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Vitalii Lomakovych  

On July 4-5 Ukraine Recovery Conference (URC 2022) was held in the Swiss city of Lugano. The Ukrainian delegation presented the Recovery and Development Plan of Ukraine (hereinafter – the Plan) – 24 volumes of thousands of pages developed by three thousand experts in 6 weeks.     

The financial need for the implementation of the Plan over the next 10 years is more than USD 750 billion. And already at this stage, there appear disagreements.

On the one hand, the presentation of the Plan states that potential sources of financing are partner grants (USD 250-300 billion), partner loans/equity (USD 200-300 billion) and private investments (over USD 250 billion).

On the other hand, the Prime Minister of Ukraine stated in Lugano that the key source of recovery should be the confiscated assets of Russia and Russian oligarchs (the frozen assets of Russia, according to various estimates, are from USD 300 billion to USD 500 billion).

However, such inconsistency is not even surprising, since bringing together and harmonizingthousands of pages that thousands of experts developed for 6 weeks is not an easy task.

International partners appreciated this creative approach and quite naturally responded with the “Lugano Principles” (Guidelines for the recovery process of Ukraine): 1) partnership, 2) focus on reforms, 3) transparency, accountability and rule of law, 4) democratic participation, 5) multi-stakeholders engagement, 6) gender equality and inclusion, 7) sustainable development.

So to speak, 1:1.          

Another thing is surprising. How do the authors of the Plan, assuming a growth of 7% per year, plan to reach GDP USD 500 billion in 2032?     

The “Rule of 70” says that growing at 7% per year, GDP will double in 10 years. This has been known since the time of Luca Pacioli. But we do not “start” from USD 250 billion and not even from the record USD 200 billion, which we barely reached in 2021. If by some miracle the Ukrainian economy falls by, say, only 25% in 2022, then we will have to “double” in the next 10 years already from the level of USD 150 billion. And this is still a very optimistic scenario.             

Theory states that the “driver” of economic growth is investment. And for the economy to grow by 7+%, the investments should be no less than 20-25% of GDP. In the meantime, in 2021, the ratio of capital investment to GDP was only 9.7%. Here, doubling is needed not in 10 years, but immediately.           

The fact that the main focus of the Plan is on foreign sources of financing is particularly worrying. This can be understood already at the level of the declared perspective of the recovery of Ukraine: “A strong European country is a magnet for foreign investments.” Is it ok if in 2021, the share of non-resident investors in the total capital investments was a measly 0.15%?! Instead, own funds of enterprises and organizations amounted to 68.6%.

That is, without significant activation of domestic sources of investment, we will not get far and will hardly be interesting to foreign investors. And this is practically impossible to achieve without a significant reduction in the tax burden, which is currently 40% of GDP. And, above all, without the rule of law. In this matter, our international partners are absolutely right.

There is another inconspicuous but symptomatic moment in the Plan. Among the thousands of its creators, there was no place for representatives of the National Bank of Ukraine (at least, nothing is said about them). Therefore, it is quite difficult to understand how the NBU will take part in the process of the future recovery of Ukraine. 

At first glance, it may seem that everything is fine with the participation of the NBU, since the Plan has a whole section on the banking system and the market of non-banking financial services. In the context of ensuring access to financing after the war, there is even a goal to increase the level of credit coverage of GDP to 40% in 2032 (in particular, SME loans – up to 12%, mortgages – up to 13%).           

But this should not be misleading, since the authors plan to achieve these goals by solving the problem of non-performing loans, the system of credit guarantees, attracting additional capital to the banking system, introducing covered financing/bonds with the support of IFOs, etc.

It is not about the cost of resources. “Decreasing interest rates on loans during the war” appears only in the context of the expansion of the “5-7-9%” program. That is, at the expense of budget funds.

Isn’t it strange that the Plan has hundreds of pages about tax, customs, budget and debt policies and not a single word about monetary policy?

More precisely, the phrase “monetary policy” appears once in the descriptive part of the volume “Functioning of the financial system, its reform and development” in the context that inflationary pressure “pushes the acceleration of normalization” of this policy. This creates an illusion that monetary policy was stimulating before that.    

In addition, “monetary policy” is mentioned twice in the context of the negotiation process regarding Ukraine’s membership in the EU. Moreover, the nature of monetary policy for the next 10 years remains a well-kept secret. This makes one feel a little… uncomfortable.   

Meanwhile, common sense suggests that having the key policy rate around 25% we will wait aninvestment boom (if speculative capital is not taken into account) until the next coming.   

Central bank independence is, of course, a good thing. But when this independence is brought to the point of absurdity, the chances of a rapid economic development go to zero.