The World Bank Group in Ukraine, 2012–20
This evaluation assesses the performance of the World Bank Group partnership with Ukraine in 2012–20, focusing on support for governance and anticorruption, crisis response and economic resilience, and energy security and efficiency.
The Bank Group contributed to the establishment of apex anticorruption institutions, promoting anticorruption reforms in some sectors (health, energy, social protection) and strengthening public financial management. At the same time, lack of direct engagement in justice sector and public administration reform diminished the impact of Bank Group support across the portfolio.
The Bank Group was part of an international coalition that helped stabilize the Ukrainian economy after the 2014–15 crisis, making a significant contribution to restoring the health and stability of the banking system and enhancing the technical and institutional capacity of the National Bank of Ukraine and the Deposit Guarantee Fund. The International Finance Corporation was an important contributor to corporate governance and risk management in the financial sector. However, despite substantial strengthening of macroeconomic fundamentals, Ukraine’s economy still faces a variety of risks, aggravated by the COVID-19 pandemic.
The Bank Group helped improve energy sector governance and put in place institutional arrangements to promote energy efficiency, including by playing a critical role in unbundling the natural gas monopoly, leading the dialogue on tariff and subsidy reforms, and helping to diversify energy supply. At the same time, reforms supported by the World Bank have not led to significant private investment in energy infrastructure modernization or tangible improvements in service to consumers.
Main lessons from this evaluation include the following: (i) sustained engagement, even when demand for reform was weak, and investment in country knowledge and analytics positioned the Bank Group to respond quickly when a political window of opportunity presented itself; (ii) a lack of engagement on aspects of justice reform undermined the impact of reforms in other areas, including the financial sector and anticorruption; in anticipation of significant engagement in Ukraine once military aggression against it ceases, the World Bank would be well advised to invest more in deepening its understanding of the links between specific weaknesses in the justice system and Ukraine’s ability to make progress on specific development objectives; (iii) public outreach and engagement to explain the reasons for reform and the costs of inaction are critical to sustain reforms; and (iv) institutional reforms that involve painful adjustments to households, such as tariff increases, need to be accompanied by improvements in service quality, including in infrastructure.
This Country Program Evaluation (CPE) reviews the effectiveness of the World Bank Group partnership with Ukraine during 2012–20. It discusses (i) the extent to which Bank Group engagement was relevant to the country’s main development challenges, (ii) the contributions of the Bank Group–supported program to development outcomes, and (iii) whether the Bank Group effectively collaborated with development partners. The CPE also draws lessons for future engagement. This CPE contains a special focus on three of the main challenges faced by Ukraine during the evaluation period and in which the Bank Group played a significant role: governance and anticorruption, crisis response and economic resilience, and energy security and efficiency.
Main Challenges and Outcomes
Ukraine has significant economic potential, but its economic and social development over the past three decades has been slow and highly volatile because of internal factors, exogenous shocks, slow adoption of market-based principles of economic management, and weak institutions. Many of the key development challenges, such as corruption, weak governance, lack of energy security, and ineffective public services, have persisted in the face of stop-and-go reform efforts.
This evaluation finds that between 2012 and 2020, the Bank Group helped Ukraine undertake several important reforms and, in some areas, establish foundations to break the cycle of reform and reversion. Before 2014, and despite low government interest in reform, the Bank Group invested in building country knowledge and local partnerships and was well prepared to respond when a political opening for reform presented itself. Since 2014, after the change of government and subsequent economic and political crises, the Bank Group has leveraged opportunities to significantly ramp up its activities and influence the trajectory of reform in Ukraine. The Bank Group has been able to provide effective support to the government to stabilize the economy and the financial sector, begin to tackle endemic corruption, reform the health and pension systems, and enhance energy security.
At the same time, many challenges remain unresolved. In a highly volatile political environment such as in Ukraine, it is difficult to gauge how well the policy and structural changes facilitated by the Bank Group will withstand geopolitical risks, pressures from powerful vested interests, and shifts in the preferences of Ukrainian people and their leaders. Ukraine’s economy remains vulnerable to macroeconomic and political risks, aggravated by the uncertainties of the COVID-19 pandemic. Vested interests are still well organized, and populist pressures for policy reversal have increased, slowing progress and drawing into question the credibility of the government’s commitment to anticorruption and the sustainability of many Bank Group–supported reforms.
