Review of 2016: Groysman’s Master Class
On January 1, 2016, Volodymyr Groysman met the New Year as head of Parliament, but as early as April 2016, as a result of political agreements, he took up the post of Ukraine’s prime minister and pledged to "show how the state should be run." UNIAN analyzed the successes and failures of Groysman’s Cabinet and assessed the prospects of his government in 2017.
UNIAN is offering its readers a series of articles covering the results of this turbulent year. One of the major political events in Ukraine in 2016 was a change of government, with maintaining the pro-presidential coalition in the Verkhovna Rada.
In 2017, Volodymyr Groysman expects to maintain his position and pledges that every Ukrainian will experience certain improvement, thanks to the policies pursued by his Cabinet. UNIAN decided to assess the performance of the Cabinet which in April 2016 took over the responsibility for reforming the country, and to make a forecast of government policy in the coming year.
Former Mayor of Vinnitsa, who had for eight years served a fast-developing city, Groysman became that one politician, on whom people rarely bet, but it’s the kind of a bet that usually wins. Groysman first came to the government in the post-revolutionary year of 2014 and got engaged in the most confusing - and that also means most unpopular – reform for many, which was decentralization. Only a few people really got its essence at the time. The more beautiful and user-friendly were promotion video clips presented by Deputy Prime Minister Groysman, the less they interested reporters and the general public. Behind his back, Groysman was branded the man of President Poroshenko, believing that the ultimate limit to the ambitions of this deputy prime minister would remain decentralization.
However, the next political height he conquered was the position of Parliament Speaker, which Groysman took up in late 2014, after the snap elections to the Verkhovna Rada. It did not take him long to master the art of managing the parliament comprised of a variety of factions and with different objectives. Pretty soon, the legislature began adopting reformist laws despite certain struggling.
By the beginning of 2016, when the whole country was watching active positional battles between Team Poroshenko and Team [Arseniy] Yatsenyuk (PM at the time) for the second most important post in the country's system of executive power, Groysman was seemingly aloof. His name was also called among the candidates for a prime minister’s post, but only in a general context. No one gave any guarantees of the victory in the race.
But the stars lined up in a way that the post, shaken by political battles, to be entrusted to Groysman. And from the very first days, the new head of the government had to prove that he is no less a reformer than his predecessor, Arseniy Yatsenyuk, and that he is able to make his own decisions and take responsibility for them. The new prime minister in the first day at the prime minister's post promised to show his compatriots, "how the state should be managed."
Groysman took up the post at the country’s exit from a deep crisis. At the beginning of 2016, the State Statistics Service for the first time in several years recorded the start of economic growth. However, torn apart with populist and military battles, Ukraine considerably slowed down the pace of reform and actually froze its dialogue with the key creditors - primarily with the International Monetary Fund. While in September 2015 the IMF chief, Christine Lagarde, showered Kyiv with compliments, in February 2016 she sent the Ukrainian authorities a dry four-line message, threatening to close the door for Ukraine if it failed to fix the situation in the economy and in its fight against corruption.
But the curious thing was that Groysman’s government was given no large-scale tasks related to any serious economic expectations to hold it accountable for in the future. The experts unanimously noted that if no one imposed any large scale tasks on the new Cabinet, then it would either remain inert or please the public with some kind of a breakthrough. Groysman promised a breakthrough. So what are the successes of Groysman’s government over the last nine months?
Starting with major issues
Having hardly assumed his duties, Groysman assembled a Cabinet meeting, where he persuaded the ministers to take one of the toughest and most necessary decisions for national economy development in recent years - the establishment of a single market gas prices for all categories of consumers.
With this step, Groysman incurred the wrath of populist politicians and many ordinary citizens, faced with the "market" utility bills. But this was also the step that gave an impetus to saving up resources and putting an end to all kinds of shady pricing schemes and tariff games in the gas market that used to be a base for corruption making a multibillion-dollar black hole in the economy.
The IMF has been pointing at this hole for the past twenty years. Moreover, it hoped that the government would only be able to deal with this issue by April 2017. Ukraine accelerated the process, although and gave rise to another problem - the need to meet the high demand for public subsidies and introduce a mechanism of installments for utility services for those who are not entitled to subsidies. As a result, about seven million households will benefit from state aid.
