27 January 2016
Reform in Ukraine: What to Expect in 2016
By Anatoliy Khomenko and Olena Prokopenko from the Kyiv Office Government and Public Affairs Department
We continue our series of articles on reform in Ukraine, today focusing on what 2016 could bring.
Read the first piece reviewing achievements in 2015 here
Dissatisfaction with the pace of reforms among the business community and civil society continues. Nonetheless, Ukraine has made tangible progress in numerous areas. This is best evidenced by the reaction of the country’s Western partners, such as continued support from the IMF; successful negotiation of a debt restructuring deal with a 20% writedown on all external debt; the EU-Ukraine Trade Agreement coming into force on January 1, 2016; and the introduction of a visa-free regime with the EU scheduled for this summer.
The main highlights for 2016 are likely to be:
EU-Ukraine Association Agreement:
The economic part of the EU-Ukraine Association Agreement (the Deep and Comprehensive Free Trade Agreement) came into full effect on January 1, 2016. In addition to duty-free trade, this treaty entails higher environmental and consumer protection standards, reducing corruption risks, technology development and simplified capital flow. The agreement sets specific deadlines for Ukraine to implement respective legislative and institutional changes. As a result, the establishment of the free trade zone will benefit not only Ukrainian exporters but also internal trade operators, both domestic and foreign.
State Budget & Tax Reform:
Due to the difficult geopolitical and macroeconomic situation, in late December 2015, the Parliament adopted another austerity budget with the emphasis on increased defense funding and decentralization. The adoption of this budget with a deficit of less than 3.7% of GDP was supported by the IMF and improves Ukraine’s chances of receiving the 3rd IMF tranche of US $1.7 billion in Q1 2016. However, as a result of the ongoing disagreement between the Cabinet and the Parliament on the concept for the planned tax reform, the budget was drafted separately, while the reform will only come into force starting January 1, 2017. The declared goals of the reform include a decreased tax burden on business, simpler administration of taxes, decreased corruption among the tax authorities, increased transparency of taxation, higher budget revenues and a more stable economy.
2016 was declared the year of “big privatization”. Ukraine’s most attractive state-owned assets are scheduled for sale by tender sometime in H1 2016, including the Odessa Port Plant, Centrenergo, a number of regional energy companies and others. However, the Government insists that Parliament amends the Law on Privatization first to make the tender process more transparent and make it impossible for end beneficiaries from ‘aggressor countries’ to purchase assets in Ukraine. Unless the law is adopted, privatization may be delayed for an uncertain period.
The Parliament is yet to vote on the decentralization amendments to the Constitution in the second reading – and it is highly possible that it will be unable to gather the 300 votes required in the coming months. The amendment package aims to transfer some authority from the central government to regional officials (including redistribution of financial flows to regional budgets), as well as give the Parliament the authority to define the status of temporarily occupied territories in the Donetsk and Luhansk regions by law.
Despite headlines about fist fights in parliament; a boisterous civil society with zero tolerance for corruption; and an incohesive ruling parliamentary coalition, Ukraine has taken a number of serious reform steps to get its house in order. Although foreign direct investment continues to shy away from Ukraine until the hostilities in the eastern regions end, international donors and financial institutions are working hand-in-hand with the Government and Parliament on pushing forward the economic reform and development agenda. All bets for 2016 focus on positive GDP growth after two years of economic depression and reorganization. Stay tuned.