The Ukrainian economy needs a prescription to overcome the crisis in its principal sectors. Troubles in the banking, building, steel-making, and chemical sectors is only the tip of the iceberg that is moving towards this country from the West. In these conditions, financial, technological and consultative assistance from international institutions is very important for the solution of these problems. Martin RAISER, World Bank Director for Ukraine, Belarus and Moldova, told The Day about the measures the World Bank is preparing to help Ukraine overcome the negative economic trend.
Would you comment on the program package that the World Bank has drawn up to provide Ukraine assistance in offsetting the negative consequences of the economic crisis?
“We are going to work in three directions. The first is to support structural reforms by way of offering development policy loans to the government. We recently signed a protocol on this issue with the government and are expecting our Board of Directors to make a decision on allocating $500 million before the end of 2008.
“Incidentally, the process of structural reforms in Ukraine is still going on. Very many targets have not yet been reached, and we hope that the development policy loan program will be continued in the future.
“The second direction is to support rehabilitation of the banking sector. It is too early to speak about the scope of funding here. But I can confirm that we will be implementing this idea together with the Ministry of Finance, the National Bank of Ukraine, our colleagues from the IMF and the EBRD, and other donors. It will take some time to do this work.
“The third direction is investments in the infrastructure (certain projects are to be carried out as part of the bank’s Country Partnership Strategy for Ukraine in 2008-2011: improvement of highways and railroads, power-generation projects, etc.). I believe two loans will be made available in the nearest future: a $400-million loan for modernizing the Kyiv-Kharkiv road and the other for upgrading the Znamianka-Dzhankoi railroad. The value of the latter has not yet been finally set, but I can say it will a handsome amount.
“Now Ukraine should (and it can) redistribute budgetary resources more effectively. A year ago we prepared a major review of state finances management, which comprises a number of proposals that can be of use today. This is especially true of more rational redistribution of social security resources. Second, Ukraine should pay more attention to protecting infrastructure investment projects. International experience shows that this approach allows the country to ride out the crises faster and further develop.”
What do you suggest as far as budgetary funds distribution is concerned and what do you advise the government to take into account in the 2009 draft budget?
“I will not enumerate everything, but I can give an example. Ukraine has two good targeted cash transfers: one is being given to the poorest families and the other to families with one breadwinner. We have analyzed the two schemes and concluded that 70 percent of the first scheme’s money and more than 50 percent of the second really goes to the poor. If you compare this with the effectiveness of all the other social transfers, it is a big difference. The average effectiveness of social transfers in 2007 was no more than 20-25 percent. This means that only 25 percent of all the budgetary social transfers really reach the people who need governmental aid. In other words, if not very effective programs are folded up, this will release more funds for more effective ones. This will make it possible to save budgetary money and give it to the people who really need it.”
Which of the budgetary programs do you think are ineffective?
“In the social sphere, a lot of privileges are being granted to enable people to pay for the utilities and education, but you should reconsider the number of people who really need state-sponsored exemptions. The most glaring example is privileges granted to members of parliament. I think there a lot of MPs who cannot be called low-income individuals. This can be the beginning. Of course, this step alone will not raise a sufficient amount to fund indispensable schemes, but it will be a signal.”
To what extent is Ukraine interested in receiving other financial instruments from the World Bank group, such as guarantees?
“The World Bank group has the Multilateral Investment Guarantee Agency (MIGA, which insures the private sector against political risks - Ed.) which has already furnished guarantees to Raiffeisenbank and Ukrsotsbank. Ukraine is one of the MIGA’s most important clients in the world. And it is absolutely right, considering the current situation, and we will continue working in this direction. World Bank guarantees are now especially important for the financial sector and may be of use for the manufacturing industries.”
Are only international parent banks’ subsidiaries eligible for such guarantees?
“They are eligible above all because their parent banks submit proposals to the MIGA. But this does not rule out the possibility that a purely Ukrainian entity can also apply to the MIGA.”
Do you think it is a good idea to nationalize problem banks?
“This is only one aspect of banking sector rehabilitation. The National Bank is now checking up the banking sector, and we will clearly know which of the banks do or do not need additional capital. As for nationalization, I think it is, above all, bank owners who should be interested in protecting their organizations. We would like a bank to be rehabilitated at the expense of its owner. But if, for some reason, the latter cannot do so, this will raise the question of which bank is to be bailed out. If the banks are part of a system, their collapse may cause problems for the entire banking sector. If this is the case, the state can be motivated to protect its financial system by providing these banks with additional capital. But if the banks are not part of a system, what’s the use of nationalization? It is far easier to cut their number and save the deposits via a deposit guarantee fund or some other instruments.”