Another strategically important decision was taking on a path of the revival of the gas industry. In July Groysman announced production targets - to increase own gas production by 2020 to the level needed to fully meet the domestic demand of the industry and the households. He set the goal at 27 billion cubic meters, while the current level of production barely exceeds 20 bcm.
At the end of this year, there will be no production records: the capacities of the state holding Ukrgazvydobuvannia, Ukraine’s key gas producer, will only allow to increase production by a small margin. However, at the end of the year, the Government has reduced the rent and simplified licensing procedures, which should facilitate prospecting, discovery of new wells, and production system upgrade. In a year, the annual production growth, according to government estimates, will amount to more than 500 million cubic meters of gas.
Path toward investors and new markets
In addition to the radical reform of the energy sector, the government began to implement another strategic goal - to begin restoration of Ukraine’s production potential. Here, the government sets an ambitious goal to stimulate creation of high-tech industries that produce competitive products with high added value. The prime minister reiterates the idea of the restoration of production capacities tirelessly, during all of his working trips to the regions, as he visits factories and plants, including those working in the defense industry.
The development of the military-industrial complex is a special point on the Cabinet’s agenda. Supported by the NSDC, the Cabinet took on the active development of the national defense industry, hoping in this way to give impetus to the development of other industries.
The latest successes of Ukrainian missile industry, the creators of combat vehicles, and aircraft manufacturers, who have recently showcased their new An-132 cargo aircraft, are very significant, although not as public. The Cabinet is sure that with time, the military victories will multiply and begin to work not only for the protection the state which is at war with the treacherous enemy, but also for the image of the country abroad. Funding amounting to 5% of GDP laid down in the budget 2017 will only contribute to this end.
But while the state is able to finance defense industry, the development of "peaceful" production and exports will be impossible without foreign investments. Moreover, these should be investment not only and not so much from the offshore Cyprus, but rather from the G20 Member States.
The Investment Support Office has already been launched, the Industrial Development Committee has been created, while the Ministry of Economic Development and Trade for the first time in 25 years of independence has begun to develop the National Export Strategy, which also has an investment component.
Large-scale changes in the most problematic areas for investors - tax and customs administration - should support these decisions of the Ukrainian government. The effect of tax amendments will only be felt next year as the government bill amending the Tax Code was adopted only at the end of December. But the outcome of customs reform is already seen today.
Since August, the key customs posts are under control of the Interagency customs risk assessment center, while special interdepartmental mobile teams have been fighting against smuggling and corruption. Their work resulted in growth of customs revenue by an average of UAH 1.5-2 billion per month. Along with other measures, steps taken will definitely help reduce the share of the shadow economy, the volume of which is gradually decreasing and now stands at 39% against 41% as of January this year, according to the Economy Ministry.
The government also has achievements in the international arena. The prime minister headed government delegations to Washington, Berlin, Brussels and other European capitals, where he met with key officials and businesses. The meetings resulted in the increase in the share of European and North American markets in the total volume of Ukrainian exports. The EU's share has already exceeded 35%. The share of the U.S. and Canada is a bit lower but the prospects are significant. In July Kyiv and Ottawa signed off a free trade deal, providing access to the Canadian market of the Ukrainian goods worth some $500 billion.
In addition, the government trade missions have done their share of work in Malaysia, Indonesia, and African countries. As noted by Ukraine’s Trade Representative Natalia Mykolska, in addition to the traditional interest in our grains, the world showed interest in our IT sector, developments in science and industry, particularly in engineering.
Regaining trust of lenders
Export development and investment attraction, without a doubt, is a priority for the Ukrainian government. However, access to international lending is just as important for the stable operation of the economy. Loans from international financial organizations and donor countries were and still remain the main external financial assistance for our country. In this regard, it is vital for Ukraine to consistently implement cooperation programs with its lenders that, in fact, do not require anything but sustained reforms, which will eventually allow Kyiv not only to boost its economy but also to return all funds borrowed.
In this context, the key is the relationship with the International Monetary Fund, which acts as a beacon for Ukraine and a key to other creditors. The negotiations with the Fund, with which Kyiv has a four-year cooperation program, approved in March 2015, this year stalled due to a political crisis. However, in September - after more than a year break - the IMF praised the government’s performance and Ukraine received the third loan tranche under the Extended Fund Facility worth $1 billion. This year, Ukraine received $7.6 billion of the total $17.5 billion funding.
