UKRAINIAN REFORMS TO DATE

The Ukrainian government needs to be effective and diligent in its efforts to reform the country, fight corruption, improve transparency and accountability, improve the rule of law and create the conditions for the return of economic growth and prosperity.

The Ukrainian government is focused on 5 priority areas:

1. National security and defense
2. Macroeconomic and financial stability
3. Energy independence
4. European integration
5. Good governance

The reform agenda has been adopted as a key part of the IMF programme to help stabilize Ukraine's economy and strengthen the financial and banking systems. This means:

• tackling corruption at all levels
• increasing the transparency and efficiency of state-owned enterprises
• bringing commercial activity out of the shadow economy
• implementing fiscal reform to broaden the tax base, and
• creating the right conditions for businesses and investors

Energy Sector

Energy sector reform and energy independence are key challenges. Ukraine historically had the most inefficient and corrupt energy sector in Europe.

• Ukraine has taken decisive action to restructure the sector, increase energy efficiency and reduce and diversifyy its gas imports. Ukraine used to depend on Russia for 90 percent of gas imports. Now, two-thirds of itsimports come from Europe, and only one-third from Russia.
• Ukraine has eliminated a major and systemic source of corruption by getting rid of intermediaries that used to purchase and sell gas from abroad.

Fighting Corruption

• Ukraine is now using a carrot and stick approach to fighting coruption, fraud and abuse.
• Ukraine has set up an independent law enforcement agency, the National Anti-Corruption Bureau, with full funding, special powers and a staff of 700 to investigate corruption by government employees, public officials and private legal entities.
• A separate agency is tasked with developing policies aimed at monitoring and preventing corruption through system-wide solutions and incentives.
• Ukraine ha implemented public procurement reforms with controls, training and transparent tendering processes including a new e-procurement practice to increase accountability and combat fraud and abuse.
• A new electronic VAT system has been introduced to increase transparency and reduce fraud that cost the government upwards of $ 1 billion in 2014.
• Ukraine has changed the governance of state-owned enterprises with new processes for the competitive recruitment of CEOs. Most of the 3,000 state-owned enterprises do not pay any taxes nor dividend to the state. Ukraine will now be auditing them and will decide on their future.
• Ukraine has started replacing its entire Soviet era traffic police with a modern, well trained police force now with competitive salaries.

Banks

Ukraine has adopted important legislation to resolve failing banks quickly and strengthen law enforcement in situations where related third party transactions and insider deals contributed to bank failures. This will enable the government to pursue and recover assets from bank owners and bring to justice those involved in fraud or criminal activity. Changes like these are essential to rebuilding public trust and ensuring citizens' deposits are secure.

Fiscal Policies

• Ukraine has started reforming its fiscal policies. The goals of the fiscal reform plan are to broaden the tax base and more fairly share the fiscal burden.
• This is being done by bringing commercial activity out of the shadow economy with tax breaks. Discounts from the very high social payroll tax rate of 41 percent have been offered to entice SME businesses back into the formal economy. The goal is to bring the tax rate down to 24 percent for everyone in 2016.
• Ukraine is also asking for greater fiscal contribution from the wealthy with a progressive income tax rate of 20 percent, the equalization of tax on all forms of passive income, and luxury taxes.
• Ukraine is also ensuring that everybody pays a fair share by closing fiscal loopholes that were exploited by big businesses to avoid taxation.
• The fiscal system has been simplified by reducing the number of taxes from 20 down to 11.

Future Reforms

The programme agreed with the IMF is based on five pillars, including

1. Monetary and exchange rate policy

• Strengthening the National Bank of Ukraine
• Bringing inflation down to single digits
• Stabilizing foreign exchange rates

2. Banking sector policies

• Identifying, monitoring and unwinding loans to related parties
• Strengthening supervision of banking risks
• Resolving banks that do not comply with their recapitalization plans
• Strengthening bank capacity to resolve bad loans

3. Fiscal policy, including

• Tax policy reforms to ensure simplicity and fairness
• Full economic cost recovery of gas tariff
• Reductions in the civil service work force
• Healthcare reform
• Education reform
• Pension reforms
• Reducing subsidies to SoEs, and eliminating Naftogaz's deficit

4. Energy sector policy

• Increasing tariffs toward market prices, improve collection rates
• Enhancing Naftogaz's efficiency and governance
• Eliminating state subsidies
• Unbundle Naftogaz in line with the EU Energy Charter Treaty
• Reviewing oil & gas royalty approach to make it both fiscally sound and investor friendly

5. Governance/transparency/business climate

• Strengthening governance and transparency of government operations
• Enhancing Ukraine's anti-money laundering framework
• Streamlining regulation over economic activity.

Delivering on the IMF programme objectives will be critical to restore confidence and growth, bring inflation to single digits, keep external deficits manageable, and replenish international reserves. There is a lot of low hanging fruit to create the right conditions for business and investment including for small and medium sized busuinesses. Reucing currency volatility and lowering inflation will enable SMEs to plan, invest and have confidence in the system. Lower interest rates and increased lending from a strengthened banking sector can help businesses expand. Other reforms to cut red tape, deregulate the economy and make tax administration more efficient and service oriented will also lower the burden on small businesses.

Ukraine is reorienting its economy in significant ways towards European and global markets and positioning Ukraine to be a reliable partner. European Union standards are being adopted in governmental institutions and regulations in order to facilitate increased trade and investment. The depreciation of the Hryvnia has impacted imports and put pressure on the state budget, but ultimately it makes Ukraine's cost position and export ultra-competitive.

Real GDP growth is expected to rebound to 2 percent in 2016 and rise to 4 percent in the medium term. But these forecasts are subject to material risks- most prominently the threat of increased violence and the potential shocks to the economy and the banking system.