IMF benchmarks in focus
On April 11 President of Ukraine Volodymyr Zelensky signed amendments to the 2023 budget. The draft law №9105 submitted by the Cabinet of Ministers is aimed to increase defense and security spending by Hr.518.2 billion ($14.2 billion) in order to meet the needs of the sector, particularly to ensure the payment of wages for soldiers. It also assigns Hr.19 billion ($519 million) to the reserve fund. This step was approved in the last Memorandum of Economic and Financial Policies with the International Monetary Fund (IMF) as the First Structural Benchmark.
The Verkhovna Rada is going to allow for the nationalization Sense Bank (formerly Alfa-Bank), which is owned by several Russian shareholders including those under sanctions. On April 11, 2023 the draft law №9107-1 was adopted by the Parliament in the first reading and the Committee on Finance, Tax and Customs Policy approved it for the second reading. The Committee held two meetings on this issue on April 26 and May 1 as a result of which the text of the draft law remained mostly the same and just several technical amendments were approved. In general, the draft law prohibits a sanctioned person from acquiring or increasing a significant stake in a bank and requires the National Bank of Ukraine (NBU) to declare such banks insolvent and withdraw them from the market. The Verkhovna Rada will adopt the draft law in the first week of May.
The Verkhovna Rada adopted the draft law №8433 to enhance transparency and accountability of the NBU special accounts for donations. This is the Eighth Structural Benchmark in the latest IMF Memorandum. It requires treating programs financed from these accounts as budget programs under a Special Fund of the State Budget and bringing them under the control of the Finance Ministry as envisaged by the budgetary legislation. The draft law is now waiting for the President of Ukraine to sign it.
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The NBU strengthened its bank governance and oversight. According to the 17th Structural Benchmark in the Memorandum with the IMF, the NBU separated the related-parties-unit from banking supervision by reorganizing the Department of Banking Supervision into two separate departments.
The NBU is also launching a resilience assessment of the banks and the banking system which is mentioned in paragraph 46 of the current Memorandum with the IMF. In 2023, the 20 largest banks will undergo the resilience assessment. According to the NBU, this process will include the asset quality review and the collateral eligibility assessment as well as the assessment of the NBU’s performance indicators under the baseline scenario and the necessary levels of capital adequacy ratios.
The Cabinet of Ministers of Ukraine approved state-owned Oschadbank’s new supervisory board. According to Oschadbank, four new independent members of the supervisory board were approved on April 21, 2023, including Michal Krupinski, former CEO of the Polish Bank Pekao, Elizabeth Nelson, former vice president of the EBRD, Philip Heasley, ex-president and CEO of the global software company ACI Worldwide and Volodymyr Lavrenchuk, former CEO of Raiffeisen Bank in Ukraine. Another two members – Juan Enrique Perez Calot and Anton Piatygin – will continue their role as independent members from the previous board.
World Bank priorities development
On April 17 the coalition faction Sluha Narodu submitted to the parliament the draft law №9212 on the mandatory funded pension system. It obliges all working citizens under 55 years to participate in the funded pension system. A state pension fund will accumulate such pension contributions until 2025, after that it would be possible to choose a private pension fund. The draft law suggests using investment in conservative financial instruments to keep contributions up with inflation. The bill requires an assessment by the Ministry of Finance, the World Bank and the National Securities and Stock Market Commission. On April 26 the Committee on social policy approved the draft law for the first reading. The Verkhovna Rada may consider the draft law in the first week of May, but there is doubt that it has sufficient support.
The draft law №5865 on the development of capital markets was approved for the second reading by the Committee on Finance, Tax and Customs Policy. Now the draft law is waiting for legal review before being considered in parliament. The draft law envisages strengthening the independence and institutional capacity of the National Securities and Stock Market Commission as a national regulator of capital markets. It also introduces mechanisms to prevent manipulation, insider trading, illegal use of insider information and other violations in the capital markets.
On April 28 the Committee on Energy, Housing and Utilities Services approved for the second reading the draft law №5322 on prohibition of abuse in the wholesale energy market under the REMIT. The draft law implements the principles and approaches set out in European Union (EU) Regulation No. 1227/2011 on wholesale energy market integrity and transparency (REMIT) into Ukrainian legislation. This step is one of the obligations of Ukraine under the Association Agreement with the EU. According to the Committee, the draft law is particularly supported by the EU Delegation to Ukraine, the Energy Community Secretariat and the USAID Energy Security Project.
