Three CASE economists share expert analysis with Ukraine’s “Ekonomichna Pravda.”


Speaking with regard to the government’s issuing of VAT bonds, executive director at the Center for Social and Economic Research (CASE) Dmytro Boyarchuk emphasised the substantial interest of foreign investors in the country’s potentially profitable bonds. “Foreign investors show remarkable interest in VAT bonds as long as they are profitable and secure, as the devaluation risks of such bonds previously caused uncertainty among investors. Considering the further devaluation of the Ukrainian hryvnia is highly unlikely, we can expect the issue of VAT bonds to act as a stimulus for foreign investors.”

Another economist from the Center, Natlya Leshchenko, assessed the repercussions of a new tax on fixed assets. “In a list of proposed tax reforms recently published on its website, the Ministry of Economics has included a measure to reform income tax. According to the bill, 1% tax on fixed assets is allergedly expected to simplify tax administration, smooth the budget revenue inflow from EPT and compensate (offset) tax rate reduction. Hence, on the surface a 1% tax on fixed assets seems harmless. However, if we are to assume a 6% rate of return, then a rate of 1% on fixed assets spells out a 16% income tax for Ukrainians. While the financial sector will enjoy a substantial tax break, industries that are less profit-oriented and more capital-intensive (i.e. coal production) will see a marked increase in effective tax rate. Such measures will indubitably have unfavorable consequences for investment, modernization, and production in Ukraine.

Finally, CASE economist Yulia Shilbakina underscored the need to drastically reduce the number of civil servants in Ukraine in order to comply with IMF regulations. On the 9th of July the Ukrainian legislature passed a bill nullifying the benefits afforded law enforcement officials by previous governments, specifically declaring healthcare, accommodation, and retirement benefits to be void. The Verkhovna Rada has, in fact, been taking steps in this direction since March, when they passed a law calling for a sharp reduction in the number officials (expected savings equal 583 million hryvnias, or 49.5 million USD), a ban on further purchasing technical equipment or furniture (55 million hryvnias/4.7 million USD), a reduction in the number of service vehicles (20 million hrynias/1.7 million USD), and a lowering of “special” pensions (11 million hryvnias/0.9 million USD).

July 28, 2014