The nation's shadow economy is shrinking, customs and tax systems are improving rapidly and the government is welcoming investors with open arms. Listening to government officials at the March 12 investor round table in Kyiv, you wouldn't think it's Ukraine they're talking about.
Yet their upbeat account of the work
they have done to improve the investment climate, has not translated
into either an inflow of fresh foreign cash, or optimism among those
who are already here. Investors say that although the government is
making some moves in the right direction, it ignores too many
skeletons in its own closet.
Ukraine sits in the 137th
place in the World Bank’s Doing Business rankings this year. And
although the government credits itself for jumping 15 points in a
single year, Ukraine still remains closer to the end of the list of
185 countries ranked. By some of the criteria, the nation really
lags. For example, by ease of receiving building permits, the nation
ranks 183rd, and has rolled back a point compared to the
previous year.
Oleksandr Klymenko, minister for taxes
and duties, said he understands that the government has a lot of
challenges: as the economy is slow, the nation needs investors more
than ever to keep the economy kicking. Last year, Ukraine received
just more than $4 billion of foreign direct investment – a drop by a
whopping 25 percent from 2011. Most of the money comes from Cyprus,
which means it’s repatriated – not fresh investment.
Klymenko says his ministry is working
hard to improve the legal framework for investor activities.
“It’s important for us to show we’re
a stable and predictable partner – that we’re not just proposing,
but are listening to those who have constructive proposals to offer,”
he told the roundtable in Kyiv.
He said the government set priorities for bringing business out of the shadows and fixing the
regulatory framework.
To bring the economy out of the shadows,
the Cabinet has drafted a bill on transfer pricing, a practice of
financial transactions between related companies that helps take
profit out to offshore destinations.
The Cabinet has also solved the
problems of value added tax refunds to exporters, Klymenko said. He
said businesses claimed Hr 43 billion in VAT returns last year, and
the government paid off Hr 46 billion. He said this means Ukraine is
meeting its current obligations, as well as paying off back debts
awarded by courts.
Graeme Hutchison, deputy country director for the European Bank for Reconstruction and Development in
Ukraine, says the government may be solving some problems, but
overlooking others. He referred to Ukraine’s business climate as a
“deteriorating environment.”
“Corruption and unfair business
practices, (are) creating instability in the markets,” he said.
Corporate raider activity is widespread and hugely damaging. Customs
and tax authorities apply laws selectively. Businesses lose out,
regardless of whether they choose to pay or fight in court.
Olena Voloshyna, head of the
International Finance Corporation, said one of the new trends she
noticed is the government’s attempt to support certain sectors,
create industrial parks, and the like.
“For us, this is a sign of an
over-regulated economy,” she said.
Anatoliy Maksiuta,
first deputy minister for economic development and trade, said
industrial parks are merely the government’s attempt to make it a
little easier to invest by offering certain perks, such as easy connections to communications, for example. He said the government is
not attempting to create unfair competition in special zones like
industrial parks.
Roman Shpek, chief
adviser to Alfa Bank, said there are already too many privileges in
the country, which are not being revised. He also said the government
is overly enthusiastic about setting new tax rates. But the focus of
its attention should be different: setting realistic economic
forecasts, for example.
Ukraine expects
this year’s gross domestic product to to grow by 3.4 percent and set
budget expenditure targets based on that figure. Investment bank
Dragon Capital, however, this week adjusted its GDP forecast to less
than half of the official figure – 1.2 percent.
“Unfortunately,
unrealistic macroeconomic forecast puts you in the situation when you
have to collect (taxes) today because you have to pay tomorrow,”
Shpek said. This results in a tax burden on business which is
impossible to meet.
“There
needs to be a healthy debate between you (in the government) because
you stick with the figure that is too hard for you to achieve,”
Shpek said.
The
International Monetary Fund, whose mission is expected in Ukraine
this month to continue negotiating a new $15 billion loan, has been
making the same point. IMF maintains that Ukraine’s 2013
macroeconomic indicators are set too high, and need to be revised. It
also urges to revise the system of subsidies and privileges,
especially in the utilities sector.
Klymenko
said that business often over-dramatizes problems that remain. “When
we meet (with business representatives, we hear about) no
improvement, no scope of reform – I think that everything will come
in time,” he said. “In a year or two, and we will be in top 100
of Doing Business ranking.”
But Shpek says it did not have to be
that long: the president’s program for economic reform last year
contained everything Ukraine needed to do to reach that target. “But
many points were not implemented and transferred to this year’s
program,” he says.
Businesses also
complain that even when the government approves the right laws and
simplifies certain procedures, it introduces new ones that eliminate
the potential positive effect. That government agencies lack
coordination. That there is a need for a better communications policy
to explain government’s plans and actions. And also, there needs to
be less action to give business breathing space, as well as time to
adjust to the changes.
Kyiv Post editor Katya Gorchinskaya can be reached at gorchinskaya@kyivpost.com.
