Within the project “Transrarent, financially healthy and competitive local governments in Ukraine” which is implemented by the Institute for Economic and Social Reforms in Slovakia (INEKO), in partnership with the International Centre for Policy Studies (ICPS) and with financial support of the Official assistance for development of the Slovak Republic – SlovakAid there was held a presentation of online platforms.
"The transparency of 50 largest cities in Ukraine” (http://transpare
- The responses to the questionnaire were sent by ICPS to 50 city councils. Each questionnaire contained 23 questions.
- The responses to the requests for information were sent by ICPS informally - through a third person ("secret client request"). Each request contained three questions and was intended to detect city councils` reactions to requests from citizens.
- Information is publicly available on official websites of local councils.
“Transparency of local budgets and their capital cities in Ukraine” (http://budgets.i
Whereas, the transparency, the financial stability and the formation of regional competitive advantages - all these are the basic principles for the effective functioning of local authorities in the long term. The site contains data on local governments` budgets of all 24 regions of Ukraine and their administrative centers. According to Slovak experience, the data are divided into the following types: geographical data, short description of areas, indicators of the financial stability and financial health.
"The competitive capability of regions and measuring regional business environment in Ukraine" (http://competiti
Analysis of the competitive capability of regions should provide stakeholders the information on business environment current state in the regions, as well as the specific problems of economic development in the regions. The project will provide the local government representatives a useful tool for regional development and eliminating the local barriers of business environment. The assessment model of the competitive capability of regions in Ukraine covers 24 regions of Ukraine (all areas excluding the Crimea). Regional Business Environment Index (RIDS) is calculated on the basis of 103 independent indicators that are calculated on the basis of two sources of information: statistical data for 2014-2015 and companies` survey concerning assessment of business conditions in the regions.
Project partners Robert Kičina (Business Alliance of Slovakia), Peter Golias (Director of the Institute for Economic and Social Reforms) and Michal Piško (Project Coordinator of Transparency International Slovakia) presented the implementation experience of the project in Slovakia. National Deputy Oksana Prodan as representative of the Chairman of the Cities Association of Ukraine in the Verkhovna Rada on behalf of the community noted about the local governments` transparency factor as an important prerequisite for creating a favorable business environment and investment climate in general. Advisor to the Mayor of the Dnipro city, Yanika Merylo in her speech focused about the necessity to introduce online services that will allow every citizen to keep track of their city, from the procurement to the infrastructure facilities map.
The conference "Supporting economic reforms in Ukraine"
Within the cooperation ICPS, Friedrich Ebert Stiftung and deputes of the European Parliament, a senior economist Vasyl Povoroznyk participated in the conference "Supporting economic reforms in Ukraine" which was held in Brussels. The report was dedicated to the informal economy and the decentralization process in Ukraine. In particular, it dealt with the analysis of key factors influencing the growth of the informal economy in the country. Because according to the data, segment of the informal economy is about 50% of GDP. Among the major, it is primarily inefficient system of state regulation and tax burden. As for the decentralization reform, the most topical issue is the legislative regulation and making appropriate changes to the Fundamental Law. Also pursuant UTC`s creation process that should occur on a voluntary basis, but in some cases the features of a particular community are not captured.
Transparent budget and investment: how to ensure the financial transparency of united community
The International Centre for Policy Studies supported by the Embassy of the Netherlands within the project “Financial Transparency of united communities” holds seminars in all 24 regions of Ukraine for representatives of local governments that make decisions on engagement and use of financial resources of regional business representatives and NGOs. The project is aimed at increasing the economic capacity of united communities that will more effectively address the issues of local development, enhance the competitiveness of territorial communities, combating corruption at the local level and ensuring the welfare of the local population. “The main goal is to tell stakeholders about how to form their own financial resources, to improve the “financial health” of united communities and to act at new legal conditions”, - the Director of the Department of ICPS Angela Bochi said. The issue of sustainable development at the local territorial level is extremely important given the need to stabilize the socio-economic situation in the region during the economic crisis and the decentralization reform. "Currently, budget legislation is changed again, the expenditure responsibilities of local budgets are changing and the Tax Code still remains unchanged. Additional sources on increased funding of tax resources to local budgets are not received. It is therefore necessary to raise funds from other sources and search for available opportunities in our time of grant support and financing”- the expert on budget and management issues Tetyana Ovcharenko explains. In addition, ICPS experts told community members about the need to raise additional funds in their budgets, because to manage money, first of all, such communities should have them. Also they called on the public to get involved in control over the use of budget funds to prevent corruption, stressing that this community should play an important role in this process, because it is talking about money which focused directly in the specific UTC.
