Nana Chornaya (UNIAN)
Political crisis
is raging in Ukraine. At stake is the fate of the government, which allegedly
failed to meet expectations. UNIAN tried to figure out what reforms had worked,
and what still needed to be changed in a number of economy sectors that
directly affect the well-being of ordinary Ukrainians.
"It’s not who, but
what. The most important thing at this point is a clean understanding of
the agenda of reform that lies before Ukraine, agreement among the political
factions to support and implement those reforms,” said U.S. Ambassador Geoffrey
Pyatt commenting on the ongoing political crisis in Ukraine.
And one can not but agree with
him. The U.S. and EU have repeatedly stressed that reforms are the most
important thing for Ukraine at the moment. In their opinion, against this
background, a conflict in the power corridors over the nomination for a top
post in Cabinet remains on the background.
UNIAN tried to figure out what
needs to be changed in a number of economy sectors and how it will backfire on
Ukrainians, no matter who the prime minister is.
Finance and
social security: unbreakable ties
Let's start with the basics –
the reform of the public sector, already launched by the Cabinet. The
Ukrainians will soon experience its effects.
This step was taken due to the
fact that Ukraine’s biggest problem is budget deficit. With a significant ($84
bln) hole in the Treasury accounts, the state struggles to fulfill social
obligations taken long ago. If the government fails to bolster the state
finances, Ukraine may, in fact, go bankrupt.
Replenishment of the state
budget is directly related to taxation. The more taxes people pay, the better.
But on the other hand, it is the reduction of fiscal pressure that gives
impetus for the development of small and medium business (SMB). This appears to
be a vicious circle. Experts believe that there is only one way out – to reduce
social spending by "cleansing" the ranks of social assistance
recipients.
"The economy won’t be
launched without reducing fiscal pressure. We cannot cut taxes, because we have
a huge burden on the Pension Fund and Social Insurance Fund. In order to cut
taxes, we have to verify the recipients of social assistance. This will save
more than UAH 10 billion. If we accumulate this amount, we can be able to
reduce the tax pressure on SMB, stimulating its development," said Viktor
Taran, executive director of the Center of Political Studies and Analytics, a
member of the Reanimation Package of Reforms Council.
This opinion is shared by
another expert, Andriy Blinov: "It is necessary to solve the issue of
simplifying the tax system, as the Code was subject of a compromise far from
perfect. I am positive that it is important to reduce the range of recipients
of financial aid."
The Finance Ministry gave a
start to a "social aid cleansing" on March 1. On March 3, the Cabinet
ordered to create a single information analytical system of e-data on citizens.
That is, the audit will be uncompromising. This will be the first time the Ukrainian
government has ever done this. Although it does not mean that the social
payments will be halted or that the honest citizens will be somehow affected,
there is still a growing popular discontent. But there is no alternative – with
a UAH 84 billion (3.7% of GDP) budget deficit, the Government in 2016 has to
spend over UAH 320 bln on social programs, including the spending of the
Pension Fund. For comparison, the country's budget revenues in 2016 will amount
to UAH 598 bln.
By the way, experts say, that
the citizens don’t need to worry about the "cleansing," given they
have not cheated while applying for any type of social support. The state is
the taxpayers. By stealing from the state (the taxpayers), the cheaters steal
from themselves.
The Cabinet will have to
continue this cleansing of social support recipients, whatever format of the
new Cabinet will be.
Another scenario of getting
out of the budget crisis would be the start of a pension reform, which is stuck
in a conflict between the Cabinet and the MPs. There are nearly 12.5 million
pensioners in Ukraine while there are 10 million payers of a single social
contribution (SSC). That is, there is more than one pensioner per each working
citizen. As a result, the Pension Fund will spend UAH 257 bln in
2016 while its revenues from SSC will be at UAH 110 bln. The deficit will
be covered by the subsidy from the State Treasury in the amount of UAH 144 bln.
There is another important
point, indicating the necessity of a pension reform – the current pension
system pushes the wages into the shadows. The thing is that the SSC is
calculated from the total payroll, which of course is unprofitable to the
employers. They tend to report lower salaries and give additional payments to
their employees “in envelopes.” The Ukrainians are later affected by this
shadow scheme when their pensions are calculated, while the Pension Fund can’t
get out of the debt hole because of this fraud. Quality pension reform should
rid the country of this problem.
