Ukraine: Owning the Reforms
IMF News, September 26, 2017
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- Published: September 26, 2017
Context and recent stabilization
- Ukraine returned to growth last year after political upheaval, economic crisis, and military conflict.
- The government implemented tough measures to stabilize the economy with the support of a $17.5 billion IMF credit line.
- The country is at the mid-point of an IMF program; the challenge is to carry reforms forward from stabilization to sustained higher growth.
Lessons from the reform period
- Reform focus over the past three years enabled the return to growth despite adverse conditions (military aggression, political turmoil, unstable commodity markets).
- The principal lesson: "we cannot stop halfway" — structural reforms must continue to revive the economy and raise living standards.
- Initial reform justification relied on IMF requirements; sustaining momentum now requires ownership and domestic commitment to the reform agenda.
Social impact and political economy
- Early reform effects included lower incomes due to economic decline and currency depreciation.
- Energy-sector reform raised gas rates to market levels; as a result, more than 50 percent of Ukrainians now receive subsidies.
- Public expectations have shifted: citizens now expect a government that knows and is committed to its agenda, and failure to implement reform undermines credibility.
Institutional and sectoral reform priorities
- Healthcare:
- Current system: in theory free, in practice expensive due to unofficial payments.
- Objective: formalize reforms to deliver "world-class healthcare," ensure doctors receive decent legal salaries, involve private finance, and provide a state-guaranteed insurance package for those who cannot afford care.
- Education:
- Problems: day-to-day corruption (informal payments), inefficient funding allocation.
- Reform direction: change funding mechanisms from financing buildings to financing services provided to real students.
- Tax and customs administration:
- The Ministry of Finance changed the value-added tax (VAT) refund system to be transparent, electronic, and fully automatic to eliminate corruption and improve business climate.
- An international consultancy and an external supervisory board (including representatives from the Custom-Border Protection of the U.S. Treasury; Germany’s Ministry of Finance; the European Commission; the European Bank for Reconstruction and Development; and the government of Canada) are engaged to ensure reform progress and prevent derailment.
- Law enforcement and anti-corruption architecture:
- Current system described as oppressive and corrupt; largely a 20th-century structure unsuited for a liberal economy.
- Proposal: create a compact analytical financial investigation unit of no more than 3,000 people to replace a huge army of more than 15,000 people across agencies investigating serious economic crimes.
- Establish a specialized anti-corruption court to handle graft offenses and demonstrate seriousness in the fight against corruption.
Political challenges to sustaining reforms
- Reduced external pressure (perceived lower Russian economic pressure) makes political consensus harder to sustain.
- Domestic ownership and communication of reform benefits are crucial because referring to the IMF alone is no longer sufficient to push reforms through Parliament.
IMF Country Focus — September 26, 2017. Interview with Minister of Finance Oleksandr Danyliuk.