Ukraine - Country Economic Memorandum : Strategic Choices to Accelerate and Sustain Growth

Abstract

This report undertakes a comprehensive
 assessment of Ukraine's growth experience over the past
 decade. It shows how vulnerabilities were allowed to
 accumulate during the economic boom. And how growth,
 averaging seven percent annually between 2000 and 2008, was
 achieved without tackling Ukraine's well known
 weaknesses in the investment climate and public sector
 governance. The report also traces the emergence of large
 structural fiscal deficits and fiscal pressures since 2004,
 as buoyant revenues and terms of trade gains masked an
 increasingly unsustainable fiscal position. It shows how
 international excess liquidity allowed Ukraine to attract
 vast capital flows, intermediated through the banking
 system, while financial sector regulation remained
 inadequate. And it analyzes how a poor investment climate,
 low competitive pressures, limited innovation and slow
 structural transformation of the economy are all interlinked
 and perpetuate Ukraine's dependence on a few commodity
 based exports. Consequently, the report argues, the route to
 sustained recovery in Ukraine lies in deepening key reforms.
 The report carries out an in-depth diagnostic of
 Ukraine's growth drivers at the macro, sector and
 firm-level and derives key constraints to sustained growth
 from this analysis. The recommendations point to three main
 challenges that deserve priority attention if Ukraine is to
 re-launch its economy on a sustained growth path. First,
 Ukraine has to tackle its fiscal crisis to restore
 macroeconomic credibility and create fiscal space for
 investments needed to support private sector growth. Second,
 Ukraine needs to improve its investment climate and fix the
 financial system to attract private sector investment.
 Third, Ukraine needs to tackle the problems with public
 sector governance through deep public sector, judicial and
 administrative reforms. Since this is a large agenda, the
 analysis identifies short and medium term priorities. The
 report also argues that the key reforms highlighted above
 are closely interlinked and that cosmetic and halfway
 measures will not do.