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Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE , Amsterdam, 23-24th of May, 2005 UNDP Ukraine 1 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, communication FDI: 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 UNDP Ukraine 2 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. UNDP Ukraine 3 Investment climate in 2004 and changes in the 1st quarter of 2005 2004 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 +/UNDP Ukraine 1st quarter 2005 ? ? ? 4 Barriers to investment in Ukraine in 2003 (% of firms in the sample) 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 UNDP Ukraine 18.2 16.5 Barriers to investment 5 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% UNDP Ukraine 6 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. UNDP Ukraine 7 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. UNDP Ukraine 8 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. UNDP Ukraine 9