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Ukraine: Continuing Reform Momentum Key to Accelerating Growth

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Cyril Muller, World Bank Vice President for Europe and Central Asia, visited Kyiv today to commend Ukraine on the wide-ranging reforms the country has undertaken recently and which led to the approval of a $750 million Policy Based Guarantee for budget financing by the World Bank in December 2018. Muller also discussed how Ukraine can boost economic growth going forward, underscoring the importance of maintaining the reform momentum for the benefit of all Ukrainian citizens.

“The Policy Based Guarantee is a major achievement because it supports historic reforms to strengthen the foundations of economic growth and macroeconomic stability in Ukraine,” said Mr. Muller. “It will help Ukraine raise $1 billion from international markets to finance its budget at a time when access to markets is particularly constrained.”

Mr. Muller met with Prime Minister Volodymyr Groysman, as well as the Minister of Finance, Minister of Education, and the National Bank of Ukraine, to discuss the country’s reform plans going forward to boost economic growth and living standards. Muller also met with members of the Public Council of International Experts participating in the selection of judges for the High Anti-Corruption Court.

“Over the last couple of years, Ukraine has taken major steps to reforms pensions, health care, and energy subsidies, and has approved legislation to establish an anti-corruption court, and strengthen state-owned banks,” said Muller during his visit. “But more needs to be done to build upon the results achieved to date, especially with regard to opening the land market, unbundling the gas sector, and cleaning up non-performing loans.”

In Kyiv, Mr. Muller also participated in the launch of a new World Bank report, “Ukraine’s Growth: Past, Present, Future”. The study argues that achieving high, inclusive and sustainable growth will require higher productivity of the domestic economy, more benefits from trade and integration into the global economy, and stronger domestic economic institutions to withstand pressures from vested interests.

The report argues that reforms in three areas, in particular, are needed to reignite productivity growth: 1) creating supportive conditions for private sector development by adjusting the role of the state; 2) addressing corporate debt overhang by strengthening the legal framework, strengthening the financial system, and shoring-up the fiscal position of the government; and 3) strengthening Ukraine’s markets by lifting the moratorium on agriculture land sales and increasing incentives to accumulate savings and human capital.

Since May 2014, the World Bank has provided a total of $5.5 billion to Ukraine (including four development policy loans and seven investment operations), as well as a $500 million gas guarantee. The World Bank’s investment projects support improving basic public services that directly benefit the people of Ukraine, by improving water supply, sanitation, heating, power, roads, social protection and healthcare, as well as private sector development.

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CAR Economic Update: A Call for Domestic Revenue Mobilization to Sustain Growth

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The second edition of the Central African Republic (CAR) Economic Update, which was published today by the World Bank, examines evolving economic trends in the country and proposes options to boost domestic revenue by improving tax and customs policy and administration.

Titled “Strengthening Domestic Revenue Mobilization to Sustain Growth in a Fragile State,” the report notes that the improved security situation is leading to brighter economic prospects, with the real GDP growth rate estimated at 4.8% for 2019. The authors indicate that although the country’s growth rate has outpaced that of countries in the Central African Economic and Monetary Community (CEMAC) and Sub-Saharan Africa, it continues to lag behind peer countries such as Burkina Faso, Malawi, Mali, Niger, and Uganda.

CAR has not experienced sustained growth since gaining independence in 1960. With the signing of the Political Agreement for Peace and Reconciliation in February 2019, the economic outlook is, however, positive,” states Wilfried A. Kouamé, World Bank economist and lead author of the report. “The successful implementation of the peace agreement is critical for jumpstarting growth. By implementing this agreement in the run-up to the elections, we are expecting growth of around 5% in the medium term.”

The report also reveals that while CAR is still at high risk for debt distress, its efforts to streamline public expenditure and clear domestic arrears are driving down the public debt level to below CEMAC and Sub-Saharan Africa averages and bringing it closer to the debt levels of its peers.

