World Bank says Ukraine economy shrinking faster than feared

AFP, Thursday 2 Oct 2014

The pro-Russia insurgency will see Ukraine's economy shrink by eight percent, even worse than feared, but Kiev must still not turn back from comprehensive reforms, the World Bank said Thursday.

"Disruption in economic activity in the east has resulted in a sharper GDP decline than we expected," said Qimiao Fan, the bank's director for Ukraine, Belarus and Moldova, who presented the latest report in Kiev.

"There is no easy way out of the current crisis," Fan added, urging the Ukrainian government to continue with structural reforms to turn the situation around.

Despite the risks of a drawn-out confrontation in the east, which has already killed more than 3,200 people and ravaged industrial infrastructure, Kiev's leaders must tackle institutional problems and "continue macroeconomic adjustment and structural reforms," he said.

Besides combatting corruption, Ukraine must deregulate the economy by getting rid of its "outdated laws that date back to Soviet times."

Kiev must also make sure that the burden of the reforms is shared so that they do not impact only the vulnerable parts of the population, bank officials stressed.

"The public needs to perceive that strict reforms are fair," said lead economist Lalita Moorty. "When high-level corruption goes unchecked, clearly that would rule out any public support for reforms."

The remarks followed similar calls by US Secretary of Commerce Penny Pritzker, who promised Kiev at the weekend that Washington would showcase the country to American investors once it sees committment to reform, notably if anti-graft legislation is approved within weeks.

Ukrainian lawmakers are expected to vote on the bills, which include the establishment of a special anti-corruption bureau and tougher punishment for graft, on Tuesday.

Provided these reforms, which also include laws streamlining bureaucracy, are pursued, gross domestic product will grow by three percent in 2016 and four percent in 2017, after falling by another one percent in 2015, according to the bank.

President Petro Poroshenko reaffirmed his committment to reforms at a meeting on Thursday with top Western companies and investment firms.

"Our goal is membership in the EU, European standards and values," he said ahead of the closed-door discussions.

"It is a significant number of reforms and problems. It is impossible to have 62 reforms at the same time, but we have no choice. Termination of the process of reformation will be catastrophic for the country." he said.

Ukraine's economy, already in uninterrupted recession since 2012, has been looking progressively more anemic as the five-month-long uprising rages on across industrial districts dotted with once-bustling steel mills and coal mines.

The World Bank had forecast a five-percent contraction in June, warning at the time that tightening economic sanctions on Russia were impacting growth across eastern Europe.

Industrial output disruptions in the ravaged Donetsk and Lugansk regions, parts of which have declared independence, are the biggest reasons for the decline, Fan said, adding that Russia's annexation of Ukraine's Black Sea peninsula of Crimea in March played a contributing role.

The International Monetary Fund said last month that the country may need an extra $19 billion in emergency assistance if the conflict continued through the end of next year.

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