Realizing the need for change
in this field, the government in May 2015 tabled to the Rada a bill on pension
reform. But, as we can see, nothing has moved from this point. The submitted
bill is a structural beacon for the International Monetary Fund.
In case the bill is adopted,
the Ministry of Social Policy intends to create a state-funded pension fund
within six months. It is proposed that the pensions will consist of three
parts: joint (55%), funded (35%) and non-state (10%), which is in line with
European standards.
"The best solution is a
funded system, where one can earn a decent pension by deducting 12-14% from
their salaries during labor period. In a joint system, to obtain this result,
28-36% must be deducted depending on the situation in the labor market. Therefore,
the funded system should have been long launched, to encourage a third
voluntary level," said the general manager of the Pension Reform group of
the Reanimation Package of Reforms social platform, Halyna Tretyakova.
Thus, the Ukrainians will face
innovations regarding their pensions, and no Cabinet will be able to evade this
reform.
The Ukrainians will see
another major surprise – the new minimum standards of social security due to
ratification of the Convention of the International Labor Organization.
"This convention introduces a lot of standards that we have yet to
implement. Those standards require additional calculations. We do not just
ratify the Convention, we take on additional obligations," said MP Olena
Sotnyk. According to the lawmaker, the legislation will be supplemented by the
new standards in health care and social assistance, as well as in the living
wage.
So, any composition of the
Cabinet will have to recalculate social programs according to international
standards, which may have a positive influence on the Ukrainians’ wallets.
Everything seems to go as
planned in the banking sector. Although the Ukrainians hate the
"cleansing" of financial institutions, it is impossible to do without
it. This opinion is shared by most experts, and most importantly, the National
Bank's actions are fully endorsed by Ukraine’s main creditor, the International
Monetary Fund (IMF).
IMF Resident Representative in
Ukraine Gerome Vacher says he sees change for the better every time he
visits the NBU, noting that among the greatest achievements is the support for
the reform program and macro-financial stabilization, including some success in
fiscal, exchange rate, and monetary policy, as well as the energy sector
reform.
The regulator has plenty of
tasks but they all boil down to the liberalization of the foreign exchange
market. The NBU pledges it will be held in stages, adding that it is not tied
to any deadlines. The NBU has also adopted a concept of a simplified merger of
banks, expecting the transformation of the system to start as early as this
fall. Meanwhile, the "cleansing" of banks will continue. No matter
how appalled the Ukrainians might be with these changes, the country's
financial system would be doomed without their implementation, and the government,
in any format, will have to continue working in this direction.
Painful
tariffs
The utility tariffs were the
first stone cast at the Government. Although initially, the prime stated that
the increased fees for utility services would be inevitable. And it’s not
because it is required by the IMF, but because the state is unable to subsidize
the difference between the market price of fuel and the actual payments by the
households. The budget cannot afford subsidizing this component.
For over 20 years, no
government has dared to resort to this unpopular step – raising the tariffs –
in fear of losing the voters. But this had to be done. Had it been done 15
years ago, the gradual increase in tariffs would not be as painful for the
Ukrainians. In view of bringing the tariffs up to the real market feasibility,
the tariffs will continue growing for a long time. Another increase is
scheduled for April 1: the price of gas for households and heating utility
companies will increase by 53% (to 75% of the global standards). The citizens
will pay for gas in accordance with the global prices as early as in April
2017.
However, it is still possible
to reduce the burden on the households. Experts name dozens of facts that today
give grounds to speak about the lack of transparency in a tariff calculation
process and massive abuses by monopoly players, which, ultimately, affects
ordinary Ukrainians.
According to Oleksandr
Serhiyenko, director of the Institute of the City analytical research
center, the high cost of heating services and hot water is affected by the fact
that the monopolies are not interested in reducing their spending, as they are
the base for calculating the tariffs. It is also impossible to verify
feasibility of these tariffs due to the low amount of installed heating meters.
The expert believes that it is necessary to limit the monopolies with
legislative restrictions, as well as address the issue of the heating meters.
