28 October 2016

Our Community

PM Groysman’s 100 days: New tariffs, no IMF money

UNIAN has analyzed the achievements and main economic priorities of Ukraine’s new Cabinet of Ministers, headed by Volodymyr Groysman, over its first 100 days in power.

Groysman assumed office as the country was exiting from a deep crisis / Photo from UNIAN
Groysman assumed office as the country was exiting from a deep crisis / Photo from UNIAN

The Ukrainian Cabinet headed by Volodymyr Groysman has completed its first 100 days governing the country. There will be no traditional events to mark this date. The Ukrainian premier emphasized that it was too early to talk about any significant success in such a short term in office.

We get it. In the history of assessments of any leader’s first 100 days, the most effective leader was U.S. President Franklin Delano Roosevelt. He assumed the office at a time when the country was experiencing a deep depression and still managed to draft and quickly enact 15 key economic laws, which pushed the U.S. economy up and forward onto the path of strategic growth. None of his predecessors or successors have achieved as much.

Volodymyr Groysman assumed office as Ukraine was exiting from a deep crisis. In the beginning of 2016, the Ukrainian State Statistics Service, for the first time in several years, recorded signs of economic growth. However, torn apart by populist and military battles, Ukraine slowed down the pace of reform quite considerably and almost froze the dialogue with its key creditors – primarily, the International Monetary Fund (IMF). In September 2015, Managing Director of the IMF Christine Lagarde showered the Kyiv authorities with compliments, but in February 2016, she limited herself to a dry four-line message threatening to close the door for Ukraine, unless Kyiv worked hard to eliminate corruption.

Traditionally, Ukraine saw this as an opportunity to improve, through a reshuffle in the power vertical and more specifically, by changing the government. Ukrainian President Petro Poroshenko decided to appoint a new prime minister and reshuffle the Cabinet, hoping that a change of guard would lead Ukraine out of the darkness. However, the president’s bench did not have many players, and therefore there were not so many options to choose from. Groysman, then-Parliament Speaker, became the only possible compromise and was greenlighted by the new parliamentary coalition. He was appointed prime minister on April 14, with the votes of the pro-presidential faction, the bloc of former Prime Minister Arseniy Yatsenyuk, who had resigned after a few months of political maneuvering, and some non-affiliated MPs.

There were no ambitious objectives set before the new Cabinet and its chief, and no one harbored any serious economic expectations. Experts were unanimous at the time, saying that if nobody expected anything from the Cabinet, it could surprise with a breakthrough. Groysman vowed to deliver change. "I'll show you how to run the state," he told the nation in an address to the Rada on the day of his election.


The decision to introduce a single market price for gas from May was unexpected / Photo from UNIAN
The decision to introduce a single market price for gas from May was unexpected / Photo from UNIAN

Immediately after his appointment, Groysman voiced his main priorities, which included restoring order in the energy market, customs, the road repair sector and the medicines market.

Explaining his objectives, Groysman noted that these were the most problematic issues faced by every Ukrainian. By mid-May, the Cabinet adopted a resolution on simplification of licensing of imported medicines produced in the U.S., EU and Japan. The establishment of a special Road Fund was agreed upon to accumulate funds for the construction of quality roads across the country. In June, the government approached the reform of the customs service, having analyzed its operations with the assistance of the U.S. government. Kyiv is currently awaiting the report of the special mission of the U.S. Customs and Border Protection (CBP) regarding the reform of Ukraine’s Customs Service. The country plans to incorporate all the suggestions of the U.S. experts by the summer of 2017.

The decision to introduce from May 1 the single market price for gas for all categories of consumers was unexpected. The introduction of this provision in a single step was not even required by the IMF. But Groysman went ahead, putting an end to all kinds of illegal pricing schemes and tariff manipulations in the gas market, which had led to corruption and a US$50 billion black hole in the Ukrainian economy. The IMF had been pointing to this black hole for the past 10 years, but Ukraine’s creditors believed that the country would only be able to deal with the issue by April 2017. Ukraine, however, chose to accelerate the process.

The populists, expectedly, have been feeding on the issue of raised utility tariffs ever since. The government responded to their attacks by focusing on providing targeted assistance to the poor. By the start of the heating season, the number of families that will need public subsidies will grow to nine million. In fact, one out of four Ukrainians will not be able to pay in full for gas and utilities, given the new prices, if they keep consuming as much as they have been up till now. But the Cabinet has assured help: UAH40 billion of public funds has been allocated for subsidies.

