of the state apparatus.

“In addition to tax reform, you should also pay more attention to the comprehensive reform of government spending. In the banking sector, the purge of the system must be completed; at the same time the banks’ recapitalization must be ensured in order to bring the sufficient amount of capital into the system. Deposit Guarantee Fund should be improved, as well as the procedures for deposit repayment and action on problematic deposits. Naftohaz should have the corporate management installed and its assets divided properly. In other words, the task of the government is to improve business conditions to the maximum.”