Vitaliy Shapran expressed his opinion that victory will not finance itself. Therefore, we need to understand what needs to be done in the economy of 2024, what shortcomings need to be eliminated first of all…
It's time to take stock and analyze the challenges for the coming year. Our economy must be strong, and the financial sector efficient, because victory will not finance itself. We will be able to sum up the results qualitatively when the annual statistics are released, but we can talk about the TOP 5 economic challenges for 2024 now:
- Regulating the parity between monetary and fiscal policy. The chaos and arbitrariness of officials on this issue in 2023 almost led to a national tragedy. Back in 2022, I warned that treating inflation with the NBU discount rate at 25% against the background of high global inflation due to the weakness of the monetary transmission mechanism in Ukraine would launder money from the State Budget. And so it turned out. With low inflation at about 5%, the state incurred colossal expenses on NBU deposit certificates and dragged the Government into high expenses on government bonds. Such a “fight” against inflation cost the budget hundreds of billions of hryvnias. And in the end, we got what we deserved – the “National Revenue Strategy until 2030”. Here I am grateful to the Cabinet of Ministers, which adopted this document and clearly showed Ukrainians what awaits them if the policy of monetary dictate continues in Ukraine. You cannot simultaneously have inflation lower than in Hungary, the Czech Republic, Poland, Romania and other countries and not have problems with the budget deficit. Monetary and fiscal pressure are interdependent. If in 2 years the NBU spent conditionally 300 billion UAH on “fighting” inflation, then the Ministry of Finance must find a compensator for these expenses, and this, as a rule, occurs at the expense of increasing taxes. So society must realize what we want from the financial authorities? I will give a simplified example. What do we want: inflation of 15% and a simplified tax system with a 5% tax, or inflation of 5% and a tax of up to 17%. This classic choice is complicated by war, because it adds a third factor to the choice – demand for budget revenues from the security and defense sector. So what does society want in 2024: a) 25% inflation, a simplified tax system with a 5% tax and a liberated Melitopol or b) 5% inflation, a tax of up to 17%, and a “stable” front line? For me, the choice is obvious – the demand for funds from the security sector, in particular for additional mobilization, is beyond any competition. And if we also mention the corruption of the fiscal system and the inefficiency of state spending, the idea of monetary dictate by increasing taxes generally loses its appeal in the eyes of society. Although corrupt businessmen who are close to the fiscal mafia willingly support the policy of expensive money and low inflation. Such distortions are in their favor, because the higher the taxes, the greater their corrupt income. In 2023, there were weak attempts by the economic authorities to counteract the imbalance in the state finance system, for example, they increased the profit tax for banks. But this will not solve the problem that has been created. Today, the NBU looks like a spoiled child, whose parents (the Government and the OP) are so busy with the war that they did not notice how this child was digging into the pockets of his parents and sending what he took out of there to his new toy - low inflation. We must change this situation and never return to it. Inflation and devaluation must be under control, it is good if they are no worse than in other countries in our region. However, priority must be given to the security and defense sector. The second priority should be a competitive tax system with a minimum of corruption, and only then - control over inflation and the exchange rate.
- Resuscitation of the credit market and interest rates. Even if the NBU lowers its discount rate, this will immediately have a positive impact on the Government's spending on government bonds, increase budget revenues by reducing the NBU's payments on deposit certificates to banks, and save budget expenditures on preferential credit programs. This step will also affect large prime-segment borrowers, whose loan rates depend on the NBU's discount rate. But market loan rates are poorly correlated with the NBU's rate. A whole set of urgent reforms is needed by the NBU to improve the market's sensitivity to changes in the value of money... Unfortunately, an analysis of the current financial sector reform strategy has shown that it does not contain even half of the necessary measures. That is, the financial authorities do not have a clear understanding of what to do to ensure that the existing credit channels really provide cheap money for the population and small businesses. Of course, we should be grateful to the Government for the set of preferential lending programs, but it is necessary that financing at an acceptable price be on market terms, then these preferential programs will not overburden the budget. Another aspect of the problem is the interpretation of the NBU's discount rate reduction. Imagine yourself as a borrower in 2022: rate 25%, inflation 26.6%, real interest burden is negative - so servicing such loans is quite comfortable. And now we find ourselves in November 2023: rate 16%, inflation about 5%, interest burden 11%. It seems that positive changes have occurred, but in reality, loans at these conditional rates will become more difficult to service. So, a reform of the monetary market alone will not do here, there must also be a correction of the NBU's interest rate policy.
