Transcript Ukraine: the Path to Stability and Growth

“Ukraine: the Path to Stability and
Growth”
29 May 2014
Challenges
 Sharp deterioration of external and internal political situation  Direct losses from
annexation of territories and gas war with Russia + Threats for the investments into the
economy of Ukraine
 Internal political conflict  Distrust to governmental institutions + Decrease of
controllability of economic and political processes
 Economic slowdown and risks of macroeconomic destabilization  Ukraine remains one
of the poorest in Europe (planned GDP per capita for 2014 is $3200, e.g. 4.5 times lower
than in Poland)
 High corruption and incomplete deregulation  Unfavorable investment climate
 Unreformed energy sector and low energy efficiency of the economy  High external
energy dependence and fiscal pressure (subsidies in gas sector reached 7% of GDP in 2013)
 Sluggish rate of modernization of the sectors responsible for human capital development
(healthcare and education) undermines possibilities for Ukraine to regain stable economic
growth (mortality rate of working age population is 47.8 per 10 thousand.; Poland – 29.5,
Czech Republic – 22.8)
Main goals
 Political stability – overcome the external threats for territorial integrity, legitimation of
government, fiscal decentralization
 Restoring macroeconomic stability – mitigate the consequences of current economic crisis
and move to the macroeconomic policy aimed at supporting sustainable economic growth
 Fighting corruption – continue deregulation, improve business climate for investments
 Modernization of energy sector – eliminate inefficient system of subsidies, increase the
energy efficiency of the economy
 Healthcare reform for sustainable economic growth – increase the efficiency of budget
expenditures on healthcare and affordability of medicines for population
Opportunities window
should be used
 There is public request for pivotal modernization of the country. Opportunities window
is open for implementation of serious (and unpopular) changes in the policy and economy
 Political stabilization  Second wave of economic reforms, aimed at liberalization of
the economy = Return to stability and growth
 Maturity tests for the new state authorities:
 Competence to lower the scale of the social and economic populism
 Ability to maintain «historical memory»
 Promptness to comply with all necessary procedures before making decisions that are
important for the society
 Decisiveness in achieving the «critical mass» of the reforms
1. External and internal
political challenges
Achievements
 Signing the political part of the Association
Agreement with the EU and scheduled for
signing in June the economic part should
promote the implementation of democratic
reforms
 Election of the President has been the first
step towards restoring trust to the institutes
of the government
Unsolved issues
 Trust to the government institutes or to the
parliament remains very weak
 Risk of spontaneous regionalization leads
to the loss of territorial integrity
 After annexation of the Crimea by the
Russian Federation, the threat of additional
territories losses / persisting instability at
the East of Ukraine remains high
 Breaking economic links with CIS countries
and risk of new trade barriers between
Ukraine and the Custom Union
 Low combat capacity of the army, outdated
equipment and army’s inability to conduct
war of a new type. Low professionalism of
the national security forces and the police
1. External and internal
political challenges
Recommendations
 Reduction of political risks
 External policy
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Ensure a de-escalation of the Ukrainian-Russian relations by holding the new
round of four-party talks including Ukraine, the EU, the USA and the Russian
Federation
Start the negotiations with the Russian Federation to maintain the access to the
markets and mutual guarantees of property rights by restoring parliamentary
dialogue and work of the expert groups
Conduct the deep reform of the national security and defense
 Internal policy
 Demilitarize the political life in the country
 Foster constitutional reform, ensure the proper check and balances mechanism and
clear delimitation of the power of central and sub-local governments
 Ensure early parliamentary elections
 Consider the use of advisory plebiscite as the mechanism of solving social tensions
2. Restoring
macroeconomic stability
Achievements
Unsolved issues
 Start of the fiscal consolidation in 2010-2011
– natural gas and district heating tariff
increases, raising pension age and
decreasing budget expenditures on state
administration
 Development of the joint government and
NBU the anti-crisis package for
macroeconomic stabilization and its
adoption by the parliament
 Signing in March 2014 the political part of
the Association Agreement with the EU
 Successful negotiations of the Yatsenyuk
