Ukraine’s economy minister believes cheaper loans and investments, not tax breaks, are the best way to help the economy.
“The government will choose 10-12 sectors to stimulate. I think it’s wrong to focus just on two or three sectors as it may ruin competitiveness,” Economy Minister Pavlo Sheremeta told the Kyiv Post. “Agriculture, energy and information technology sectors will be among the stimulated for sure.”
He continued: “I just had a conversation with a diplomat from Finland and he asked me – ‘what can we do for the Ukrainian economy?’ My position is this: we should come up with an idea of 10-15 projects in each of the stimulated sectors to attract investments in them,” said Sheremeta, noting that tax breaks shouldn’t be a catalyst.
The logic is that the country’s biggest businesses already enjoy tax preferences by reporting profits in offshore tax havens.
Thus, providing fiscal stimulus is not the only way to support producers. Monetary stimulus, which focuses on cheap loans, could be a better one. “We work with the Ukrainian government on introducing a financial instrument for providing cheaper banking loans to agricultural businesses and for energy efficiency projects,” Gabriela Miranda, Organization for Economic Cooperation and Development project manager, said in an interview with the Kyiv Post.
Under such an approach, the central bank would provide loan guarantees to push interest rates down that would make them cheaper for borrowers.
The world’s leading central banks, among them, the U.S Federal Reserve and European Central Bank, use a monetary approach to stimulate the economy. They keep low interest rates to provide commercial banks with cheap liquidity which in turn means cheap money for the private sector.
To catch up with at least Poland, whose gross domestic product per capita is three times higher than Ukraine’s, the nation’s economy must grow three times faster. Back in 1990 – the year that Soviet nostalgias like to recall as Ukraine’s peak economic performance, Polish and Ukrainian figures were basically at the same level.
Still, economist Oleksandr Paskhaver sees sector stimulus as a risky policy because it might also foster corruption. “What are needed is not sectoral stimulation, but rather the country’s exports and infrastructure,” he emphasizes.
Agriculture mogul Oleg Bakhmatyuk, owner of the giant farming holding Ukrlandfarming, is one of the most interested stakeholders in the stimulation policy. “If authorities are going to help – it’s great,” he says.
Bakhmatyuk is planning to take Ukrlandfarming public, most probably on the London and Hong Kong stock exchanges, according to the holding’s deputy director Ihor Petrashko. Bakhmatyuk’s Avangardco is publicly traded in London. It is also no surprise that the businessman stands for a stronger stock market in Ukraine, which can reap the benefits of having Ukrainian companies going public at home.
Ukrainian authorities spent 7.5 percent of its GDP on gas subsidies and 1 percent on supporting unprofitable coal mines last year which experts say is an ineffective way of stimulating the economy. They say this leads to severe corruption. The International Monetary Fund is also among the policy’s critics.
“The country needs a law on state support that would outline who and how will be helped,” says Igor Burakovsky, director of Institute for Economic Research and Policy Consulting, a Kyiv-based think tank.
“The government should list specific goals for each sector to reach prior to providing any kind of support for them. And if any sector fails to meet those goals – the support turns into loans that have to be paid back,” Burakovsky explained. Germany used this approach to boost electric car production.
Stimulating the economy is healthy because private initiatives can’t be the only basis for successful development, says Pavlo Demchuk, senior consultant for EY, a global audit company. “It should have two main priorities – satisfying the demands of Ukrainians and use the available production capacities. Food, health, and education should be one part of the stimulus and innovative capital, infrastructure and technology – another part,” he comments.
IMF analysts and World Bank experts, who devote a substantial amount of their time to researching economic stimulus models, still have not reached a consensus on whether fueling separate sectors of an economy rather than the whole is an effective approach. It appears that the Ukrainian government has already made its choice. In order to reach a 3.5-percent projected rate of economic growth in 2016-2017, it will focus on energy, agriculture and information technology.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