You mentioned restructuring the banking system. How long can this last?
“It is difficult to forecast. But it is obvious that this cannot be done in one or two months. One must first finish the checkup and only then draw conclusions.”
This country must pay off several billion worth of foreign debts in 2009, including sovereign and corporate debts. Can this be done without problems in the conditions of a credit crunch?
“The question of foreign debts is a question of investors’ trust in Ukraine. Naturally, if all the investors choose to go, this will create problems. But I do not see this kind of tendencies on the Ukrainian market because many investors know: it is profitable to do business in Ukraine, for there is still an opportunity to make money.
The main thing is that there should be a macroeconomic program, a plan of structural reforms, and political will-and all this is being really implemented, as was agreed upon with our IMF colleagues. This helps to increase the refunding of banks and, hence, to reduce the so-called funding gap. All you have to do is take the measures stipulated by the anti-crisis program and the memorandum.”
The president said that the 2009 budget is going to be the most difficult to form and fulfill over the past 8 to 10 years. Is the World Bank prepared to offer Ukraine a loan again in case of a budget deficit?
“If the fiscal policy is well-considered and the overall economic picture fits in with the framework outlined by the IMF memorandum, the World Bank will be prepared to allot funds for the budget. But if they begin to promise to allocate the budgetary money to all, without taking into account whether these resources are available, and to pin hopes on World Bank funds alone, this will be unrealistic. We are aware that the next year will be difficult for Ukraine, and we are prepared to provide support. But we will be doing this within the framework of a well-balanced economic policy.”
Will you name the principal macroeconomic targets for 2009?
“It is too early to speak about this because the situation is not all too clear. I would like to say that our vision of macroeconomic dynamics in this country by and large coincides with IMF forecasts, but we will make our forecasts public later this year.”
Do you share the view that overcoming the crisis in the Ukrainian economy will depend on overcoming the budgetary crisis?
“I would put it differently. Ukraine is not a poor country and the Ukrainian budget is not poor, either. There is simply an opportunity to utilize its resources more effectively. Of course, it is much more difficult to do so in the conditions of an economic mess than when everything is all right. So I do not see a budgetary crisis but, on the contrary, I can see some levers for protecting effective budgetary programs by way of resource waste reduction.”
Can you confirm or deny that in your budgetary recommendations to the government you suggest reducing governmental support to offset the cost of imported gas for the public utilities sector?
“The whole question is what you mean by support. We would like utility rates for individual consumers and public service facilities to increase gradually — within two years-to the level of gas market price. This step will improve the financial state of these facilities, but it will also require support on the central, as well as local, level. Besides, the populace should understand that people all over the world pay for the real cost of energy. Why has it been different in Ukraine all this time?”
Is it really worthwhile to do this right now, when unemployment and wages are expected to rise and to drop, respectively?
“It is, naturally, difficult to do so, but you cannot avoid this. The resulting profits will also allow Naftohaz Ukrainy to repay the loans it had taken and to improve the quality of its utility services. This was done in 2006, when the average pay was lower than today, and this decision has not been canceled. As a matter of fact, you can no longer delay increasing utility charges.”
Do you think it would be a good idea to revise not only the utility rates but also the selection criteria for low-income individuals?
“This is why we are speaking about target-oriented subsidies. We are to aid, first of all, the poorest individuals. Let us get back to the scheme intended for the poorest. If you take 20 percent of the poorest Ukrainians, only three percent of this category are involved in the low-income family scheme. The state should look at this very category. And when these people obtain governmental aid and there still are resources left in the budget, one can begin to consider individuals with higher incomes.”
Why do you think that the existing anti-crisis mechanisms are working very poorly?
“It is too early to discuss this. I emphasize that one should first bring all the required mechanisms into play and only then see. But if they are not being utilized, if everything is always being blocked, if everybody has a plan that is ‘better’ than the other ones, then, of course, it will be unclear which plan is to be really implemented. This kind of approach will not make it easier to combat the crisis.”
In other words, you mean that we are talking more than we are doing?
“You said it, not I. There is an anti-crisis program and a memorandum signed with the IMF. You should fulfill the latter, and I think there will be a result.”
What is your attitude to the view that a floating exchange rate will be able to solve the balance of payments problem but, at the same time, will cause inflation and speculative actions on the currency market?