The causes and consequences of delaying IMF tranche
The International Monetary Fund decided to postpone the allocation of the next tranche of $ 1 billion to Ukraine. First of all it is important to identify the root causes of postponement. The official version is the Donbas blockade. But it is important to clarify that it is not about blockade participants, but about the actual decision of the NSDC about the governance effectiveness as for 2 months after the blockade there hadn`t been done any quality calculations and plan out of the crisis. Director of the Economic Department Angela Bochi notes that it is obvious that the IMF decision cannot be fully associated with the Donbas blockade. One of the important tasks posed by the IMF is the anti-corruption reform. Particular attention was paid to the implementation of anti-corruption courts in Ukraine that hasn`t been started, as well as the election of the NACB auditor was called into question. Formally, our reform of anti-corruption bodies means only their creation because the international business and investors don`t see changes in the country's anti-corruption field and don`t feel the pressure reduction. In fact, postponement of the fourth tranche in March hasn`t become the news, because we had to get this tranche in December 2016. I remind that the third tranche was delayed because it has already been clear that the issue of the next tranche will be postponed. In addition, the third tranche would still be an advance because Ukraine formally didn`t fulfil the requirements concerning implementation of pension reform (the retirement age raising), land reform (the introduction of land turnover), launch of anti-corruption courts. Speaking in fact, we have only fulfilled 3 of the 11 structural lighthouses in the last period. Preliminary requirements – the budget and "Privatbank" nationalization - our country is ostensibly satisfied but, for example, SFS reform hasn`t been carried out since 2015. In other words, the second tranche was given in advance to Ukraine and the third, most likely, won`t be given in advance. The expert also noted that it is likely that IMF program for Ukraine will be stopped altogether, as in 2009, and then the main issue for the government will be curbing the exchange rate. And this question is not in gold and forex reserves which are enough now, but in another factor - the panic among the population. This situation could further deepen the political crisis in the country. Senior economist Vasyl Povoroznyk also noted that the IMF is often a signal for foreign partners: is it worthily to trust the country or not. If the assistance stops, it is a red light for other international partners.
"Competitiveness Index of Ukraine depends on the pace of reforms" - Vasyl Povoroznyk
During the World Economic Forum in Davos was presented the global competitiveness ranking - Global Competitiveness Index 2016-2017. Ukraine has lost six positions, fallen to 85th place among 138 countries. This year it was the worst result for the last four years. Switzerland became the leader (5.81), second one - Singapore (5.72). Also the top ten included: USA, the Netherlands, Germany, Sweden, United Kingdom, Japan, Hong Kong, Finland. Nearest neighbors of Ukraine became Namibia (84th place) and Greece (86th place). What exactly should be implement in order to improve the position of Ukraine in the ranking of global competitiveness - the commentary of senior economist Vasyl Povoroznyk: "We need to re-raise the topic of reforms. There are small accomplishments as system Prozorro, deregulation in certain sectors. But we need to do a lot: protection of property rights, judicial reform, deregulation, anti-monopolies reform. Without all this things, we will not soon go up in the ranking."
