Over the past several
months, council members have held meetings with numerous agencies involved with
providing economic assistance to Ukraine, including representatives of the
International Monetary Fund, European Union, World Bank, the European Bank for
Reconstruction and Development, the U.S. Agency for International Development,
as well as the embassies of Canada and the United States. The work of the council
has been supported by the Canadian government as part of the assistance program
for Ukraine.
Recently,
the council has issued a statement on economic reform which outlined its
position with respect to the needs for economic reform in Ukraine. The main
conclusion of this Statement was that
“Swift
and radical economic reforms must be undertaken if Ukraine is to seize this
historic opportunity to clean up corruption, to realize its substantial growth
potential and to put the economy on a path of rapid growth.”
We
see corruption as the major economic issue which must be addressed. The statement
further outlines the essential reforms which need to be undertaken: Regulatory Corruption
Reduction; Reform of Energy Markets; Establishment of the Rule of Law; Simplification
of Tax Code; Trade Enhancement Measures; Restructuring of the Banking Sector;
Agricultural Land Reform; Restructuring of Bureaucracy; and (critically)
Macroeconomic Stabilization.
A
wide range of measures by which to achieve these essential reforms are detailed
in the Statement of Council.
For
example, with regard to corruption reduction, the council recommends measures
such as substantial deregulation of prices and trade, simplification of
business procedures, minimization of licenses and permits, sharp reduction of
the number of regulatory agencies, introduction of e-government on a wide scale
along with the implementation of sanctions against corrupt practices. On energy
markets, the Council recommendations include that domestic gas prices move to
market levels as quickly as possible and the elimination of energy subsidies to
limit corrupt practices. To improve the
tax code it is necessary to rationalize
procedures for tax compliance and inspection, simplify the tax system by reducing
the number of taxes and to restructure the social tax system to be consolidated
and become part of the State budget. At the same time, regional and local
authorities should be given certain taxes to allow them some financial
independence. In the area of trade enhancement, reform is required in the system
of VAT refunds to render VAT refunds for exporters transparent and automatic
and preparation for likely Russian trade sanctions can be pursued by
negotiations both bilaterally and through the WTO and mobilization of international
support. Agricultural sector reform will require the legalization of private
sales of land and the enhancement of rural infrastructure.
In
light of the substantial budgetary and payments deficits, the precarious need
for debt refunding and the weakness in the currency, the Council regards macroeconomic
stabilization to be of overwhelming importance in reforms. The recommended
measures of Council are that the deficit in the national budget must be brought
under control with the medium term goal of achieving a balanced budget and that
Ukraine soon should unilaterally accept Maastricht criteria as constitutional
limits for public debt of 60 percent of GDP and for the budget deficit of 3
percent of GDP. At the same time, a monetary policy must be put into place to
permit the stabilization of price inflation and of the Hryvnia exchange rate.
In the medium term, Ukraine should aim at a floating exchange rate and
inflation targeting.
The
above recommendations must be seen as critically important in the context of
both the Stand-By Arrangement signed with the IMF and the Association
Agreements signed with the EU. These agreements provide the basis and support
for the development of a viable and thriving economy in Ukraine. Importantly,
these agreements provide for the extension of substantial credits to Ukraine,
in the amount of $17.1 billion by the IMF and an almost equivalent amount by
the EU. These funds are of vital importance to prevent defaulting on the maturing
debts of Ukraine, in support of the current government budgetary deficits and
in funding of the current trade deficits. Without these credits, Ukraine would
quickly descend into a financial quagmire which can destroy the economy. Additionally,
the EU Agreement provides for the establishment of a deep and comprehensive
free trade agreement which can provide a substantial enhancement of trade with
one of the largest economic blocks in the world.
However,
both the IMF and EU agreements are conditional on the implementation of
economic reforms. These conditions include the meeting of various specific
targets with regard to a broad range of areas. In particular, the IMF agreement
requires that certain macroeconomic targets, for example in the area of budget
deficits and debt levels, need to be achieved. But most importantly, both
agreements extend to requirements for reforms in the areas of corruption
reduction, energy markets, rule of law, taxation reform, regulatory reform,
bank restructuring, land reform and governance. In fact, the EU Agreement
commits Ukraine to bring the laws of the country to be consistent with EU
directives across almost the whole spectrum of both economic, judicial,
regulatory, political and social areas.
In this regard, it is assumed that these reforms will be put in place by
the Government of Ukraine with the assistance of international agencies. The implementation of these reforms would
transform Ukraine into a country which could be potentially a candidate for EU
membership. Most importantly, in the
view of the Economic Advisory Council, such economic reforms would provide
Ukraine with the opportunity to establish a viable and growing economy and move
the standard of living toward more European levels.
On
the other hand, there is also an issue of caution and concern which must be
expressed. In the absence of meaningful economic reforms, as broadly
recommended, Ukraine will find itself in default of its IMF and EU commitments.
This would have dramatic and serious implications to the economy of Ukraine.
The most drastic could be the withholding of future tranches of IMF funding. It
must be understood that the $17.1 billion it to be drawn in tranches with only
the initial $3 billion advanced to date. Periodic reviews of compliance with
the agreement are required and future payments are dependent on positive
assessments. As a reminder, the previous Yanukovych regime, due to its lack of
reform, was unable to pass the subsequent reviews and never obtained the full
IMF credits which were negotiated.
In
a similar vein, the EU Association Agreement still requires the ratification of
each of the countries of the EU. If Ukraine does not move on the path of
economic reform, there is also the threat that the Agreement for which so much
has been sacrificed may not be finalized. Ukraine must be seen as moving
rapidly toward an economy which can be seen by the EU as a worthy and
beneficial trading partner. In this, the interest of Ukraine is to achieve
rapid and visible momentum for reform. Such momentum will enhance the trade
linkages with the EU and be beneficial to both parties. Ukraine must not lose
this historic moment for rapid and radical economic reforms which would
consolidate its position as a European state.
Basil Kalymon is professor emeritus of the Ivey Business
School in Canada and Oleh Havrylyshyn is adjunct professor of George Washington
University. They are members of the Economic Advisory Council to the Ministry
of Economic Development and Trade.
