First, any agreement with the IMF has
two aspects: economic and political.
Economically, a country obliges itself
to implement reform measures, which are calculated based on their
effect on the state budget to either increase revenues or decrease
expenses, or both.
A country agrees to live within these
projections taking into account its ability to meet financial
obligations domestically and with external debtors. If reforms are
implemented and state budget revenues increase, external debtors
remain confident sovereign obligations will be met. Thereby,
creating a general positive economic outlook that extends not only to
international financial institutions and creditors, but also to
multinational investors looking for a return on investment.
IMF agreements also have a political
aspect, which consists of the geopolitical ability of countries
represented on the IMF Board of Governors to influence the
country-recipient of the loan. Influencing, in this context, means
encouraging leaders of the borrowing country to undertake certain
political decisions.
A good example of such influence is the
negotiations on the signing of the association agreement with the
European Union and its deep and comprehensive trade agreement. The
EU, I believe, has decided to continue negotiating with Ukraine
because this is an opportunity to get Ukrainian officials to
democratize further government decision-making processes.
Similar considerations may be also
guiding the IMF Board of Governors. For the IMF board, issuing a
loan often transcend the basic economic aspects described above. The board may be evaluating whether or not the “creditor-borrower”
tools of influence over the country may lead to a more intense policy
of prodding Ukrainian leaders to certain economic and geopolitical
decisions.
Under the current circumstances, I
believe, the IMF board is weighing whether or not its potential
refusal of a loan to Ukraine may push it further into the “embrace”
of Russia. And, not particularly because of a desire to become
closer politically, but because of Kyiv’s need to find a source for
repaying existing debts and increase sales volumes of Ukrainian
products.
It is clear the political aspects of
the decision to continue cooperation between the IMF and Ukraine are
much stronger that the economic ones. Equally, it is difficult to
foresee the Fund allowing the Ukrainian government to continue its
current economic policy. Lets review the economic considerations
more closely.
First, with regard to Ukraine’s real
budget deficit, it ended up being much higher than the figures
declared by the Ministry of Finance by some 60 percent — some
economic experts believe they are even 100 percent higher!
We can affirm the current government
economic policy is not leading to a decrease in the state budget
deficit, which means it is not creating incentives for economic
development. In fact, we see the authorities actions are two-fold:
monopolizing most branches of the economy; and reducing the level of
competition. These two measures alone will reduce entrepreneurial
and business activities, and hence reduce the ability to increase
budget revenue collections from taxation.
This problem could be resolved by a
simultaneous reducing both fiscal pressures and the corruption tax,
which all businesses are forced to pay. Consequently, this would
take the economy out of the shadows and increase budget revenues
provided the corruption tax paid by business would be reduced at a
faster pace. Both the IMF and the World Bank stress the importance
of “de-shadowing” the economy and improving conditions for doing
business as a recipe for increasing economic activity.
Ukrainian authorities seem to have
heard these recommendations. On the one hand, the government wants
to decrease the single social levy from 37.5 percent to 15 percent.
And, it also wants to more efficiently control transfer pricing of
major Ukrainian business by closing loopholes allowing profit margins
to go untaxed because they are located in offshore tax havens such as
Cyprus.
On the other hand, it remains uncertain
if these measures will result in the real reduction of shadow fiscal
pressures over business. This is due to the fact that government
will be forced to look for compensators for the single social levy
rate reduction, which will lead to less revenue collection. Draft
legislation on closing transfer loopholes could be viewed as such a
compensator, however, so far the numbers don’t add up. For
instance, the expectation is that closing the loop on transfer
pricing will raise some Hr 500 million revenues. However, a decrease
in the single social levy could increase the Pension Fund deficit
from Hr 10-30 billion, according to some expert estimates.
One of the tools government is
considering using as a tax reduction compensator is the creation of a
financial police service, which is expected to take over the
investigation of economic crimes and consolidate the right of
government to inspect business – all under the auspices of the
president. Given government’s totalitarian instincts, its pressure
on businesses and taxpayers to pay more might be counterproductive
and could provoke a backlash.
The idea of creating a financial police
service is correct. However, as any other mechanism, it may work
well under certain conditions and it may perform poorly under other
circumstances. This is especially true, when implemented in countries
with unstable democratic institutions and a dependent court system
where society has no control over the actions of enforcement
authorities. In Ukraine, such a mechanism might just consolidate the
authoritarianism in power, but it will not lead to greater revenue
collection.
Both domestically and internationally,
Ukraine’s government continues to navigate in tough political and
economic waters. The coming weeks will show if the government is
able to convince the IMF that its economic plans can work and lead to
an economic turnaround.
Alexander
Paskhaver is an economist and president of the Center for Economic
Development. He’s been an economic adviser to several Ukrainian
presidents and prime ministers.
