Ukraine’s government and its internal partners are drawing up more complete recovery and reform plans in anticipation of the end of the war and to counter growing concerns about the rampant corruption in the country that are starting to threaten Ukraine’s international funding needs.
The Ukrainian government, led by the Ministry of Economy, has finalised the concept note required for preparing the Ukraine Plan as part of the Ukraine Facility, a €50bn financial support programme from the EU for 2024-2027, the Kyiv School of Economics (KSE) said in a recent note.
The Ukraine Facility will be an important component in Ukraine's recovery process, focusing on economic growth, internal transformations and European integration. The plan focuses on key sectors such as energy and agriculture as well as greenifying the economy.
The International Monetary Fund (IMF) has also recently listed reforms that the government needs to meet in order to comply with the terms of its $15bn Extended Fund Facility (EFF).
The head of the IMF mission, Gavin Gray, said last week that Ukraine first must adopt the new gas transportation system operator statute. Secondly, it is still waiting for a resolution on the issue of business tax audits.
"Thirdly, the authorities of Ukraine should develop a conceptual note regarding the preferential lending programme, known as 5-7-9, which should outline the vision for improving its monitoring and preventing negative consequences for the financial sector," Gray said.
He also emphasised that the IMF expects to fulfil its obligations as part of the changes that must be made to the law on combating money laundering and terrorist financing. However, he noted that the law on the declaration of assets has already been adopted.
"If we talk about the Budget Code, which paves the way for medium-term budget planning, it was adopted early. I also want to note the return to the simplified taxation regime that worked before the war," the IMF representative concluded.
The IMF wants the Ukrainian government to optimise tax collection against a possible decrease in international financial support as worries over sourcing support from Ukraine’s international partners grow. The government recently released a draft of Ukraine’s 2024 budget where just under half of all its anticipated funding will come from international donors.
Gray said tax revenues need to increase as “the need to finance social expenditures will increase after the war's end.”
"That's why the authorities need to focus on strengthening the capacity to collect revenues – both tax and customs," added Gray. He noted that by the end of this year, Ukrainian authorities plan to launch the National Income Strategy. At the same time, the IMF representative reminded observers that the IMF has developed a programme of extended financing with Ukraine, considering the main scenario, which assumed the end of the war by mid-2024.
"But we also predicted a more negative scenario with a longer war and, accordingly, larger amounts of external funding," Gray said. The government’s draft budget also noted that the main risk to the budget forecast was growing uncertainty over international financial support.
Gray noted that international financial assistance should increase under a more pessimistic scenario. In the case of implementing the base scenario, it is about $115bn in aid, and the negative is $140bn.
The IMF recommendations and the government’s own priority list follow on from a letter from the White House outlining the key reforms needed to continue the West’s support for Ukraine, many of which concern the fight against corruption.
Separately, a leaked internal report by the White House showed that the US is more concerned about rampant corruption in Ukraine than it is publicly admitting. Fears of corruption and the lack of accountability for the Ukrainian government spending have undermined US enthusiasm for providing Ukraine with the necessary funding to continue the war. As detailed in a feature by bne IntelliNews, Ukraine has a bad corruption problem despite real progress made by President Zelenskiy to bring graft to heel.
The successful defeat of corruption is rising in importance as it becomes increasingly clear the $300bn of frozen Central Bank of Russia (CBR) reserves will not be available to pay for Ukraine’s reconstruction. At the Ukraine Recovery conference held in London in June Western leaders called on the assembled captains of Western industry to invest in Ukraine, but investors’ enthusiasm will remain tepid unless corruption is eliminated and property rights as well as Ukraine’s corporate governance are improved.