government on the international assistance
package from IFO and first tranche of the
IMF rescue package
 Continuing economic stagnation (In the
1Q2014 GDP, industrial production and
construction declined by 1.1%, 5.0% and 6.4%
respectively)
 Increasing fiscal risks – government debt/GDP
ratio increased to 52.7% and the service of
the state debt amounts to 35.5% of the
budget
 Deep uncontrolled devaluation (more than
40%) and high inflation (IMF and WB forecasts
for 2014 are 15.0% and 16.2% respectively)
 Deposit flight and increasing risks for banking
system
 Additional fiscal pressure of anti-crisis
package went mainly to population while
large business avoided it
 Lack of progress with tax evasion fighting and
raising fiscal pressure on legal business
2. Restoring
macroeconomic stability
Recommendations
 Fiscal policy
 Implement the medium-term fiscal consolidation plan aimed at stabilizing government debt
within 55-60% of GDP range and supporting economic growth of at least 4%
 Liquidate tax loopholes, abolish the advance payments of corporate income tax, liquidate
indebtedness on VAT refunds
 Accelerate the full application of the transfer pricing legislations to large financial and industrial
groups
 Optimize the non-working sectoral tax exemptions
 Monetary policy
 Adopt and start the implementation of the medium-term plan on inflation targeting with
responsibility division between NBU and the government, which envisages the rigid inflation
targeting below 5% since 2016
 Ensure the predictability of the monetary policy – switch to the manageable exchange rate
floating after the stabilization of the situation
 Increase the political and financial independence of NBU and its transparency
 Banking sector
 Implement the stress-tests and make a decision on recapitalization of the system banks by their
owners or by the state; prepare the plans on strengthening the largest banks and ensure the
tight control of refinancing
 Improve the legislation on protection of creditor rights and simplification of bad assets writeoff; increase the capitalization of the banking sector by increasing the capital adequacy
requirements
3. Fighting the
corruption:
deregulation (1)
Achievements
 Since 2010 more than 50 laws were adopted
on deregulation and provision of
administrative services
 Permit system. Declaration principle and
principle of acquiescence were adopted. The
list of types of economic activities that must
be licensed was shortened by 30%
 State supervision. Division of policy-making
and controlling functions, risk-oriented
approach to implementation of planned
inspections, moratorium for inspections of
business units on simplified taxation system,
requirement of a court order for a
suspension of operations of a company
 Opening/ closing of business. Since 2012 a
company can be registered via Internet based
on the model charter. Maximum duration of 6
months was set for the business closing
procedures. Mandatory audit of liquidation
balance sheet was eliminated
Unsolved Issues
 Legislation work was not finished (technical
regulations, duplication of controlling authorities’
functions)
 The adopted laws on permit system and state
supervision were not fully implemented. Partial
return of controlling functions to the central
authorities (in ecology and agriculture) occurred
 The number of unplanned inspections in the 2nd
quarter of 2013 increased by 4 times (!)
Duplication of controlling authorities’ functions
remain. Single rules for making decision about
suspension of operations of a company were not
implemented
3. Fighting the
corruption:
deregulation (2)
Achievements
 Taxation system. The Tax Code was adopted:
number of taxes and duties decreased from 44
to 22. Average time for servicing taxes and
duties shortened from 657 tо 390 hours per year
 Public procurement. In 2010 Law on Public
Procurement was adopted. The list of exceptions
included only 5 positions.
 Provision of administrative services. Basic Law
on administration services was adopted, as well
as provision of administrative services through
administrative services provision centers
(ASPCs), which is based on the principle of
‘single window’. 636 out of needed 680 ASPCs
were created
 Regulation of automobile services. Mandatory
inspection of passenger cars was abolished that
saved UAH 0.7 bln of official and UAH 3.0 bln of
‘unofficial’ payments annually to car owners;
general powers of attorney for driving were
abolished
Unsolved Issues
 Further decrease in the number of taxes was
postponed. Further improvement of tax
administration system did not occur
 Although the new Government eliminated
tender-exempt procurement (that were
widespread during the last 2 years), the risk of
purchases from one participant remains
 The list of ‘guaranteed’ administrative services
provided by ASPCs was not adopted. Tariffs for
administrative services were not fixed.
