Ukraine in the Conditions of Military Turbulence: Challenges and Opportunities

Ukraine has been in a state of full-scale war for the second year, and this critically affects all aspects of life. The country is forced to operate under conditions of significant uncertainty, driven by various factors, including economic ones. Defense expenditures have increased, the volume of economic operations has decreased, leading to a growth in the budget deficit. The forecast for 2024 stands at 20.6% of GDP, whereas in 2021, this figure was 3.8%.

The government will need $43 billion in 2024 to cover the deficit. The main source of funding is external loans and grants. By the end of 2022, Ukraine received $32.2 billion in international financial assistance and $32.7 billion in the first 9 months of 2023. Since the beginning of the full-scale invasion, the share of loans has increased, while the share of grants has decreased.

At the same time, partners more emphatically signal the need for reforms. On the one hand, this is a condition for obtaining funding and decisive steps towards EU integration. On the other hand, reforms should contribute to economic growth, reducing deficits, and decreasing dependence on external financing.

The Institute of Analytics and Advocacy, in collaboration with Transparency International Ukraine, conducted research on the challenges and opportunities for growth that Ukraine has in times of war.

Reform = Funding

In September 2023, U.S. President Joe Biden appointed Penny Pritzker as the Special Representative of the United States for the Economic Recovery of Ukraine, thereby emphasizing the focus on the economic issues of our country. Pritzker will be responsible for attracting investments, supporting reforms, and collaborating with foreign partners.

In her interview, she emphasized that for Ukraine to receive funding from the U.S., it must effectively use funds and implement reforms to become a member of the EU and the Western trade bloc.

Compared to 2023, the government currently lacks confidence in how the budget deficit in 2024 will be covered. The European Union promises financial assistance through the Ukraine Facility, but the Hungarian government does not support the new aid package. Therefore, the EU summit regarding €50 billion for Ukraine will take place in February 2024. The decision on financial support from the U.S. has not been made yet.

In March 2023, the IMF approved a four-year funding program of $15.6 billion to support the economic and financial stability of Ukraine and promote reforms to align with the EU.

The basis for the EU’s financial assistance instrument, the Ukraine Facility, will be the Ukrainian Plan being worked on by the government. It outlines paths for economic growth and includes a set of measures for implementing reforms and attracting investments. Obtaining funding will depend on the implementation of reforms and quarterly reviews of the Plan.

It is important to understand that reforms are not only a condition for receiving funds but also the foundation for the economic growth of our country.

Reforming State Institutions

Ukraine must actively develop its economy independently, even during times of war and uncertainty. The Ukraine Facility plan and the IMF program serve as the foundation for growth and reforms.

To meet the needs and ensure financial stability, Ukraine must regularly seek external financial support. It is crucial to continue receiving support from international partners and work on increasing domestic revenues.

In October 2023, the State Customs Service transferred 48.3 billion UAH in customs and other payments to the state budget, an increase of 15.8 billion UAH compared to the previous year. However, challenges in the State Customs Service may contribute to the growth of the shadow economy, leading to revenue losses.

Addressing personnel and technical issues is essential for improving the efficiency of customs operations. The Customs Service has already initiated personnel policy reforms, considering new legislative projects and measures to enhance efficiency.

The State Tax Service also requires reforms, addressing issues such as its punitive role, complex tax administration, non-transparent competition for leadership positions, corruption, and other aspects. Tax reform is under consideration, including legislative projects aimed at improving the competitive selection of leadership and ensuring an annual audit of efficiency.

International partners expect effective utilization of financial assistance, making control over funds’ inflow and utilization through the reforms of the Accounting Chamber and the State Audit Service of Ukraine critically important.

However, without ensuring justice, the rule of law, and conditions for investments, reforms will not yield the expected results. Judicial and law enforcement reforms should serve as a foundation for protecting rights, ensuring economic freedom, and holding individuals accountable for violations.

The “follow the money” plan outlines key stages: receipt, distribution, expenditure, control of usage, sometimes involving investigations and holding responsible parties accountable. Institutions working in this direction require enhanced capacity and comprehensive approaches for efficiency and achieving desired outcomes.

Financial Inflow Control and Management

To quickly and effectively rebuild Ukraine after the war, significant efforts must be invested in reconstruction, planning, and construction. The World Bank has indicated that as of March 2023, the reconstruction will cost $411 billion. To avoid abuses and inefficient spending, fair allocation of funds is crucial, particularly through transparent public procurement.

The Prozorro system ensures transparency in procurement information. However, transparency alone does not guarantee efficiency. It is important for the State Audit Service and the Accounting Chamber to oversee the legality of procedures and the efficiency of fund utilization.

The State Audit Service conducts control through various methods, including monitoring.

The Accounting Chamber also exercises control through financial audits and other measures. However, it needs to improve its operations by adopting international standards, changing personnel policies, and enhancing institutional capacity.

Key directions for improving the control system include closing gaps in legislation, focusing on preventing violations, and digitizing control measures. It is necessary to reform all key institutions simultaneously to increase trust among international partners and enhance the efficiency of Ukraine’s financial system.

Judicial Reform

The last 10 years have shown that reforming the judicial system and law enforcement agencies is the most challenging. They are tasked with overseeing the legality of other state institutions, and their actions can impact the fight against corruption and relations with investors.

In Ukraine, an ongoing judicial reform aims to ensure an independent judiciary. Quality work from the High Council of Justice and the judges’ commission will help address personnel issues in the judicial system and hold undisciplined judges accountable. This is an investment in the future, but the results will be noticeable not immediately but in 4-5 years.

Prosecution bodies also play a crucial role in overseeing the activities of pre-trial investigation bodies. Disciplinary and self-governing bodies of the prosecution should operate effectively, and their work should be apolitical to contribute to the development of the system.

Law enforcement and security bodies play a key role in maintaining law and order and holding individuals accountable in criminal cases. Evaluating their work and transparently selecting leaders are crucial for creating effective institutions.

It is also necessary to strike a balance between economic freedom and combating the shadow economy. Reforming the Bureau of Economic Security is crucial in this regard, providing it with resources and efficiency. It is essential to choose qualified leaders for this body and conduct audits of its activities.

Thus, effective control over the expenses and activities of all these bodies is critical for the successful recovery of Ukraine.