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Non-paper
2016 Report of the Cabinet of Ministers of Ukraine
Summary
The key objectives of the Government after its appointment on 14 April 2016 were to preserve the macroeconomic stability and create conditions for rapid recovery of economic growth in 2016 and subsequent years. Ensuring such growth is essential for building a successful, prosperous country that provides an adequate standard of living for its citizens.
Following the adoption by the Verkhovna Rada of Ukraine on 14 April 2016 of the Action Program of the Cabinet of Ministers of Ukraine,on 27 May 2016 the Government endorsed a Priority Action Plan of the Government for 2016. Given weak institutional capacity of public administration and grave economic circumstances the Government focused its activity on the most pressing economic issues to ensure that Ukraine's economy will be able restore its steady growth. Action Plan is the result of joint work of the ministries, the public and experts.
Action Plan set five strategic priorities – high level goals, without reaching progress in which it is impossible to ensure the creation of adequate living conditions for the citizens of Ukraine, namely:
macroeconomic stabilization;
creating favorable conditions for business development;
rule of law and combating corruption;
improving the quality of public administration and public services;
restoring security of the state and citizens.
Major reform measures and consistent ways to implement them were directed towards achievement of the above strategic priorities.
This Report presents the implementation status of the Action Plan and key achievements of the Government performance since its appointment.
According to statistics, due to well-balanced policy and implementation of priority reforms the Government contributed to ensuring GDP growth, which exceeded forecasts of Ukrainian experts and international organizations.
In the first quarter of 2016, GDP growth was 0.1 percent compared to the corresponding quarter of the previous year, in the second quarter – 1.4 percent, in the third quarter – 2 percent, and in the fourth quarter of 2016 there was an accelerated GDP growth – 4.7 percent compared to the fourth quarter of 2015. Following the results of 2016 there was a GDP growth at the level of 2.2 percent (calculations are based on quarterly data of the State Statistics Service of Ukraine).
Unlike previous years, the sources of growth are not the external factors but internal ones: investment and consumer demand. At the same time, the negative impact of external factors was reduced to almost nothing. The initiated and structural changes have become an essential factor in improving economic dynamics as well.
The government focused on deregulation of entrepreneurial activity, improvement of business climate, improvement of the public investment and public sector management effectiveness, successful implementation of the EU-Ukraine Association Agreement, in particular with regard to in-depth and comprehensive free trade area, as well as Government's active efforts in the field of foreign trade policy, which enabled most economic agents to successfully go through the adaptation period and adapt to the new conditions of the economy functioning.
Change in GDP, % compared to the corresponding quarter of the previous year
In 2016, the Government managed to improve the dynamics of domestic prices in consumer market, despite some relaxation of the National Bank's monetary policy and the growing influence of the administrative component of inflation. At year-end, as expected, the inflation was within the target included in the budget for 2016 – 12.4 percent vs. 43.3 percent in 2015.
Slowdown in inflation makes it possible now to claim sufficient controllability of pricing processes in domestic market and positive impact on long expectations of economic entities.
Changes in consumer prices, % compared to corresponding month of the previous year
An important indicator of perception by economic entities of the new economic reforms was to restoration of confidence in the domestic economy resulting in a decrease in the level of the shadow economy by 5 percentage points constituting the biggest decrease over the years of observations (from 40 percent of GDP at the end of the first 9 months of 2015 to 35 percent for the same period of 2016). In addition, an increase in the number of registered legal entities takes place: according to EDRPOU, as of 1 January 2017 the number of registered legal entities increased by 5.7 percent (compared to 1 January 2016). According to the National Bank, Business Expectation Index in the fourth quarter of 2016 showed one of the highest values over the last two and a half years – 108.7 percent. This has become possible due to respondents' expectations for further growth in sales volumes, investment in equipment and recovery of enterprises.
Increase in confidence, securing macroeconomic stability along with the gradual increase in investment attractiveness of Ukraine enabled an intensification of investment activity after long decline in investments that was observed over a long period – from the fourth quarter of 2012 to the fourth quarter of 2015, thus shaping long-term factors of the country's sustainable development.
For 9 months of 2016, the volumes of assimilated capital investments have increased by 16.4 percent compared to a decrease by 6 percent for 9 months of 2015. Investment demand has been a leader in making a positive contribution to GDP growth at the end of the first 9 months of 2016. Real growth in Gross Fixed Capital Formation (GFCF) at the end of the first 9 months of 2016 was 16.5 percent taking into account the increase over all the three quarters of the year and forming the main component of the cumulative growth in the third quarter of 2016, in which the GFCF growth had the highest dynamics at the level of almost 25 percent since the fourth quarter of 2007.
