2017 should be the year Ukraine's economy takes off - Atlantic Council

18:15, 04 January 2017
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Three years after the Revolution of Dignity, the Ukrainian economy has stabilized and is ready for growth. Dangers lie ahead, but opportunities prevail, Anders Aslund wrote for Atlantic Council.


"Success is easily taken for granted, so it is worth recalling what Ukraine has accomplished in the past three years," reads the article on Atlantic Council. "An unsustainable budget deficit of 10% of GDP has now been brought down to about 3% of GDP, mainly through cuts in public expenditures. The public debt has leveled out at 80% of GDP, while the IMF had feared it would spiral out of control. The government has sensibly reduced the exorbitant payroll tax from 45% to 22%."

Aslund adds that foreign payments have reached balance thanks to a necessary devaluation of the hryvnia, and the exchange rate has stabilized on the market. Ukraine's international gold and currency reserves have surged from $5 billion in February 2015 to $15 billion, sufficient for a gradual liberalization of the strict currency controls. Ukraine accomplished this while Russia deprived it of one quarter of its prior exports through draconian trade sanctions.

Read alsoCash payments by individuals reduced to UAH 50,000 from Jan 4Owing to its strict monetary policy, the NBU has reduced inflation from a high of 61% in April 2015 to 12% today, the author writes, adding that the nationalization of PrivatBank has nearly completed an impressive cleansing of the country's banking system. 

Among major structural reforms, the article points out the unification of energy prices, which deprived corrupt gas traders of up to 8% of GDP, the introduction of e-declarations of wealth, ProZorro public procurement system, as well as deregulation and improved corporate governance.

Further growth of the national economy and better quality of public services are the great hopes for 2017, the author believes.

"In the new year, reform of the state administration should finally start in cooperation with the European Union. The byzantine top government structures need to be simplified, modernized, and opened up," the raticle reads.

Read alsoTax innovations under Christmas treeFirst real reform of the Ukrainian health care system has been launched, as well as the restoration of the twelve-year school system. But the most important reform of the state is the judicial reform that was legislated last June, accordnig to Aslund. A new Supreme Court is supposed to be composed in March.

Hopefully, a reformed government will interact better with the private sector. More deregulation is gradually taking place, but one should "not expect significant improvement of the fiscal or customs services," the author writes. That is likely to take another year.

Current forecasts suggest 2-3% growth in 2017, but it should be the year that Ukraine takes off with a much higher growth driven by exports to the EU, Middle East, and China. "Lower inflation and interest rates should spur credit expansion and drive higher domestic investment," the article reads. "Energy production should rise with lower taxation."

Read alsoU.S. senators vow no "Faustian bargain" with Russia - RFE/RLThe greatest threat to Ukraine’s immediate future is U.S. President-elect Donald Trump, who "seems to be dying for an early deal with Russian President Vladimir Putin."

"The victim is all too likely to be Ukraine," the expert writes.

Another Russian threat is the largest ever arbitration case between Naftogaz and Gazprom in Stockholm with multimillion mutual claims. A verdict is expected in the second quarter, though any settlement would presumably take years.

Traditionally, Ukraine received about 4% of GDP in foreign direct investment each year, but this has effectively been zero since 2014 because of Russia's military aggression, and minimal recovery is expected in 2017.

Read alsoOPP suspends operations due to high gas prices, debts"By contrast, Ukrainian domestic concerns seem relatively limited. Prime Minister Volodymyr Groysman aspires to the legalization of private sales of agricultural land by 2020, which might be realistic. After having failed to privatize the Odesa fertilizer plant twice, privatization has stalled. Corruption scandals are ample and they are welcome because they expose and impede corruption," the article reads.

In view of Ukraine's substantial reform attainments and embattled position, one would hope that the international community would mobilize $5 billion a year in international investment credits to compensate for some of the great damage Russian aggression has caused to the Ukrainian economy, according to Anders Aslund.

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