Finance the victory. What are the challenges of 2024 for Ukraine?

It is time to evaluate and analyze the challenges of the coming year. Our economy must be strong, our financial sector must be efficient, because victory will not be self-financing. We will be able to summarize the results qualitatively when the annual statistics are published, but now we can talk about the top 5 economic challenges of 2024:

1. To regulate parity between monetary and fiscal policies. In 2023, the irregularity and arbitrariness of the authorities in this regard almost led to a national tragedy. In 2022, I warned that in an environment of high global inflation due to the weakness of the monetary transmission mechanism in Ukraine, approaching inflation with the NBU’s 25% discount rate would drain money from the state budget. And so it happened. With inflation low at around 5%, the state spent heavily on NBU certificates of deposit, pushing the government into high spending on government bonds. This “fight” against inflation cost the budget hundreds of billions of hryvnias. And finally we got what we deserved: the 2030 National Income Strategy. Here I am grateful to the Cabinet of Ministers for adopting this document and clearly showing the Ukrainians what awaits them if the monetary dictatorship policy continues in Ukraine. You can keep inflation lower than Hungary, Czech Republic, Poland, Romania and other countries and not have a budget deficit problem. Monetary and fiscal pressures are interconnected. If the NBU spent about 300 billion UAH on “fighting” inflation in 2 years, then the Ministry of Finance needs to find compensation for these expenses, and this, as a rule, happens by increasing taxes. So should society be aware of what we want from financial power? Let me give you a simplified example. What do we want: a simplified tax system with 15% inflation and 5% tax, or 5% inflation and up to 17% tax? This classic choice is complicated by war because it adds a third factor to this choice: the demand for financial income from the security and defense sector. So what does society want in 2024: a) 25% inflation, a simplified tax system with 5% tax and a liberated Melitopol or b) 5% inflation, up to 17% tax and a “stable” front line? For me the choice is clear – the demand for funds from the security sector. It occurs without any competition for additional mobilization. If we also remember the corruption of the financial system and the inefficiency of government spending, then the idea of ​​a monetary dictatorship by increasing taxes generally loses its appeal in the eyes of society. Although corrupt businessmen close to the financial mafia willingly support the policy of expensive money and low inflation. Such distortions benefit them because the higher the taxes, the greater the proceeds of corruption. In 2023, there were weak attempts by economic authorities to address the imbalance in the public financial system; for example, they increased the profit tax for banks. But this will not solve the problem created. Today the NBU resembles a spoiled child whose parents (Government and OP) were so busy with the war that they did not notice how this child rummaged through the pockets of his parents and directed what he took out of there to his own child. new toy – low inflation. We must change this situation and never return to this situation again. Inflation and devaluation must be brought under control, it would be better if it is not worse than other countries in our region. However, priority should be given to the security and defense sector. The second priority should be a competitive tax system in which corruption is minimized and only then control over inflation and exchange rate should be achieved.
2. Revitalization of the credit market and interest rates. Even if the NBU reduces the discount rate, this will have an immediate positive effect on the state’s spending on government bonds, increase budget revenues by reducing NBU payments for certificates of deposit to banks, and save budget expenses on concessional loan programs. This step will also affect large prime segment borrowers whose loan rates depend on the NBU discount rate. But there is a weak correlation between market loan rates and the NBU rate. We need a number of urgent reforms on the part of the NBU to increase the sensitivity of the market to changes in the value of money… Unfortunately, analysis of the current strategy for financial sector reform has shown that it does not include. not even half of the necessary precautions. So financial authorities do not have a clear understanding of what needs to be done to ensure that existing credit channels bring truly cheap money to the public and small businesses. Of course, we should be grateful to the Government for a number of concessional loan programs, but affordable financing needs to be on a market basis, then these concessional programs will not overload the budget. Another dimension of the problem is the interpretation of the decrease in the NBU discount rate. Imagine yourself as a borrower in 2022: the rate is 25%, inflation is 26.6%, the real interest rate is negative – so servicing such loans is quite comfortable. And now we find ourselves in November 2023: The rate is 16 percent, inflation is around 5 percent, the interest burden is 11 percent. Positive changes seem to have occurred, but in reality loans at these conditional rates will become more difficult to pay. Therefore, reform in the money market alone is not enough; NBU’s interest policy also needs to be corrected.
