Transcript Investment Climate in Ukraine: Old and New Challenges

Investment Climate in Ukraine:
Old and New Challenges
Iryna Akimova, Chief Economic Advisor, UNDP
Ukraine
ABCDE , Amsterdam,
23-24th of May, 2005
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Some statistics on capital investment in
Ukraine in 2004
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Volume– 20% of GDP
Growth rate- 28% (higher than GDP growth rate)
Main source- retained profits of the firms (62%)
Main sectors- industry, transport, communication
FDI:
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Volume- US$ 1.93 bln (cum. US$ 8.54 bln, US$
177 per capita), 2.5% of GDP
Growth rate- 23%
Main sectors- wholesale trade, food industry
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Investment climate components
Investment climate is a general term for factors that provide incentives or
disincentives for private sector investment, including :
Investment potential
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resource endowment and operation costs;
physical, financial and technological infrastructure;
openness to international trade and access to international markets;
Investment risks
macroeconomic performance and political stability;
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the regulatory and policy framework and policy coherence , i.e. quality
and stability of public policies including:
a) rule of law and protection of property rights (including corruption
issues) ;
b) competition policy;
c) entry barriers , operational and exit restrictions;
d) tax policy.
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Investment climate in 2004 and changes
in the 1st quarter of 2005
2004
physical, financial, technological
infrastructure
openness to international trade
+
macroeconomic performance
corruption
+
++
--
rule of law/ protection of property rights
competition policy
-+/-
Entry barriers , operational/exit restrictions ++
Tax policy
+/UNDP Ukraine
1st quarter
2005
?
?
?
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Barriers to investment in Ukraine in 2003
(% of firms in the sample)
Total
sample
Firms with
foreign capital
Instability of tax and regulatory policy
46.9
47.8
Macroeconomic instability
40.8
39.0
High tax rates
39.5
39.1
Tax administration
34.9
34.5
High interest rates
30.9
33.7
High corruption
27.9
28.6
Access to credits
26.4
29.0
Customs and trade regulations
21.7
20.0
Weak protection against criminality
19.5
22.1
Registration and licensing of entrepreneurial
activity
UNDP Ukraine
18.2
16.5
Barriers to investment
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Risks: Macroeconomic situation
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GDP growth rates: 2003- 9.4% , 2004-
12.2% , 1st quarter of 2005- 5.5%, 2005
(forecast)
Inflation: 2003- 8.2%,2004- 12.3%, 1st
quarter of 2005-5.1%, 2005 (forcast)-13%
Budget deficit (as % of GDP): 2003- 0.2% ,
2004- 3.4, 2005 (forecast) official- 1.6%,
unofficial- 4%
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Risks: security of property rights
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Privatisation strategies:
a) Re-privatisation (unclear criteria, scale, procedures,
no credible protection of good faith purchases);
b) Slowing down of privatisation process, focus on state
sector.
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Weak corporate law;
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Moratorium on bankruptcy of the firms with state
shares ;
Weak court system.
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Risks: unstable regulatory and tax
policies
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Cancellation of tax privileges in FEZ;
Dangerous changes in simplified system of
taxation for SMEs;
Postponement of tax cuts and tax
simplification;
State interference in price setting;
Low transparency of public policies;
Absence of an efficient ad hoc monitoring of
new legislation.
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Conclusions
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After “orange revolution”, Ukraine received a window of
opportunity for attracting domestic and foreign investors;
Efforts in improvement of investment climate should be
supported by sound macroeconomic policies and fiscal
stability;
Ensure security of property rights. Re-privatisation (if not
stopped) should be limited in scale and pursued via
transparent procedures as quick as possible;
Continue liberalization of trade and financial markets;
Changes in regulatory and tax policies should be predictable
and constrained in terms of time;
Reduce the level of state interference in the economy and
strengthen anti-trust institutions.
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