Restrained Optimism before a Future Growth
In order to understand Ukraine, one must understand its mentality. The people who live here are so indifferent to everything happening in the country that any event may be seen as a “betrayal” and “victory” (victory and betrayal). In addition, you can read about “treason” in an abundance of materials: western media outlets write about a country in which the conflict is ongoing, and corruption together with oligarchy are yet be overcome. But you will agree, hopefully, that we have come a long way and should be able to leave this “betrayal” in the past. In November 2013, tired of corruption and shocked by the government’s decision to cease preparations for signing the Association Agreement with the European Union (EU), a dissatisfied population came out to protest in the centre of Kyiv. Euromaidan and the events that have taken place following over the last five years have radically changed the political, economic, and social situation in Ukraine. In April 2014, an armed conflict flared up in the Donbass region of eastern Ukraine. It is ongoing today.
The conflict has led to a significant reduction in the volume of industrial production and state budget revenues in the Donetsk and Luhansk regions, large-scale destruction of supply and sales chains, as well as a decrease in confidence in the country’s economy as a whole. In 2014-2015, amid falling commodity prices, the conflict on the East of Ukraine, and political instability, the economy fell by 16%. Real GDP decreased rapidly in 2014 by 6.6%, and in 2015 — by another 9.8%. In 2016, GDP was lower than it had been in ten years.
No matter how hard we tried to stabilise the economy, the prospects for its development remained weak, which included significant macroeconomic vulnerability and an increase in poverty. We asked ourselves: “What was Euromaidan for if our life became worse?” Of course, it’s easy to forget about history, where, for example, the Jews needed 40 years to free themselves from slavery in Egypt, and likewise, here in Ukraine, there will be no lightning-fast changes. Rather, it has been necessary to solve long-standing problems in several fields.
The three main challenges we have been working on over the years include macroeconomic instability, low private sector productivity, and inefficient service delivery.
The government’s priority plan of action for 2017 and up to 2020 was approved in April 2017. We identified five strategic goals, which include economic growth through increased exports and investments, implementation of tax and customs reforms, privatisation, energy reform, and maintaining macroeconomic stability through continued fiscal consolidation. Let’s start with investments. First Deputy Minister of Economic Development and Trade of Ukraine Maksym Nefyodov commented on the growth of Ukraine’s legislative changes related to entrepreneurship, and spoke about the state of the economy: “We often somehow have an idea that in terms of the economy in Ukraine, everything is bad, that we are not growing enough, that we are losing opportunities. Investments into Ukraine (foreign and domestic) in this year alone have increased by 20%. In my opinion, this is a victory. We are growing in every metric you track. I think we are on the right track.” In January, at the world economic forum in Davos, President Petro Poroshenko said that he considered 2017 to be the year of investment growth for Ukraine. In fact, the income from the investment in 2017 decreased compared to 2016 — by 57.5%, to UAH 1.817.2 billion from UAH 4.405.8 billion. At the same time, the volume of direct investments per person increased by 4.3% to USD 925 in 2017. The last time such a drop was recorded in 2014, when the inflow of investments decreased by 55.1%. However, by the next year, there was a significant increase of 53.5%, to UAH 3.763.7 billion.
The Ministry of Economic Development and Trade of Ukraine reports that in 2018, capital investments in January-September 2018 increased by 19.9% against the same period in 2017. Almost half of UAH 337 billion was invested in new equipment, machinery, and inventory.
Export and import
The volume of Ukrainian foreign trade in 2018 reached USD 104.1 billion, which is 12% more than a year earlier. But the trade balance remains negative and goes further down. This is stated in a report made by the State Fiscal Service.
In 2018, Ukraine exported goods on USD 47.334 billion, which is 9% more than in 2017. Imports of goods last year increased by 15% to USD 56.854 billion. Thus, imports exceeded exports by almost 20% or USD 9.5 billion.
The World Bank believes that for more powerful growth in the Ukrainian economy it is necessary to unlock the potential of the private sector through institutional reform and implementation of key investments designed to ensure the functioning of markets. One of the significant institutional shortcomings that limit the competitiveness of the private sector is a highly concentrated oligarchy, where the influence of private interests in public decision-making belongs to the most impressive features of the economy of Ukraine. Since independence in 1991, Ukraine has been struggling with the impact of business interests on public decision-making, and just after the events of Euromaidan, civil society has begun to counteract the influence of private interests of oligarchs on the concentration of assets and the redistribution of rents. However, the situation has changed in 2018. In fact, the National Bank of Ukraine even created a survey on business expectations of Ukrainian enterprises with regards to currency regulation. There is also a plan to simplify the systems of business registration and taxation, as well as to facilitate construction permits. We have risen five positions in the Doing Business ranking, which measures business climate, due to regulation of foreign trade and protection of minority investors.
Development of the economy is impossible without an effective infrastructure and reforms in the infrastructure sector. The first task in Target Area 1 is to improve the quality of infrastructure services, especially in the energy and transport sectors. After the events of 2014, we lost a big portion of energy capacity on the East of Ukraine, as well as in Crimea. And only in 2018, Ukraine decided to close all its “territorial” losses, due to the growth of state-owned companies, which were not functioning effectively. This is a great achievement. In Ukraine there are 1 594 state-owned enterprises, the amount of assets of the TOP-100 of which is about 93.3% of the total value of all working state-owned companies.
For the first six months of 2018, the net profit of these TOP-100 largest state-owned companies amounted to UAH 21.5 billion. The oil and gas sector and the electric power industry remained the most profitable sectors. Enterprises of the electric power industry for the first six months of 2018 increased the financial result by 12.2% from UAH 7.6 billion to UAH 8.6 billion.
With regards the development of Ukrainian industry there are more than enough victories — from the agricultural sector and IT, which brings Ukraine more than 3% of GDP, to the revival of the domestic aircraft industry. In the agricultural sector, a record harvest since independence provided an inflow of foreign exchange earnings from exports of agricultural products, which strengthened the hryvna. By the end of 2018, Ukraine is expected to grow by 3.5%, which will be achieved thanks to exports, and farmers in particular. This includes resumption of production of tractors at KhTP and the Kherson Machine-Building Plant as well as the success found at the Vinnytsia Poultry Farm, which has seen investment of 300 million USD in its second stage, thereby becoming the second biggest poultry farm in Europe.
Perhaps one of the most significant investments into Ukraine is that of the military— industrial complex. Though our enemies would wish to destroy us, we are not going to give up. Despite a weakened army in 2014, we were able to establish the production of weapons, in particular, in 2018 it was the production of a cruise missile under the Neptune project, high-precision Vilha weapons, as well as the creation of a Draft Law to liberalise the procurement of defense products, and a bill that allows enterprises of UkrOboronProm to create joint ventures with foreign partners.
Author: Olha Ptashka