The probability of IMF tranche for Ukraine
Media has published new requirements of the International Monetary Fund to Ukraine to be done in order to receive the next tranches. For the moment the document is at the stage of approval. On the one hand, this is only a recommendation, but not the implementation guidelines for the Ukrainian government. On the other - considering the requirements of the IMF as the advices only, it is unlikely to receive any tranches. There are 12 benchmark targets set in the memorandum, seven of them are new. Director of the Economic Department Angela Bochi has some comments concerning the benchmark task implementation, especially: Subsidy adjustment and its monetization, which implies that customers should receive money for saving resources. Pension reform – the Parliament will approve legislation relevant to: gradual adjustment of the statutory retirement age; further reduction of the scope requirements for the early retirement; review of the eligibility criteria for the minimum pension; consolidation of pension legislation and application of a single principle without pension privileges for any profession (exception for the military); expansion of the base for the social security contributions; equitable tax treatment of pensions; better link between the income and the contributions, and encouragement to declare actual incomes. Land reform, which will be difficult to carry out due to a moratorium until 2018. Audit of PrivatBank and implementation of the restructuring plan. A single register of social benefits, which will contribute to their revision Anti-corruption courts Privatization – the 2017 budget again foresees the sum of 17 million UAH from privatization but the task is challenging considering the situation with Odessa Portal Plant. There are 2 scenarios for further cooperation between Ukraine and the IMF: Optimistic – the IMF will offer concessions and Ukraine will receive the next tranche of 1 billion USD in February 2017. Ukraine will continue to meet structural benchmarks and there will be a chance to get 3 more tranches in 2017 – 1.9 billion USD in May, 1.3 billion USD in August, and 1.3 billion USD in November. It is an unlikely scenario because meeting most of the structural benchmarks entails political risks due to populist decisions in the government. Pessimistic – most of the structural benchmarks will not be met and others will be delayed. Hence the situation of 2016 may recur (Ukraine received only one tranche of 1 billion USD). IMF loans do not only provide support for international reserves and external payments but also serve as an important indicator of the country’s stability for other potential investors. If Ukraine does not fulfil all the commitments under the IMF arrangement, the next loans will not be granted, which may discourage cooperation with other donors.
Economic Analysis: Economic Trends and forecast for 2017
According to preliminary calculations, Ukraine managed to tackle recession in 2016 and demonstrated little economic recovery. Annual GDP growth for 9 months amounted to 1.2%. A gradual way-out of economic recession is proved by the fact that a negative gap in GDP has been narrowing since the second half of 2015. It is expected that a positive dynamic in GDP will continue in 2017 since a risk of the armed conflict escalation has decreased and economic agents have become increasingly inclined to investment and long-term consumer-oriented decisions. GDP The IMF – Ukraine’s key creditor – predicts that Ukraine’s GDP will grow by 1.5% in 2016 while inflation rate will amount to 15.1%. The World Bank expects that that GDP will grow by 1% while inflation rate is estimated at 15%. The EBRD predicts GDP growth at 2%. According to government forecast, Ukraine’s GDP growth will amount to around 1.5% at the end of the year. According to the State Statistics Service of Ukraine, the GDP has grown by 1.8% in Q3 2016 in comparison with 1.4% demonstrated in Q2 2016. Thus, a period-to-period GDP has grown by 0.4% in comparison with Q2 2016. According to ICPS calculations, annual GDP growth for 9 months will amount to 1.2%. In Q2 2016 a real GDP growth has reduced to 1.4%. Key factors that contributed to economic recovery were a domestic demand for investments and a positive dynamic of household consumers. The reasons for increasing investments are little improvement in business expectations and increasing capital expenditures of integrated budget. In its turn, a net export resulted in negative contribution to GDP dynamics. A transit potential remains limited in Eastern Ukraine. Besides, Russia strengthened transit restrictions. Meanwhile, a high harvest resulted in high agricultural production. In Q3 2016 an economic growth was restricted by a net export. There was a negative balance of current account in Q3 2016 ($ 1.7 mln) due to a higher than expected deficit in trade of goods. Reduction in export of goods was facilitated by deteriorating economic state of affairs. Meanwhile, there was a resumption in import of goods resulted by increasing purchases of natural gas and domestic demand. Inflation The National Bank of Ukraine predicts that inflation in Ukraine will amount to 12% at year-end of 2016, the World Bank - 15%. State Budget of Ukraine for 2016 provides for annual inflation at 12% and currency rate around 24.1 UAH per USD. The ICPS forecasts the inflation rate at 12% under the currency rate at 26.1 UAH per USD. In October 2016, consumer