Many reports have been published and conferences held in the last months on Ukraine’s economic reconstruction and reforms, focusing on ‘building back better’, preparation for EU membership, and the organisation of all these efforts (e.g. Gorodnichenko et al. 2022). Based on my experience with financial and economic reforms in Central and Eastern Europe, including in Ukraine, and preparation for EU Accession, in this column I offer some comments and suggestions for the organisation and implementation of the reconstruction and reform.
There are three groups of activities which we can distinguish: preparations on the donor side, preparations on the Ukrainian side, and implementation of all planned actions.
Since the beginning of the Russian invasion last year, at the initiative of the European Bank for Reconstruction and Development (EBRD), a group including the IMF, the World Bank, the EBRD, the European Commission, and the European Investment Bank (later joined by Ukraine, the US and the G7 Presidency) has been active in coordinating the donor response. In December, the G7 agreed on setting up a Donor Coordination Platform, with a political steering committee comprised of Ukraine, donors, international financial institutions (IFIs) and other organisations, an operational delivery coordination platform for on-the-ground activities, and a central secretariat at the European Commission headquarters in Brussels. So, while the organisation of coordination on the donor side more or less seems to be agreed upon, the next steps should be the further organisation of the platform, the content of the assistance, and the conditions upon which it will be provided. Clearly, the focus of the assistance will be on EU accession, physical reconstruction, and investments to reform the Ukrainian economy.
After the disappointing experiences with some of the younger EU member states, we should take a fresh look at the ‘Copenhagen criteria’ for EU accession. Above all, we must concentrate on the overlooked ‘fundamentals’ – the rule of law, democratic institutions, basic structures of the judiciary, market economy and public administration (Mathernova 2019) – before addressing the (presently) 35 chapters of the EU Acquis Communautaire and the ‘functioning market economy’.
As for the investments, in particular in public infrastructure, these will require extensive preparation of project promotors and funders, often taking several years. This will be helped by setting up a very good preparation and procurement system using best practice, international accepted rules, fast decision-making processes, and extensive training of involved officials.
This brings us to the financing of the planned activities. While it is clear that grants would be most helpful for Ukraine, in the beginning the understanding was that loans would be larger than grants, and for donors easier to budget and restructure in a later stage. Only after some months was it realised that loan disbursement, in particular of some European countries, was rather slow and that loans could contribute to Ukraine’s debt becoming unsustainable, with negative effects on the country’s attractiveness for international investors. The future points to a mix of grants and loans with very flexible conditions such as low interest, long grace periods, and long maturity. Many variants are feasible, including guarantees against exchange or political risk.
It is slightly worrying that no joint fund or pooling of financial resources is foreseen at this moment, and that individual donors would implement their contributions in line with their respective procedures and decision-making requirements.
While this seems to be easier from the donors’ perspective, and would increase their visibility, it requires substantial extra coordination and communication efforts as compared to single-source funding.
The necessary involvement of private finance will require the creation of an ‘enabling environment’: on the ‘macro’ level, acceptable legislation and regulation; and on the ‘micro’ level, support with project design and preparation, and mitigation to overcome the (perception of) high risk.
The conditions for releasing donor funds would be set by achieving milestones of the ‘fundamentals’, the Acquis Communautaire, major policies defined by the EU (such as the European Green Deal), and preparatory actions for investments (e.g. introducing specific legislation or setting up a specific fund).
During the Ukraine Recovery Conference in Lugano last July, an impressive National Recovery Plan (NRP) was presented by the Ukrainian National Recovery Council (National Recovery Council 2022a). Supported by 24 working groups,
it had accomplished a huge task by identifying recovery priorities and detailed national programmes (some of them adapted versions of earlier approved programmes), which are a good starting point for the implementation plan.
However, a review of the NRP published in November identified several shortcomings and areas for improvement, including inconsistencies, areas of overlap, lack of coordination, incorrect prioritisation of tasks, and a poor balance between different policy initiatives and their fiscal implications (Bogdan 2022). These deficiencies would have been prevented (and saved a lot of work in Stage 2 of the NRP) if top-down strategic planning and medium-term (economic, budget, fiscal) frameworks had been in place, as planned in Ukraine’s Public Finance Management Strategies for 2017-2021 (2017) and 2022-2025 (2021), and recommended in Public Expenditure and Financial Accountability (2019) and IMF (2019) reports. However, the recent Ukraine Recovery Plan for the Financial System makes no mention of these systems, but for one reference: “the medium-term budget planning was suspended” (National Recovery Council 2022b). This is a mistake. These systems should be developed and implemented in the near future, as they are important parts of public investment management systems and would facilitate the (regular) adjustment of the NRP, increase public data transparency, help better absorb and manage EU (pre-accession and structural) funds, and are indispensable for ensuring macroeconomic stability.
Figure 1 Important factors for public investment management
Source: IMF (2022).
Once preparations on both sides have been finalised, the implementation plan – combining agreed actions, timing, sequencing, budget, indicators, and conditions upon which the financing will be provided – will have to be drafted, with cooperation and coordination between donors and Ukraine. This could be done along the lines of the EU National Recovery and Resilience Plans, with specified amounts disbursed upon the achievement of specific conditions and milestones.
The support can be delivered in two parallel streams: a priority one aimed at ‘fundamental’ institution building, creating the ‘macro’ environment for investments and implementing low risk investments; and a second stream dealing with other institution building, preparing high risk investments, and the Acquis Communautaire.
Before the priority activities can start, the emphasis on the Ukrainian side should be on drafting a realistic National Recovery Plan, after which an implementation roadmap can be drawn up in consultation with the donors. Meanwhile, the donors should finalise setting up their platforms, with specific attention for project preparation, procurement, funding, and private sector involvement.
Bogdan, T, M Landesmann and R Grieveson (2022), Evaluation of Ukraine’s National Recovery Draft Plan, Vienna Institute for International Economic Studies
Gorodnichenko, Y, I Sologoub and B Weder di Mauro (eds) (2022), Rebuilding Ukraine: Principles and policies, CEPR Press.
IMF (2019), Ukraine: Technical Assistance Report-Strengthening Public Financial Management, Staff Country Report.
IMF (2022), PIMA Handbook, Public Investment Management Assessment.
Mathernova, K (2019), “Ukraine and EU”, in I. Mikloš and P. Kukhta (eds), Reforms in Ukraine after the Revolution of Dignity, SAGSUR
National Recovery Council (2022a), Ukraine’s Recovery Plan Blueprint.
National Recovery Council (2022b), Ukraine’s Recovery Plan: Financial System Functioning, Reform and Development.
Public Expenditure and Financial Accountability program (2019), Performance Assessment Report Ukraine.