Week’s balance: Prime Minister Honcharuk’s failed resignation, NBU delivering relief to entrepreneurs, and productive Rada
Prime Minister Oleksiy Honcharuk filed a resignation letter in the aftermath of audio leaks from his alleged meeting, the National Bank following public outrage eased restrictions on individual entrepreneurs related to the personal use of business accounts, while the Verkhovna Rada adopted a number of important bills – these are the main economic developments of the past week.
In the past week, a scandal erupted around the Cabinet of Ministers led by Oleksiy Honcharuk, which led to the prime minister filing a resignation letter for President Volodymyr Zelensky’s consideration. According to Honcharuk, the government will continue to work as usual until the head of state, who is the political leader of the mono-majority in the Verkhovna Rada, decides on this issue.
The Constitution of Ukraine says though that it’s the Verkhovna Rada, the body that appoints a prime minister, shall also decide on their dismissal. The dismissal of the head of government entails resignation of the entire Cabinet.
Due to the fact that no personnel decisions were taken by Parliament Friday and that the deputies do not plan to hold plenaries until February 4, it is too early to talk about the upcoming change of government. The legal conflict with the possible resignation of the prime minister is also due to the fact that in October 2019, the parliament approved the government program by a majority vote, which bans Parliament from sacking the Cabinet in a no-confidence vote for twelve months.
The scandal erupted after leaked recordings were released on Wednesday night, purportedly covering the meeting where Prime Minister Honcharuk, Finance Minister Oksana Markarova, First Deputy Head of the National Bank Kateryna Rozhkova, and other officials discussed economic issues before meeting with the president.
A man with the voice resembling the one of Honcharuk referred to himself as a “complete ignoramus” in economy and admitted that Zelensky wasn’t too strong in it either. On the morning of the next day, the prime minister called the leak “machinations” by government opponents, adding that "the president’s team will not be intimidated." But on Friday morning, he said he had filed a resignation letter.
“I came to the position to fulfil the president’s program. For me, he is a model of openness and decency. However, in order to eliminate any doubts regarding our respect for and trust in the president, I wrote a letter of resignation and handed it to the president with him being entitled to submit it to parliament,” Honcharuk noted.
The President’s Office took a long pause, only releasing Zelensky’s statement instructing security forces to find out the source of the leak within two weeks, and also demanded that measures be taken to rule out similar incidents in the future and protect information.
On Friday evening it became known that Zelensky did not accept the prime minister’s resignation, deciding to “give a chance” to him and his government, but subject to certain tasks.
“I decided to give you and your government a chance if you address certain things that today are very important and of concern to our society. Now is not the time to undermine the state economically and politically,” Zelensky said during a meeting with Honcharuk.
The president announced the following conditions: the government must introduce a new concept of salaries for the heads of ministries, departments, and state companies, as well as their deputies, taking into account the overall economic situation.
Zelensky warned that those ministers who would not agree with the salary proposed by the government would go.
The president also instructed the prime minister to resolve the situation with bonuses that are envisaged for top managers of Naftogaz for receiving compensation from Gazprom.
In addition, the president emphasized the importance of strengthening the government through staffing changes.
Financial markets reacted rather sluggishly to the latest government "drama". Financial analyst with the ICU Group, Mykhailo Demkiv, says prices for Ukrainian Eurobonds fell slightly, but this is slightly noticeable against the background of growth of the previous days. But it is too early to give solid estimates.
"Carrot" for entrepreneurs from National Bank
Last week, the National Bank pleased small businesses with the news about the abolition of the infamous norm, which forbade the use of current accounts by private entrepreneurs for their own needs and allowed to withdraw funds from these accounts only after taxes and fees have been paid.
The regulator explained that the corresponding requirement introduced at the beginning of the year saw no understanding among business community, so the NBU decided to heed the opinions of entrepreneurs and banks. Indeed, the National Bank and the State Tax Service had not provided Ukrainian entrepreneurs and banks clear explanations on how to use their accounts and conduct business in the new conditions.
However, despite the abolition of the norm, the NBU does not abandon the idea of introducing other restrictions aimed at combating fictitious financial transactions. According to the head of the National Bank, Yakiv Smolii, in the near future, financial market regulators will coordinate their positions and develop real mechanisms to minimize risks of such operations.
“The position of the National Bank, as before, remains unchanged. Since 2003, the norm has been in force that the current accounts of individuals cannot be used to conduct operations related to entrepreneurial activity. Since the banking system must be protected from the risks of financial transactions with signs of fictitiousness, the National Bank will discuss with the State Tax Service mechanisms aimed at minimizing these risks,” the NBU noted.
Legislative support for business
Relief from the NBU was not the only news of the past week that was of interest to Ukrainian entrepreneurs. On Tuesday, January 14, the parliament returned to plenary work after a long New Year holiday, making a number of important decisions aimed at improving the business climate.
The Verkhovna Rada voted to create an Entrepreneurship Development Fund in Ukraine, whose main task will be to ensure affordable lending to small and medium-sized businesses. According to the Prime Minister’s forecasts, the adoption of this law will allow many Ukrainians to realize business ideas in their native country, and will also lead to the emergence of about 90,000 new jobs this year. Honcharuk noted that the Entrepreneurship Development Fund would provide support to small and medium-sized enterprises in two areas. This is the provision of partial guarantees for loans issued to small businesses, if there are not enough collaterals, and the cheapening of loans by compensating the interest rate to the level of 5, 7 and 9 percent per annum for loans in national currency. The size of compensation will depend on the size and type of business. The procedure for providing support will be determined in the near future by the Cabinet of Ministers.
In addition, the Verkhovna Rada adopted amendments to the Tax Code, according to which income limits for each of the small business groups were revised. The deputies increased the income limit for the so-called individual entrepreneurs of the first group to 1 million hryvnias, the second to 5 million hryvnias, and the third to 7 million hryvnias. Previously, these limits were set at 300,000 hryvnias, 1.5 million hryvnias and 5 million hryvnias, respectively.
In addition, the parliament introduced a new format for the activities of the state Customs and Tax Services as a single legal entity. Now the territorial bodies of these structures will carry out activities not as legal entities of public law, but as separate units with the necessary scope of authority.
Another important law adopted this week was the one on the implementation in Ukraine of a number of rules of the Organization for Economic Cooperation and Development in Europe to combat Base Erosion and Profit Shifting (BEPS).
The Rada also adopted at first reading bills on removing the scrap metal market from the shadows, which should bring 900 million hryvnias of taxes to the state budget annually, and on the legalization of the gambling business.
This week promises to be no less rich in important economic events. Prime Minister Honcharuk, together with President Zelensky, will pay a working visit to Davos (Switzerland) as part of the World Economic Forum, and the State Statistics Service will report on the results of industrial output for 2019.