prices rose by 2.8%, accelerating the annual growth in consumer prices in October to 12.4%. CPI growth has been 9.4% since the beginning of 2016. The main factors that contributed to inflationary pressures in Q3 2016 was a significant increase in heating tariffs, increase in water prices, a slight increase in excise duties on alcohol and tobacco products as well as an accelerated seasonal rise in prices of dairy products in October 2016. There were signs of recovery in economic activities in Q3 2016 in countries that are Ukraine’s main trade partners. However, global price environment for Ukrainian exporters deteriorated primarily due to significantly lower prices for agricultural products - grains and oilseeds. In line with a seasonal increase in demand for foreign currency and reinforced uncertainty in obtaining official external financing from the IMF, this resulted in devaluation pressure on exchange rate in August and early September 2016. ICPS expects that consumer inflation will be within 12% at year-end of 2016. However, there are several factors that can cause fluctuations in inflation. The main risks include the following: the abolition of state regulation of social value products, a significant correction in prices for raw foods, increase in administrative and regulatory prices. Foreign trade In 2016 Ukraine’s foreign trade continued rather radical transformation. It was primarily caused by the military conflict and trade war with Russia that resulted in the loss of Russian market, the economic crisis and the consequences of severe devaluation in 2014-2015. Subsequently, there were changes in the structure of foreign trade, namely a shift from traditional Russian market (and CIS market in general) and an increase of EU countries in a foreign trade share. Generally, this trend is considered to continue in the medium term. These trends were observed amid the fall in foreign trade, especially export. In January-September 2016 export of goods and services has decreased by 7.8% and import by 0.9%. In particular, in Q3 2016 exports fell by 5% while import increased by 8.7%. Ukraine’s export mostly fell to CIS countries reaching by 18.7% for 9 months and by 14.4% in Q3 2016. Meanwhile, import from CIS countries fell by 21.8% in January-September 2016, and only by 9.5% in Q3 2016. Export to the EU for nine months has increased by 3.3%, while import from the EU has increased by 4.9%. In G3 2016, export rose only by 0.2%, while import had a considerable growth by 13.1%. In Q3 2016 trade deficit with the EU was 1.317 billion USD and 2.394 billion USD totally for three quarters. Deterioration of Russian-Ukrainian economic relations affected trade between Ukraine and other CIS countries, resulting in a relatively high reduction of export-import operations with these countries. First, it proved that such countries as Belarus and Kazakhstan are affiliated with the Customs Union, where Russia plays a leading role. Second, deteriorating of Russian-Ukrainian relations hampered Ukraine’s economic relations with countries in the South Caucasus and Central Asia, which are carried out by transit through Russia. Over three quarters of 2016, export of goods decreased by 8.7%, including by 4.9% in Q3 2016. Export of plant products fell by 1.2%, but there was an increase of its share in total exports (up to 21.3% in January-September 2016 from 19.7% in January-September 2015). Key products in this group are grains and sunflower seeds. Export of sunflower oil increased by 21.3% and amounted to 10.6% of total export. Export of ferrous and non-ferrous metals and its products fell by 17.6% (its share in total export decreased to 23.9% from 26.5%). In particular, exports of ferrous metals decreased by 16.4%. Export of mineral products decreased by 20% (its share reduced to 7.5% from 8.5%) and while export of machinery and equipment declined by 9.1% (its share remained unchanged - 10.2%). In January-September 2016 import of goods has not changed in comparison with the same period of the previous year, but in Q3 2016 import has significantly increased by 10.2%. In the structure of import, vehicles showed an excellent dynamic increasing by 71.6% (its share increased to 7.4% from 4.3%). This was due to the increase in import of cars after a sharp reduction in 2015. Import of machinery and equipment has also significantly increased by 27% (its share increased to 20.3% from 16%). Import of chemical products increased by 11.7% (its share increased to 15% from 13.4%). In particular, import of fertilizers rose by 11.6% (its share increased to 2.3% from 2.1%) due to a reduction in domestic production. Import of mineral products fell by 38.6% (its share totally fell to 20% in January-September 2016 from 32.5% in January-September 2015). The drop was caused by a decline in world oil prices. A physical volume of energy import has also decreased, though it has significantly increased on a year-on-year basis at the end of the period - in August and September 2016. It is also important to note a high concentration of Ukraine’s foreign trade (18 countries provide for over 70% of export of domestic products and over 80% of import). There is a significant untapped capacity for geographical trade expansion. However, it must be precisely based on diversified goods structure of foreign trade in order to make such expansion efficient and sustainable. Forecast for 2017 According to a majority of forecasts, it is expected that Ukraine’s economy