Ukraine needs ‘radical’ reform to sustain war effort, economists warn | Ukraine

The Ukrainian government must revise its fiscal and spending policies or risk an economic crisis that could “cripple its ability to sustain the war effort”, according to a group of leading economists.

With inflation soaring to over 20% and a debt crisis looming, President Volodymyr Zelenskiy must introduce reforms to stabilize the fragile foundations of the economy, they warned.

“The survival of Ukraine – and the future of Europe – is at stake,” the economists said, adding that “extraordinary challenges must be matched by extraordinary policies and extraordinary support from the world’s international partners.” ‘Ukraine’.

Measures to increase the number of people paying taxes would improve government finances, while greater coordination between the central bank and the finance ministry would support the currency, the group said.

They also recommended anti-corruption measures to limit the flight of money from the economy, helping the government meet the costs of a long war.

After Russian forces invaded Ukraine in February, Kyiv implemented a series of emergency economic measures to deal with disruption and additional military costs. While foreign governments financed and provided military equipment and training to support the war effort, Kyiv financed most of its domestic policies by printing the local currency, the hryvnia, and deferring payments on 20 billion dollars of external debt.

Nine economists working for an academic network of economists, the Center for Economic Policy Research, which includes former International Monetary Fund (IMF) economic advisers Simon Johnson, Barry Eichengreen, Maurice Obstfeld and Kenneth Rogoff, said the measures emergency had run its course and Ukraine needed to adopt a more strategic approach.

Ratings agency Moody’s has forecast Ukraine’s budget deficit to reach 22% of GDP this year – $50 billion – forcing the government to print money to fill the gap.

A recent devaluation of the hryvnia failed to ease pressure from international investors who found that “moral support for Ukraine only partially translates into a strong financial lifeline”.

An increase in the central bank’s policy rate to 25% also failed to instil confidence in the management of the economy.

Economists said the government should stop relying on the central bank to print money and start taxing wealthy Ukrainians and selling war bonds to ordinary citizens. Ukraine has a flat personal income tax rate of 18%. A military levy introduced in 2015 adds another 1.5 percentage points.

“If the government cannot make these taxes progressive, it can introduce a progressive ‘war surcharge’. For example, the surtax would only apply to income or capital above a certain threshold which might be easier to accept politically and could be reversed after the war,” the report states.

The G7 and the EU have announced official funding commitments to Ukraine worth $29.6 billion. However, the country’s allies and international financial institutions are said to have disbursed only $12.7 billion.

The economists’ report coincides with World Bank, EU and Kyiv analysis that shows the impact of the war on Ukraine’s fabric and how the invasion has damaged its infrastructure, education system, sector health and driving up poverty levels.

As of June 1, direct damage had reached more than $97 billion, they said, with housing, transport, trade and industry being the most affected sectors. The disruption to the economy is expected to cost an additional $252 billion this year, reducing Ukraine’s GDP by 15.1% and increasing the proportion of people living in poverty from 2% to 21%.

“Over the next 18 to 36 months, approximately $105 billion will be needed [from internal sources of finance and external donors] to meet the most urgent needs,” the report said.

The economists’ report suggests broadening the tax base and raising tax rates to survive the period of conflict, pointing out that wartime governments have always done this.

Moving away from a pegged currency would also reduce pressure on the central bank to repeat July’s 25% devaluation. A high value currency encourages businesses to depend on imports, which increases an already large deficit in the trade balance. However, a free-floating currency could be highly volatile amid ups and downs of wartime news.

More controversially, the authors argue that market forces should become a more prominent feature of Ukraine’s highly regulated economy. They said the government’s Achilles’ heel was persistent corruption and a hidden, untaxed business sector that would be difficult to reform using existing institutions, adding: “To this end, the aim should be to pursue radical and extensive deregulation of economic activity, avoid price controls, and facilitate a productive reallocation of resources.

Kyiv recently started selling its excess electricity to the EU to generate foreign exchange after constraints on generators were relaxed. He also introduced labor market reforms that allowed companies to “relatively easily lay off and unilaterally suspend elements of employment contracts.” Similarly, workers wishing to change jobs no longer need to give notice to their employer.