Economic reforms

Section 1. Monitoring of the implementation of recommendations on reform priorities for 2020–05.2021

1. To adopt the budget declaration based on the three-year budget planning.

Done

On May 31, 2021, the Cabinet of Ministers of Ukraine approved the budget declaration for 2022-2024 by the Resolution №548. Although amendments to the Budget Code of Ukraine on the introduction of medium-term budget planning were adopted in December 2018, this is the first formally approved budget declaration (the first declaration was prepared by the Ministry of Finance in 2019, but was never approved by a governmental decision).

Despite some weaknesses, the budget declaration approved by the government generally meets the requirements of this document, and its adoption can be considered a significant achievement of fiscal policy reform.

Subsequently, this reform can be either intensified or ignored in the Parliament. According to the Budget Code of Ukraine, it is the Parliament that will consider the declaration approved by the Government and directly adopt the annual budgets, which will correspond to or contradict the three-year plan approved by the Government.

2. To review of budget expenditures in accordance with the functions and objectives.

Not done

For 2019-2020, it was planned to conduct expenditure reviews in 24 areas of budget. Appendix to the order of the Cabinet of Ministers of Ukraine of May 19, 2021 № 470-r it states that the reviews were not completed in 14 of the identified 24 areas. The effectiveness of completed reviews is also unclear. As of 2021, this order identified only two areas for expenditure reviews.

Although the very fact that the government's order was adopted is a positive sign of attention to the issue, the pace of expenditure reviews is unsatisfactory. In turn, without spending reviews, funding for key managers will continue to follow the previous practice without revising the strategic priorities for spending limited resources.

Unfortunately, we do not observe proper leadership from the current government in terms of accelerating expenditure reviews. The experience of 2019-20 shows that only the efforts of the Ministry of Finance without the political support of the Prime Minister are not enough to achieve a significant revision of budget expenditures.

3. To ensure independence of the NBU and continuation of the policy of inflation targeting and flexible exchange rate formation

Partially done

Formal decisions that would violate the status quo under this recommendation were not made during the analyzed period. At the same time, the independence of the National Bank of Ukraine and the policy of inflation targeting were actually undermined.

On July 1, 2020, the Chairman of the NBU Yakiv Smoliy wrote a letter of resignation. "For a long time, the National Bank of Ukraine has been under systematic political pressure. With my resignation, I seek to warn against further attempts to undermine the institutional foundations of the central bank in Ukraine," Yakiv Smoliy stated. This was preceded by a long conflict between the NBU Board and the NBU Council appointed by the politicians, which escalated after the Council refused to approve the appointment of Oleh Churiy, Deputy Chairman of the NBU, to the NBU Board for a second term. At the same time, the policy of the National Bank became the object of harsh criticism of politicians. In particular, the former Minister of Economy of Ukraine Ihor Petrashko and the Chairman of the Parliamentary Committee on Finance, Tax and Customs Policy Danylo Hetmantsev called for a significant easing of monetary policy and an increase in inflation to 10% per year (for the target corridor of the NBU 5 +/- 1%).

Contrary to the principles of the Law on the National Bank, which was amended in 2015 in accordance with the agreements with the IMF, the new Chairman of the NBU Kyrylo Shevchenko focused on forming his team in the Board of the NBU. Within three months of his appointment, three of the six members of the NBU Board changed. The Chairman of the NBU redistributed powers among the members of the Management Board in order to narrow the responsibilities of the members of the previous Management Board. They were put under additional pressure by the NBU Council appointed by politicians, which reprimanded Kateryna Rozhkova and Dmytro Solohub and expressed distrust. The collegial decision-making model introduced in 2015 was replaced by the classic vertical, where collegial bodies have a more of an advisory than a decisive voice. This led to mass layoffs of middle management.

The change of the NBU Chairman under political pressure made the National Bank more flexible to the wishes of politicians. Justifying it by the challenges of the coronavirus crisis, the NBU has significantly expanded banks' access to long-term financing and at the same time significantly reduced the discount rate. This has allowed policymakers to make progress in lowering interest rates and increasing the availability of credit for businesses and individuals.

As a result, against the background of global inflation trends in the first half of 2021, the consumer price index flew beyond the target corridor of the NBU 5 +/- 1%, and in May amounted to + 9.5%. At the same time, the National Bank maintains the discount rate at a real negative level.

The politically motivated change of the NBU Chairman caused great concern and the first delay in the schedule of reviewing the implementation of the IMF loan program. As of June 2021, we have seen a lack of positive IMF decisions for a year now, despite the current program and the high need for funding this year.

