Growth or illusion: How to assess Ukraine's economic policy?

Author : Alla Shlapak

Source : 112 Ukraine

We can honestly say that today state economy survives on the Ukrainians themselves
09:59, 21 September 2017

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How effective is the management of today's power? Let us see the data. Phenomenally, in terms of fall in living standards, increase in unemployment rates, and political turbulence, GDP is rising. Only for the first quarter of 2017, Ukraine's GDP grew by 2.4% compared with the same period last year. How is it possible?

It is worth recalling that for the first quarter of 2016, real GDP growth was only 0.1%, and for the same period in 2015, real GDP fell by 16%. For the first quarter of 2017, the industrial production index fell by 0.7% compared to the same period last year. For the first quarter of 2017, agriculture showed a drop of 0.8%. Even such an important indicator as production of electricity and other energy resources, fell by 3% for the first quarter of 2017. This clearly shows: "shadow economy" also fell, but did not grow.

Related: Ukraine’s economy grew by 2,3% in second quarter of 2017, - National Bank

Construction boom

The situation in the sphere of Ukrainian construction is paradoxical: in a country where the economic crisis continues and the war is going on, and the standard of living is rapidly declining, the construction boom has unexpectedly begun. At the same time, prices for the flats in the new buildings do not decrease. The heyday of construction continues only in large cities, where the population has become poorer. The main construction works in 2017 take place in the capital and suburbs of Kyiv. Nearly half of the commissioned housing belong to this region. This became the driver that ensured the growth of Ukraine's GDP. In fact, retail sales and construction have become the main factors for the growth of the Ukrainian economy.

Related: We can't live like this any more: How to change Ukrainian economy

Dollars "under the pillow"

But here the question immediately arises: how could the growth of construction take place, if the lending system does not work in Ukraine after the events of 2013-2014 and war in Donbas? Now Ukrainians cannot take normal mortgage loans, and the volume of this type of lending has been declining for the past three years. Therefore, the growth of construction is war chest of the Ukrainians themselves. As soon as in 2016 the devaluation of the hryvnia calmed down, the Ukrainians began to think about what to do with their savings in dollars. Ukrainians do not need dollars, they buy them for currency speculation, to protect their savings from depreciation. But when the US dollar rate does not grow, interest in these pieces of paper is lost, and Ukrainians are looking for an application for their savings. In simple words, they are buying housing. That is why the housing construction in Ukraine is currently growing.

Money from migrant laborers

More and more Ukrainians are going abroad to work, and the currency they bring back is working for the country's economy. In 2016, the country received more than 5.4 billion dollars, which is 5.3% more than in 2015. This amount is comparable to 20% of the revenues of the state budget of the previous year and is 7% of GDP. Experts expect an increase in the number of people who will go abroad to earn money, especially after the introduction of a visa-free regime, and this will mean an increase in the number of "people's" foreign exchange earnings. The largest currency flow comes from Russia, although during the year it declined significantly - by 15.9%, or by almost $ 200 million. And after the Russian Federation banned money transfers to Ukraine through foreign payment systems since March, our experts expect a further sharp reduction in the flow of currency (at least official flow) from Russia.

Related: IMF predicts world economy ramp-up

The US stand in second place by money transfers – 600 million dollars, which is 17% more than a year ago. The highest increase in percentage comes from Italy (+ 19.4% per year), and in general 66% of official currency transfers account for Europe. Most of the money from the migrant laborers go through exchangers to the interbank market and is redeemed by the National Bank or importers, which also contributes to strengthening the hryvnia exchange rate. And this amount is 4-5 times more than foreign investments.

Investors "in waiting"

In private conversations foreign investors identify four major obstacles to investing money in Ukraine:

Macroeconomic instability. Because devaluation of the hryvnia depreciates both the investment itself and the profit received from these investments.

The investor wants to be able to protect his investments. And if he cannot defend the provisions of the contract in court, he will not sign a contract.

Corruption risks, when state agencies ask for money at any convenient opportunity (for obtaining a license, refunding VAT, etc.) and exert administrative pressure.

The inability to return investments through dividends prevents investors from deciding to work in Ukraine.

Related: Influence of new US sanctions on Russian economy

For example, "Oschadbank" offers individuals to place deposits at 7.5% in dollars and 6% in euros. There are no such high rates in Europe. Investments are guaranteed by the state. Large foreign investors regard Ukraine as a state where there is no consolidated economic strategy. That is, the state should clearly articulate what it wants to achieve. Now the strategy of Ukraine's economic development can be described as follows: "Everything will be fine, but no one knows how."

Recipes for Ukraine

We can honestly say that today Ukrainian economy survives on the Ukrainians themselves. They are the chief investors and the main driver of economic growth. That is why the government needs to help Ukrainians to live normally in Ukraine. It should immediately stop indefinitely raising utility tariffs, reduce the fiscal burden on Ukrainians' incomes and stop (due to fiscal pressure on business) provoking the growth of retail prices. Ukrainians deserve and desire positive changes for the better future, but this does not mean that citizens should take all the responsibility on themselves. The state needs to really fight against corruption, not just imitate this struggle. It should ensure an effective judicial system, political stability, and implement democracy. Last, but not least, Ukraine should start communicating with investors with the help of a special state institution, an investment attraction agency, so that the investors could really enter Ukraine.

Related: Putin wants to restore economic ties with Ukraine "bloodlessly, in course of democratic processes"

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