Shadow economy in Ukraine grew to 32% of GDP in 2021 - Economy Ministry
MOSCOW. Nov 1 (Interfax) - The size of the shadow economy in Ukraine in 2021 grew by two percentage points compared to 2020 to reach 32% of GDP, with two of the four methods used to estimate its share (the electricity consumption and the monetary transactions) showing its increase and the other two (consumer spending and retail sales method and the business lossmaking method) showing its reduction, Ukrainian media reported citing the Economy Ministry's tentative estimate published on its website.
"A slight increase in the level of the shadow economy occurred amid a 'shock' growth in global prices for commodities (energy and agricultural products), which prompted businesses to reduce the risks of losing limited resources while their production costs were increasing," the ministry said in an analytical memo on general trends in the shadow economy sector in 2021.
That said, while occasional coronavirus quarantine restrictions in 2021 restrained the development and recovery of most types of economic activity, they did not create significant obstacles any longer, it said.
Two of the four methods of estimating the size of the shadow economy indicated its growth in said period. In particular, the electricity consumption method showed its increase by three percentage points to 27% of GDP and the monetary transactions method by two percentage points to 33% of GDP, the ministry said.
The electricity consumption method recorded growth in the size of the shadow economy amid the increased demand for energy and growing activity primarily in the metallurgical and machine-building sectors.
The monetary transactions method recorded shadow economy growth amid the increasingly more expensive financing for businesses and private borrowers, the growing refinancing rate set by the National Bank of Ukraine, and growing physical cash flow, which increased 12.6% throughout the year.
"Hence, the hypothesis is considered quite convincing that new models of consumer behavior engendered unconventional non-cash shadowing channels, which are partially covered by the existing estimation method," it said.
At the same time, the consumer spending and retail sales method manifested the shadow sector's reduction by one percentage point to 22% and the business lossmaking method by three percentage points to 23% of GDP. The ministry explained this by a number of objective reasons, such as shrinking opportunities for purchasing goods at irregular markets, the stimulation of consumer demand amid growing social standards and a gradual revival of business activity while businesses were adapting to permanent restrictions, resulting in an improvement in their financial performance in said period.
All the aggregated types of economic activity manifested a trend toward the shrinking of the shadow economy's size, it said.
The most noticeable reduction in the size of the shadow sector was observed in the extractive and mining industries (by nine percentage points to 32% of gross value added (GVA) in foreign trade, in the wholesale and retail trade (by eight percentage points to 24%), in the processing industries (by six percentage points to 24%), and in the agricultural, forestry, and fishing industries (by six percentage points to 11% respectively).
The document also lists systemic factors that need to be overcome to provide favorable conditions and strengthen the foundations of the institutional environment in Ukraine, among them a low level of protection of property rights, stock market liquidity, and investor rights, along with the regulator's inadequate ability to counter market improprieties, an imperfect judicial system, and a high level of corruption.