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UNDP Ukraine 1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE , Amsterdam, 23-24 th of May, 2005

UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

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Page 1: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 1

Investment Climate in Ukraine: Old and New Challenges

Iryna Akimova, Chief Economic Advisor, UNDP Ukraine

ABCDE , Amsterdam, 23-24th of May, 2005

Page 2: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 2

Some statistics on capital investment in Ukraine in 2004

Volume– 20% of GDP Growth rate- 28% (higher than GDP growth rate) Main source- retained profits of the firms (62%) Main sectors- industry, transport,

communicationFDI: Volume- US$ 1.93 bln (cum. US$ 8.54 bln, US$

177 per capita), 2.5% of GDP Growth rate- 23% Main sectors- wholesale trade, food industry

Page 3: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 3

Investment climate components

Investment climate is a general term for factors that provide incentives or disincentives for private sector investment, including :

Investment potential resource endowment and operation costs; physical, financial and technological infrastructure; openness to international trade and access to international

markets;Investment risks macroeconomic performance and political stability; the regulatory and policy framework and policy coherence , i.e.

quality and stability of public policies including:a) rule of law and protection of property rights (including corruption

issues) ;b) competition policy;c) entry barriers , operational and exit restrictions;d) tax policy.

Page 4: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 4

Investment climate in 2004 and changes in the 1st quarter of 2005

2004 1st quarter2005

physical, financial, technological infrastructure

+ ?

openness to international trade +

macroeconomic performance ++

corruption - -

rule of law/ protection of property rights

- -

competition policy +/- ?

Entry barriers , operational/exit restrictions

++ ?

Tax policy +/-

Page 5: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 5

Barriers to investment in Ukraine in 2003 (% of firms in the sample)

Barriers to investment

Total sample

Firms with foreign capital

Instability of tax and regulatory policy 46.9 47.8

Macroeconomic instability 40.8 39.0

High tax rates 39.5 39.1

Tax administration 34.9 34.5

High interest rates 30.9 33.7

High corruption 27.9 28.6

Access to credits 26.4 29.0

Customs and trade regulations 21.7 20.0

Weak protection against criminality 19.5 22.1

Registration and licensing of entrepreneurial activity

18.2 16.5

Page 6: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 6

Risks: Macroeconomic situation

GDP growth rates: 2003- 9.4% , 2004- 12.2% , 1st quarter of 2005- 5.5%, 2005 (forecast)

Inflation: 2003- 8.2%,2004- 12.3%, 1st quarter of 2005-5.1%, 2005 (forcast)-13%

Budget deficit (as % of GDP): 2003- 0.2% , 2004- 3.4, 2005 (forecast) official- 1.6%, unofficial- 4%

Page 7: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 7

Risks: security of property rights Privatisation strategies:a) Re-privatisation (unclear criteria, scale,

procedures, no credible protection of good faith purchases);

b) Slowing down of privatisation process, focus on state sector.

Weak corporate law; Moratorium on bankruptcy of the firms with

state shares ; Weak court system.

Page 8: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

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Risks: unstable regulatory and tax policies

Cancellation of tax privileges in FEZ; Dangerous changes in simplified system

of taxation for SMEs; Postponement of tax cuts and tax

simplification; State interference in price setting; Low transparency of public policies; Absence of an efficient ad hoc

monitoring of new legislation.

Page 9: UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, 23-24 th of May,

UNDP Ukraine 9

Conclusions After “orange revolution”, Ukraine received a window

of opportunity for attracting domestic and foreign investors;

Efforts in improvement of investment climate should be supported by sound macroeconomic policies and fiscal stability;

Ensure security of property rights. Re-privatisation (if not stopped) should be limited in scale and pursued via transparent procedures as quick as possible;

Continue liberalization of trade and financial markets; Changes in regulatory and tax policies should be

predictable and constrained in terms of time; Reduce the level of state interference in the economy

and strengthen anti-trust institutions.