Financial stability of the country in the next several years depends on whether it receives EU support in the amount of EUR 50 billion. Deputy Economy Minister Oleksii Sobolev explains what the government needs to do to achieve that.
For the second year in a row, Ukraine has only enough money to finance its armed forces. The maintenance of the state has fallen on the shoulders of partners, who are covering a budget deficit of $40 billion. It is expected that this will continue to be the case in 2024.
However, it is becoming increasingly difficult to fight for support from abroad. For example, financial assistance to Ukraine from the United States and its size remain in question amid the quarrels within the U.S. Congress.
The government plans to cover almost half of its needs for 2024 thanks to the support of the EU under the new Ukraine Facility programme. The programme, worth EUR 50 billion, is designed for four years. In the first year, the Ukrainian government expects to receive 18 billion euros.
To make the Ukraine Facility work, the EU needs to approve its main condition by January – the set of reforms submitted by Ukraine, which the country pledges to implement over four years. If the conditions are not met, the funds will not be disbursed. The first step has already been taken: after months of consultations, on November 3, the government submitted a preliminary draft of the plan to the European Commission.
What does the plan consist of? What will the received funds be used for and how is the EU’s attitude towards Ukraine changing? Deputy Economy Minister Oleksii Sobolev, who coordinates the work on the plan from the Ministry of Economy, provides answers to these questions.
About conditions for receiving funds from the EU, necessary reforms and their “price”
— Ukraine Facility programme is designed for EUR 50 billion. Is that a loan or grants? How are they divided?
— Of these 50 billion euros, EUR 17 bn are grants, and EUR 33 – concessional loans, with payments starting in ten years. These EUR 50 billion are divided into three parts.
The first part amounts to EUR 39 bn, and it simply goes to the budget, i.e., as macro assistance. EUR 8 billion is the investment component, which will come through international financial organizations that will be able to cheapen their loans, which they allocate to Ukraine. According to our calculations, these 8 billion euros in loans can generate an additional 30 billion euros or more in investments in Ukraine over four years.
Therefore, we need to understand which areas offer investment proposals to “use up” these 30 billion. We are holding working groups with businesses, where they propose subsectors for investment. Another 3 billion goes to programme administration, technical assistance, and compensation for interest on 33 billion concessional loans for the state budget; the difference in the market rate is included in the programme itself.
— Every reform costs a certain amount of money. Is that a reform price list?
— The EU checks the fulfilment of the plan quarterly, and they say: you fulfilled these five, and did not fulfil these three, which means you will get this amount of money. If we fail to fulfil something on time, there are four quarters to catch up. If we fail to fulfil some condition for a year, the money “disappears”.
Europeans would like all reforms to cost the same, but that would require performance indicators of the same complexity. Maybe, there will be two types of indicators: the first one slightly more expensive and the second less expensive, but this is still up for discussion.
— What does Ukraine’s plan consist of?
— There are technical chapters about how the consultations are held or how oversight and audit will be performed, and four main sections. The first one is the macro section, where we model Ukraine’s GDP once the programme is launched. There will also be two sections on reforms, one is economic, the other is basic, which need to be implemented for the country to be able to develop.
Basic reforms include public administration reform, which covers such issues as ensuring that professionals work in the state, and how to attract and retain them.
There is also a reform of the public finance system, where the general framework is that we must learn to provide for ourselves again as a state. This process has many different components. A mechanism is needed that prioritizes recovery projects. What we are building and why is enshrined in the reform of public investment management. A strategy for public debt management is needed, and a reform of state financial control.
There is the reform of the justice system: protection of property rights, strengthening trust in courts and making it easier for businesses to turn to them. The key block among them is the fight against corruption, strengthening the capacity of anti-corruption bodies.
The fourth section is about the most promising sectors, additional investments in which can give us a boost in percentage terms to GDP. These are, for example, energy, agriculture, transport, logistics for export. The IT sector is also obvious, as it can provide a significant macro effect, processing industry and green metallurgy.
