Ukraine’s economic performance has been anemic since the early 1990s. A major impediment to productivity growth has been low investment, held back by lack of strong and independent institutions. This paper aims to assess the major areas of institutional weakness in Ukraine and quantify the long-term growth impact of catching-up to Poland in terms of the quality of major economic institutions and market development. Our analysis identifies the legal system as the area where the institutional quality is weakest compared to Poland, followed distantly by market competition, openness to trade and financial depth. Using a methodology that accounts for positive spillovers between the structural reform areas, we estimate that even under the most optimistic scenario, where institutional gaps are fully addressed, Ukraine would need 15 years to catch up to Poland’s current income level.
reform scenario, Ukraine’s medium-term growth outlook should be bright.
Policy discussions . The discussions focused on the following issues:
Staff argued that the authorities’ 2005 deficit target (2½ percent) needs to be met, while the 2006 budget needs to be tight (deficit target of 2¼ percent of GDP) to support disinflation. A key measure would be to ensure that wage and pension increases do not exceed projected inflation in 2006. Staff also urged the authorities to base their 2006 budget on a realistic and consistent macroeconomic framework. The authorities
been improving, but it still remains quite low (the second lowest in Europe). As a result, the old-age dependency ratio has doubled between 1960 and 2015.
Figure 11. Demographic Trends
Source: UN World Population Prospects (2015) .
20. Ukraine’s population will continue shrinking and aging further, resulting in significant changes in its demographic structure in the coming decades . Under most scenarios, Ukraine’s population will shrink and age rapidly. If both fertility and mortality rates would remain unchanged from their current levels, the population
medium term prospects for the public sector’s external position also appear quite favorable . On the basis of the staff’s baseline scenario, Ukraine’s public external debt as a share of GDP is projected to continue to decline steadily in the coming years. Moreover, the vulnerability of the public sector’s external position to a variety of possible shocks appears relatively low. Standard stress tests involving shocks to the exchange rate, interest rates, and GDP growth (described in Appendix V of the staff report) do not result in significant destabilizing trends for
scenario : This is the most optimistic scenario with far-reaching structural reforms that allow Ukraine to catch-up with Poland in the four macrostructural areas with the largest structural gaps (the legal system, product markets, the financial system, and trade and openness). This scenario assumes a full liberalization of the land market, without any restrictions on non-resident buyers, and with the ability to pledge land as collateral for bank financing.
Partial reform scenario : In this scenario, Ukraine catches-up with Poland in the macrostructural areas of product
Ukraine has the potential to be a very wealthy country. It has a well-educated workforce, some of the best agricultural land in the world, an enviable supply of hydrocarbons and minerals, and a relatively well-developed infrastructure. Despite these advantages, however, Ukraine's per capita income remains low. Using a cross-country stochastic-frontier framework, this paper argues that Ukraine's failure to tap its full potential is mainly a result of its market-unfriendly institutional base. With an inherited Soviet framework that is ill suited to the needs of a market economy, Ukraine has been slow to establish the institutions needed to use its resources efficiently. The paper provides a quantitative guide to the benefits, in terms of potential output, of further structural reform. Looking forward, the study finds that durable growth in Ukraine will depend primarily on the authorities' ability to implement their ambitious reform agenda, and thereby to help secure the basic foundations of a modern market economy.
This Selected Issues paper analyzes the extent of corruption in Ukraine compared with other countries. The level of corruption in Ukraine is exceptionally high. This could severely undermine economic growth prospects by hindering private investment. Reducing corruption is therefore essential to speed economic convergence with the rest of Europe. Regional comparisons help identify best practices in reducing corruption. The Ukrainian authorities have recently adopted key measures that follow some of these best practices. The country is, however, facing several challenges, including the concentration of political and economic power in a small group of people, which may hamper effective anticorruption efforts.
Source: IMF staff estimates.
13. Absent more comprehensive reforms, medium-term growth prospects are muted, and shadowed by persistent vulnerabilities . Under the baseline scenario, Ukraine’s reform program fails to pick up pace, financial support from IMF and most international financial institution (IFI) remains suspended, and global growth gradually improves in line with the latest WEO forecast. Ukraine’s real GDP growth would recover to a modest level of around 3.5 percent next year—reflecting in part some recovery in partner country growth—, well
This Selected Issues paper presents a snapshot of some economic issues for Ukraine. It analyzes risks for the banking sector stability. It investigates Ukraine’s real equilibrium exchange rate, drawing chiefly from cross-country panel-data analysis, and the experience of other neighboring East-European countries. The results suggest that Ukraine will likely experience significant upward pressure on the real exchange rate, particularly as it orients itself to the European Union. The paper also uses newly available data to give a broad overview of Ukraine’s asset and liability position vis-à-vis the rest of the world.
Following the 2008/9 financial crisis and deep recession, a cyclical recovery took hold in Ukraine, supported by a stronger external environment. Efforts to consolidate public finances and repair the banking system began strengthening Ukraine’s resilience to external shocks. More recently, policies have not been sufficient to meet key objectives, and the government has hesitated to undertake politically unpopular reforms. The external environment has become less supportive, and the recovery is losing momentum.