Other key economic issues
Verkhovna Rada sets a salary cap of 10 times the minimum wage – as of now Hr.67,000 ($18,300) in total – for civil servants and employees of state-owned enterprises. On April 10, 2023, the Verkhovna Rada adopted Draft Law № 8312 with such an amendment along with the amendment that would return the Hr.30,000 ($821) additional payments to the military. However, even the calculations show that the reduction in salaries would compensate for as little as 2 percent of the amount required to cover expenses on such additional payments. That means that implementation of this amendment requires a change in the state budget. On April 11, 2023, lawmaker Volodymyr Tsabal (Holos faction) proposed a draft parliamentary resolution to cancel parliamentary decision to adopt the above law. He suggested that funding sources for such expenditures should be found beforehand. In the first week of May the Verkhovna Rada will vote for the resolution. The government is expected to try to repeal the amendment to the law. This can be done by voting for Tsabal’s parliamentary resolution with at least 226 votes, although it is unlikely to get that many.
Verkhovna Rada voted in the first reading for the draft law №6490-d on the State Customs Service (SCS) of Ukraine reset. It suggests a special procedure for selecting the top management of the SCS as the competition, with the majority of international members in the Commission on Election (following the best practices of various anti-corruption institutions). In case of adoption, the draft law will establish an independent yearly audit and reassessment of SCS employees. It also suggests higher salaries for SCS staff and abolishes the obligation to coordinate the appointment and dismissal of middle managers with the Finance Ministry. The Committee of Finance, Tax and Customs Policy will prepare the draft law for the second reading.
On April 26 the draft law №9243 on the State Tax Service (STS) of Ukraine reset was submitted to the Parliament. It’s the third draft law in the reset package for the key Ukrainian financial institutions. It suggests changes similar to those which were proposed in the draft laws on SCS (№6490-d) mentioned before and the Economic Security Bureau (№9080) reset.
On April 11, the Cabinet of Ministers dismissed Vadym Melnyk the head of the Economic Security Bureau of Ukraine (ESBU) – the Ukrainian state body which should be responsible for investigation of economic crimes. Melnyk’s first deputy, Eduard Fedorov, became the Bureau’s acting director. Before his appointment to the ESBU, he worked as head of the Security Service office in the Sumy region, and in 2021-22 held the post of deputy head of the Kyiv customs department. Earlier, the Verkhovna Rada Committee on Finance, Taxation, and Customs Policy found that the work of the ESBU’s management needed to be revised and recommended that the government reset the ESBU leadership. Subsequent investigations of the Temporary Investigative Commission on Economic Security in the Verkhovna Rada found several violations of the law and raised the suspicion of corruption on the part of some ESBU officials.
On April 10 the Verkhovna Rada of Ukraine dismissed Valeriy Patskan as the chairman and member of the Accounting Chamber of Ukraine. Earlier that day the Budget Committee recommended the parliament to decide by voting on a draft resolution of no confidence in the chairman of the Accounting Chamber. A total of 250 lawmakers voted for the decision on Patskan’s dismissal. In December 2022, the decision to dismiss the Accounting Chamber head was also put up for a vote in the Verkhovna Rada, but it didn’t secure enough votes. The Parliament will vote and appoint the new Chairman of the Accounting Chamber in the beginning of May. Most likely Hennadii Plis, the ex-head of the State Audit Service and now a member of the Accounting Chamber will be appointed as the new Chairman.
The Government of Ukraine approved the report on the 2022 State Budget execution. According to the report, as a result of 2022 state budget revenues amounted to Hr.1.788 trillion ($49 billion). State budget expenditures in 2022 reached Hr.2.706 trillion ($74 billion). The deficit of the state budget was Hr.915 billion ($25 billion) which is significantly below the limit established by the budget law (17.6 percent of GDP against the 31.7 percent of GDP planned). Expenditures on defense and security reached 29.6 percent of GDP (5.8 times more than in 2021).
On May 2 the Verkhovna Rada extended martial law and general mobilization in Ukraine from May 20 for a period of 90 days, i.e. until mid-August 2023. Previously the Parliament had already voted for the extension of martial law six times.
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