The Ukrainians will, however, also have to learn to be energy-efficient. The Energy Efficiency Fund will start operating from 2017 and is expected to become a mechanism for transferring innovation technology to "every household." In July, the Cabinet approved the framework for the fund’s operations.

In particular, one cannot but note the government’s statement on the need to boost the country’s own fuel production to fully cover the domestic needs and export the surplus. The premier has repeatedly stressed that the country is rich in minerals, and by 2020, it could become completely energy-independent. Notably, Ukraine has not restarted buying gas from Russia’s Gazprom since Groysman assumed office, limiting itself to purchase from the German hub.

Groysman’s success in the international arena should also be noted. The prime minister visited Washington, Berlin and Brussels, where he met with key officials. In Kyiv, he hosted his Canadian counterpart Justine Trudeau, and signed a free trade agreement, granting Ukrainian goods access to the Canadian market with a $500 billion capacity.

The newly-appointed ministers did not lag behind. In April, Finance Minister OleksandrDanylyuk, on behalf of the Ukrainian Cabinet, signed an agreement on U.S. government loan guarantees worth $1 billion. The funds under these guarantees are expected to be received in August and September. In the same period, Ukraine also expects to receive a tranche of the loan from the IMF. According to Danylyuk, all outstanding issues regarding this tranche have been resolved.

It is worth mentioning that the initial meeting of the IMF Executive Board on the Ukrainian issue was scheduled to be held before the end of July. However, some "technical details", which both Kyiv and Washington associate with the reluctance of the Ukrainian Parliament to pass government-drafted bills, did not allow IMF to fulfill the plans previously agreed upon.

Last week, the IMF managing director made it very clear -- there are no major issues concerning Ukraine, but laws must be enacted and work on the ground must be done. Only then will it make sense to discuss the reform program.

Kyiv is waiting for the resumption of the lending program, which will be a good signal to potential investors, on whom Ukraine is counting. According to government forecasts, a $4.5 million investment inflow will be a key driver of the country’s economic growth in 2017.

Moreover, the authorities expect investments not only from the offshore jurisdiction of Cyprus, but also from the G20. One of the ways to achieve this goal will be an agreement on free trade areas. Following the signing of the FTA with Canada, by the end of the year, the government expects to ink a similar deal with Israel.

Higher prices of Ukraine’s key exports will greatly assist the Cabinet. The anniversary of Groysman’s first 100 days coincided with the rise in commodity prices, which immediately led to a slight strengthening of the hryvnia, surprising pessimistic Ukrainians.

"We see positive signals today in the development of the national economy and stabilization, including that of the national currency. These are good signals, but we must understand that we need to improve upon them so that growth can be more substantial and people can see the results," the prime minister stated at a recent government meeting.

At the same meeting, the ministers decided to simplify marriage formalities, limiting the procedure to just one day. Welcoming this initiative, Groysman also made an ambiguous offer to prohibit divorce, since Ukrainian families were the country’s most “precious value” and should be protected.

Threats and risks

Experts rate the government’s performance / Photo from UNIAN
Experts rate the government’s performance / Photo from UNIAN

Experts have shared with UNIAN their feedback of the Groysman government’s first 100 days. They praised the move to set the market price of gas and highly commended the desire of the prime minister to tackle populism, which has been overused by certain political parties to manipulate voters. The experts were, however, cautious in their overall assessment of the new government’s initial period.

According to a research by the Democratic Initiatives Foundation, the government’s activities earned 4.6 points on a 10-point scale. Groysman’s personal contribution is estimated at 5.3 points. Among the main political successes are the establishment of a direct line with the president, willingness to work with NGOs, the presence of reformers in the government, and the significant economic ambitions of ministers with virtually no political motives.

At the same time, among the government’s failures, the research names personnel policy, certain gaps in social issues in connection with the growing tariffs and compromised leadership of the State Fiscal Service.

However, according to Oleksandr Valchyshen, head of the analytical department at ICU, it is obvious that the State has begun putting more money into the economy.

"To maintain financial stability, the government has resorted to an unpopular step in the tariff policy. This is making NJSC Naftogaz of Ukraine financially healthier, paving the way for the new tranche of the IMF to be granted to Ukraine," Valchyshen stated.

Senior fellow at the Institute for Economic Research and Political Consulting Andriy Butin shared these views. According to him, along with the tariff regulation, there were some other very successful steps aimed at improving and simplifying procedures for the movement of goods across the border -- the implementation of a so-called“single window system” at customs and the introduction of mandatory video recording of custom checks and inspections.