"On the one hand, the IMF
demands that there be no government subsidies to compensate for the tariff
difference, are right. But on the other hand, the payment settlement mechanism
in Ukraine works for monopolies, which include all of their gross expenditure
into the tariffs for the households," he said.
Ex-Minister of Housing and Communal
Services (2007-2010) Oleksiy Kucherenko said that in such circumstances, the
regulator should oblige suppliers to install heating meters for in all
households.
"How can we allow the
monopoly to sell the heat without heating meters under these conditions? This
is a crime, I believe. The regulator should urgently make it clear in license
terms that [the payment should be calculated] only based on data from the
heating meters. If monopolies fail to install the meters they should bill the
households according to social norms, rather than those they calculated
themselves,” said the expert.
Thus, the government’s next
step should be restoring order in the field of "monopoly," which in
turn will help the Ukrainians survive through this very difficult, though fair,
increase in utility tariffs. With regard to the installation of heating meters,
the current Cabinet said it would complete the process within two years.
Another very important factor
in the tariff case is the energy efficiency of utility companies. Perhaps this
should have been something the government needed to start from, and then the
financial losses of the population from higher tariffs would have been much
lower. But energy efficiency is expensive. Amid the war in the east of Ukraine,
the government can’t afford it. But with the help of investors, the work in
this direction is already underway. And it will
continue.
Privatization:
new owners
This year, Ukraine launches
large-scale privatization. 450 state-owned enterprises are set to be sold, of
which 20 are major enterprises, 50 – medium, and 380 – minor. The government
expects to raise UAH 17 bln from the process. All the necessary legislation for
the sale of state assets has already been passed.
It also makes the Ukrainians
anxious – what should they expect from the new owners?
The government has repeatedly
stated that privatization of SOEs is the main point of growth of the Ukrainian
economy, since it contributes to the increase in foreign direct investment,
creates new jobs and reduces the risks of corruption in the management of these
companies.
"Despite our attempts to
change something in the SOEs, some people still want and will want to have
control over financial flows from these companies. The only correct approach in
the management of the SOEs is quick privatization," said Minister of
Economic Development and Trade Aivaras Abromavicius.
The experts agree. They also
point out that the privatization will attract investments and facilitate
modernization at the enterprises, as the state has no money for it.
Western investors have already
shown interest in the Ukrainian assets. They see advantage in having production
facilities in Ukraine – due to the free trade area with the EU, the conditions
for exports to the European Union have become favorable, plus the Ukrainian
workforce is known as highly skilled.
The main task of the
government (of any composition) is to carry out transparent privatization and
prevent corruption schemes of previous years, when the companies were given to
the cronies of those in power for a song. And then these cronies squeezed all
juices from the purchased companies, not spending a kopiyka on innovative
technology, depriving the Ukrainian products of competitiveness, and
"minimized" taxes in every way possible. It all affected the budget
revenues, which in turn affected the wallets of ordinary Ukrainians.
Adviser to the Minister of
Agrarian Policy and Food Zubritskiy Oleksiy Zubritskiy believes that society
will no longer stand corruption around SOEs. "The government understands
that the privatization is a real reform, and its economic effects will come
soon: saving on losses of state enterprises reaching two annual military
budgets is reason enough. If we recall the SOEs’ asset evaluation by the book
value at $30 bln – this is the way to not look for loans, but to take what has
been used irrationally and put it to use.
The main privatization brake is
corruption lobby. Financial flows from the SOEs are the last thing the corrupt
officials and their businessmen-cronies can still steal from. So they spin the
myths about unfair privatization playing on old Soviet-era fears in the minds
of ordinary Ukrainians. If there is no privatization, this mess will
continue," he said.
By the way, Abromavicius
offered to ban the sale of the SOEs to the Ukrainians at the first stages of
privatization, selling only to foreigners, of course excluding buyers from the
aggressor state – Russia.
If this time, the
privatization is a success, the Ukrainians can count on foreign investment,
western-type corporate ethics, new management standards, and “white” salaries.
In addition, the National Bank binds with large-scale privatization the hryvnia
exchange rate. Receiving $1 bln in 2016 from the sale of state assets will
ensure its stability.
