IMF NEWS

Ukraine, torn by political upheaval, severe crisis, and military conflict, returned to growth last year. Its government took tough measures to stabilize the economy, with the support of a $17.5 billion IMF credit line. Ukraine has an opportunity to transition from stabilization to more rapid growth to catch up with its European peers—but it depends on carrying reforms forward.

We used the opportunity of an IMF—Croatian National Bank conference in July to sit down with Minister of Finance Oleksandr Danyliuk to discuss Ukraine’s reform agenda.

In the past two years, the government took several important steps to stabilize the economy and return it to growth. What lessons do you draw from the implementation of these reforms?

We returned to growth last year. It was hard work as everything that could possibly have gone against us did: there was military aggression, economic aggression, political turmoil after the revolution, and unstable commodity markets. All of this left the country in a very bad condition.

We have returned to growth because in the past three years we focused on reforms.

We're now at the mid-point of an IMF program and the challenge is how to move forward. The elites and Parliament feel that Russia’s economic pressure is significantly lower now. This makes it more difficult to forge ahead politically, but I remind my colleagues and the Parliament whenever it's possible that people don't feel the effects of reform yet.

That is because, initially, incomes went down due to the economic decline and depreciation of national currency. Still we had to carry out unpopular reforms. For example, as a result of the energy sector reform, which included raising gas rates to market level, more than 50 percent of Ukrainians now receive subsidies. Knowing that more than half of the population cannot afford to pay for their utilities is quite depressing, but that's a reality. We can't stop the reforms now because we cannot leave people in this condition. The situation is getting better but is still fragile. The lesson I learned is that we cannot stop halfway. We have to continue structural reforms so that our economy revives and the living standards rise as a result.

How can the reform momentum be sustained now that the immediate crisis is over?

What has changed is how we look at the tasks. At the start of the current IMF program, we explained reforms by pointing to the IMF requirements, and that helped us to push decisions through the Parliament.

Now, reforms have to be our own initiative, on our own agenda—referring to the IMF alone does not help. It is now the expectation of people to have a government that knows and is committed to what it's doing. If we are not successful in implementing our reform agenda, we pretty much annul our credibility.

What kind of institutional reforms and economic policies do you think Ukraine needs to achieve a higher standard of living?

The recipe is to gain trust, and the sooner people will start to feel the results of reforms, the better. Those do not necessarily have to be economic reforms. Now we focus on some of our own-initiative reforms that are not in the IMF program but are important for Ukraine’s development and Ukrainians’ wellbeing: healthcare and education reforms.

Healthcare reform is critically needed because the quality of healthcare in the country is very low. In theory, healthcare is free of charge, but in practice it is extremely expensive through unofficial payments to hospital workers, so not many people can afford it.

We want to formalize this reality in well-thought-through healthcare reforms, to make sure that we have world-class healthcare and that doctors receive a decent salary, legally. Such restructuring will involve private money, obviously, but we’ll make sure that people who cannot afford healthcare can also have access to it by providing a state-guaranteed insurance package. 

As in healthcare, there is also corruption in education on a day-to-day basis. Parents need to pay for some things they shouldn't have to pay for, while the state pays a lot of money to maintain its education system. Right now we are changing funding mechanisms and moving from financing school and university buildings to financing services these schools and universities provide to real students.

What other areas affected by corruption do you plan to clean up?

There is extensive potential for corruption all over—some places more, some places less. Wherever there is excessive discretion, apparent underfinancing, excessive powers, lack of transparency, there is room for corruption. And vice versa. A few months ago the Ministry of Finance changed the value-added tax (VAT) refund system, an area which had been plagued by corruption for many years.  It had been a chronic problem for foreign and Ukrainian businesses which could not get their refund on time or were asked to pay a bribe. Now we have made the VAT-refund process transparent, electronic and fully automatic, which excludes opportunities for corruption. This is a massive anti-corruption move as well as an improvement in business climate conditions.  

Another area we are working on with the support of the IMF is our tax and customs authority. An international consultancy is helping us run the project, and we are inviting representatives of 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 to join the supervisory board to make sure that this reform is progressing and is not derailed.

I should also mention the law enforcement reform. The system largely stayed in the 20th century while the country is in the 21st century. In a liberal economy, there is no place for such an oppressive and corrupt law enforcement system as we have now.

One of the initiatives that I’m actively promoting is creating a compact analytical financial investigation unit, of no more than 3,000 people to replace a huge army of more than 15,000 people in different law enforcement agencies which investigate serious economic crimes at the moment. In theory, they work to protect the rights of the state, but in reality they are busy crossing businesses.

We also need to build up a specialized anti-corruption court to deal with graft offenses. People will thus see that the fight against corruption is serious.