“Devaluation is important for setting a true rate of the hryvnia. Ukraine needs improved competitiveness, and a currency policy can help here. The rate should be regulated by means of a tough monetary policy supported by fiscal measures. One should also set the criteria of refunding in the banking system. This can and must be done. In my opinion, a more flexible rate is the only tool to absorb the international shock. This will not necessarily stir inflation and speculation. The main thing is that it should be clear to all market players what policy the National Bank is pursuing — then everything will be all right. It is a question of renewed trust in the actions of the National Bank and the government.”
What should the National Bank do to restore the trust of people and banks?
“It is better to ask private businessmen about this. It seems to me it is the question of communication, explanation, access to information, and consistency in actions.”
What kind of negative effect will devaluation have on the number of problem assets in the banking portfolio?
“Naturally, it will have a certain effect. This is why we are also working on banking sector rehabilitation schemes in order to see how strong this impact may be and how to react to this.”
What protection mechanism should be devised for the banking clients who are already paying an increased loan interest rate and, at the same time, see their profits dwindling?
“International experience shows: if a good client wants to defer paying the interest, there is such a thing as voluntary restructuring of the loan. To this end, the National Bank should adopt certain standards which would encourage banks to do so.”
What do you think are the ways of redistributing fiscal expenses in order to alleviate the social consequences of the crisis?
“I have already named some. I can add to this a more target-oriented nature of social security and increased investments in the infrastructure aimed at creating new jobs and increasing the demand for domestic resources, such as metal.”
Some people also say we can introduce progressive taxes on the income earned by natural persons.
“I do not know what immediate effect this will produce. I am not sure that there are many people for whom income tax is a great problem. Other taxes are more important.”
The point is that the funds saved from tax reduction can be utilized for paying increased loan interest rates or increased utility charges.
“But will the rich people pay if the tax goes up? I think there should be a different approach. One should think over introducing a system for more precise assessment of the incomes of natural persons. In this case your tax administration should apply some indirect methods: you should declare not only your official incomes but also the ownership of a car, an apartment, etc. Then all this is checked up and it is clear whether you paid the whole necessary amount or just a part of it. So if you improve your income declaration system, you will be able to collect more taxes than you do now.”
Will the reduction of the National Bank’s discount rate help renew crediting? If so, why?
“No, the reduction of the National Bank’s discount rate will not help solve the crediting problem. This will only weaken the monetary policy and increase monetary liquidity. And where does this liquidity go? It goes to the stock market, not to investments. Therefore, one should strengthen the monetary policy in order to keep up the rate of currencies.”
Can an enhanced Ukrainian-Russian trade potential be a more or less effective factor in overcoming the crisis in the national economy?
“It is good and convenient to increase trade with Russia, but we should think why this potential is not being fully tapped. If there are infrastructure-related or bureaucratic obstacles, they should be removed. On the other hand, there are proposals on establishing a single Russian-Ukrainian economic space. To implement this project, Ukraine should raise its tariffs to the level of Russian ones. But this may cause problems with the WTO.”
In other words, it is impossible to establish a single economic space because...
“Well, this is not ruled out, but there are certain WTO restrictions and requirements. It seems to me that the best way out of the crisis for Ukraine is expansion of trade with not only Russia but also with all countries of the world. Ukraine is now a WTO member and should develop this potential. Russia is one of the most attractive partners, but there are also countries of Europe, the Middle East, etc.”
Is the government doing the right thing by helping big business ride out the crisis, quite to the detriment of small and medium business?
“You are right. We should speak now about reforms for small and medium business in order to improve the overall business climate. As far as I know, a number of laws have been drawn up, which are expected to be supported in parliament by the entrepreneurship committee. It is about licensing certain types of [business] activity, reducing the number of permits, and reducing the minimum capital, which will allow people to create new companies and jobs. These laws will remove the bureaucratic barriers we have been talking about for ten years. You just have to remove these barriers, and this will speed up riding out the crisis.”
Can the failure to pass the law on public procurement jeopardize the Euro-2012 projects?
“This law is a must. And the sooner it is passed, the better. We have been working on its text together with the Ministry of Economics, and we support the agreed-upon version of the law, which we think is in line with international standards. The failure to pass the law may well thwart the effective utilization of all state resources. And if we are saying today that the state now lacks sufficient resources to assist low-income individuals and the country does not yet have a law on public procurement regulation, which annually consumes about 7 percent of the GDP, then you can make a conclusion yourselves.”