So, the government, the
current one, or its successor, should not allow braking the privatization
process, which Ukraine needs so bad. And it will have to make sure the
state assets fall into safe hands.
The village
is waiting for changes
Ukrainians are also facing the
reform of the agricultural sector, which also affects their wallets. Although
the agricultural sector seems to survive through the crises without losses, the
problems don’t disappear. Painful are the issues of taxation and land lease.
These areas see great corruption-related problems and are difficult to
administer.
The farmers are waiting for
the tax changes, in particular regarding the VAT mode, the laws on dairy and
meat, as well as on farms, based on European standards. All bills have already
been drafted and they are waiting to be considered by the Verkhovna Rada.
And most importantly, the
country is waiting for land reform, that is, the opening of the agricultural
land market.
"This is an urgent issue,
because it’s already the second half of March now, and the moratorium [on the
sale of land] was extended only until year-end. Ukraine is a country with a
market economy, and it should open the land market, but open it right. It must
be clear, who, how, in what amounts and at what price should land," said
the Acting Director General of the Ukrainian Agrarian Confederation, Maria
Didukh.
Until January 1 2017, a
moratorium is in force on the sale of land in Ukraine. At the same time, the
reform of the land market is one of the key ones proposed by the IMF. The
Cabinet offers to open the land market in two phases – to allow trade in
state-owned farmland in 2017, and to allow the citizens trade farm land in
2019.
President of the Ukrainian
Club of Agrarian Business association Alex Lissitsa agrees with the
government's decision. He says that in order to avoid manipulations on the
market, especially with regard to prices, the sale should start with
transparent auctions with the participation of local communities, the heads of
village councils and district administrations. “Only then wil it become clear
that the mechanism of the sale of farm land is working properly, and we can
move on to the opening of the market of private land," he said.
Experts are divided in their
opinion about the lifting of the moratorium on land sales. Some believe that
its extension creates the shadow land market, others point to the fact that the
lifting of the moratorium will lead to deprivation of framers of land as
foreign companies will start buying.
Meanwhile, there are more
people who support the opening of the market. According to the advocates,
agricultural producers today operate on leased land, which means they are not
interested in its radical improvement and efficient use. As a result, there are
mass cases of failure to comply with crop rotation and soil depletion across
Ukraine. In addition, agricultural companies see it much cheaper renting the
land rather than buying it. It is they who lobby for the extension of the
moratorium on land sale, thereby eliminating the opportunity for the farmers to
earn.
A government of any format
will have to solve the land sale issue, and the Ukrainians can only hope that
this will be done as soon as possible.
So…
We have considered only a few
reforms, but those that primarily affect the well-being of Ukrainians.
Transformation is underway in all spheres of Ukraine’s economy – in the
transport sector, industry, construction, energy, education, and healthcare.
And all the innovations meet European standards. The result will be there.
People just have to wait. For 24 years, Ukraine has born on its shoulders the
Soviet economic legacy, so futile, fed through the needle of raw materials
exports, and riddled with corruption.
With regard to the claims of
the West regarding the speed of reforms, the global change in Ukraine cannot
occur in a moment. And the West
knows this from personal experience.
But in order to speed up the
process, it’s time for the Ukrainian politicians to consolidate around the
reforms, which should result in economic growth, active investment support of
the West and the country’s major creditors. By denying responsibility for what
is happening, political elite seem to have found the scapegoat – the Cabinet –
actively trying to push for "reformatting" it, starting with Prime
Minister Arseniy Yatsenyuk.
It should be understood that
the reforms implemented by Yatsenyuk’s Cabinet, which are radical at times,
resented by the people, are not his creation. They have long been spelled out
in the Ukraine-EU Association Agreement and in the Memorandum of Cooperation
with the IMF. The principles of these documents have been recognized by
Ukraine, so their implementation is mandatory. Therefore, either with
Yatsenyuk, or without him, but Ukraine will continue to go on its determined
course to become a civilized European state.
Anyone who stands at the helm
of the executive power will succumb to the criticism, because he will have to
make unpopular decisions. And without such decisions, the Ukrainian economic
system will remain futile, which will jeopardize the independence of the state.
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