Threats

4. To launch of large-scale privatization.

Partially done

In November 2019, amendments to the legislation on privatization of state property came into force. They have significantly reduced the list of companies banned from privatization and removed obstacles to both large-scale and small-scale privatization.

In late 2019 - early 2020, a number of large enterprises were transferred to the State Property Fund of Ukraine for large-scale privatization, including Elektrovazhmash and United Mining and Chemical Company, which is now the first candidate for large-scale privatization, with an auction scheduled to August 2021. Similarly, more than 500 small enterprises were transferred to small-scale privatization during the same period.

As a result of active actions of the State Property Fund of Ukraine, even after the change of government in spring 2020, in 2020-21, great progress was made in terms of small-scale privatization. At the same time, under the pretext of the coronavirus crisis, the Parliament suspended large-scale privatization in March 2020. This decision was revoked only in April 2021.

Thus, for the eighth year since the Revolution of Dignity, despite constant talks about privatization, no large enterprise has been sold in Ukraine under various pretexts. This once again underscores the reluctance of the Ukrainian politicians to lose opportunities (particularly corruption), which give them control over state-owned enterprises.

5. To continue the reform of corporate governance of state-owned enterprises (creation of independent supervisory boards at least on 10 enterprises per year).

Not done

There is a general regression in this direction of recommendations. Although an independent supervisory board was established at one state-owned enterprise in 2020 (SJSC Automobile Roads of Ukraine), the scale of the recourse was significantly larger.

On April 28, 2021, the Cabinet of Ministers of Ukraine dismissed Andriy Kobolev, Chairman of the Board of Naftogaz Ukraine, and appointed Yuriy Vitrenko as the new Chairman of the Board. Since according to the company's charter and the law on joint-stock companies submission of proposals on appointment/dismissal of the chairman of the board and adoption of the relevant decision is in the competence of the exclusive Supervisory Board, the Cabinet of Ministers dismissed the existing company’s Supervisory Board for two days, and held a general meeting of the company to change the Chairman of the Board in its absence.

Although from a legal point of view the dismissal of the chairman of the board was legitimate, in fact there was a violation of both the spirit of the law and the principles of corporate governance reform, which was aimed at depoliticizing the management of state-owned enterprises. At the same time, the attention (in particular, of the IMF) of the reform was focused specifically on Naftogaz Ukraine, given the size of the company, as well as the threat of a quasi-fiscal deficit, which in 2014 reached 5% of GDP.

As a result of the decision of 28 April, the independent members of the nomination committee for the selection of managers and members of the supervisory boards of particularly important enterprises representing international organizations refused to participate in the work of the committee.

According to the Interfax-Ukraine news agency, since May 1, due to the fact that the nomination committee did not elect independent members, there are no supervisory boards in 12 large companies, the controlling stakes of which have been transferred to the State Property Fund of Ukraine. In particular, this list includes the Odessa Port Plant (OPP), Centrenergo, Turboatom, Energotyazhmash, five state-controlled regional power companies (excluding Ternopiloblenergo), Kharkivenergozbut, Dnipro and Kryvyi Rih CHPs.

Thus, we generally observe the loss of political will to depoliticize the management of state-owned enterprises and the rollback of this process.

Threats

6. To open of the market of agricultural lands from 2020.

Partially done

On March 31, 2020, the Draft Law on Amendments to Certain Legislative Acts of Ukraine Concerning the Circulation of Agricultural Land was adopted in the second reading. It lifted the moratorium and established the land market from July 1, 2021. The bill was signed by the President on April 28, 2020. It states that:

From July 1, 2021, the moratorium on the sale of agricultural land will be lifted.
From July 2021 to January 1, 2024 there will be restrictions on the purchase of land - no more than 100 hectares in per person. From 2024, the limit will be increased to 10,000 hectares per person.
From July 1, 2021 to January 1, 2024, only private individuals will have a right to purchase land.
The issue of granting the right to purchase agricultural land to foreign citizens must be decided by referendum.

To ensure the proper legal framework for the functioning of the land market, a number of bills were additionally adopted: №0858 on combating raiding, №2195 on electronic auctions, №2194 on deregulation in the field of land relations, №2370 on national geospatial data infrastructure, №2280 on land use planning.

Thus, all the necessary laws for the technical launch of the land market have been adopted. But due to extremely strict restrictions on land purchase, it will not ensure full use of the potential of agricultural land to increase productivity.