will recover and its GDP will continue growing. However, such expectations are rather modest given the fact that Ukraine’s economy has already survived deep recession at 1.5-3%. Organization Expected GDP growth in 2017 Ukraine’s MEDT 3% NBU 3% IMF 2.5% World Bank 2% ICPS 3% Recovery of domestic demand is among key factors contributing to economic growth. Private consumption will moderately recover in the medium term as a result of pent-up demand and rising incomes. It is also expected that business investments will rise. However, a substantial increase in investment activity in the near future will stimulate a respective increase in investment imports, including machinery and equipment, which will largely increase in a negative contribution of net export to GDP. A revival of credit activity amid expected reducing interest rates will be an additional factor contributing to growing domestic demand. A net export will slow down the GDP growth. Slow global economic growth, including a slowdown in China’s growth, will curb increase in Ukraine’s export. Thus, the ICPS expects that a moderate economic recovery will continue in 2017-2019 (3%, 5% and 4% respectively). Despite further growth, Ukraine’s macroeconomic indicators will remain below the level of 2013. Key factors containing inflation in the long-term perspective are external support for reforms (in cooperation with donors, especially the IMF), an absence of negative shocks in foreign markets and of escalated fighting in Eastern Ukraine and, as a result, a further improvement in inflation expectations. The absence of these factors will cause additional depreciation and inflationary pressures. In this case, a return of inflation to a target level will require tighter monetary policy. According to the NBU, a positive shock may result in a faster increase in world commodity prices, more substantial increase in external demand for Ukrainian products and speed-up of reforms. Under these conditions, a recovery of economic activity will be accompanied by strengthening UAH due to increased export revenues and capital inflows in financial terms. This may increase pressure on prices by consumers, but the effects of strengthening UAH will be more significant. Domestic assumptions: The overall public sector deficit (including deficit of Naftogaz) will amount to 4% of the GDP in 2016 Tax reform will continue. The use of a simplified tax system will continue to shrink. Territories controlled by Ukrainian authorities in Donbas, has not significantly changed, and will not be returning of the active phase of military operations. In other regions of Ukraine "hot spots" will not appear and massive military intervention by Russia will not be occured. Sabotage on the whole territory of Ukraine is possible throughout the forecast period. Significant increase in administratively regulated tariffs will not cause a significant increase of debt for housing and communal services. Dissatisfaction of the population because of falling real incomes did not transform into mass protests. There will be a gradual transition to inflation targeting and subsequent purification of the banking sector. The exchange rate will remain relatively floating. Because of significant amounts of assets in foreign currency a lot of banks cannot provide the level of capital in accordance with Basel III conditions. External assumptions: The world economy will grow at around 3.5% during the forecast period. There will be a gradual slowdown in China, falling in Russia and a slight increase in the EU. Loans will come from the IMF and other macro-financial assistance promised by superstate organizations and the governments of particular countries, which will provide service of external payments, but it is possible substantial delays in obtaining funds. Access to capital markets remain very limited World oil prices will fluctuate within 40-60 dollars per barrel There will be a deepening of cooperation between Ukraine and the EU, in particular in the framework of the Association Agreement, the increase of the EU share in foreign trade and increased investment flows and financial assistance from the EU. It will further decrease trade and other economic ties with Russia It will continue the diversification of natural gas supplies to Ukraine, but Russia will remain the main supplier (directly and through re-export). Gas price will drop because of falling oil prices. It will decrease the flow of funds to the markets of developing countries, and gradually will increase interest rates by curtailing the program of quantitative easing of US Federal Reserve. The main risks of the forecast include the following factors: possible escalation of military conflict, blatant Russian intervention, the suspension of cooperation with the IMF and other international organizations, populist increase of social expenditures without an adequate increase in revenues, organized mass protests, the collapse of the coalition, early elections, a sharp change in prices on main export or import goods as well as adverse weather conditions in 2017, with a significant impact on harvest. State budget and taxes In 2016 the state authorities took measures towards increasing of state revenues through fiscal incentives. The state budget for 2016 is likely to be performed in accordance with its figures. Performance of the state budget Restoration of economic activity of enterprises had a positive impact on the state and local budgets. Overall, the