25 October 2016

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Business in Ukraine: Two years of waiting

Reforms in Ukraine have launched two years ago. Much has been done, but there are still too many problems, especially regarding the business environment. Ukraine’s Doing Business index is slightly above zero, and UNIAN tried to learn why.

Business for two years has been waiting on positive changes from the authorities/ telegraf.com.ua
Business for two years has been waiting on positive changes from the authorities/ telegraf.com.ua

Two years since the Revolution of dignity the reforms are still ongoing designed to transfer our country, after years of idleness, onto the civilized, European development track. One of the key tasks of the authorities is declared the improvement of the business climate, which the domestic entrepreneurs, who have survived the enormous pressure of Yanukovych regime, need the most.

The result of the government policy should be active development of small and medium business – the core of any economy. Progress in this direction will allow the country to solve many social and economic problems – reduce unemployment, fill the market with goods and services, forma a competitive environment, increase budget revenues, which will lead to higher living standards.

A lot has been done in this direction, in spite of the "fraternal assistance" from Russia in the form of the occupation of Crimea and military aggression in Donbas, which provoked the fall of the national economy.

Dozens of bills in the area of business have already been adopted, as well as the amendments to the Tax Code. A so-called "regulatory guillotine" has been launched - business service terms have been cut and the volume of paperwork required for licensing and granting various permits has been reduced. The number of taxes and fees has been cut from 22 to just nine, while the rate of the single social contribution has been compressed. In addition, the electronic databases and reporting systems have been implemented, as well as a "Businessman’s E-Office", which aims to provide a full range of services – registration, payment of taxes, advisory services, consultations and so on.

Due to innovations, Ukraine in 2015 jumped 13 positions in a Doing Business index, ranking 83 among 189 countries.

But, despite such active actions of the authorities, on which the officials report almost daily, the business environment remains unfavorable.

86% of small and medium entrepreneurs of Ukraine see the state as an "obstacle" of doing business, and almost the same percentage (89%) expect a direct or indirect state support.

Against this background, the credibility of the central government continues to remain at a low level: the government – at 30%, the president – at 25%, and the Parliament – at 22%. The Business Climate Index in our country is somewhere at the level of just above zero (on a scale from -1 to +1).

These data are presented in an annual USAID Annual Business Climate Assessment, in which some 2,000 entrepreneurs working in various sectors of our economy took part.

The businessmen call among their main problems the low domestic demand, inflation risks, corruption, tax burden, the complexity of tax administration, and high duty rate. As a result - more than 40% of entrepreneurs in the crisis reduced the volume of their operations, while another 8% intend to do so. And only 35% of respondents expect improvements.

Director of economic programs at Razumkov Center Vasyl Yurchyshyn believes that in order to remedy the situation and to achieve the stated objectives, the implementation of reforms declared by the government lacks coordination.

"Coordinated of different branches of government and action aimed at liberalization, which should be understood not as permissiveness but as the dominance of market-based instruments over the administrative ones, are not working yet," said the expert.

However, business expectations remain positive – if the government eases the administrative burden, we will witness the development of small and medium business in the next few years.

Government plans

The Government outlined its priorities, taking into account the claims of businesses / www.zaimo.pl
The Government outlined its priorities, taking into account the claims of businesses / www.zaimo.pl

Realizing the complexity of the economic situation, which primarily puts pressure on the businesses, the government has outlined its action plan for the near future – the reform of Customs, the State Fiscal Service (with the reduction of its staff to 41 employees), and the elimination of the tax police.

In addition, according to Prime Minister Volodymyr Groysman, the Ministry of Finance has drafted a bill on the reform of tax administration, which in July will be submitted to the Parliament.

By the way, Groysman also pledged to introduce a moratorium for two-three years on making any amendments to the Tax Code in order to eliminate the current "fiscal" mess.

It is also planned to introduce personal responsibility of fiscal officials for exceeding authority.

The experts believe that the proposed steps are right, but first of all, economic recovery should be achieved and then maintained. This in turn will trigger a revival of business, the growth of production and services, new jobs, the increased budget flows, and thus more purchasing power of the population.

"All the steps of the government are right. But there is another thing that’s a matter of concern – a budget resolution has been drafted, where the officials attempt to look at the potential prospects not only for the coming year, but until 2019. It seems that a conservative scenario is taken as a basis. I wouldn’t say that the claimed economic growth of 1-2% is the result of some extremely revolutionary reforms. Rather, it is an indicator, which characterizes the minimum self-sustainability of both the economy and economic subjects," said Yurchyshyn.

According to the expert, in order to achieve economic recovery after the fall caused by various actions and events, the growth is needed for several years, at least at the level of 7-8%.

Meanwhile, according to Serhiy Firsa, a specialist at the debt securities sales department sales of Dragon Capital investment company, all the government-offered economic innovations are secondary. The most important thing the authorities need to achieve is the rule of law. This is the main problem of the Ukrainian business, he claims.

"All economic innovations are secondary. The biggest problem is the lack of the rule of law. This is the basic and fundamental problem of the Ukrainian business. Indeed, the laws are being adopted, but nothing is happening, in fact. Nothing has been implemented, and it is still unclear in which shape it will be done. In the framework of the rule of law there are included the claims of the businesses relating to the fiscal services, all kinds of raider attacks, and litigations. If the rule of law is respected, against the background of Ukraine’s economic potential, the country’s economic growth in Ukraine will be huge in the years to come. And the business will start work actively," said Firsa.

The issue of the rule of law was repeatedly addressed by our foreign partners.

European Commissioner for Enlargement and European Neighbourhood Policy Johannes Hahn earlier said that a lot accomplished had been accomplished in Ukraine but the decisions made needed to be implemented so that Ukraine could show it was different from what it had been in the past.

In 2015, Ukraine ranked 70th in a World Justice Project’s Rule of Law index among 102 participant states. We are somewhere between Moldova and China, but still ahead of Russia. In 2014, we took the 84th position. Hence, there is progress. Although much is yet to be done in this direction. And it’s not only about the legislative level. There is no point in changing the legislation endlessly, if those who should monitor their implementation keep helping the "grateful" ones to wriggle out of their commitments. That is, the eradication of corruption is one of the main tasks of the Ukrainian government. And if Ukraine’s weak points mentioned are eliminated, the business will revive and work actively for our common good.

Nana Chornaya (UNIAN)

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