Anti-Crisis Solutions to Save Ukraine’s Economy

In 2020, the Ukrainian government approved the Economic Stimulus Program to overcome the COVID-19 epidemic consequences. Unfortunately, it proved to be inefficient: in the second quarter of this year, the country’s GDP fell by 11.4%, industrial production by 8.3%, and agriculture by 18.7%.

Given that, the state needs to create an anti-crisis plan that will be able to fully support the people, the economy, and the health care system. Promote Ukraine asked the experts what the anti-crisis steps Ukraine should take.

Dmytro Sofina, Director of R&D Center “Winstars Technology,” Chairman of the Vinnytsia IT Association, and co-founder of IT Park Vinnytsia

As a representative of technology and export-oriented business, I see the following measures:

1. Administrative and Management Reforms:

• total digitalisation of public administration (rejection of paper medium and one Unified State Register with all information and protected block-chain technology);
• real and full transfer of all managerial authorities to the local associated territorial community (ATCs) (schools, hospitals, roads, resources, police, real estate, forestry units, property, etc.), moreover, without any manual regulation, only based on law. Namely, with the possibility of ATC to decide independently on the closure, opening, construction, reconstruction, terms of payment, etc.;
• abolition of oblasts and establishment of a single controlling body (president’s office) at the level of newly created areas with the supervision function of the compliance with the law and a maximum staff of 10 people per area, including a President’s Office representative;
• renunciation of all central powers except security, army, foreign policy, border and customs, financial investigations, anti-corruption and antitrust authorities, special services and classified forces, NBU, Treasury, the reformed Tax department;
• closure of all other service centres, institutions, and organisations, reduction of the employees due to total digitalisation;
• 100% privatisation of state property except for administrative buildings and office facilities;
• reform of courts and prosecutor’s office (new, independent and transparent);
• reform of law enforcement agencies (all police functions are to be transferred to the field, only specialised investigation services and special forces remain under the central responsibility);
• huge ministries abandonment and the establishment of a small centre for analysis and planning based on the Cabinet of Ministers, with the world’s best economists and reformers attracting for high salaries.

2. Tax and Financial Reforms:

• single income tax implementation for all the legal entities and individuals at the level of 10%, as well as the abolition of VAT and other additional taxes. This tax will be sent exclusively to local ATGs on the principle of individuals and legal entities/units registration place;
• companies engaged in financial services must have transit accounts that must be in the State Treasury. This will preserve the mechanism for taxing only real income, not turnover. For companies engaged in buying and selling, it is necessary to create an Agency, when the buyer knows the final producers of goods or services and pays them directly. In turn, the intermediary (retail, firm, etc.) receives only the agency fee of payments and pays tax on this amount. That will allow the country to withdraw capital from the shadow;
• the state budget after the reorganisation (point 1) will be minimised to such extent that just the following items can be allocated for its revenue: 10% of ATCs’ revenues (i.e. 10% of all income taxes in the country), state duties, licenses and individual dues for vodka and the tobacco industry;
• pension, social and medical reforms. The maximum digitalisation, transfer of all service functions to the open commercial market, and to remain administrative functions with a small Social Security Fund. Introduction of a single insurance mechanism for the pension, social and medical spheres with free choice of services and tariffs for citizens.

Alexander Khmelevsky, independent expert

To overcome the crisis, first of all, it is necessary to abolish quarantine. It was quarantine restrictions that led to the economic downturn. Although the quarantine is now adaptive, some cities or districts fall into the red and orange zones, which means stopping businesses, transport, and so on. Such things do not allow companies to resume their business.

As for economic recovery measures, they have been developed long ago during the crises overcoming in Europe and the United States. In particular, a pre-condition is the reduction of the refinancing rate of the National Bank and cheaper loans. The United States has reduced the refinancing rate to almost zero. And the National Bank of Ukraine is only up to 6%, which is insufficient. That did not lead to a significant reduction in banks’ interest rates.

During the crisis, the central banks of the United States and the European Union increased its public debt financing. The US Federal Reserve and the European Central Bank repurchase trillions of dollars in government bonds, but the National Bank of Ukraine does not buy government bonds. Therefore, Ukraine has to borrow on financial markets at very high interest rates. Such a policy leads to an increase in state budget expenditures on public debt service and increases the risk of default. Under a crisis, the National Bank must finance the state budget deficit.

