Ukraine's economic vicious circle

Author : Olexandr Honcharov

Source : 112 Ukraine

The real sector of the Ukrainian economy does not develop, following the vicious circle: direct foreign investments reduce, domestic credit markets contract, and the country suffers from the technological backwardness, which decreases the competitiveness of Ukraine's enterprises
10:40, 2 March 2018

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The degradation of intellectual potential and of the manufacturing economy is detrimental to the banking sector, for example, many borrowers cannot repay their loans. Therefore, the market has a huge number of credit bubbles. The volume of non-performing loans in the banking system of Ukraine increased only in December 2017 by 0.5 billion USD and by early 2018 reached 22 billion USD! In the state-owned banks, the volume of problem loans in December increased by 200 million USD (up to 6 billion USD).

Thus, the volume of the problematic loan portfolio in the banking system of Ukraine amounted to 54.54% in relation to the total volume of loans, in particular, in PrivatBank the share of such loans was 87.64% (!), in other state banks - 55.75 %, in banks of foreign banking groups - 41.01%. And it is hard to predict, who and when will begin to disrupt these pyramidal financial institutions. Although the list is known to the public. This is why the Cabinet of Groysman has prepared a new Strategy for managing problem assets of the state-owned banks, envisaging the sale of Ukrgasbank, PrivatBank and the withdrawal of Oschadbank to an IPO. So, the State Fiscal Service (SFS) began publishing a schedule of planned inspections of taxpayers (published on the SFS website) in accordance with changes in the Tax Code, which includes taxpayers with the risks of not paying the taxes and fees.

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The procedure for drawing up the schedule now defines 44 risks in the activities of the taxpayers, of which 18 are high risk, 19 are medium, and 7 are insignificant. In this regard, experts advise involving experienced lawyers in advance, for example, experts in tax law in order to audit the relevant operations, identify vulnerabilities in the accounting and tax accounting of enterprises, prepare primary documents for protection in court. Let me remind you that the SFS has pointed out that in 2018, 5.5 thousand taxpayers have to come through the scheduled inspections - legal entities with a turnover of 44 million USD, against 5.1 thousand inspections in 2017.

The key problem of our manufacturing economy is also that Ukrainian production, oriented to the domestic market, has no prospects since the state supports and encourages mainly export-oriented business. And even the agricultural industry is now oriented to foreign markets. Well, in fact, as we know, our financial authorities can draw any model of the hryvnia exchange rate. In turn, the lack of the external financing and foreign direct investment will continue to strongly influence the growth of volatility of the national currency and a record level of inflation.

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And the West this realizes it. Not so long ago, Anders Aslund, an expert at the Washington-based Atlantic Council analytical center, warned that the absence of a program of the International Monetary Fund for Ukraine could cause a significant devaluation of hryvnia. Aslund said: "Ukraine is expected to receive payments of $ 7 billion this year, as far as we know, maybe a little more. And if Ukraine does not have sufficient reserves, we can see a significant devaluation."

It is clear that the money is becoming more expensive in our market, and the panic can begin at any moment. So, there is a vicious circle. We see that the market does not react to Groysman's rhetoric. It is necessary to act within the regulatory field. It is time to propose legislation that would limit speculative movements in the financial market, create the conditions for a hedging business and provide real incentives for a sustained recovery of the manufacturing economy. And the financial authorities should carefully listen to the recommendations of our Western partners.

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American and European investors insist on the development of the real sector of the economy, shift the focus on combining the competitive potentials of the commodity and stock markets of Ukraine, using economies of scale, and not to cling to narrow fringe sectoral sectors where it is impossible to quickly increase the capitalization of companies and enterprises. Finally, foreign investors constantly ask us when we will solve the problems in the sphere of capital flow and when will the barriers to foreign direct investment be reduced? How soon will conditions for the hedging business be created, and when the Verkhovna Rada will vote for the draft Law No. 7055 "On Capital Markets and Regulated Markets"? February 27, people's deputies have finally discussed this bill in the hall of the Verkhovna Rada and also the draft Law of Ukraine No. 6141 "On Amending Certain Legislative Acts of Ukraine Concerning Assistance in Attracting Foreign Investments."

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Therefore, Western partners offer us to take part in lobbying more actively, for example, by establishing the Ukrainian Association of International Investors to implement the standards of the International Swaps and Derivatives Association (ISDA, headquarters in New York) and the National Futures Association USA (National Futures Association - NFA). Otherwise, the Ukrainian commodity and stock markets and in 2018 will live their hard life, not related to the volatility of the forecasts of the Ministry of Finance and the Ministry of Economic Development. And we will constantly ask, what will the Cabinet of Ministers and the Verkhovna Rada do next on the withdrawal from the peak of the country's economy? Will it devalue the hryvnia or strengthen the national currency, fighting inflation?

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