This also includes critical materials. Ukraine has 22 of the 34 critical materials that are strategic for the EU (titanium, zirconium, graphite, manganese). For the EU to be able to produce its products, they need these materials. This is a section on what needs to be done to ensure that factories for the transformation of critical materials into added value end up in Ukraine.
ДЖЕРЕЛО: FACEBOOK-СТОРІНКА ОЛЕКСІЯ СОБОЛЕВА
— What does the economic component consist of?
— The economic reform component is divided into several parts. The first one is financial markets reform, which needs to be done to ensure that finances are distributed most effectively through the banking system. The key elements here include the strategy for state-owned banks privatization and settling the problems of non-performing loans.
Next is the management of state property. The state-owned property sector is growing, including through the sanctioning of Russian assets by us. That is why we say that we need to continue to privatize companies and strengthen corporate governance. It is also necessary to centralize management of some of the companies that remain. We will create a fund with an independent supervisory board that will professionally deal with this.
The next section is human capital development. It will be significantly larger in volume than the others. It is about improving education, reintegration of veterans, the social sphere, housing affordability, the labour market and entrepreneurship, and migration policy.
This includes, in particular, updating social security programmes and improving access to them. One of the reforms will be to improve social infrastructure and deinstitutionalize care for children, people with disabilities, and the elderly.
To facilitate the return of veterans to civilian life, access to rehabilitation and medical services, prosthetics, and, of course, employment are required. A labour market strategy will be developed. A number of measures are aimed at improving the functioning of the labour market, and reducing gender gaps, ensuring more opportunities for creating and developing private businesses. There is a section on the business climate and deregulation.
Decentralization is the last component of the economic reforms. Everyone understands that the recovery will take place locally, so we need local authorities to have the necessary capacity – from competencies to financial resources, as well as responsibility in this area.
There are also three elements that are related to all others: digitization, European integration, green transition, and protection of the environment. For example, public finance reform contains digitization of customs services and tax service. There is a focus on the adoption of EU standards or fulfilment of directives in each section.
— What do Ukraine and the EU have to do for this plan to work?
— The European Parliament approved these rules in the first reading and opened consultations. Now, the European Commission, the European Parliament and member states meet over the course of November and hold consultations on what they would like to see in the final version and what conditions will be there. Over this time, we have the time to develop the first version of the plan.
They will give their feedback in working mode and in the end of November, we will know everything that is required from us. At the same time, we will continue consultations with internal stakeholders: MPs, businesses, non-governmental organizations. In December, we have to finalize this and in the same month member states will approve the regulation for the launch of the Ukraine Facility, which will enter into force in January.
Next, the Cabinet of Ministers will approve a decision to submit Ukraine’s plan to the EU. Once the document is approved by the Council of Europe, we will have an opportunity to receive the money. I am hoping that will happen in January.
The programme also provides a mechanism for receiving money in case the programme comes into force, but the EU procedures for approving the plan are delayed. Under this mechanism, Ukraine will be able to receive interim financing for three months. One of our tasks is to prepare for such a scenario. To do this, we are forming a list of indicators to be met during this period. This is similar to the IMF’s prior actions mechanism.
— What sectors are the most difficult in terms of reforms, and what are better synchronized with EU requirements?
— I can’t name one most difficult sector. Agriculture has more indicators of what can be done. Energy has fewer, but they are more comprehensive, i.e., the conditions there are tougher. Also, energy is bigger as a sector. It is even more complicated, because the energy infrastructure is so damaged. The same applies to transport. This distinguishes these two sectors. We are trying to balance everything so that the indicators are approximately the same.
About attracting foreigners to strategic enterprises and the attitude of EU countries to Ukraine
— Our interlocutors at the Finance Ministry said that within the framework of the plan, the EU was ready to allocate EUR 9 billion to Ukraine for the first year. You noted that Ukraine is seeking to receive EUR 18 billion. Is this true and have there been any other differences?
— This is not a difference. This distribution was proposed by the EU in the summer. It is in the draft of this law, which they submitted to parliament and which was approved in the first reading. We say that the deficit in 2024 is about EUR 40 billion. EUR 9 billion is too little to be sufficient macroeconomic assistance.