budget will be performed by the end of the year, which means that the fiscal and regulatory incentives having used during 2016 showed a certain efficiency. However, it should be remembered that the increase in revenues is also associated with inflation processes, including annual inflation at 12%. According to the State Fiscal Service of Ukraine, following the results of 11 months revenues to the consolidated budget of Ukraine amounted nearly 677 billion UAH, whereas last year – 522 billion UAH, the difference compared to last year constitutes nearly 155 billion UAH. or 6 billion USD. The State Fiscal Service of Ukraine reported that following the results of 11 months of this year the state budget received 545,4 billion UAH, whereas last year – 431,9 billion UAH, 113,5 billion UAH more compared to the previous year. According to the Ministry of Finance of Ukraine during January-November 2016 the general fund of local budgets (without transfers) received 131,9 billion UAH, constituting 104,6% of annual revenues, approved by local councils. Increase in revenues to the general fund during January-November 2016 (in comparable terms, excluding areas which are not controlled by Ukrainian authorities) amounted to 49,6% or +43,7 billion UAH. The growth rate of actual income tax revenues in January-November 2016 constitutes 147,9%, land tax – 161,7%. Thus, the growth rate was above the average level in 6 regions – Kyiv, Odesa, Zakarpattia, Volyn, Zaporizhia and Rivne regions. Budget for 2017 For the first time in recent years, draft state budget for 2017 was submitted to the Verkhovna Rada of Ukraine on time in accordance with the Budget Code. According to government of Ukraine, draft state budget for 2017 provides for economic growth and raising incomes. Social expenditures, in particular, increases by 23%, and the minimum wage is doubled (from 1600 to 3200 UAH). For this purpose, state budget provides for additional costs in the amount of 28.3 billion UAH. This decision of the government aimed at reducing the shadow economy, but the Ministry of Finance didn’t carry out public consultation on this matter. There is a risk that in fact a substantial increase in minimum wages will lead to shadowing of wages and increasing expenditures will result in inflation, although the Ministry of Finance has denied such a possibility. According to the government, in average the salaries of the government employees increase by 50% since the new year. The level of pensions will increase by 10%. Main budget shares in 2017: defense and security sector expenditures – 132,9 billion UAH, general fund expenditures – 117,4 billion UAH, consolidated budget expenditures on education increased by 35,7% comparing to 2016 and amounted to 168,4 billion UAH, overall spending on health care increased by almost 26% (18.2 billion UAH) to 88.7 billion UAH. Budget expenditures in 2017 will be spent to support agriculture – next year for support of agriculture producers it is provided 5.5 billion UAH directly from the general fund or 1% of GDP in production agriculture. To ensure sustainable financing of road infrastructure in 2017 it will be created a Road Fund (funding from the budget 14.2 billion UAH). Additionally it is planned to attract 27.2 billion UAH from international financial institutions, first of all, from the World Bank. In general, there is a likelihood that the budget in 2017 will be performed. Political processes, the general deterioration of the economic situation and business activity, further shadowing of the economy, inflation and devaluation processes could prevent performing the state budget. Tax reform In 2016 major tax changes were characterized by a decrease in the social fees to 22%, increase in excise taxes. In general, significant institutional change and improving of tax administration was not observed, but state revenues was provided in accordance with plan. At the end of the year it is began actively discussions regarding further tax changes that become the basis for the state budget for 2017. Committee of the VRU on taxation and customs policy together with the Ministry of Finance of Ukraine has prepared a so-called “anticorruption bill” No. 5368. Key changes: - introduction of the full electronic cabinet of taxpayer – it will increase the transparency of the administration; - introduction of tax holidays for new enterprises (for 5 years) – it will promote the development of small business; - introduction of the United register of tax consultations – it minimizes the number of tax disputes by effectively clarification of the law. - administration of all databases by the Ministry of finance – it reduces opportunities for abuse; - Acceleration of depreciation for 2 years for manufacturing equipment – it stimulates investment; - single public register of requests for VAT refund – it increases VAT refund transparency; - introduction of a mechanism of blocking the registration of tax bills, which is subject to the risk criteria – it eliminates opportunities for abuse of the VAT; - Suspension of penalties, exemption from local taxes – it will settle the issue of tax payments on the territory of ATO. The bill is likely to be adopted and will be the basis for fiscal changes in 2017. The greatest achievement is not the preparation of the bill, and establishing of cooperation after a long confrontation of two government bodies, since the absence of the common position prevented carrying out effective tax reform in 2016.