Path for economic reforms drafted for Ministry of Economic Development and Trade

Economic Advisory Council Ministry of Economic Development and Trade June 26, 2014 

The economy of Ukraine is in need of radical reforms. Despite some significant moves toward a market economy and away from the socialist economy of the past, the Ukrainian economy is today crippled from decades of corruption, which have created a toxic business environment preventing economic growth and job creation for its citizens. Ukraine today does not provide its citizens with an economic standard of living comparable with other countries of Central and Eastern Europe that underwent early and substantial reform after the disintegration of the Soviet Union. At the current time, Ukraine has received major financial backing of the International Monetary Fund. In addition, the signing of the EU Association Agreement will offer further financial support and trade liberalization from the largest economic block in the world. In the long term, a potential EU membership may offer further support of future economic development. The World Bank, the European Bank for Reconstruction and Development and other institutions have allocated substantial funding in support of Ukraine. A number of countries, including the United States and Canada, have offered credits and assistance grants. Finally, the country now has a President who was elected with a large majority on a platform of reform. Now, reforms are needed in a broad section of social programs, including education, health and pensions. Of central importance, is that the aspirations of the people to achieve a higher standard of living must be realized.

Swift and radical economic reforms must be undertaken if Ukraine is to seize this historic opportunity to clean up corruption, to realize its substantial economic potential and to put the economy on a path of rapid growth.

Economic Advisory Council Members: Dr. Daron Acemoglu, Professor of Economics, Massachusetts Institute of Technology, Boston, USA Dr. Anders Aslund, Senior Research Associate, Peterson Institute, Washington, USA Mr. Kakha Bendukidze, Chairman, Free University, Tbilisi, Georgia Dr. Oleh Havrylyshyn, Adjunct Professor, Munk Centre, University of Toronto, Toronto, Canada Dr. Basil Kalymon (Chair), Professor Emeritus, Ivey Business School, Western University, London, Canada ESSENTIAL REFORMS 1) Corruption Reduction • Carry out substantial deregulation of prices and trade and prohibit most forms of government inspections. • Simplify business procedures, and minimize licenses and permits. • Reduce the number of regulatory agencies sharply, by merging and abolishing many. • Introduce e-government on a wide scale, so that most contacts with the government can be carried out through the Internet. All laws, rules and regulations should be available on the Internet. • Implement sanctions against corrupt practices. 2) Energy Markets • Move domestic gas prices to market levels as quickly as possible and eliminate all energy subsidies to eliminate corrupt practices. • Provide social cash transfers to the half of the households that is worst off with the support of the World Bank • Separate companies transmitting and producing energy. • Open gas mineral rights market to both domestic and foreign companies 3) Rule of Law • Remove corrupt judges from system by cleaning up the court system from the top. All judges should go through attestation. Utilize Western assistance for the cleansing of the court system possibly by temporary reliance on foreign judges. • Develop programs for enhancing quality of justice system, providing sufficient financing. • Provide for separate commercial dispute resolution panels. 4) Tax Code • Rationalize procedures for tax compliance and inspection. Reduce the number of tax payments and make it possible to carry out nearly all tax procedures on the Internet. • Simplify the tax system by reducing number of taxes. • Restructure social tax system. Social taxes should be consolidated and become part of State budget aiming at a universal budgetary system. • Regional and local authorities should be given certain taxes to allow them some financial independence. 5) Trade Enhancement • Reform system of VAT refunds to render VAT refunds for exporters transparent and automatic. • Prepare for likely Russian trade sanctions by pursuing negotiations both bilaterally and through the WTO and mobilize international support • Provide support for expansion of EU trade through market information, trade fairs and limited export credit facilities. • Promotion of foreign direct investment by focus on improvement of business climate. 6) Banking Sector • Establish a structure to deal with non-performing loans in bank portfolios. • Recapitalize viable banks with the assistance of the IFC, the EBRD and the World Bank. • Consolidate banking sector by closing insolvent and non-complying banks. • Privatize state-owned banks 7) Agricultural Sector • Legalize private sales of agricultural land. • Establish a market for land. • Enhance rural infrastructure. 8) Restructuring Bureaucracy: • Major rationalization of the Ministry of Economic Development and Trade, largely eliminating its interventionist control activities and modernizing its trade policy components. 9) Macroeconomic Stabilization • The deficit in the national budget must be brought under control with the medium term goal of achieving a balanced budget. Ukraine soon should unilaterally accept Maastricht criteria as constitutional limits for public debt of 60 percent of GDP and for the budget deficit of 3 percent of GDP. • A monetary policy must be put into place to permit the stabilization of price inflation and of the Hryvnia exchange rate. In the medium term, Ukraine should aim at a floating exchange rate and inflation targeting.