In early January 2017, Ukraine expects to get another $1.3 billion tranche. To this end, the Verkhovna Rada adopted the state budget for 2017, agreed with the IMF, while the government together with the National Bank nationalized Ukraine’s largest bank, PrivatBank, which needed new management solutions and significant recapitalization.
If the IMF Board in January approves the government policy, Ukraine will receive its money. Thus, the total amount of funds allocated to Kyiv by the IMF alone in March 2015 will amount to about $9 billion. For comparison, the amount foreign direct investment over the same period is almost three times lower.
Meeting the New Year with new hopes
The coming 2017 will be the year of consolidation of trends that emerged in 2016.
The government's goal is to double the economic growth rate to approximately 3% of GDP, to reduce inflation to about 8% from 12-13% in 2016, to maintain the hryvnia exchange rate at the level of UAH 27-28 per dollar with the growth of incomes of citizens. The minimum wage in a week will be doubled to UAH 3,200, which will be followed by the raised minimum pension and the living wage - a key indicator for calculating social assistance.
In 2015 the Ukrainian economy only in the fourth quarter managed to push up from the bottom, dropping only by 9% over the year with a record level of inflation for the past nine years at 45%. In the crisis year of 2014, the GDP fall was even greater – at 16%.
So a 3% growth of the economy is significant progress for the war-torn country, which requires significant coordinated efforts of all branches of power and public support. And the main thing here is not to fall for the promises of populists, who vow to return to the "bright past" with cheap gas and friendship with the aggressor state on the conditions of the conquered slaves.
The main financial priorities of the government, laid in the budget for 2017 are the support for the Ukrainian Army in the amount of more than UAH 120 billion, covering the Pension Fund deficit (which is over UAH 150 billion), the program of housing subsidies at more than UAH 40 billion, and funding construction projects for badly battered roads at about UAH 35 billion. Education and healthcare will receive over UAH 15 billion.
Continuing decentralization with the transfer of administrative powers and finances to the regions is also in focus, as well as further improvement of the business climate to attract investment, and the active promotion of energy efficiency technologies. In a strategic perspective, the goal is to develop a model of pension reform in close cooperation with the IMF and the World Bank, to carry out privatization, and adopt legislation for the introduction of the land market.
Volodymyr Groysman also stresses that the priorities declared are just the beginning.
Both the public and the experts expect that the Cabinet will focus on other priorities, accelerating reforms. Among them are the judiciary, land and tax reforms. The challenge is to restore the respect of the courts and the judge, to allow the owners of land to exercise their rights of ownership and, finally, to instill a culture of paying taxes honestly, without attempts to circumvent the law and minimize the obligations to the state. Consolidation of efforts of the Government and Parliament in the adoption of economic and anti-corruption laws will help achieve this goal.
Also, the government is expected to continue breaking bureaucratic obstacles to business development. In 2016, Ukraine failed to achieve its goal to significantly improve positions in the World Bank's Doing Business ranking, moving only three steps up to the 80th position in the list of 190 countries. But in a year, Groysman’s Cabinet expects to see Ukraine in TOP 50, thanks to the implementation of regulatory initiatives.
The government, with the active participation of the National Bank, is expected to ensure the recovery of lending to businesses, primarily to SMBs, as well as reformatting the budget process, involving the transition from drafting survival budgets to forming the budgets of growth and investment incentives.
What the experts do not wish to see is any excessive PR campaigns, which would overshadow the very reform. They also warn that the impact of external factors on the Ukrainian economy will continue to be significant and that it will even intensify. The most pressing factors will be the continued uncertainty of pricing on the main commodity markets for Ukraine, significant risks of the economic crisis in China, India and Turkey, as well as debt payments. At the beginning of the year, part of them will have to be paid, and they will total some $2.5 billion in 2017. Equally significant will be the outcome of the gas dispute with Russia in Stockholm Arbitration. The ruling will be handed down in the first half of 2017. Very important not only for Ukraine but also for the global economy will be the first steps of the new administration of Donald Trump. So far, the statements of the new U.S. leader indicate that 2017 will be full of changes, and Ukraine, just as the rest of the world, should be ready for this.