Key Reforms: What the Government Has Achieved in the Last Few Months

In August and September 2015, the Ukrainian government achieved two major breakthroughs - restructuring debt with creditors and the approval by parliament of a decentralization package. The first was a stunning success. The second was a highly controversial event that sparked protests and violence, resulting in several deaths. In addition to these major events, the government saw a relative lull in hostilities in eastern Ukraine and the advancement of several less visible, but important reforms.

Constitutional Reform

The main progress in constitutional reform during this period was recorded on August 31, when the decentralization measures package passed its first reading in the Rada. This package will provide local councils the right to form executive bodies, thereby removing a significant barrier to decentralization. Other measures include granting equal rights for all local communities and other innovations.

The bill faces an uncertain future as it needs to garner 300 votes to pass a second reading, which is scheduled after local elections set for October 25.

Judicial Reform

The government is preparing a number of other constitutional amendments regarding judicial reform and civil rights. On September 4, a judicial reform package was approved aimed at shielding judges from political interference.

Anti-Corruption Measures

A number of laws regarding the National Anti-Corruption Bureau were adopted; the president appointed the head of the bureau after an open, competitive, and transparent selection process, and 25 special investigators were hired. However, the bureau has yet to start operating, as some key personnel appointments still need to be made. The Rada attempted but has yet to expedite this process.

Local Elections

Parliament has introduced new election rules aimed at improving transparency and voter participation, as well as expanding the powers of local administrations.

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The most sensitive issue for the public is concerns about elections in Donbas. The Parliamentary Assembly of the Council of Europe urged Ukrainian authorities and all stakeholders to ensure 'inclusive and pluralistic' local elections involving all political forces.

Association Agreement - Ratification

The Italian Senate ratified the Association Agreement between Ukraine and the EU on September 10. National parliaments of all EU member states, except Greece and Cyprus, had also ratified the agreement earlier. (Belgium and the Czech Republic still have to take several formal steps in the ratification process.)

The Russian Federation's position concerning the Association Agreement remains hostile. On September 7, trilateral negotiations in Brussels among the EU, Ukraine, and Russia ended without progress.

Economic Policy

The exchange rate of the hryvnia to the dollar remains generally stable. In the second quarter of 2015, GDP fell by 14.6 percent year-on-year and by 0.8 percent compared to the previous quarter. Inflation slowed down, allowing the central bank to reduce the key interest rate by 3 points to 22 percent. The International Monetary Fund (IMF) agreed to provide a second tranche of the extended support program for Ukraine, amounting to $1.7 billion.

In August, the government reached an agreement with Ukraine's major creditors on debt restructuring. The Rada approved the deal. However, Ukraine's overall debt burden remains relatively high, which may create long-term issues if further reforms are not carried out.

Budget and Tax Policy

The Ministry of Finance presented its proposals to reduce social security contributions by nearly 50 percent and to implement a flat rate of 20% for most major taxes.

Banks and Financial Sector

The banking system remains fragile: in the first seven months of the year, its total losses reached $4.2 billion (4.4 percent of the projected GDP in 2015). This was mainly due to 40 banks that have gone bankrupt since the beginning of 2015.

The volume of hryvnia deposits by the public has fluctuated slightly over the summer and is expected to increase in the fall. Deposits in foreign currency continue to decline as the public lacks confidence in the banking system. People are also afraid that the government may resort to inflationary measures and expect the hryvnia to depreciate further.

Inflation Targeting

The monetary strategy draft prepared by the NBU envisages a transition to an inflation targeting regime in 2016, with targets of 12 percent for 2016-2017, 8 percent for 2017-2018, 6 percent for 2018-2019, and 5 percent for 2019-2020.

In August, the central bank's currency reserves increased to $12.6 billion compared to $10.4 billion in July.

Energy Sector

The National Oil and Gas Company of Ukraine 'Naftogaz' has not acquired gas directly from Russia from July 1 to September 26. However, Russia, Ukraine, and the EU reached a preliminary agreement on gas procurement and transportation for the upcoming winter period. The price Ukraine will pay for Russian gas was set at $227 per 1000 cubic meters in the fourth quarter of 2015 (it was $248 in the second quarter). The purchase is to be partially financed by a loan from the European Bank for Reconstruction and Development of $300 million.

State Property

The Ministry of Economic Development and Trade announced plans to conduct audits of 183 largest state companies by international auditors. In 2014, state enterprises reported losses of $5.3 billion. The Rada is expected to approve a list of state enterprises to be privatized shortly.

Deregulation and Improving the Business Climate

Several government decrees and laws passed by the Verkhovna Rada are intended to promote deregulation. They include reducing the duration of phytosanitary and quarantine certificates from five days to one day, loosening transfer pricing rules, introducing a new law on animal identification, allowing for the repeal of privatization of enterprises, and simplifying the procedure for obtaining permissions for work in seaports.

Changes in public finance, governance, and anti-corruption efforts aimed at improving the business climate included repealing taxes for non-profit organizations, changes to the Tax Code aimed at reducing the tax burden on business, and simplifying the registration of foreign companies.

Defense

The Presidential Administration published a new version of the military doctrine. The doctrine identifies Russia as an 'aggressor'. Additionally, the government has begun implementing new, more transparent procurement procedures - in an online system.

The Ministry of Internal Affairs continues to make progress regarding patrol police. After successfully launching the structure in Kyiv, Lviv, and Odesa in August, patrols began working in Kharkiv in September.

Prosecutor General's Office

The Prosecutor General's Office has initiated a selection process for prosecutors. In addition, 5,400 applications were submitted for 700 managerial positions. As a result of these changes, the number of local prosecutors will be reduced by 30 percent. The government has also introduced a public oversight mechanism in the recruitment process.

Security Service of Ukraine

The Security Service of Ukraine has intensified efforts to combat corruption within its ranks. Over the last two months, sixteen employees of this service have been detained.

Property Tax

As part of the much-debated tax reforms, the government proposes to expand the local property tax base by narrowing existing exemptions for commercial real estate, warehouses, and luxury apartments. However, local authorities will retain the right to restore benefits if they wish. The property tax introduced in 2015 increased revenue by just 0.3 percent for local budgets.

Reforms in Decentralized Sectors

The areas of healthcare, education, and social policy have also undergone sectoral reforms to improve financing and administration of their key programs. These reforms aim to address inconsistencies in decentralized financing, introduce a needs-based budgeting model, and eliminate conflicts of interest in service delivery.