What Ukraine needs to do in terms of economic policy in 2022 – KyivPost
Ukraine has achieved significant macroeconomic stability, but its growth is unsatisfactory. The assessment of the International Monetary Fund is that Ukraine’s gross domestic product (GDP) grew by only 3.2% in 2021 and projects growth of 3.6% in 2022.
Ukraine has become the poorest country in Europe, with Moldova overtaking Ukraine and growing faster than Ukraine. Given its access to the large and rich European market, Ukraine is expected to grow at 7-8% per year, but investment, both domestic and foreign, remains minimal in Ukraine. Foreign direct investment was even negative in 2020.
Old problems are holding back growth
The Ukrainian government must adopt and pursue a growth-oriented policy.
First of all, it must adopt a credible program for high economic growth, which focuses on solving the persistent problems of the Ukrainian economy: the absence of the rule of law, a corrupt and predatory public administration and the raids. business. It is customary to complain about the oligarchs, but only wealthy businessmen with good political connections are able to defend their property rights. It is mainly the Ukrainian state administration that needs to be cured.
The main problem is the dysfunction of the higher courts and the attorney general’s office. Obviously corrupt judges and prosecutors must be sacked. As the legal profession in Ukraine has become steeped in corruption, Ukraine needs the help of high-level foreign judges to do so. Fortunately, Ukraine’s new legislation on the Supreme Council of Justice should make it easier to clean up the highest courts.
Further reform of the Attorney General’s office is also needed. Today it operates as a political agency, pursuing enemies of the presidential office, while ignoring the prosecution of its friends.
The presidential office has become a back seat driver
The Zelensky administration created a new problem, stopping the normal work of the Cabinet of Ministers. The Cabinet of Ministers has traditionally been responsible for economic policy, while the presidential administration oversaw domestic and foreign policy.
The Zelenskyy administration restored the old-fashioned Soviet telephone rule. Decisions are made in the presidential office and someone, an unknown figure, calls the relevant minister or prime minister and tells him what has been decided.
The chaos in the Cabinet of Ministers has been compounded by frequent staff changes. Zelenskyy loves to fire ministers, when the only relevant criteria for appointment seems to be that he knows the candidate and perceives him to be loyal. Skills and qualifications have lost their importance.
In the space of two years, Ukraine has had seven energy ministers, three have been confirmed and four have done nothing but act. Therefore, the Ukrainian government has not been able to formulate or implement an energy policy. Elementary competence, stability and authority must be restored within the Cabinet of Ministers.
Non-payment of green tariffs hits FDI and the country’s image
The immediate reason for the negative foreign direct investment in Ukraine in 2020 was that the government refused to pay the high green tariffs that had been guaranteed to wind and solar power producers. After unsuccessful discussions with producers, the government reduced tariffs with new legislation.
As if to add insult to injury, he didn’t even pay the new rates. During the 2016-19 period, renewable energies had attracted significant foreign direct investment due to the high green tariffs guaranteed by the state, so the inability of the Zelenskyy administration to deal with this issue prompted serious concerns. A few foreign investors have apparently initiated international arbitration against Ukraine on the basis of bilateral investment treaties.
Ukraine’s electricity pricing policy and payments are extremely complex, and with a rotating energy minister, no policy can be crafted. Ukraine should gradually reduce cross-subsidies and adopt market prices, while encouraging decarbonization and new investments. Fortunately, the IMF has now made electricity payments one of its financing conditions. In addition, Ukraine plans to join the central European electricity grid, ENTSO-E, from 2023. Its rules should help Ukraine to properly implement its electricity policy.
Better governance of state assets would boost growth
Ukraine needs strong institutions with competent and well-paid staff. The first of these institutions was the National Bank of Ukraine (NBU) from 2014. Although the Zelensky administration ousted its original leadership, it appears to have accepted the integrity of the NBU due to pressure from the IMF.
Another important independent institution was the National Anti-Corruption Office (NABU). After numerous attacks, mainly from the Constitutional Court, he seems to have resisted resistance. A major reform that works well is the decentralization of funding and the transfer of power to cities and local communities.
Unfortunately, the Zelenskyy administration does not understand the value of good corporate governance in state-owned enterprises and banks. The Presidency insists on appointing its friends to the highest posts without distinction of diplomas, when it seems remarkably disinterested in their economic efficiency.
The IMF and the United States are now demanding that the Ukrainian government honor its commitments on good corporate governance. This is a major battleground between the current Ukrainian administration and its Western supporters, who seem more committed to high economic growth in Ukraine than the current rulers.
Public finances are doing well despite high inflation
Nonetheless, the current administration is to be commended for what it has done in macroeconomic stability. Ukraine has maintained a low budget deficit and its public debt is relatively limited to 50% of GDP.
The NBU has replenished the international currency reserves that the ousted leadership of Viktor Yanukovych has almost exhausted. This allows the exchange rate to float in the market. Granted, Ukrainian inflation was high at 10% year-on-year in December, although this was largely due to high commodity prices, and the NBU raised its interest rate to 9%.
It is great that the United States, the IMF and other international bodies have focused more on economic reforms such as electricity trading and corporate governance, after the end of the coronavirus pandemic in Ukraine. .
However, an oft-repeated truth is that foreign donors cannot wish reform more than domestic leaders. It is time for President Zelenskyy to show his true colors. Is he interested in economic growth, raising the standard of living of Ukrainians and rule or law or not? This new year should be the year for him to prove that.