We are actively working to realize our proposal. This can be achieved through prioritization of reforms in 2024, to make them “more expensive” and implement them and then receive less. This means that there is a way to get this money. We are trying to structure the plan in a way that we could receive this entire amount. This is important for the country to persevere and to show that the plan is working.
— How will the reforms be broken down over these four years so that we can receive certain funding?
— You can look at the regulation, there is a table in the appendix that is divided into four equal parts. EUR 8 billion within the framework of the second component, the special investment mechanism, go according to the EU’s proposed schedule. We do not plan to talk about changing it. We propose to review the schedule for receiving EUR 39 billion of macro-financial assistance so that Ukraine can receive half, EUR 18 billion, already in 2024.
They say, then we need more indicators. So, we are looking for those that will correspond. It is relatively easy, because we know the plan of work for 2024. We know what we have to do. There are draft laws that have already been introduced to the parliament, and this task is being fulfilled.
Next, Ukraine provides the final plan to the EU, which must approve it from the point of view of fulfilling all the requirements specified in the programme, and then propose a payment calendar to the Council of Europe for consideration and voting. Once the Council of Europe votes on it in January, the process will be completed. All parties will have an understanding: the schedule of indicators to be met and the schedule of payments for them, as well as, the amount of assistance according to the stages.
— The state sector is growing, and its reduction has always been among the requirements of partners. Are there such requirements in this plan?
— Of course, there are. It is an important part, because our state sector is indeed large. It is necessary to legislatively define strategic companies. We believe there will be around a hundred of them. The largest are Naftogaz, Ukrzaliznytsia, UkrEnergo, EnergoAtom, and others. There are many strategic state-owned energy companies. The war has shown that they are not fulfilling only business tasks. There are many defence companies and very many technology companies that perform a state function, such as Prozorro.Prodazhi (Prozorro.Sales).
We hope that the parliament or the government will approve a list of companies for which this can be done. For example, there possibility of finding a strategic investor for Ukrposhta and Ukrzaliznytsia has been discussed. I think that corporate reform will work when people have a monetary stake. That is, when there is not just an independent member of the board of directors, but there is a third party that has invested a lot of money in a company and does care about its fate. It is important for this party that everything is good there, no corruption, and everything is super-efficient. Therefore, we divide the companies into strategic and non-strategic. Non-strategic companies are to be put to privatization, and over a hundred strategic companies require management consolidation.
— So, you want to “insert” the sovereign fund into Ukraine’s plan?
— That’s one of the ideas – a fund for centralization of public administration. We are currently discussing the best way to do it with the IMF and the World Bank. This is a four-year plan and you cannot put something down and then find out that it cannot be done. Changes can be made to the plan, but changing the document every quarter is not an option. If everyone understands that this idea, i.e., centralization, is really needed, then it will be written in the format of a fund. Both we and the Europeans seem to agree that part of the state assets will need to be consolidated under one roof.
Of course, there are risks to centralized ownership. We need to build everything so that there are a lot of benefits and few risks. For companies that remain state-owned, we need to move towards attracting competition in the sectors in which they operate. That is, to build such processes or regulations that private capital can enter those markets where the state is currently the key player.
— How is the attitude of EU partners towards Ukraine changing?
— Before London (the Ukraine Recovery Conference in London – EP), I had the impression that the issue of Ukraine’s membership in the EU was not settled for the international community. There was some uncertainty. Then, there was London and the speech by Ursula von der Leyen (President of the European Commission – EP), when everybody thought: “Oh, it seems they’ve already decided).”
Now they are saying directly: “Look, this is how we treat member states, we have already made 12 plans, you are next. We are teaching you how to do this bureaucratic European procedure.” And that’s cool. They say: “Learn, it will be difficult for you, because we have bureaucracy in the EU, but you need to go on this path.” They are really teaching us what it means to be a member of the EU, when you need 27 member states to agree on something. This is a very atypical and interesting story, but it is inspiring. We, like all other ministries, are learning to be members of the EU.