COMMENT: Reform in Ukraine - mixed progress

By bne IntelliNews June 28, 2011

Olena Bilan of Dragon Capital -

This report presents our first comprehensive attempt to quantitatively assess the reform program put forward by Ukraine's new leadership last year. Using global investment attractiveness rankings as benchmarks, we analyse the country's recent achievements and potential progress over 2010-14.

Though Ukraine is unlikely to replicate the results that top global reformers achieved in the past five years, we think that with elections in the country becoming less frequent and the political will in place, progress on the most pressing issues would enable Ukraine to somewhat improve its position in global rankings, offsetting the poor track record of previous years.

Comprehensive reform agenda, yet controversial first steps

• In June 2010, newly elected President Viktor Yanukovych laid out a five-year reform agenda which became one of the most comprehensive action plans produced by any Ukrainian administration in recent history. Working on their 2010 priority action plan, the authorities made progress in a number of areas including those outside of International Monteary Fund (IMF) oversight, such as tax legislation, energy sector privatisation and business deregulation. But underperformance on other fronts overshadowed the early achievements, with increased corruption, customs delays, slow VAT refunding, imperfections of the new Tax Code and non-transparent distribution of grain quotas all adversely affecting investors' perception.

Measuring recent reform progress

• However, the local business community seems to assess the first steps largely positively, at least according to the Investment Attractiveness Index compiled by the largest business association in Ukraine. Going forward, Ukraine's progress in different reform areas will be revealed by its position in key global rankings including the Doing Business, Corruption Perception Index, Economic Freedom and Global Competitiveness.

• Analyzing the government's first steps, we think upcoming ranking releases will show a mixed picture. Assuming the business climate in the rest of the world has undergone no major change over the past year, Ukraine may move up 23-33 points in the World Bank's Doing Business ranking. Yet the survey-based Corruption Perception Index will likely show Ukraine staying where it was, if not falling.

What's next?

• The government's 2011 priority list centres on pension, land and healthcare reforms. The authorities also plan to move forward with energy sector privatisation and business deregulation. Despite the 2011 action plan being another step in the right direction, the timeframe for its implementation is shortening as the October 2012 parliamentary elections approach. The IMF-required pension reform and energy tariff hikes will likely become the last "brave deed" for the authorities this year.

• The political landscape should again become conducive to reforms after next year's parliamentary elections, giving authorities another window of opportunity to move forward. Analysing the experience of Georgia, Rwanda and Qatar - the most successful reformers over the past five years - we think Ukraine's reform progress will be more modest, especially in fighting corruption.

• Yet progressing gradually in selected areas such as investment and property rights protection, financial markets development and business deregulation, Ukraine may see its 2016 Economic Freedom score improve by 5 points to 51. Despite looking small in absolute terms, this will mark a notable achievement for a country whose rating has been declining since 2005. It remains to be seen, however, if the current administration has the political will to continue to deliver on its reform programme, ultimately reducing the economy's exposure to the global commodity cycle.

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