Ukraine’s macroeconomic performance has continued to improve. The metallurgy and engineering industries have been the most successful, compensating for slower growth rates in the chemical and agricultural sectors.
Despite the gradual return to growth, the economy of Ukraine still faces many problems. The government’s low level of commitment to the implementation of reforms caused the International Monetary Fund to defer negotiations over the next tranche of loan funding until June or July.
Inflation is still growing. The government is yet to decide between free trade with the European Union and a customs union with Russia, Belarus and Kazakhstan.
The growth of world oil prices negatively affects the prices of oil products in Ukraine, resulting in the rise of the cost of transport services as well as municipal services. All of these factors undermine the purchasing power of the population. Another problem is the sudden 90 percent increase in imports in February 2011, compared to February 2010, tipping the import-export balance $1.1 billion further into Ukraine’s disfavour.
The fact that the Ukrainian population purchased $3.3 billion in currency trading during the first three months of 2011 is indicative of the amassed capital of the “shadow economy” and the lack of public confidence in the future of the nation.
The number of business owners and registered small and medium sized businesses has dropped by 30 percent, compared to the first three months of 2010 as a result of the new tax legislation.
Attempting to address this problem, the Verkhovna Rada opted to simplify the procedures for opening a business. But these measures have not been enough to remedy the situation and help the small and medium sized businesses suffering from the new tax code.
National Bank of Ukraine Governor Serhiy Arbuzov, commenting on the IMF tranche, said Ukraine expected to receive a double tranche from the IMF of $3 billion following the results of the first half of the year. But in order to receive this tranche, the Ukrainian government is obligated to meet specific IMF requirements concerning the implementation of pension reforms, increase of tariffs, settlement of the VAT debt, grain quotas, etc.
The Ukrainian government has voiced its intention to sign a settlement agreement with Vanco Prykerchenska Ltd., a requirement of initiating joint projects in Black Sea, which will come as good news for foreign investors. But Prime Minister Mykola Azarov predicts that it will take at least 10 years to develop the production of oil and gas in the Black Sea.
Any further progress will require substantial political will from those managing the country, professionalism in the government, a genuine fight against corruption and abuse of power together with renewed respect for democratic principles and norms. The economic policy of the government and the president still faces numerous risks due to deteriorating living conditions with potential protests, the potential for a new wave of world economic crises and Ukraine’s vulnerability manifest in an unstable and misbalanced national budget.
People First Comment: While the government should be congratulated for what looks like an economic turnaround, questions need to be asked as to the real causes of the apparent growth and the cost in social terms. Most certainly the upturn in world demand for commodities such as steel, chemicals and grain has enabled the government to show a large rise in exports. Similarly the government’s statistics are rather odd as the growth rate is calculated in comparison with the crisis months.
For economic growth to be sustainable, we cannot just consider the figures. It is good that commodity-exporting companies are able to cash in on growing world demand but this does not put food on the kitchen table for the majority or put children through school.
While export companies are expanding, the small-and-medium business sector seems to be doing exactly the opposite. Certainly the tax authorities have become much more assertive in their bid to stamp out evasion and improve collection, but some of their methods verge on extortion and human rights violation. Many small and medium business owners are complaining about excessive and illegal demands that have no bearing on the reality of their businesses. One business owner reported recently that the whole attitude of the tax police has changed. “In the past they would call to make an appointment and we would have a reasonable discussion. Now they just barge in and make all sorts of demands based on hearsay and rumor and sometimes this happens two or three times a month. It really is very shortsighted and does nothing to build faith in the system.”
Another unprecedented policy is the writing off of commercial company debts to the state when the company is owned by people close to the authorities: a commercial debt of over $3 billion owed to Naftogaz was simply written off. Such policies can only breed public discontent.
Some fight but most just give up and plan their exit from Ukraine. One measure of this is the number of parents now seeking to join their children who are being educated abroad. In the last year, Ukraine has become one of the top five countries in the world where the population is prepared to pack their bags and leave in search of a more equitable and secure future.
Tax collection the world over is an issue and many systems have been tried and tested. In Georgia, for example, the tax levels were reduced, corruption was virtually eradicated and the state started to supply real levels of service. As a result, state revenue levels have increased by 672 percent over the past six years and the people are happy about it.
But if you pay taxes and see nothing for it, then eventually you have to question what you are paying for. Similarly simply increasing the efficiency of the tax collection system in an environment where the banks are not lending is a sure recipe to guarantee that you kill off the small and medium business sector.
Viktor Tkachuk is chief executive of the People First Foundation, a politically independent democracy foundation. He is a former deputy secretary of Ukraine’s National Security and Defense Council, a former senior adviser to three presidents and a former member of the Ukrainian parliament.