Han Fraeters, World Bank Country Manager for the Central African Republic, explains that “this report aims to help the government and its development partners identify opportunities and address challenges in order to move forward on combating extreme poverty. Domestic resources will therefore have to be mobilized to boost public revenue and enhance delivery of basic public services, which are pivotal to guiding the country into a virtuous cycle of peace and security. The upcoming elections will require sound fiscal discipline and provide a unique opportunity to place the country on a path of sustained growth.” 

The report presents a number of options to address the growing needs of Central Africans:

Strengthen the social contract: The social contract between the State and its citizens, which is vital to mobilizing tax revenue, was undermined by the recent crisis. To strengthen the social contract, the State must undertake to improve the efficiency and quality of goods and social services, while restoring the trust of taxpayers to encourage them to move out of the informal sector and pay their taxes.

Broaden the tax base: CAR’s tax revenue currently accounts for approximately 8% of GDP, which is below its potential and among the lowest in Sub-Saharan Africa. CAR could consider increasing the tax rates on alcohol and tobacco products in the short term, and reducing the number of tax brackets that hinder business creation and development in the long term. 

Improve property tax collection:  Legislation on property taxation has not been updated to reflect recent economic developments. Current revenue collection is inefficient and is based on a declarative system that narrows the tax base. New legislation could generate close to CFAF 12 billion (roughly $22 million).

Limit tax exemptions: In 2016, tax exemptions were a major source of lost tax revenue for the country (almost CFAF 2.4 billion or roughly $4 million). A significant share of these exemptions were granted to the private sector and related primarily to VAT. The adoption of the new investment charter in 2017 and the implementation of reforms aimed at curbing tax exemptions and improving the business environment to attract private investment require the firm commitment of the authorities and a formal legal system to institute legal proceedings in the event of abuse.

Modernize the tax system: Strengthening tax administration capacity is critical to improving the tax system. This requires heavy investment in the computerization of public administrations and the purchase of the equipment and software needed to improve revenue collection.  Computerization will help curb abuse and corruption, trace transactions related to taxes and duties, facilitate the sharing of information between tax and customs authorities, and enhance the efficiency of financial boards.

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Afghanistan Improves its Growth Despite Uncertainty

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Afghanistan’s economy grew by an estimated 2.9 percent in 2019, driven mainly by strong agricultural growth following recovery from drought, but lingering political uncertainty dampens private confidence and investment, says the World Bank.

Released today, “Navigating a Sea of Uncertainty”, the latest edition of the twice-a-year Afghanistan Development Update examines recent key economic developments and focuses on the impacts of current uncertainties around the outcome of the September 2019 presidential election, levels of future international civilian and security support, and the prospect of a peace agreement with the Taliban. The Update also includes special topic reflecting on achievement of development outcomes since 2001 .

“Growth picked up in Afghanistan in 2019. This is good news, but insecurity and political uncertainty are holding back the Afghan economy,” said World Bank Country Director for Afghanistan Henry Kerali. “Afghanistan needs to ramp up the pace of reforms to generate faster growth necessary to improve the living standards of its people and reduce poverty.”

The report notes that as drought impacts further recede and private sector confidence improves following conclusion of the presidential election, growth is expected to accelerate to 3.3 percent in 2020. Over the medium-term, growth is projected to hover around 4 percent provided that the security situation does not further deteriorate and that international aid support continues. Growth prospects are subject to other significant downside risks, including further political instability, unexpected cuts in foreign aid, and adverse regional developments.

Domestic revenue collection reached a new high of 14.5 percent of GDP in 2019, up from 13.3 percent in 2018. Strong revenue performance reflected both progress in establishing a robust tax system and substantial one-off revenues, including transfers from the Da Afghanistan Bank.

The potential for much-faster growth exists but remains dependent on continued support from the international community and the Afghan government’s commitment to pushing business environment and anti-corruption reforms, the report says.

