26 October 2016

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Week’s balance: Start of heating season, EU’s new requirements, and Cabinet’s incentives to industry

The Ukrainian authorities gave start to the heating season, the European Union put forward new conditions for Ukraine to obtain macro-financial assistance, while the government promised to find incentives for the development of national industry in the hope to accelerate the economy growth.

Photo from UNIAN
Photo from UNIAN

This week the heating season started in Ukraine. The weather – the average ‘+8 C with rain’ did not let the government delay heat supply to November, as it was in previous years.

Speaking at a meeting of the Regional Development Council on Monday, Ukrainian President Petro Poroshenko said: "I would like to categorically refute the rumors that we are not ready for winter. This is by far not the case."

Following the president, Prime Minister Volodymyr Groysman had his say, too. He also brushed aside any concerns over a possible disruption of the heating season in the regions. At a video conference on Thursday, he said: "We have a standard schedule for launching heat supplies - 14 days. But I think that we can solve everything within 5 days."

Groysman also noted that the government took all necessary decisions for the normal passage of the winter season - from the establishment of limits to gas supplies to TPPs to the procedures of restructuring of debts of utility companies’ to state holding Naftogaz of Ukraine. The prime minister said that it was now up to local authorities and the state regulator to provide central heating services to the people at reasonable rates.

Fortunately, the funding is secured to this end. This week statistics say that the local budget revenues in the first nine months of 2016 exceeded expenses by UAH 32 billion. Means from a loan a EUR 150 million loan agreement signed this week with the Germany’s KfW will also be allocated for the regions. The document is part of a package of a larger credit program between the governments of Ukraine and the Federal Republic of Germany, approved in the spring of last year totaling EUR 500 million.

The Government also recalled that in the near future, a special interdepartmental group will start its work on inspecting regional energy utility companies for the objectivity of tariff calculations and fulfillment of government orders on the implementation of energy saving technologies and their rational use.

In turn, the Ministry of Social Policy urged Ukrainians to quickly apply for subsidies: the documents must be filed before November 1. According to Vice Prime Minister Pavlo Rozenko, payments are already assigned to 5.5 million Ukrainian households, while in the future this figure might rise to 8.5-9 million households. The average size of subsidies will amount to nearly UAH 2,000.

Compliments from the U.S. and requirements from the EU


During the current week, Ukraine has seen a package of new requirements set by its partners. The European Union called announced the conditions for Ukraine to obtain the next tranche of a EUR 600 million macro-financial assistance. Previously, the aid was "tied" to the dynamics of our relations with the International Monetary Fund, more practical requirements emerged this time.

Firstly, a 10-year moratorium on the export of timber must be lifted. As reported earlier, the ban was introduced a year ago, as the only possible measure to restore order in the timber industry, where uncontrolled felling and export of precious timber under the guise of firewood prevailed recently. Tellingly, in 2015, a moratorium didn’t get the Europeans worrying. However, today it is the first key condition for granting Ukraine financial aid from the EU. Obviously, the interests of the European woodworking lobby stick out of this requirement. These are furniture manufacturers and other industries related to wood processing.

The second condition is just as weird. Ukraine is told to resolve all financial issues regarding internally displaced persons. This category of people emerged in Ukraine in 2014, as Russia started its war on the Ukrainian territory and occupied parts of it. Now the Europeans demand that the Ukrainian government renew all social payments and, in fact, wrap up its recent campaign on verification of such payments launched by the finance ministry.

It is not quite clear why the issue of IDPs, initially generated by Putin's aggression, appeared on the agenda of Ukraine’s relations with the EU. Six months ago, no one put forward such conditions before Kyiv. Moreover, even today, Head of the EU Delegation to Ukraine Hugues Mingarelli, who held his first press conference in his new status in Kyiv this week, was unable to elaborate on the new requirements or at least clarify the reason for their emergence, limiting himself to a common phrase that "we [Ukraine and EU] are in the process of negotiations."

