Report No. PIC1776 Project Name Ukraine-Rehabilitation Loan Region Europe and Central Asia Sector Economy-wide Project ID UAPA9108 Borrower Republic of Ukraine Principal Responsible Ministry of Finance Entity 12/2 Hrushevsky St. Kiev, Ukraine 2008 Telex: 7-044-131450 Date PID Prepared March 21, 1995 Appraisal Date November 1994 Board Date December 22, 1994 Country and Macroeconomic Background 1. Ukraine has a land mass that is the largest in Europe (with the exception of the European part of Russia) and a population of 52 million that ranks fifth in Europe. GNP per capita was estimated at US$ 1,910 in 1993, down from US$ 2,340 in 1991 at the time of the breakup of the FSU. After declaring its independence in August 1991, it took Ukraine more than three years before it launched a meaningful economic reform program. 2. Under the leadership of President Leonid Kuchma, Ukraine began in October 1994 to lay the foundations for macroeconomic stabilization and structural reforms with the objectives of reducing inflation and promoting sustainable economic recovery and better living conditions for the population. In support of the Government's program, the IMF approved a first purchase of $370 million under the Systemic Transformation Facility (STF) in October 1994. The program included measures to reduce the budget deficit and limit credit expansion as well as to improve international competitiveness. A Standby Arrangement (SBA) has been submitted to the IMF Board for consideration in late March 1995. The SBA aims to reduce inflation and consolidate the stabilization program. 3. The economic reform program consists of two main parts -- a stabilization program and a program of structural reforms. The structural reform program has three main components: (i) measures to promote competition by letting markets function and removing the inhibiting role of the state towards the private sector; (ii) policies to harden the budget constraint on enterprises, farms and banks through privatization, elimination of subsidized credit and other transfers to loss-making enterprises, and the restructuring of state enterprises into commercial entities; and (iii) measures to strengthen the social safety net for the most needy groups of the population through improved targeting of benefits. All these actions are necessary to promote a more efficient use of resources and to create the conditions for a stable and sustainable improvement in the living standards of the population. Objectives and Description of the Rehabilitation Loan 4. The main objective of the loan is to support the Government's economic reform program to stabilize the economy and create the conditions for a resumption of economic growth. Other objectives are to (i) provide foreign exchange for the purchase of critical imports, including for the private sector; (ii) provide budgetary support for the strengthening of the social safety net for the neediest; (iii) improve the functioning of the foreign exchange market; and (iv) provide a framework for financial assistance from other donor agencies. 5. The loan supports policies that: (a) promote the development of competitive markets -- through price liberalization, liberalization of domestic trade, reform of the external trade regime including abolition of the system of state orders, and private sector development; (b) result in improved financial discipline and hard budgets for enterprises, farms and banks -- through privatization of small, medium and large enterprises and agricultural land, enterprise management reform and restructuring, financial sector reform, and restructuring of the power sector; and (c) improve the targeting of benefits to the most needy and strengthen the social safety net, especially to protect children in poor families and poor pensioners against the impact of price adjustments and subsidy removals. Terms and Features of the Loan 6. The loan was approved by the World Bank's Board of Directors on December 22, 1994. Amount: US$500 million equivalent Terms: Seventeen years maturity with a five year grace period, at the Bank's standard variable interest rate. Disbursement: - US$0 million was made available for disbursement when the loan became effective (December 27, 1994). US$100 million (20 percent of the loan) was used to finance retroactively eligible imports that were procured in the four months preceding effectiveness. - A further US$0 million is expected to be disbursed after April 1, 1995 on the basis of a satisfactory review of the progress in the overall program. Poverty: Poverty focussed. The program includes measures to: (i) protect low Category: low income households from the impact of increases in prices; (ii) strengthen mechanisms to deal with unemployment; and (iii) monitor the impact of adjustment on the poor and unemployed. Environment: As an adjustment operation, the project does not require an environmental assessment. - 2 - 7. Procurement under the project follows standard procedures as spelled out in the "Guidelines for Procurement under the IBRD Loans and IDA Credits". The standard negative list has been agreed with the Government. In an effort to improve institutional capacity with respect to procurement, technical assistance is being provided by UNCTAD/GATT to prepare an operational program for international competitive bidding by Ukrainian entities. Preparation of a public procurement law constitutes part of this program. Financing 8. The loan is made to the Republic of Ukraine, represented by the Ministry of Finance. The proceeds of the loan are being disbursed upon evidence that imports of eligible goods have taken place during the period. As agreed with the Government, disbursements are being made through the National Bank of Ukraine (NBU) and an account of the Ministry of Finance at the NBU is being credited with the karbovanets equivalent at the market exchange rate as determined on the interbank exchange market; the Government thereby receives non-inflationary budget support. The foreign exchange receipts of the loan are being sold by the NBU in the interbank exchange market or are held in reserve in accordance with the objectives of monetary policy. Implementation 9. The Government has set up a Council on Economic Reform under the chairmanship of the First Deputy Prime Minister to oversee, coordinate and monitor the implementation of the Government's reform program. Within the Council, a committee chaired by the Deputy Prime Minister for Finance and Banking and consisting of all the ministries and agencies concerned, including those of Finance, Economy, Energy, Agriculture, Labor, Social Protection, the State Property Fund and the NBU will monitor and coordinate the implementation of policies under the proposed loan. 10. Overall coordination of project activities and general loan administration is the responsibility of a project manager, located in the office of the Deputy Prime Minister for Finance and Banking. Officials in the Ministry of Economy and the Ministry of Finance provide support to the project manager, who works solely on the implementation of the project. The manager is responsible for preparing applications for disbursement of World Bank funds, maintaining project accounts and arranging for their timely audit, monitoring overall loan implementation, and preparing monthly progress reports. Implementation Progress 11. Performance under the loan has been good. In the period December 27, 1994-March 21, 1995, disbursements totalled $190 million (the remaining $60 million of the first $0 million is expected to be disbursed in April 1995). Release of the second $0 million is subject to a review of economic performance in March/April 1995. Benefits -3- 12. The implementation of reforms will help to restore macroeconomic stability and reverse the decline in economic activity, thus creating new jobs and improving living standards. This objective will also be served directly through the increased availability of foreign exchange to alleviate critical production bottlenecks. The local counterpart funds from the Bank loan will directly benefit the poor insofar as these are used to augment the resources targeted for them. Risks 13. The main risks relate to the pace of implementation of reform measures. A slow-down could happen either because of opposition to the structural reforms in Parliament (which has not been the case since October 1994 as the Government has successfully pushed its legislation through Parliament) or because of constraints in implementation capacity within government. The first risk is being mitigated by the special attention that the Government is devoting to its public information campaign, which highlights the special features of the economic reform program. For example, the mass privatization program is designed to ensure that every citizen gets a share in state property and that the citizens are informed of their rights. The Bank also is mounting a public economic education program, maintaining close contacts with Parliamentarians, and persons in the media and academia. Weaknesses in implementation capacity will continue to be addressed through technical assistance in various sectors, as well as by efforts to design policies that minimize the burden on the various agencies. Task Manager: Ritu Anand, EC4C2 (202) 473-2962 (tel) (202) 477-3378 (fax) Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 4 -