The messaging from the reform camp is increasingly fraught and frustrated, as President Petro Poroshenko’s administration seems to be stalling/even going backwards now in terms of reform.
I would highlight a few noteworthy disappointments:
IMF lending frozen
First, still little progress to write home about on the International Monetary Fund front, with no signs of any progress in kick starting the fourth review under the loan program. Remember that this review was supposed to have been completed back in April, and Ukraine should have been on the ninth review by now, rather than only having completed the third review, and even then going back on some of the commitments made therein, including the hike in gas prices which was to have been introduced back in July. Alongside the gas price issue, the fund is still unhappy over the pension reform bill passed earlier this autumn, PrivatBank reform, the anti-corruption agenda, National Bank of Ukraine governorship, et al, from the 3rd review.
The fund kind of gave a pass on the requirement for progress on land reform from the fourth review, but I think hoped to see some steps in the right direction by year end. Little seems to have actually been achieved with Poroshenko this week indicating that while he supported land reform, there was no point pushing forward unless there was an accurate land registry. Well correct, but after 25 years since independence, and with Poroshenko now in office as president for three years, we might actually have expected more progress.
In the fiscal sphere, an IMF technical mission visited Kyiv last month to review the budget for 2018 – actually it seemed to be more than a technical mission as unusually, the IMF desk chief from D.C. also joined. Likely he wanted to better understand the local commitment/buy in to the current program. I doubt that the fund will have been enthused to hear of two new initiatives by the Presidential Administration and the government. One, from the Presidency, plans to replace corporation tax with a tax on distributed capital. The second, from the prime minister’s office, plans a 24-month deferral on value-added tax paid on imported equipment. Both are likely undermine the revenue base of the budget, and are unlikely to be supported by the IMF. Indeed, I expect these to be added to the now long list of concerns for the IMF – putting off/out the timing of any re-engagement with the IMF. I don’t even see it in the first half of 2018, but see scant hope of re-engagement with the IMF this side of elections.
EU freezes 600 million euros in aid
Second, the government failed to secure the release of the final 600 million euro tranche of macro financial assistance from the EU by the deadline, and hence the funding lapsed. Four outstanding areas of concern for the EU remained unresolved, including the ban on the export of timber, the launching of automatic checks on electronic declarations, adoption of a law on the NBU’s credit register, and launching checks on company beneficiaries. The administration has tried to spin all this positively, suggesting that the EU is looking to extend another 1.8 billion euros for Ukraine, but this seems more likely wishful thinking from the Ukrainian side, without existing issues resolved, and with the IMF program still stalled. In the past the EU has tended to view progress in the IMF front as a prerequisite for disbursements. Given slow progress still on the anti-corruption agenda, this just adds another reason for the EU to stall.
No anti-corruption fight
Third, on the anti corruption front, still few people have been brought to account – I cannot think of anyone – for last misdemeanours, with little progress still on the issue of anti-corruption courts. Meanwhile, we have seen the unedifying sight of the National Anti-Corruption Bureau of Ukraine and the Prosecutor General’s Office engaged in open warfare this week. I guess as long as the two agencies are busy infighting, corrupt elites rest safe. The downside though is that domestic and foreign investment will continue to stall.
Danyliuk out?
Fourth, the rumor mill in Kyiv is again rife with rumours over the position of the finance minister, Oleksandr Danyliuk. The State Fiscal Service has once again launched an investigation into his tax filings for the period when he worked overseas, clearly not understanding of the double tax treaties that Ukraine has in place. Danyliuk has marked himself out as an effective reformer in the current administration – trying to reform the State Fiscal Service, so creating numerous enemies therein. Obviously this has also marked him out for special attention. It has long been known that his position is coveted by those individuals in the Presidential Administration. I sense a crew would like to return to the grace and favor value-added tax refund gig, which Danyliuk reformed to root out graft.
I have long argued that a group within the administration is opposed to the IMF program, is unwilling to do much of the anti corruption stuff, which is really now central to the reform agenda and the IMF program. They think that by keeping the program off track they can stall on the agenda. I think they are likely selling the message to the president that Ukraine does not need IMF financing, and can now go it alone. Indeed, I think they feel that freed from the shackles of the IMF program they can pump prime growth to ensure Poroshenko secures a second term in the 2019 elections. It is quite notable now how anyone offering fair, objective criticism of reform failures to date is branded as being unpatriotic and this also dovetails with a centralization of political control around the president. It seems that political technologies are being rolled out to rein in the opposition – populist and reform democrat alike. The message is that only the Poroshenko administration can offer stability, security in the east, albeit that is not really bringing radical but much needed reform, and economic performance is mundane.
Indeed, on the economy, the growth/recovery seems to be stalling. The NBU’s production index, a decent gauge for real GDP, dropped 1.6 percent year-on-year in October, albeit was still higher by 2 percent year-on-year for the period January – October. Full year growth looks set to come in below 2 percent which I think is a major disappointment given the near 20 percent real GDP contraction for the period 2014-15, hence providing a very favorable base. Inflation has, meanwhile, remained stubbornly in the mid teens despite the stellar best efforts of the NBU. The current account deficit also seems again to be on a rising trend. Worryingly investment is weak, and the quality of growth seems poor, and driven by private consumption and hardly sustainable. This looks set to continue into 2018 and through to the elections in 2019, with fiscal easing likely the order of the day, already seen with big hikes in pensions. This all just seems a repeat of the period 2011-2013 under former President Yanukovych.
I think the big question the Poroshenko administration should ask is why investment, domestic and foreign is still so weak? I would wager it is because not enough has and is being done to address the problem of corruption. But unless it is addressed more wholeheartedly, investment and growth will not pick up pace, as needed.