It is also necessary to take measures to prevent increased withdrawal of funds from Ukraine. Otherwise, there will be a significant devaluation of the hryvnia, which will deepen the economic crisis. To restore the economy requires ensuring the stability of the exchange rate. This can be done only by administrative measures and by abandoning the floating exchange rate of the hryvnia.

Public investment is a vital tool for overcoming the crisis. In particular, to overcome the crisis of 2008-09, the United States and the European Union invested state funds in the construction of roads, bridges, schools, hospitals, etc. These countries plan to start similar actions today. The Big Construction program operates in Ukraine. However, its results are still invisible to the general public.

Also, the leading countries of the world during a crisis support strategic enterprises through financial assistance, public investment, soft loans, tax holidays and more. These methods should be used in Ukraine as well.

In the context of the crisis, the United States and the European Union support socially vulnerable groups. For example, in the United States, poor people received funds from the government for several months. This saved many people from poverty and allowed them to maintain the efficient demand that is so necessary for economic recovery. The EU takes similar actions. For example, in Germany, people who were forced to stay at home during quarantine received money from the state in the amount of 2-3 salaries. Ukraine also has a program to support people who have not quarantined or worked part-time because of quarantine. However, the funds come not to people, but enterprises, and not all of them. In Ukraine, state support for socially vulnerable groups in quarantine was virtually absent. This worsened the living standards of the population significantly, and therefore efficient demand remains extremely low. Some quarantined businesses become now bankrupt and shut down. The labour market remains depressed very much.

Despite the government’s cheering statements, Ukraine’s economy does not recover. Therefore, the state must pursue an active incentive policy to restore the economy. Without state support, companies will not be able to resume their activities, and the population will continue to be in poverty.

Oleksandr Zakrynychny, human rights activist

As a rule, foreign governments try to maintain the citizens’ solvency because it is the citizens who are the source and stimulus for production. To do this, we need to provide a simplified system of lending to the economy, to establish measures to directly support small and medium-sized businesses, especially for the most affected areas – tourism, hotel business, services, and more.

Given the practice that has developed in the country’s economy over the past four months, it is necessary to make comprehensive decisions as soon as possible, which will result in slowing down the GDP decline. I believe that the anti-crisis program should consist of three most important categories:

1. Citizens social protection. Creation of a monthly state surcharge from 400 hryvnias for non-working pensioners and persons who care for seriously ill children.
2. Economics and entrepreneurship protection. Exemption of entrepreneurs of 1-2 groups from the single tax for the period of quarantine. Target subsidy for each new job created and lending at 0%.
3. Health care. Protection of physicians, the introduction of adequate wage financing. Providing hospitals with the necessary equipment, medicines, and protective equipment.

Konstantin Denisov, Candidate of Economic Sciences

In the second quarter of 2020, Ukraine’s GDP decreased by 11.4% due to a decline in industry (-8.3%), agriculture (-18.7%), construction (-5.5%), freight traffic (-16.3%), exports of goods (-6.4%) and services (-7.1%). The growth was ecorded only in retail trade (+ 3.0%).

Due to the pandemic, world markets have closed or reduced consumption, which directly affects the export-oriented model of Ukraine’s economy. Therefore, I will repeat myself: there is a need to develop the domestic market and domestic demand.

1. Internal market. Over the last 10 years (2010-2019), the share of Ukrainian goods in the domestic market decreased by more than 10% – from 64.3% to 52.4%. That is especially true of industrial goods. The ways to solve the problem are the fight against smuggling, affordable lending to local manufacturers, the introduction of targeted multidimensional (loans, grants, subsidies, marketing) program “Buy Ukrainian.”

Noteworthy, that the government’s program of affordable loans for business “5-7-9” was imperfect from the beginning. Its first version contradicted the Commercial Code of Ukraine in terms of the concept of “small business” definition (in terms of income and number of employees). The program also limited the annual income of small businesses to UAH 50 million.

2. Domestic demand. For the first time since 2010, its low level has been accepted by the Ukrainian business as the main obstacle to economic development.

Consumer demand can be stimulated as follows: reduce the tax burden on all segments of the population, especially, small and medium enterprises; implement progressive taxes on luxury, to direct at least 30% of such revenues to reduce consumer prices for basic-needs products. Also, it is necessary to abolish VAT on necessities; introduce a single social income tax with a progressive tax scale, and a standard rate of 20%; and not to tax the individual income in the amount of the minimum wage.

Natalia Tolub