Ukraine’s shadow economy has grown to 47.2 percent of its gross domestic product in 2018, an increase from 46.8 percent in 2017, according to research by the Kyiv International Institute of Sociology.
This is considerably higher than previous findings by the Ministry of Economic Development and Trade, which estimated the shadow economy in 2018 at just under a third of GDP in July. The size of the shadow economy represents a major fiscal problem and an obstacle to further economic growth.
The term “shadow economy” refers to economic activity that is undeclared or informal, including illegal activity.
“First of all, (shadow economies) lead to a decrease in tax revenues from income, thus affecting the economic viability of the state,” the KIIS wrote in its research findings. “Because of this, the state spends less on infrastructure and social services for its citizens.”
The institute surveyed a sample of 800 enterprises between March and May of 2019, conducting telephone interviews with owners, directors and top managers of companies across Ukraine.
The proportion of the economy in the shadow crept up by a few percentage points across almost all regions of Ukraine, except the north and center, which saw a 4 percent decline from 2017.
Retail and construction are deepest in the shadows, with more than half of all economic activity in those sectors being undeclared. However, the proportion of shadow activity in retail and construction declined since 2017.
The institute found three predominant forms of tax avoidance, chief among which was revenue concealment. About 56.7 percent of enterprises that participated in the shadow economy hid their revenue in 2018, compared to 60.2 percent in 2017.
Other methods include concealing the total number of employees and the total salaries paid to employees — just over 21 percent of enterprises engaged in either of these practices. Salary concealment was the fastest-growing method, with 21.3 percent of enterprises employing it in 2018 compared to 18.3 percent in 2017.
According to the survey, enterprises hid 40 percent of their revenue last year, while 32 percent of their employees were unofficial and 45 percent of salaries went undeclared.
Many enterprises are worried about being caught. About a third of respondents believe that fines would affect their competitiveness and over a quarter believe that fines would threaten their companies with bankruptcy. Yet more than a quarter are confident that they will be safe from any ramifications.
President Volodymyr Zelensky had stated that the fight against the shadow economy is one of his priorities.