Some of the important reforms supported by the Bank Group have yet to produce tangible results for the population. For example, the establishment of new high-level anticorruption institutions has not translated into higher rates of prosecution or improved public perceptions of the pervasiveness of corruption. Similarly, significant institutional and structural reforms in the energy and social sectors (for example, health and pensions), while important for resolving the fiscal crisis and reducing opportunities for corruption, did not result in more private sector investments in infrastructure or improved services. Lack of attention to important enabling areas with systemic impacts, such as justice sector and public administration reform, has also undermined the impact of progress in several areas.
World Bank Group Contributions
Responding to the different political situation after 2014, the World Bank broadened its engagement on governance and helped the government establish legal and institutional foundations for improving transparency and fighting corruption. The World Bank also supported sector reform programs (health, energy, banking) to advance the anticorruption agenda, including through tariff and subsidy reforms in the gas sector, modernization of bank supervision, and a deregulation effort to reduce administrative barriers for small and medium enterprises. At the same time, the effectiveness and sustainability of World Bank–supported reforms on governance and anticorruption continue to be undermined by weaknesses in the overall quality of public administration and lack of progress on reforming the judiciary.
The Bank Group was a key partner in helping Ukraine manage the severe economic crisis of 2014–15 caused by a triple shock from the disruptive change in government, the conflict in Eastern Ukraine, and a weak external environment. The Bank Group joined an international coalition to assist Ukraine by supporting the policy reforms needed to stabilize and resume economic growth. Substantial International Bank for Reconstruction and Development lending (alongside considerably larger International Monetary Fund and European Union rescue packages) helped the authorities reduce sizable fiscal and balance of payments deficits. The Bank Group focused on expenditure rationalization, particularly in social protection and pensions, energy tariffs, and subsidy reform. The Bank Group’s continued engagement in the financial sector provided effective and timely support during the crisis and helped improve the stability of the banking system. Nevertheless, despite substantial strengthening of macroeconomic fundamentals, Ukraine’s economy is vulnerable to macroeconomic shocks, which are aggravated by the COVID-19 pandemic.
The energy sector was a major contributor to the fiscal crisis through large subsidies for gas and the losses of the state-owned gas monopoly. The main obstacles to reform included market capture, weak sector governance, underinvestment, and heavy dependence on gas transit. The Bank Group provided assistance to enable tariff and subsidy reform, unbundle the gas monopoly, strengthen institutional arrangements for promoting energy efficiency, and build regulatory capacity. However, improvements in the quality and reliability of services and the credibility of regulatory mechanisms and institutions still lag. Reforms were not sufficient to attract private investment for sector modernization and to enhance customer satisfaction and choice.
This CPE offers the following lessons:
- Continuity of engagement during periods of weak demand for reform positioned the Bank Group to respond quickly when a window of opportunity presented itself. When there was little appetite on the part of the government for significant policy reform (2012–13), the World Bank invested heavily in analysis and partnerships at the technical level of government. These efforts helped the World Bank respond rapidly after the change in political leadership.
- Greater attention was needed in the justice sector given its importance to the efficacy of reforms across a range of other sectors. This lack of attention was particularly relevant to the effectiveness of anticorruption reforms and to reforms in the energy and banking sectors. Entrenched interests often used the justice system to neutralize the impact of reforms in other sectors, thereby undermining the credibility of the broader reform effort and commitment to change.
- Effective communication by the World Bank through outreach and engagement with civil society organizations is important to help the public understand the reason for reforms and the costs of not reforming. Although Bank Group strategies envisaged broad engagement with civil society and the private sector, implementation was uneven across sectors, with communication on banking sector reform particularly lacking.
- Institutional reforms that impose a burden on citizens need to compensate by making progress in service delivery. Despite many accomplishments, Ukrainians remain deeply skeptical about the overall progress and impact of reforms on their daily life. Institutional reforms that impose painful adjustments on the citizenry (such as tariff increases) need to be paired with improvements in service quality, including in infrastructure.