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
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
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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.
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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 +/-
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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
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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%
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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.
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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.
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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.