Development of ASPCs network covering all
territory of Ukraine was not completed
 Although Ukraine improved its position in Doing
Business rating from 138 to 112, it did not enter
the top-100 group, besides in Global
Competitiveness Index Ukraine lost 11 places
and shifted to the 84th position out of 148
countries
3. Fighting the
corruption:
deregulation
Recommendations
 Implement the adopted laws on deregulation, using the mechanism of social control and
in cooperation with international financial organizations
 Implement social control over realization of the new law on public procurement
(transparency and objectivity of tender procedures)
 Decrease the number of permissive documents by 30% (first of all in agriculture and
transportation) and expand the practice of declarative principle
 Introduce complex tax inspections by all controlling authorities, decrease the number of
reasons for unplanned inspections, eliminate duplication of controlling authorities’
functions
 Continue reform of technical regulation system in accordance with the EU requirements;
implement adaptation of the system of state control over safety and quality of food
products towards the EU best practices
 Improve ranking of Ukraine in the ‘Doing Business’ rating to the 100th or higher position
through simplification of the procedures needed to connect a construction cite to the
communications and electricity supply, enforcement protection of investors’ property
rights
4. Modernization of
energy sector
Achievements
Unsolved issues
 Accession to the Energy Community and
Candidate in the of Extractive Industries
Transparency Initiative
 Adopted in 2011 amendments to the law on
production-sharing agreement (PSA) allowed
to sign PSA with Chevron, Royal Dutch Shell
и ExxonMobil in 2012
 Adopted Law on power market reform aims
at modernizing power sector and
incentivizing competition in the industry
 The privatization of fossil-fuel power
generating plants and distribution and supply
companies was almost completed
 In April 2014 the government adopted
schedule for natural gas and heating tariff
increases for residential consumers
 Energy intensity is almost twofold higher than
the average figure for the EU, even after
correcting for structure of the economy
 Poor business climate does not allow to
attract the investments in the sector
 Fund for Cost Imbalances Settlement
contradicts to the competition goal of the
Law
 Adopted by the government in 2012 heating
sector modernization plan was not
implemented
 Coal sector reforms were not implemented
while state subsidies doubled
 Tariffs for subsidized consumers remain far
below cost-covering level
4. Modernization of
energy sector
Recommendations
 Oil and gas sector
 Foster Naftogaz restructuring plan to guarantee its unbundling and creation of the independent,
sustainable and transparent extraction, transportation and supply companies
 Comply with the adopted schedule on natural gas and heating tariff increases for residential consumers till
2018
 Improve the business climate and investment attractiveness in oil and gas sector by complying to the
obligations to Energy Community
 Power sector
 Ensure real competition in generation and supply segments of the power market
 Evaluate the required schedule and necessary funding for complying with the Large Combustion Plant
Directive
 District heating
 Foster the implementation of energy efficiency increasing in the district heating. The priority should be
given to modern building-level heat metering and installation of the individual heating substations
 Improve the legislative framework on possible transfer of the district heating infrastructure into leasing or
concession and on energy performance contracting and energy service companies (ESCO)
 Coal sector
 Liquidate «Vugillia Ukrainy» by 2015 and switch to the direct contracts and coal trade on coal exchange
 Foster phasing out of the state loss-making coal mines. Develop the programs for IFO assistance to
address the social and environmental issues of coal mines closure
 Promote implementation of the new technologies in the coal industry
5. Healthcare Reform for
Sustainable Growth
Achievements
 Four basic laws were adopted: changes into
The Budget Code, law on ‘pilot’ regions,
changes to Basics of healthcare legislation,
law on emergency care
 Increasing efficiency of budget expenses:
 The 3-level model of financing (state,
oblast, rayon) was established
 Priority of primary health care (PHC)
increased, legal separation of PHC from
secondary health care (SHC) was made,
system of economic motivation was
introduced for medical workers on PHC
 Performance Program Budgeting and
contracts were introduced in financing of
public healthcare
 Raising accessibility of medicines:
 Reference pricing and reimbursement
were piloted on anti-hypertension
medicines
Unsolved Issues
 Law on healthcare institutions was not adopted
 Low efficiency of budget expenses :
 Attempt to return back to 4-level model of
financing (state, oblast, rayon, community),
funds are still channeled based on maintaining
beds approach
 Bonuses to medical workers are still limited
only to PHC in ‘pilot’ regions
 Provision of ‘free medical services’ to
population remains declarative
 Low accessibility of medicines:
 Excessive regulation in the areas of registration
(re-registration) and licensing of medicines
 Use of reference pricing and reimbursement
was not expanded to other groups of
medicines
 Very low investment into production of new
medicines
5. Healthcare Reform for
Sustainable Growth
Recommendations
 Increase efficiency of budget expenses:
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Adopt law on healthcare institutions aimed at implementation of healthcare institutions financing
based on medical services they provide to population; equal access to budgetary financing for public
and private healthcare institutions; economic autonomy of public healthcare institutions
Introduce Performance Program Budgeting for healthcare financing by types of healthcare service
Transit in the medium-run towards financing healthcare institutions based on agreements for
provision of medical services signed between healthcare institutions and local governments, which
will enforce the key indicators of medical services treatment
Develop and introduce system of bonuses for medical workers in all healthcare levels and in all
regions of Ukraine
Eliminate declarations of ‘completely free medicine’, develop guaranteed package of free medical
services to the population
 Raise accessibility of medicines for population:



Simplify and bring closer to the EU standards regulations in the areas of registration (re-registration)
and licensing of medicines
Introduce reference pricing for budgetary purchases of medicines and for socially-important
medicines used in ambulatory treatment
Implement shift from free of charge provision of medicines by doctors to subsidized categories of
patients towards provision of these medicines through pharmacies where patient has the right to
choose a more expensive medicine with a co-payment
Opportunities window is open
for modernization of the policy and economy
And this opportunity should not be wasted!
Than you for attention!