What the next president is expected to do in the first 100 days.
Whoever wins the Feb. 7 election will inherit a nation facing crises on multiple fronts – economic, political and financial. Whether it’s Victor Yanukovych or Yulia Tymoshenko, the next president will not have much of a honeymoon period to solve a growing list of problems.
Moreover, the more bitterly fought the election, the less likely supporters of both candidates will reach out to the other side and unite in clearing the backlog of festering sores.
A national budget has not been adopted for this year. International Monetary Fund lending is in limbo. Foreign investors are hesitating. The policy-making process is frozen.
The Kyiv Post talked to various experts and members of the community and asked what the next president of Ukraine should do in the first 100 days of office to keep the country afloat in the near term and put it on more solid ground to recover from a punishing recession.
The following issues rose to the top as essential to solve if the nation has any hope of regaining stability:
Adopt a budget
A financial no-no for any country but more serious for one in such financial disarray, Ukraine entered the year without a budget. In doing so, Kyiv’s leadership violated legislation which requires the country to adopt its major financial document by Dec.1 for the following year’s spending plan.
“It’s not only about adoption: the budget must be realistic,” said Olena Bilan, an analyst with Dragon Capital investment bank. “The revenues should be estimated first, based on realistic macroeconomic assumptions, and then expenses, not vice versa, as it seemed to be the case before. This would be the first step to improve vitally important relationships with the IMF.”
In 2009, the general fund of the national budget collected Hr 172 billion in overall tax and other revenue – less than $30 billion, or about half the size of the New York City’s budget.
International lending
Most experts emphasize renewal of IMF ties, which would unleash another $5 billion or so from an agreed-upon $16.4 billion credit line that is needed to keep Kyiv financially afloat in the near term. It would also serve as a signal to other lenders and investors that the country is on the right track. The IMF froze lending at roughly $11 billion after the nation’s political leaders failed to keep government spending in check and also failed to live up to commitments, such as raising domestic price on natural gas for households.
“The IMF is the major source of financing for Ukraine right now,” said Oleksiy Blinov, an analyst with Astrum Investment Management in Kyiv. “The National Bank (of Ukraine) is another one, and it is being used through the process of emission (of excess currency),” which raises the threat of inflation.
Utility hikes
Ukrainian residents and businesses should be prepared to pay more for gas and electricity. Experts unanimously agree that these unpopular price increases – introduced along with a targeted social safety net to support the poorest echelons of society – are essential to putting that sector on a free-market footing and encouraging conservation.
“Current prices for both gas and electricity do not cover the expenses for them,” Astrum’s Blinov said. “The gap, one way or the other, is compensated by the money of taxpayers, while politicians continue to show demonstrative refusal to increase the prices.”
Experts predict that gas and electricity prices could rise by up to 90 percent this year, a significant factor in an inflation rate that could be 10 percent this year.
Banks
During the first 100 days, the next president is expected to appoint the new head of the National Bank of Ukraine. But a big task in the banking sector is to find a way to get banks to start lending again. Credit has been limited in many sectors, including home-mortgage lending, as banks still reel from a bout of bad lending in the economic bubble that burst in 2008.
“It is essential, however, for the National Bank of Ukraine to immediately develop the system of perks and guarantees so that banks are not afraid to give out the loans,” says Yaroslav Stetsin, a financial expert with Astrum Investment Management.
The central bank can lend money cheaply and hope it gets pumped into the economy through loans. Smaller businesses could use the credit. “It’s essential that policies of National Bank of Ukraine will let small- and mid-sized business take loans at reasonable interest rates, not 30 percent as it is now,” said Yaroslav Misyats, head of the Party of Small and Medium Size Businesses.
Taxes
Official taxes are burdensome and encourage evasion. Simplification has yet to take place in independent Ukraine. Many businesses think that a tax holiday or reduced and simplified taxes for smaller businesses is needed to stimulate this sector.
“Small businesses are mostly in the shadows and not paying taxes,” Misyats said. Rather, entrepreneurs are paying bribes to multiple institutions. Replacing the current corrupt system will stimulate the small-business sector, the engine of many healthy economies.
Investment climate
Foreign investors had it rough this year in Ukraine, facing losses, currency fluctuations, and thinking hard about whether doing business in the nation is worth the difficulty. One of the biggest concerns is reimbursement of value added taxes, which many foreign and national businesses still await, and removal of red tape.
For Ukraine to improve investor confidence and trust, it should start with “ensuring proper, transparent and in-time value added tax reimbursement,” said Jorge Zukoski, the president of American Chamber of Commerce.
But that’s just the tip of the iceberg. Zukoski said the business community also expects new political leadership to act right away to cancel the moratorium on agricultural land sales, and improve the investment climate overall.
Compared to the United States and even the Caucasus republic of Georgia where a company can be registered within days, it takes months to get your venture operating in Ukraine. And once you get past the mountain of permissions and bureaucratic hurdles to register your business, more barriers and outright corruption hits you from all sides, causing headaches and hefty losses.
Anti-corruption
Ukraine is moving lower in the corruption ratings. “Ukraine has multiple anti-corruption programs and always had. They don’t work,” said Mykhaylo Salnikov, senior researcher at the Kyiv School of Economics.
“Only consolidation of legislative base, executive branch and law enforcement can make them work. The new leadership, from the first days, will have to demonstrate strong commitment to establishing such consolidation,” Salnikov said.
Euro 2012
The nation’s preparations for Euro 2012, the major European soccer tournament to be co-hosted with Poland, will be watched closely. Aside from the expected tourist boost, Ukrainians want to see whether the nation’s politicians can find billions of hryvnia for much-needed infrastructure improvements of roads and airports.
Sending right signals
Many people believe that the next Ukrainian president will have to get his or her team picked to start sending the right soothing signals in the first 100 days for the nation to break from its political gridlock, which has pushed it to the edge of many catastrophes.
“This will be a positive signal of the movement towards modernization and long-term strategic solutions, which Ukraine needs vitally and in every single area,” Oleksandr Paskhaver, an analyst with the Economic Development Center in Kyiv.
Kyiv Post staff writer Nataliya Bugayova can be reached at [email protected].