3. Tax reform and reducing corruption. This is our main goal for 2024-2025. in the financial sector. I’m tired of listening to corrupt officials talk about increasing taxes and complicating the tax system for corrupt purposes in the name of increasing its efficiency. The simpler the system, the cheaper the control and the more honestly the taxes are paid. In addition to VAT dealers, a whole market of optimizers has been created in Ukraine – these are insurers, securities dealers, appraisers, auditors, tax lawyers, etc. This infrastructure itself consumes 3-5 annual budgets of the State Tax Service. The ideologues who complicate the tax system and increase the tax burden are not much different from Putin, only by firing missiles and suicide bombs into Ukraine, ensuring the rapid flight of the population, and these tax “corruption reformers” are squeezing the economically active population From Ukraine to Georgia to Bulgaria and all the way to the Baltic countries, where tax systems are simpler than we are asked to create. War and corruption are already driving business away from Ukraine; Therefore, we need tax reform that takes into account competition in the region. In Ukraine, self-employed people and small businesses should be untouchable, as people working there generate their own income and free the social support system from the budget.
4. We are working on seizing Russian assets and preparing the economy for recovery. Ukraine should focus on seizing frozen assets of the Russian Federation. According to my estimates, this is about $ 500 billion in sovereign assets of the Russian Federation (Central Bank reserves, National Welfare Fund, Russian state companies and banks, unofficial funds of various institutions) and the same amount from private individuals (Russian oligarchs, officials, etc.). We need to accelerate the identification of these assets by our partners’ financial monitoring bodies. It is also worth working with the EU to promote the idea of ​​seizing Russian assets in favor of Ukraine; In the United States, this issue is currently being resolved at the legislative level. We must not only find a source of financing for current needs and restoration, but also receive reserves from the aggressor country so that they can quickly recover. There are two obstacles to this strategic goal. First of all, there is no transparent infrastructure responsible for restoration in Ukraine yet, it is still being created. Therefore, our international partners may not be in a hurry to transfer such assets under the pretext of the lack of transparent infrastructure regarding corruption in Ukraine. Second, our economy can accept up to $50 billion in foreign financing annually. In November 2023, the total amount of non-cash and cash hryvnia in circulation was $45 billion. Therefore, accepting +50 billion dollars into such a small and monetarily weak economy would already be a problem. Both problems require an urgent solution, otherwise our partners will have every reason not to rush to seize assets in favor of Ukraine.
5. Development of transport corridors to the Baltic – This is one of the foundations of post-war reconstruction and diversification of exports. The existence of the Dnepr-Gdansk transport corridor will allow us to diversify our exports to two regions at once and fully compete with grain exports from the Russian Federation. Diversification of export channels will automatically reduce the effectiveness of constant Russian attacks on the south of Ukraine and create a new mega investment project with the prospect of long-term transit earnings for Poland and Ukraine for 2-3 years. Events related to the closure of the Polish-Ukrainian border showed that the problem of the passage of Ukrainian goods through Polish territory exists, but the existence of a transport corridor partially eliminates this problem. Neither Ukraine, nor Poland, nor the EU needs friendly Poland to be choked by the flow of Ukrainian raw materials, so the parties are ready to strengthen their transit positions.

To summarize, it would be possible to mention nearly 20 more challenges in various sectors of the economy and the financial sector. Ukraine can cope with all these challenges; The main thing is to choose the right tools and time of action.

The author expresses his personal opinion, which may not coincide with the position of the editors. The author is responsible for the data published in the “Opinions” section.

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