In addition to these demands, the EU also insists on the launch of the pension reform, which should resolve a problem of the Pension Fund’s significant deficit. It also demands to carry out transparent privatization, continue the programs on deregulation, decentralization, and the fight against corruption.

Mingarelli stressed that the EU was ready to provide Ukraine with the widest support and share its experience. He noted that Ukraine had made significant progress on the path of reform, praising the work of both the government of Arseniy Yatsenyuk and that of Volodymyr Groysman. Mingarelli said he knew of really few countries who in the conditions of war managed to reduce budget deficit from 11% to 3% in just two years and stabilize the exchange rate.

U.S. Secretary of Commerce Penny Pritzker agreed with Mingarelli. This week, the press service of the Ukrainian government issued a joint statement by Prtizker and PM Groysman following the visit of the U.S. delegation to Kyiv late September. The statement included a lot of flattering words to Kyiv but at the same time stressed that further progress in the implementation of the program of cooperation with the IMF, efforts to combat corruption, as well as the deep and accelerated economic reforms will be crucial to attracting long-term foreign direct investment to Ukraine. " Both sides agreed on the importance of quickening momentum on reforms, to ensure a smooth transition of work areas with the incoming U.S. Administration," reads the statement. U.S. citizens will elect their new president on November 8, 2016.

Incentives for industry


The Cabinet also discussed investments, reforms and development of the national industry this week. Prime Minister Groysman at a meeting of his Cabinet once again stressed that the key to Ukraine's economic growth should be the restoration of the country’s industry and attraction of investment. Moreover, the size of initial investments is not critical. The main thing is for the money to work for the country, and investors to able to build a successful business.

"We have great opportunities. We are laying a 3% growth, but it can be doubled. Within a year, we can give an impulse for the development of production, to stop being a commodity type of economy we are today," said Groysman.

The Cabinet has supported the prime minister’s offer to establish a National Industrial Revival Committee. Its mission is to stimulate production of high value-added products and develop the most high-tech industries.

"The committee’s task is to become not only the structure, but the real mechanism of diagnostics of problems in the national industry, of the development of mechanisms of practical solutions, I stress – practical solutions that will give us an opportunity to get a quality domestic product," said Groysman, promising that in the near future, the situation in will begin to change.

According to the prime minister, the Cabinet will set an example of its concern for investors." "Our task is to support the attraction of investments into the country, to make this investment a success. This investment will bring jobs for Ukrainians and a quality competitive product for the country," Groysman said.

The prime minister added that Ukraine still had significant growth opportunities that are not being used. The scientific and production potential inherited after the collapse of the Soviet Union has been destroyed or remains idle, giving way to short-lived, mainly commodity-oriented production.

"A 45-million country with such capabilities must be self-sufficient, economically strong, independent, and socially fair,” said the Head of Government. “We need to move away from the commodity economy orientation. The commodity type of economy that has prevailed in our country should remain history."

And the first evidence of the correctness of the chosen path, according to the prime minister, should be the production statistics 8 months of this year. In August, the State Statistics Service recorded an increase by 3.4% after falling 0.2% in July. Forecast growth in industrial production as a whole for the year - 1.2%.

We will see as early as next week whether positive production dynamics prevails in Ukraine as the State Statistics Service is expected to release new data covering three quarters of 2016 next Friday.

WB to consider allocation of a $500 mln loan to Ukraine /
WB to consider allocation of a $500 mln loan to Ukraine /

On Tuesday, October 18, the World Bank's Board of Directors will consider the allocation of $500 million loan guarantees for Ukraine, to be used to purchase natural gas for the 2016-2017 heating season. By the end of the week, Ukraine will have finally formed the agenda of the forthcoming Ukraine-EU summit, which promises to be the most productive one over the recent years. The focus is on the provision of a visa-free regime for Ukrainian citizens, the increase in trade quotas for Ukrainian manufacturers on the European market, and the possibility of signing the Open Skies Agreement with the EU.

The resumption of parliament meetings will also be important, as the agenda includes a number of important economic laws, the adoption of which is part of the package of reforms agreed with the International Monetary Fund.

Olesia Safronova

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