Economists warn that Ukraine needs “radical” reform to continue Ukraine’s war effort

The Ukrainian government needs to reform its tax and spending policies or risk an economic crisis that could “cripple its viability” war effortaccording to a group of prominent economists.

They warned that with inflation rising to more than 20% and an impending debt crisis, President Volodymyr Zelensky should introduce reforms to stabilize the economy’s shaky foundations.

“Ukraine’s survival — and Europe’s future — is at stake,” the economists said, adding that “extraordinary challenges must be matched by exceptional policies and exceptional support from Ukraine’s international partners.”

The group said that measures to increase the number of people who pay taxes will improve the government’s public finances, while greater coordination between the central bank and the Ministry of Finance will support the currency.

They also recommended anti-corruption measures to reduce the amount of money leaking out of the economy, and help the government bear the costs of a prolonged war.

After Russian forces invaded Ukraine in February, Kyiv implemented a series of emergency economic measures to counteract the disruption and additional military costs. While foreign governments funded and supplied military equipment and training to support the war effort, Kyiv funded most of its domestic policies by printing local currency and the hryvnia and deferring payments on $20 billion in foreign debt.

Nine economists work in an academic network of economists, the Center for Economic Policy Research, which includes former International Monetary Fund (IMF) economic advisor Simon Johnson, Barry EichengreenMorris Obstfeld and Kenneth Rogoff said emergency measures had run their course and Ukraine needed to adopt a more strategic approach.

Rating 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 plug the gap.

The recent devaluation of the hryvnia failed to relieve pressure from international investors who saw “the moral support for Ukraine only partially translates into a strong financial lifeline”.

that Increasing the central bank’s base rate to 25% He similarly failed to instill confidence in the 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%. The military tax introduced in 2015 adds another 1.5 percentage points.

“If the government cannot make these taxes progressive, it can impose a gradual ‘war surcharge’. For example, the surcharge will only be applied to income or capital that exceeds a certain limit that may be easier to accept politically and can be rolled back after the war, As the report says.

The Group of Seven and the European Union announced $29.6 billion in official financing commitments to Ukraine. However, it is understood that the country’s allies and international financial institutions spent only $12.7 billion.

The economists’ report coincides with analysis by the World Bank, the European Union and Kiev that shows the impact of the war on Ukraine’s fabric and how the invasion damaged infrastructure, the education system, the health sector and raised poverty levels.

As of June 1, they said, direct damages amounted to more than $97 billion, with housing, transportation, commerce and industry being the hardest hit sectors. The economic disruption is expected to cost another $252 billion this year, reducing Ukraine’s GDP by 15.1% and increasing the proportion of people living in poverty from 2% to 21%.

Over the next 18-36 months, about $105 billion will be needed [from internal sources of finance and external donors] to meet the most urgent needs.

The economists report suggests broadening the tax base and increasing tax rates to bypass the period of conflict, noting that wartime governments have always done so.

A move away from the fixed currency would also ease pressure on the central bank to repeat July’s 25% devaluation. A high-value currency encourages companies to rely on imports, adding to an already large trade deficit. However, a free-floating currency can be very volatile against the background of widespread news about the conduct of the war.

More controversially, the authors argue that market forces should become a larger feature of Ukraine’s highly regulated economy. They said the government’s Achilles heel is persistent corruption and a hidden untaxed business sector that would be difficult to fix using existing institutions, adding: “To this end, the goal should be to seek a broad, radical liberalization of economic activity, avoid price controls, and facilitate the re-establishment of economic activity.” Allocate resources productively.

Kyiv recently began selling its surplus electricity to the European Union to generate foreign exchange after easing restrictions on generators. It also introduced labor market reforms that allowed companies to “release workers with relative ease and unilaterally suspend elements of employment contracts”. Likewise, workers who wish to change jobs no longer need to notify their employers in advance.

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