Cash for Ukrainian Reforms

"200 hryvnia 2007 back" by Национальный банк Украины - own personal collection, scan by Vizu. Licensed under Public Domain via Wikimedia Commons

In March, Ukraine’s government adopted the Action plan for reforms in 2015 and 2016 while the IMF board approved four-year USD 17.5 bn extended arrangement under the Extended Fund Facility (EFF). The EFF supports ambitious program of Ukrainian authorities, which would in IMF words ‘put the economy on the path to recovery, restore external sustainability, strengthen public finances, and support economic growth by advancing structural and governance reforms, while protecting the most vulnerable’.

The first disbursement of the loan was made immediately after the approval of the Program. To continue receiving IMF money the Government has to deliver rather quickly an ambitious reform program. Complying with the IMF program is also one of the conditions for assistance from other official donors. However, the EU, the World Bank and other donors add also other required reforms to the agenda. In total, donors are ready to provide about USD 25 bn in cheap foreign currency loans, while Ukraine does not have access to commercial financing (IMF aired USD 40 bn figure but it includes USD 15 bn in postponed debt payments after sovereign debt restructuring expected in the nearest months). Ukraine also committed to change its legislation under EU-Ukraine Association agreement.

This means that most of the points in reform agenda are part of external commitments. On the bright side, it gives political cover for Ukrainian politicians as each reform not only stands on its own merits but is also a precondition for vital external aid. It also creates external deadlines for reform, which is useful where ruling coalition is fractured and slow to act. Most obvious downside is hasty decision making leading to second best solutions and lack of legislative certainty. External influence on reform agenda also may lead to externally imposed priorities/reforms, but so far all proposed reforms are supported by at least part of coalition and are clearly needed for the country. Overall, the upside of the external drivers for reforms clearly outweighs the downside.

There is a perception that reforms are progressing slowly in Ukraine, which led some of Ukraine’s international partners to express frustration. For example, key appointment for anti-corruption reform, that of the head of the Anti-Corruption Bureau, is still under way. Complaints of slow reforms are only half-right. Reforms should go faster, if we want economy to really recover and achieve sound economic growth. However, we should remember that the Government has to deal with war and preventing economy from crumbling under the current crises. On the institutional side, the Government has to work with entrenched soviet-style bureaucracy, relatively weak discipline in coalition and backward-looking elites used to politics of Byzantium-style. The Government itself is a coalition government. Taking all this into consideration, reform progress is still spectacular.

Substantial changes in public finances were made in the early March as prior actions to receive IMF support under the EFF. Most measures were implemented to achieve fiscal consolidation, including the following:

  • The Government has finally reduced energy subsidies, i.e. central fiscal transfers to the Naftogaz. In particular, it approved gradual increases in tariffs for housing and utility tariffs for households (e.g. gas, electricity, heating) and gas prices for heating generating companies with immediate increases taken place already in April. Such changes were required by not only the IMF, but also by other official donors. Instead, the coverage of population by housing and utility subsidies will increase and the procedure for the application for the subsidy was eased. For this the Government increased financing of this subsidy by UAH 12.5 bn to UAH 25 bn, which is likely to be partially financed at the expense of the loan to be received from the World Bank with the focuse to protect the poor;

  • The Government used a political window of opportunity and reduced state aid to coal mining as many mines are allocated at the occupied territory. In previous years, state aid to coal mining was equal to nearly 1% of GDP;

  • The Government attempted to narrow the deficit of the Pension Fund (required by the IMF and the World Bank) through cuts of pensions to pensioners that continue working, elimination of pensions to retired prosecutors, judges, deputies and civil servants if they continue working in these occupations as well as applying approximation of reduced retirement age for a number of occupations (miners, aircrafts, agriculture, etc.) to general retirement wage;

  • The Government revised some rules for providing in-kind benefits to different categories of population making them more means-tested.

Even though these measures are still fragmented and should be complemented with other measures including an increase in efficiency of public spending and deeper structural reforms, they are already a step forward. Besides, the Government has already made some progress in shifting to e-procurements of goods up to UAH 100 000 and services up to UAH 1 m.

Another area of partial success of reforms is a deregulation, which was among priorities for financing by the World Bank as well as were required by the obligations within the Association Agreement with the EU. In particular, the Parliament approved two laws (which were elaborated by the Government), which reduced the number of licenses and permissions required for business operations in Ukraine. This is expected to improve business climate in the country.

Energy reform, which is one of the priorities of international donors, is also on its way. In particular, on April 9 the Parliament approved a law on the Natural gas market, which is in compliance with the Third Energy Package. The Law envisages the restructuring of the Naftogaz, which was demanded by official donors as well as expert community for a long time.

Overall, Ukrainian authorities are moving in the right direction with assistance of international donors. Reforms are slower than it is necessary but much faster than it could be expected in the current situation – weak institutions and a lack of unity among the policy makers. It is likely that Ukraine will be able to remain on track with main aid programs providing external financing necessary for macroeconomic stabilisation. However, the perceived slow pace of reforms may lead to lower external investments and may negatively affect raising additional funds for reconstruction of Donbas and modernization of economy.

An article by Oleksandra Betliy, Vitaliy Kravchuk,

This is an extract from a publication Monthly Economic Monitor Ukraine (MEMU). The MEMU contains a monthly review and brief analysis of the key economic policy measures and data that came public during the previous month. The MEMU supplement presents extended analysis of one key event in the Ukrainian economy. There are 12 issues per year distributed among subscribers.

The Institute for Economic Research and Policy Consulting - Kyiv