"However, a serious problem lies in the problematic sector of foreign trade, notably, the loss of traditional markets. In particular, a serious downside is the introduction by Moldova of restrictions on our imports and the lack of an adequate and clear response on our part.There are also problems associated with the transit of our goods to Central Asia [a Russian ban on the import and transit of Ukrainian goods to other countries through the territory of Russia, introduced in July]," the expert said.

Partner at Da Vinci analytical group Andriy Kolpakov also noted some errors in Ukraine’s export policies. According to him, the new Cabinet has been operating within the framework of what it inherited from the previous government.

"So far, there have been many statements that bring nothing new to the table, and, moreover, are very voluminous and largely devoid of substance. I wish I was wrong, but the current Cabinet has symptoms of a "total victory" disease, which goes against common sense. Against the backdrop of a negative situation, it looks increasingly alarming,” Kolpakov said. “For example, it is weird to hear statements – as the Office of Export Promotion is being launched – that ‘the work is just beginning!’ from the people who have long been working in this sphere, especially given the terrible situation with foreign trade. It is as weird to hope that this Office will be able to stop the negative trend without tax reform."

Director of economic programs at the Razumkov Center Vasyl Yurchyshyn is also cautious in his assessment. According to the expert, the common problems associated with economic deregulation have overwhelmingly remained sole declarations. He believes that coordination among the different branches of power and the steps aimed at liberalization, which must be understood not as permissiveness but as the dominance of market-based instruments over the administrative ones, are not working yet.

"The previous government laid the foundation for strengthening the country's economy, by attempting to balance various cash flows and budgets. Fiscal decentralization has been launched. Groysman’s government needs to go further, notably by enhancing transparency. In this sense, the scheduled privatization may demonstrate how the government's messages on market ideology and transparency really reflect in its actions," Yurchyshyn said.

It should be noted that Groysman’s first 100 days were supposed to be marked with the start of privatization. The sale of the Odesa Port-Side Chemical Plant was scheduled for July 26. However, authorities were forced to cancel the tender on receiving no bids. The government has pledged to make another attempt to sell the asset this fall, reducing its starting price by a third.

With regard to the general economic prospects, experts are expecting more daring and bold initiatives by the ministers. As Yurchyshyn noted, the government should not act based on conservative estimates. "I wouldn’t say that the claimed economic growth of 1-2% [for 2016-2017] 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. In order to achieve economic recovery following the fall caused by various actions and events, growth is essential for several years, at least a minimum level of 7-8%,” the expert said.

What to expect from the next 100 days


Several factors will decide whether Ukraine will see an economic breakthrough. These include whether the Cabinet manages to pull the economy out of the shadows and attract for production modernization the funds from foreign investors and the money the Ukrainian oligarchs have stocked in offshore jurisdictions. In fact, after the Panama papers, the issue of de-offshorization of the Ukrainian economy, the lion's share of which is registered in overseas jurisdictions with low tax rates, has been and still is very important.

At the moment, international rating agencies have no optimistic forecast for Ukraine. The prime minister, himself, when addressing his Facebook readers every Monday, is in no hurry to set any deadlines for transformation, limiting only to the promise that "all the necessary decisions will be taken."

But one thing is clear: the country and its economy will start functioning only when the money comes in: the investments, the loans, the funds derived from the shadow economy and offshore jurisdictions. Only then will Ukraine be able to stretch its wings and start creating that added value the country’s leaders are so keenly talking about. Only then will there be real competition in the markets – markets without monopolies, with clear rules and independent regulators. Only then will the business and the market – not the government – set the price for products and services, which will significantly reduce the level of administrative influence of the State on the economy.

The market, which would be actually working, would help reform the country's legal framework effectively, and in one step, without the need for constant ad hoc legislative changes. Real market will ensure access to resources of energy, finances and commodity.

This is what both experts and businesses expect. The Cabinet also has to present real steps in this direction in its next phase. The first task on the list should be the dismissal of discredited officials, reduction of pressure on business, and actual reform in the judiciary, the prosecutor's office, public service and the anti-corruption policy.

However, the government can’t do this alone, without active and coordinated efforts from the president, the prosecutor's office and the judiciary.

We will soon see whether the government will meet the expectations of the public – in another 100 days, right at the start of the heating season, and also when the active phase of budget planning for 2017 will begin.

Olesia Safronova

If you notice a spelling error, please highlight it with your mouse and press Ctrl+Enter

Do you like the new site?
Leave your opinion