With inflation soaring above 20 percent and a debt crisis looming, President Volodymyr Zelenskiy must introduce reforms to stabilize the economy’s shaky foundations, they warned. “Ukraine’s survival – and the future of Europe – is at stake,” the economists said, adding that “extraordinary challenges must be matched by exceptional policies and exceptional support from Ukraine’s international partners.” Measures to expand the number of people paying taxes will improve the government’s finances, while greater coordination between the central bank and the finance ministry will support the currency, the group said. They also recommended anti-corruption measures to limit the amount of cash leaking out of the economy, helping the government deal with the costs of a long-running war. After Russian forces invaded Ukraine in February, Kyiv implemented a series of emergency economic measures to deal with the disruption and extra military costs. While foreign governments have financed and supplied military hardware and training to support the war effort, Kyiv has financed most of its domestic policies by printing the local currency, the hryvnia, and deferring payments on $20 billion in foreign 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 emergency measures were over 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 saw “moral support for Ukraine only partially translating into a strong economic bailout.” Raising the central bank’s key interest rate to 25% has similarly failed to inspire confidence in its 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 an additional 1.5 percentage points. “If the government cannot make these taxes progressive, it can introduce a progressive ‘war tax.’ For example, the surcharge would only apply to income or capital above a certain threshold that may be easier to accept politically and could be reversed after the war,” the report said. The G7 and the EU have announced official funding commitments to Ukraine of $29.6 billion. However, the country’s allies and international financial institutions are understood to have disbursed only $12.7 billion. The economists’ report coincides with analysis by the World Bank, the EU and Kiev showing the impact of the war on Ukraine’s fabric and how the invasion has damaged infrastructure, the education system, the health sector and raised poverty levels. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. As of June 1, direct damage had reached more than $97 billion, they said, with housing, transportation, commerce and industry the hardest hit. The disruption to the economy is expected to cost another $252 billion this year, reducing Ukraine’s GDP by 15.1 percent and raising the percentage of people in poverty from 2 percent to 21 percent. “Over the next 18-36 months, about $105 billion will be needed [from internal sources of finance and external donors] to address the most urgent needs,” the report said. The economists’ report suggests broadening the tax base and raising tax rates to survive the conflict period, pointing out that wartime governments have always done so. Moving away from a fixed currency would also reduce pressure on the central bank to repeat July’s 25% devaluation. A high-value currency encourages businesses to rely on imports, which increases an already large trade deficit. However, a free-floating currency could be extremely volatile in the context of news of the conduct of war. More controversially, the authors argue that market forces should become a greater 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 seek far-reaching radical deregulation of economic activity, the avoidance of price controls. and to facilitate the productive redistribution of resources”. Kyiv recently began selling its excess electricity to the EU to generate foreign exchange after restrictions on generators were eased. It also implemented labor market reforms that allowed companies to “lay off workers relatively easily and unilaterally suspend elements of employment contracts.” Likewise, employees who want to move jobs no longer need to notify their employers in advance.
