What Reforms Await Ukraine in the Next Four Years?

The EU accession, the Ukraine Facility plan, and the Extended Fund Facility IMF program require a long list of reforms that would unlock money for the country to recover from Russia’s ongoing devastating war, reach goals needed for EU integration, improve investment sentiment, and improve governance in Ukraine.

The general rule for this could be termed: “Money in exchange for reforms.”

Vox Ukraine outlined all the steps Ukraine needs to implement in the next four years.

They form a list of general governance, sectoral reforms, and reforms on public finance management.

This is a summary of Vox Ukraine’s findings. You are welcome to check out the publication’s original, more comprehensive work here.

Anticorruption and Anti-Money Laundering

Often an object of emotional statements from Ukraine’s major anticorruption organizations, anti-corruption institutions should be supported in three ways: supporting existing ones against attempts to compromise them, strengthening already functioning institutions, and relaunching the ones that do not function.

This includes:

• Implementing the existing anti-corruption program (2023-2025), and Asset Recovery Strategy
• Restoring transparency in the work of the Bureau of Economic Security and Asset Recovery and Management Agency (ARMA)
• Protecting the e-declaration system from being compromised
• Increasing staff at the Specialized Anticorruption Prosecutor Office, National Anticorruption Bureau, Higher Anticorruption Court and protecting the independence of these institutions

Implementing EU Rules in Regulations for Business

Corporate legislation should make the company’s ownership structure and cross-border operations more transparent, protect shareholder rights, increase digitalization, and expand gender equality. Other benchmarks include:

• Launching the e-license system by the end of 2023
• Complying with EU legislation on copyright
• Launching the Intellectual Property Court that’s formally operated since 2017
• Creating a full list of state aid programs for businesses
• Improving transparency of state-owned enterprises and public-private partnerships

Also, antitrust law should enable anyone to file a case with a court without the consent of the Anti-Monopoly Committee.

Other Topics of Interest

Central Bank Raises Key Rate to Tame Inflation Rise

Inflation increased above the central bank’s maximum forecast, forcing monetary governors to lower the heat by raising the key rate by half a percent– but it should decelerate in 2025.

Banking Sector and Financial Markets

Everything should be done to avoid fiscal easing. Other measures include reducing state ownership in the banking sector, including privatizing state-owned banks.

Ukraine’s banks should reduce the non-performing loan ratio, and Ukraine should reload the concessional financing program 5-7-9 percent to focus it on correcting market failures rather than crowding out market loans.

Developing a mass market war insurance includes the development of a draft law on war insurance by the end of June 2024, and two bills for the insurance industry– on valuation and Motor Transport Bureau.

Other to-dos include developing regulations for Peer-to-Peer (P2P) lending and virtual assets.

Public Finance Management

The government should work on reducing foreign debt and its replacement by domestic debt – and realize that additional expenditures should be covered by additional revenues. It is vital to:

• Cover additional expenses with additional revenues
• Replace foreign debt with domestic
• Return to mid-term budget planning
• Assess fiscal risks and introduce budget spending reviews
• Implement the National Revenue Strategy that should bring about 3-4 percent of GDP - though the Ministry’s intention to reduce the system of simplified taxes caused negativity among the experts
• Restore budget data transparency where it is possible
• Strengthen the Accounting Chamber of Ukraine, State Audit Service

State-owned enterprises (SOEs) mostly include continuing corporate governance reform, independent audits, and appointing Supervisory board members.

Tax System

Ukraine would unify the system of tax privileges and establish monitoring of their effectiveness.

A great debate inside the country was caused by the Ministry of Finance initiative to combat Ukraine’s simplified tax system.

It was once used as a tool for small businesses and freelancers, yet now companies use it to legally evade paying more taxes. The state decided to fight it by making employees demand fair employment, otherwise, those who use the simplified tax system would be forced to use cash registers and would have to pay VAT after they reach a certain revenue threshold.

Personal income tax would be adjusted to a progressive scale rather than stay fixed. The finance ministry states it’s a good idea. Experts claim a key problem lies in the low efficiency of the tax service and customs governance and the inability to make data-driven decisions and monitoring.

Tax and Customs Administration

Centralization and digitalization are key tools to combat tax evasion as the Ministry of Finance needs to cover more than a trillion hryvnia of budget deficit, created because of military spending to stand against Russia’s full-scale invasion.

Revenue Strategy plans to depersonalize (automate) communication between tax or customs inspectors and people or enterprises and introduce risk-based approaches. If it gets trust credit from the business, tax inspectors would get access to taxpayers’ banking data.

Ukraine has already criminalized smuggling, but it should also consolidate tax and customs data in the Ministry of Finance and simplify customs applications for business online.

Decentralization 

Strong local governments became key to fighting Russia in early 2022, but it is vital to support them with the following actions:

• Now allowing presidential civil-military administrations to undermine local governance
• Ceding a part of presidential power to local authorities by voting for the necessary amendments to the Constitution, and outlining the distribution of powers between the central government and local authorities
• Granting municipalities (communities) the status of legal entity – another debatable idea
• Providing no less than 20 percent of grants for reconstruction to local communities under the Ukraine Facility – €1.1 billion ($1.2 billion)
• Not allowing the controversial bill on urban planning, 5655, to be enacted

Law enforcement and judicial system

This sector has a huge list of what has to be done as Ukraine tries to strengthen the rule of law:

• Modernizing legal education and making it comply with ethics basics like anti-plagiarism
• Implementing the Istanbul Convention and the Rome Statute
• Updating and implementing bills that enhance human rights compliance, prisoner’s rights, fighting organized crime
• Reforming the migration policy – this can be added by enhancing the employment for foreigners’ process from social policy
• Including merit-based selection of judges and prosecutors, establishing the procedures for punishing those of them who lack integrity or violate the law, and strengthening enforcement of court decisions

Civil Service

Ukraine needs to reform its calculations of wages and salaries for civil servants, eliminating the loopholes for corruption and raising the salaries to market levels.

The country’s statistics service should gain more independence and increase the transmission of quality data to Eurostat.

Human Capital

Wages for the most vulnerable should be unified in one database, and government should make them more sustainable rather than chaotic. The housing policy would foresee the adoption of legislation to enable the purchase of old post-Soviet communal housing and transparently manage public housing. Education also includes adopting several new bills.

The Ministry of Education and Science should finish merging universities for more effective public spending and reform post-Soviet calculation methods for funding scholarship students. For now, this policy implementation has caused debates between universities and the ministry.

Energy Market, Environment and Agriculture

The sector is overwhelmed by state ownership and post-Soviet subsidies for various consumer types, so Western partners would like to implement market pricing and competition. This includes:

• Aligning Ukrainian legislation with EU directives on electricity and gas markets and atomic energy
• Introducing market-based carbon pricing mechanisms and a different carbon tax model
• Decentralized and more efficient district heating
• Increasing the energy supplied by renewable sources to 27 percent by 2030 according to an Energy and Climate plan

Unfortunately, the introduction of market energy tariffs is delayed until martial law is lifted, the authors of the research wrote.

The environmental policy includes implementing the draft law on the emerald network (several nature preservation sites) and installing Automated pollution control systems on all factories, post-Soviet and modern ones.

Ukraine should impose land monitoring systems and the State Agrarian Registry for the farmers, making the state aid to the sector less affected by corruption. Farmers would also be provided €75 million ($81 million) in 2024-2025 and the same amount in 2026-2027 for demining.