“The international community needs to maintain its support to Afghanistan over the medium-term to sustain the country’s recent development progress and help realize its long-term growth and self-reliance prospects. In this effort, the Afghan government needs to assure its international partners that progress is being made on governance and that aid resources are used efficiently,” saidKerali.

To improve confidence in the short-term, the Development Update notes the need for Government to accelerate improvements in business environment and anti-corruption reforms.

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Shaping the Conference on the Future of Europe

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European Commission set out its ideas for shaping the Conference on the Future of Europe, which should be launched on Europe Day, 9 May 2020 and run for two years. The Communication adopted is the Commission’s contribution to the already lively debate around the Conference on the Future of Europe – a project announced by President Ursula von der Leyen in her Political Guidelines, to give Europeans a greater say on what the European Union does and how it works for them. The Conference will build on past experiences, such as citizens’ dialogues, while introducing a wide range of new elements to increase outreach and strengthen ways for people to shape future EU action. The Conference will allow for an open, inclusive, transparent and structured debate with citizens of diverse backgrounds and from all walks of life. The Commission is committed to follow up on the outcome.

The Commission proposes two parallel work strands for the debates. The first should focus on EU priorities and what the Union should seek to achieve: including on the fight against climate change and environmental challenges, an economy that works for people, social fairness and equality, Europe’s digital transformation, promoting our European values, strengthening the EU’s voice in the world, as well as shoring up the Union’s democratic foundations. The second strand should focus on addressing topics specifically related to democratic processes and institutional matters: notably the lead candidate system and transnational lists for elections to the European Parliament.

Ursula von der Leyen, President of the European Commission, commented: “People need to be at the very centre of all our policies. My wish is therefore that all Europeans will actively contribute to the Conference on the Future of Europe and play a leading role in setting the European Union’s priorities. It is only together that we can build our Union of tomorrow.”

Dubravka Šuica, Vice-President for Democracy and Demography, stated: “We must seize the momentum of the high turnout at the last European elections and the call for action which that brings. The Conference on the Future of Europe is a unique opportunity to reflect with citizens, listen to them, engage, answer and explain. We will strengthen trust and confidence between the EU institutions and the people we serve. This is our chance to show people that their voice counts in Europe.”

A new public forum for an open, inclusive and transparent debate

The Commission sees the Conference as a bottom-up forum accessible to people well beyond Europe’s capitals, from all corners of the Union. Other EU institutions, national Parliaments, social partners, regional and local authorities and civil society are invited to join. A multilingual online platform will ensure transparency of debate and support wider participation. The Commission is committed to taking the most effective actions, with the other EU institutions, to integrate citizens’ ideas and feedback into EU policy-making.

Background

All Members of the College will play their part in helping to make the Conference a success, with Vice-President Šuica leading the Commission’s work on the Conference, supported by Vice-President Jourová on the institutional strand, as well as Vice-President Šefčovič on the foresight and inter-institutional side.  

The European Parliament and the Council are also working on their contributions to the Conference on the Future of Europe. The European Parliament resolution of 15 January 2020 called for an open and transparent process which takes an inclusive, participatory and well-balanced approach towards citizens and stakeholders. Meanwhile, the European Council conclusions of 12 December 2019 called on the Croatian Presidency to begin work on the Council’s position. The Croatian Presidency has itself listed the Conference among its Presidency Priorities.

After this, it is of crucial importance that the three institutions work together towards a Joint Declaration to define the concept, structure, scope and timing of the Conference on the Future of Europe, as well as setting down its jointly agreed principles and objectives. This Declaration will later be open to other signatories including institutions, organisations and stakeholders. National and regional Parliaments and actors have an important role to play in the Conference and should be encouraged to hold Conference-related events The Commission underlines in its contribution today that it is commited to follow up on the outcomes and recommendations of the different debates.

The Commission proposes to officially launch the Conference on Europe Day, 9 May 2020 – 70 years after the signing of the Schuman Declaration and 75 years after the end of the Second World War.

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