Change in capital investment, % compared to the corresponding period of the previous year
As part of commencement of activities aimed at ensuring conditions for fully-fledged functioning of the free trade area and development of trade and economic cooperation under the EU-Ukraine Association Agreement the geographical structure of Ukrainian exports has changed in favor of an increase in exports to EU countries, which has partly offset another loss of CIS markets, including Russian Federation. So, for example, the share of exports of goods to EU countries in 2016, according to preliminary data of the National Bank, has increased up to 31.9 percent compared to 29.5 percent in 2015 with simultaneous increase in volumes by 2.4 percent compared to a decrease by 26.2 percent in 2015. The share of exports to Russian Federation has decreased from 11.9 percent in 2015 to 9.3 percent in 2016 with simultaneous decrease in volumes by 25.8 percent.
As a result of growth of domestic investment and consumer demand, partial compensation and geographical reorientation in foreign trade, an acceleration of development of any and all types of economic activities of the real economy sector took place in 2016, in particular:
industrial production has increased by 2.4 percent (in particular, under conditions of the restoration of growth of engineering goods production, for the first time since 2011, including against the background of a significant increase in the production of computers, electronic and optical products for the needs of Defense Industry Complex);
agricultural production – by 6.1 percent (in particular, owing to the largest grain, sunflower and soya crop in the entire history of observations);
construction – by 13.1 percent (against the background of the launch of large-scale processes on housing construction and upgrade of production facilities and infrastructure);
retail trade turnover – by 4 percent (under conditions of expansion of the households' financial capacity);
cargo turnover – by 2.4 percent, passenger turnover – by 5.4 percent (against the background of the restoration of passenger air transport development).
Change in the volumes of industrial, construction and agricultural products, % compared to the corresponding period of the previous year
Under such circumstances, and under the influence of changes introduced to tax legislation, which are aimed at improving the administration of payments, the creation of equal and fair taxation conditions, as well as increase in filling of budget the revenues of the state budget have increased in 2016 by 15.3 percent up to UAH 616.3 billion compared to 2015. The annual distribution of state budget revenues as amended was overfulfilled by 1.4 percent or by UAH 8.3 billion. Over 2016, VAT was refunded in cash to the amount of UAH 94.4 billion, which is by UAH 26.0 billion or 38 percent more than in 2015.
At the same time, as a result of production growth, slowdown in inflation wave, raise in minimum wage (by 13.1 percent in 2016 in weighted average calculation), as well as reduction of single social contribution rate and accordingly the load on the payroll, from May 2016 the growth in real wages is observed for the first time over the past two years compared to the corresponding period in the previous year, which at the end of 2016 was 9 percent. Moreover, the average monthly salary of full-time employees in 2016 has increased by 23.5 percent up to UAH 5,183. In 2016, the wages in socially important areas of activities were increasing at a fast pace – in education by 20.3 percent (nominally before 2015) up to UAH 3,769, in health care by 20.2 percent up to UAH 3,400.
Change in real wages, % compared to the corresponding period of the previous year
In turn, against the background of raise in wages and decrease in the amount of wage arrears a labor productivity growth takes place, which in the future will to a great extent contribute to improvement of competitiveness in the current economic conditions. Labor productivity growth for 9 months of 2016 amounted to 2.4 percent in calculation to the corresponding period in 2015 compared to a drop by 2.9 percent for 9 months of 2015. The amount of wage arrears as of 1 January 2017 has decreased by 4.8 percent compared to the corresponding period of 2016.
Thus, the overall situation prevailing in the economy at the end of 2016, despite the presence of significant problems and risks, makes it possible to ascertain the beginning of the gradual laying of foundation for further sustainable development in the new economic realities.
In general, according to Priority Action Plan of the Government for 2016 the work of the Cabinet of Ministers was focused on 74 priority areas, for each of which a goal and targets expected to be achieved in 2016 were set, as well as specific steps planned to be done before the end of the year (more than 360 in total).
In order to ensure effective implementation of the Action Plan an electronic system for monitoring its implementation by the ministries and other central executive bodies with the involvement of external experts was introduced. The monitoring was conducted both for the observance of deadlines for completion of the relevant tasks and for the achievement of the defined indicators of reform implementation in a given area, which allowed the prompt settlement of problematic issues.
Results of Cabinet of Ministers activity in 2016
The results of Government performance in 2016 show gradual progress in achieving strategic priorities.
Macroeconomic stabilization is one of the Government's key priorities in 2016, the successful implementation of which is evidenced by a recovery of GDP growth, significant decline in inflation, stability of the national currency exchange rate throughout the year.
State budget deficit was retained within target indicators. The Law of Ukraine "On the State Budget of Ukraine for 2016" (as amended) set the ceiling volume of the state budget deficit in the amount of UAH 83.7 billion or 3.7 percent of Gross Domestic Product (calculations included the projected Nominal Gross Domestic Product of UAH 2.2628 billion according to SNA 2008 methodology), which meets the agreements and is agreed upon with the IMF. At year-end 2006, the actual state budget deficit made up UAH 70.1 billion corresponding to 80.4 percent of the annual target with amendments, or 3.1 percent of the projected Nominal Gross Domestic Product.
The Government has taken important steps to eliminate imbalances and solve problems that have accumulated in the economy over the past years and posed a threat to macroeconomic stability.
