When Ukraine faced its big crises in 2014, the World Bank stepped up its game in a big way: $5 billion in support in the last two years alone, compared to just under $8 billion in the 22 years prior.
“As a development institution, we saw this as a huge opportunity to help the country,” Qimiao Fan, the outgoing director of the World Bank in Ukraine, Belarus and Moldova, told the Kyiv Post in a June 15 interview. “It was a huge, huge scale-up. It obviously that means we will not be able to continue at that pace.”
The World Bank also lifted its ban on direct budgetary support, imposed because of the lack of transparency in public spending by the regime of Viktor Yanukovych, the former president ousted in the EuroMaidan Revolution on Feb. 22, 2014.
Improvement seen
“Today, we see a difference for the better under the new government,” said Fan, who has lived in Ukraine for more than four years.
While Fan said World Bank support led to important changes in the energy and banking sectors that reduced corruption and will increase revenues for the state budget, Ukraine’s reforms are still incomplete in many ways.
“I leave Ukraine today with a considerable sense of optimism, but at the same time a serious sense of concern,” Fan said. “The optimism is because a lot has changed in the last two years. With support of the international community, Ukraine can do these difficult reforms.”
He also said Ukraine is blessed with talented people, a third of the world’s fertile black soil and easy access to eastern and western markets.
And now for the but.
“I’m worried because in the past what we have seen that every time the economy starts to stabilize and Ukrainians are no longer in desperate need of international assistance, they stop reforms,” Fan said. “This is not the time to stop these reforms. This is the time to accelerate, so the country can get over the top of the hill and the country can then have a much smoother ride.”
The World Bank divides its help in two categories: One is direct budget support for structural government reforms such as automation, better targeting of social payments and restructuring the banking sector. The other is long-term loans for infrastructure improvements in roads, water, sanitation, health care and district heating.
The two biggest success stories involving World Bank support involve the energy and banking sectors, which have” traditionally been two major sectors of corruption,” Fan noted.
In the energy sector, natural gas-trading intermediaries were deprived of huge profits after the government lifted household pricing to close to market levels.
In the banking sector, 77 out of 180 banks have been liquidated, at a cost to taxpayers of at least $3 billion from the state-funded Deposit Guarantee Fund.
But billions of dollars yearly will be saved from the changes, Fan said.
“By helping this country improve transparency in government, and efficiency, the amount of money you help the country save through these reforms can far outweigh any budget support we can provide,” Fan said. “Greater transparency is absolutely needed in Ukraine, not just in the banking sector but in every aspect of business, public administration and in the judicial system.”
Banking successes
One of the bright spots of reform is the liquidation of the so-called “pocket banks” or “corporate treasuries” — banks “controlled by oligarchs or other business interests” and operating with “very non-transparent” lending procedures. Often, bank owners would lend to themselves or people and businesses close to them and the money would not be repaid.
While related-party lending hasn’t ended, Fan said three steps have been taken to curb the practice: 1. public disclosure of a bank’s beneficiary owners; 2. new laws aimed to cut related-party lending; and 3; making the owners legally responsible for wrongdoing that causes a bank to fail.
“That is something that has never happened before,” Fan said. “We have to give them credit for doing so.”
Guaranteeing deposits (up to $8,000 per individual) is crucial to keeping faith in the banking system.
“This is the first time in Ukraine’s history that insured depositors got paid what they’re supposed to get paid by law, up to the guaranteed amount,” he said.
Banking challenges
But much more needs to be done, Fan said, including strengthening the legal powers of the National Bank of Ukraine to take stronger action against problem banks to prevent their assets from being stripped before liquidation. This insider looting has happened many times — most recently in June, involving the alleged theft of $40 million from Mikhailovsky Bank before the NBU shut it down.
“The NBU needs more legal tools to be able to deal with some of these issues more quickly,” Fan said. “From the time they identify a bank as problem a problem one to the point it’s declared insolvent, it takes too much time.”
Banks also “need to work down the stock of the non-performing loans so lending can resume in the economy,” Fan said. And tougher lending standards need to apply. “They should not be lending to everyone. They should be very selective to end to those viable enterprises that can pay back the loans,” he said.
As for greater transparency, Fan said he doesn’t believe that the state should make public a register of bad loans. He said better development of credit bureaus would eventually weed out bad borrowers.
Additionally, the nation’s second and third largest banks, state-owned UkrExImBank and Oschadbank should rethink their strategies. State banks should exist to fulfill needs not being met in the private market. “What specific market failures are each of these banks trying to address?” he asked.
“They’ve done a lot, but much more needs to be done,” he said.
Law enforcement
Just like the International Monetary Fund, the World Bank takes a hands-off approach to Ukraine’s badly broken and corrupt judicial system, from police to prosecutors and judges. “We’re not experts on law enforcement or the court system,” he said. “These are not areas we work on.”
Pensions
“This is a country that spends 13.4 percent of gross domestic product on pensions,” Fan said, a GDP that might only hit $100 billion in 2016. “They provide far too inadequate pensions for far too many people: Too many people are getting too little pensions. It’s clearly not sustainable. There needs to be some urgency to reform.”
Unfair taxes
Ukraine still has a long way to go in creating a broad-based simple program of taxation.
“The biggest problem is that the tax system has far, far too many exceptions, waivers and exemptions for special interest groups. Many of those tax laws in the past were tailor-made for special interest groups,” Fan said. “You can have a quite nicely written tax law, but underneath that in the law you have 50 exemptions. That’s no longer a very good law.”
He said the problem extends to public procurement rules.
“They had literally pages and pages of exemptions from competitive bidding,” Fan said. “In the end, it becomes a very bad law.”
The World Bank supported a successful change in the transfer pricing law that had been “used by some of the oligarchs and other interest groups to transfer profit outside the country so they don’t pay any taxes,” Fan said.
“Treat everybody equally you could potentially save the country billions of dollars a year,” he said. n