- Tax reform and reducing corruption. This is the main task for 2024-2025 in the fiscal sector. I am tired of listening to corrupt people who talk about raising taxes, complicating the tax system for corrupt purposes under the guise of increasing its efficiency. The simpler the system, the cheaper it is to check and the more honestly taxes are paid. In Ukraine, a whole market of optimizers has been created, in addition to VAT dealers - these are insurers, securities traders, appraisers, auditors, tax lawyers, etc. This infrastructure alone eats up 3-5 annual budgets of the State Tax Service. The ideologists of complicating the tax system and increasing the tax burden are not much different from Putin, only he is pounding Ukraine with missiles and shaheeds so that the population will flee as soon as possible, and these tax “reformers-corruptors” are squeezing the economically active population out of Ukraine into Georgia, Bulgaria, and the Baltic countries, where the tax systems are simpler than what they are proposing to create for us. War and corruption are already scaring business away from Ukraine, so we need tax reform that takes into account competition in the region. In Ukraine, self-employed individuals and small businesses should be untouchable, since people employed there provide their own income and relieve the budget of the social support system.
- Work on confiscating Russian assets and preparing the economy for recovery. Ukraine should focus on confiscating frozen Russian assets. According to my estimates, this is approximately $500 billion of Russian sovereign assets (reserves of the Central Bank, the National Welfare Fund, Russian state corporations and banks, unofficial funds of various institutions) and the same amount from private individuals (Russian oligarchs, officials, etc.). It is necessary to accelerate the identification of these assets by the financial monitoring bodies of our partners. It is also worth working with the EU to promote the idea of confiscating Russian assets in favor of Ukraine, in the USA this issue is already being resolved at the legislative level. We must not only find a source of financing for current needs and reconstruction, but also take away reserves from the aggressor countries, at the expense of which they could quickly recover. There are two obstacles to this strategic goal. First, Ukraine does not yet have a transparent infrastructure that would be responsible for reconstruction; it is still being formed. So our international partners, under the guise of the lack of a transparent infrastructure, citing corruption in Ukraine, may not rush to transfer such assets. Secondly, our economy can accept up to $50 billion in external financing per year. In November 2023, all non-cash and cash hryvnia in circulation amounted to $45 billion. So accepting +50 billion dollars into such a small and poorly monetized economy will already be a problem. Both issues require an immediate solution, without which our partners will have every reason not to rush to confiscate assets in favor of Ukraine.
- The development of transport corridors to the Baltic is one of the foundations of post-war recovery and export diversification. The presence of the Dnipro-Gdansk transport corridor will allow us to diversify our exports into 2 regions at once and fully compete with grain exports from the Russian Federation. Diversification of export channels will automatically reduce the effectiveness of the constant attacks of the south of Ukraine by the Russians, and for 2-3 years will create a new investment mega-project for Poland and Ukraine with prospects for long-term earnings on transit. The events surrounding the blocking of the Polish-Ukrainian border have shown that the problem of transit of Ukrainian goods through Polish territory exists, but the presence of the transport corridor partially eliminates this problem. Neither Ukraine, nor Poland, nor the EU needs friendly Poland to suffocate from the influx of Ukrainian raw materials, so the parties are ready to strengthen transit positions.
Summing up, one could list up to 20 more challenges in various sectors of the economy and the financial sector. Ukraine can cope with all such challenges, the main thing is to choose the right tools and time for action.