Thanks to the measures taken by the Government, the National Joint Stock Company "Naftogaz of Ukraine" for the first time over the past six years did not receive budget funding, and according to preliminary data for the first time over the past five years received net profit in the amount of more than UAH 21 billion, from which among other things, the company will pay dividends to the state budget.
In addition, in order to facilitate the increase in volumes of domestic production of natural gas, attract investments in the energy sector and ensure energy independence of the state, efficient use of energy resources and management of the sector with due regard for the principles of rule of law, non-discriminatory participation of all stakeholders, transparency, and ensure social standards, further improvement of policy in oil and gas sector the Government approved the Concept for Development of Ukraine's Gas Production Industry.
The implementation of the Concept will enable public and private enterprises to increase natural gas production up to 27.6 BCM in 2020.
In order to ensure further sustainable functioning of coal industry companies, the funds amounting to UAH 2,156.3 million were provided for in the State Budget for 2017 as an additional state support for such companies, including for the implementation of measures to restructure the coal- and peat-mining industry in the amount of UAH 846.3 million, state support to coal mining companies for partial covering of the cost of finished commercial coal products (payment of wages to miners) in the amount of UAH 870 million.
A reform of public finance management system was launched for the purpose of further recovery of public finances that will make it possible to prevent the reproduction of fiscal crisis in the future. A comprehensive strategy to reform public finance management system was developed in cooperation with donors, which implies a range of measures aimed at mitigating fiscal risks, increasing the efficiency of public expenditure, improving tax administration and the level of compliance with tax legislation, improving control over the use of public funds, etc.
Work is ongoing on verification of social payments, in particular, a software product is being created for the automation of information exchange with budget funds spending units for carrying out electronic verification and a draft law of Ukraine "On Verification" and draft Strategy for Creation of Analytical and Information Platform "Payment Verification" are being developed.
So, for example, over March-December 2016, budget funds spending units were given 1,577,984 recommendations for termination of payments and verification of data provided by recipients of social payments.
Creating favorable conditions for doing business.
Economic growth in Ukraine is restored and revives gradually. Today, the task is to accelerate the pace of growth for steady and sustainable development.
In the course of 2016, the Government paid special attention to measures aimed at ensuring economic growth, in particular, the development of business and investment climate, as well as development of infrastructure, primarily road network.
At the end of the year, the Parliament adopted legislative changes to tax administration reform – the outcome of joint work of the Government, People's Deputies of Ukraine, expert community and business representatives. This reform has solved a number of important problems in tax administration. Changes that have the greatest effect include, among others, the following:
introduction of a single public register for value added tax refund;
legislative support for the taxpayer's electronic cabinet;
transfer of control functions to the Oblast level, while only service functions are left at the Raion level;
tax reform.
To enhance the Government's capacity for work with business climate, a number of auxiliary institutions was created, such as Investment Support Office, Export Promotion Office and High-tech Office, National Committee for Industrial Development and Expert Board of the Committee. These institutions are focused on work with the key areas for further economic development of the country, that is attracting investment, increasing exports and developing high-tech industries.
Customs reform is implemented to improve the efficiency and ease of cross-border trade. In particular, positive results are shown by "single window" system during customs clearance of goods and vehicles, which makes it possible to simplify and accelerate the process of interaction between enterprises and public authorities exercising customs, sanitary and epidemiological, veterinary and sanitary, phytosanitary, environmental, radiological and other types of control.
At the request of the Government a Group of Experts of the United States Customs and Border Protection conducted a diagnostic mission, following the results of which the Government of Ukraine was provided with a report on the results of analysis of policies, procedures and laws, as well recommendations on reforms and removal of shortcomings to create modern, efficient customs authorities.
Currently, a working group chaired by the Prime Minister of Ukraine is preparing an action plan for reform of Ukrainian customs, taking into account, in particular, Ukraine's commitments under the WTO, EU-Ukraine Association Agreement and the conclusions and recommendations of the United States Customs and Border Protection.
The mandatory introduction of electronic procurement via ProZorro system for all government agencies, local authorities and state enterprises has opened a huge market for public procurement for the business. Equal access to public procurement for all market players will make it possible (in particular, by reducing the information asymmetry) to significantly strengthen the market positions of a high-quality conscientious business in the economy. Since the introduction of electronic procurement system and as of 1 January 2017, the budget savings amounted to about UAH 8.3 billion or 10.2 percent of the total amount of procurement.
In order to improve regulation the Government conducted work on comprehensive review of regulatory acts. Today, the following key areas are covered: agriculture and food safety, construction, energy industry, transport and infrastructure, information technology and telecommunications.
Simplification of conditions for doing business is ensured by means of technical regulation, in particular, over 76 subordinate regulatory acts were adopted to implement the Laws of Ukraine "On Standardization", "On Metrology and Metrological Activity" and "On Technical Regulations and Conformity Assessment".
In 2016:
1466 national standards were adopted, 1320 of which are identical to international and European standards (in total, over 2014-2016, 6749 standards were adopted, 6388 of which are identical to international and European standards);