0 comments

Only authenticated can comment

Section 2. The current major challenges in the implementation of the reform

As in other key areas of reform, the main challenge is the reluctance of politicians to lose control of institutions that must be politically independent in an effective democracy and economy.

In the area of economic reforms, it creates a risk of halting and rolling back reforms in key areas such as the independence of the National Bank of Ukraine, as well as in the privatization and depoliticization of corporate governance of state-owned enterprises. It also hinders the strengthening of the Antimonopoly Committee, which could become a powerful mechanism for de-monopolization and de-oligarchization.

An important challenge, in particular, regarding the implementation of recommendations in the field of budget policy and optimization of public expenditures, is the incomplete public administration reform. Strategic planning and revision of expenditures is not possible without the civil service and government procedures of a different quality than currently available. This problem was further complicated during the pandemic, when the already limited resources of the public administration system were aimed at minimizing its consequences, rather than complex reforms.

High share of redistribution of expenditures through public finances remains to be one of the key problems, which in 2020 amounted to more than 45% of GDP, which negatively affects the growth of the country's economy. Economic theory, confirmed by practical experience, determines the relationship between the level of national expenditure and GDP growth. According to CASE Ukraine (2021) and the Center for Economic Strategy (2015), the optimal range for our country is the range of 33–37% of GDP, at which the GDP growth rate will be the highest.

Finally, a serious barrier and challenge to the implementation of certain economic reforms is their unpopularity among citizens. This applies to the already mentioned land reform, as well as the market formation of prices and tariffs, primarily for energy. Rising inflationary pressure will threaten further rollback of reforms in pricing and tariff policy.

0 comments

Only authenticated can comment

Section 3. Recommendations on priorities for next year's reforms

The monitoring revealed that the progress in the field of economic reforms in 2020-2021 was extremely insufficient. Recommendations on priority actions for 2020-2021 remain relevant.

The priority steps of economic reform next year should be:

Preservation of macroeconomic stability. It is necessary to prevent further regression in the independence of the NBU and to maintain a credible policy of inflation targeting in order to prevent the unwinding of the inflationary spiral. Cooperation with the IMF should be resumed to ensure cheap debt refinancing with minimization of expenses of money of taxpayers for their service. With Ukraine's exit from the coronavirus crisis, the budget deficit should return to a comfortable level of 2-3% of GDP for assessing Ukraine's credit risks.

Privatization of state enterprises. The experience of 2020-21 shows the lack of resilience of corporate governance procedures of state-owned enterprises to political interference. Privatization, even of minority interests, significantly reduces the influence of politicians on the operational activities of state-owned enterprises, and the associated inefficiencies and corruption risks. Therefore, it is necessary to accelerate the privatization of state and municipal enterprises, as well as state-owned banks.

Strengthening the antitrust policy. It is necessary to introduce transparent selection of members of the Antimonopoly Committee with the participation of independent experts with a casting vote, guarantees of political dismissal, and to strengthen sanctions for violations of antitrust law and non-compliance with the requirements of the Committee. An antitrust law that requires the sale of a business share that exceeds the concentration limit should be enacted.

Optimization of national expenditures. The fiscal policy aimed at reducing the share of national expenditures to 33-37% of GDP, as well as fiscal rules that would limit the share of redistribution of GDP through budgets shall be introduced. This should give impetus to the strategic revision of public spending.

Institutional reform of regulatory bodies. It is necessary to continue and complete the reform of the State Tax Service of Ukraine, which is currently successfully moving in line with the reform plan approved by the Cabinet of Ministers. It is necessary to ensure the reform of the State Customs Service of Ukraine, which is currently slowing down, in particular in the direction of recruiting employees in open competitions, as well as providing them with a decent salary and automation of processes. By the end of 2021, a single analytical body for the investigation of economic crimes (Bureau of Economic Security) should be established with restrictions on "old" staff working in the new body, while by the end of 2021 the tax police should be abolished and other law enforcement agencies (Ministry of Internal Affairs of Ukraine, Security Service of Ukraine, etc) should be deprived of functions of investigation of economic crimes in accordance with the Law of Ukraine "On the Bureau of Economic Security of Ukraine" of January 28, 2021 № 1150-IX.

Reform of effective regulation and creation of better conditions for doing business. The introduction of an efficient market economy is impossible without completing the transition from total administrative control to proportional and effective rules in the markets. It is worth continuing and completing the reform of market rules in areas such as urban planning, electronic communications, forest management and timber market reform.

0 comments

Only authenticated can comment

Economic reforms

Sectoral brief “Economic reforms”