2 May 2023 15:34

Mobilization of domestic revenue to be essential to sustainable, long-term economic growth in post-crisis Ukraine - IMF representative

MOSCOW. May 2 (Interfax) - Ukraine's recovery and reconstruction will require enormous financial resources, and the international community is willing to share part of the burden, but Ukraine should continue to play its part and step up the mobilization of its domestic revenue in order to fund growing social and infrastructure needs, International Monetary Fund (IMF) Resident Representative to Ukraine Vahram Stepanyan said.

For post-crisis Ukraine, "this will be a core prerequisite for sustained and robust economic growth. It follows logically that measures that reduce tax collection or erode the existing tax base would limit Ukraine's ability to meet its reconstruction and development goals, thus affecting negatively long-term economic growth," he said in an interview with Ukrainian media.

Stepanyan noted that the four-year, $15.6 billion Extended Fund Facility (EFF) program, which was approved in late March, is aimed at promoting sustainable and robust economic growth.

One of the policy tools to foster economic growth is efficient and fair tax policies that enable redistribution of public resources to meet a country's social and infrastructure needs, while enhancing the competitiveness by providing equal conditions for businesses.

The IMF representative said that the National Revenue Strategy (NRS), which is being developed in 2023 in the program, in practical terms, would help align revenue mobilization with government development priorities and medium-term spending needs, including reconstruction and social needs.

"To maintain the revenue base in the short-term, the focus will be on lifting measures introduced under Martial Law, and on reforms in tax and customs," Stepanyan said.

He said that the NRS would become a comprehensive roadmap including clear revenue and other policy targets covering both policy and administrative reforms.

The IMF representative noted that in accordance with the Memorandum of Economic and Financial Policies submitted by the Ukrainian side, the strategy will include five main steps. It will include: measures to strengthen tax and customs services; a revised simplified tax regime to address the erosion of labor taxes; alignment of VAT and excise duties with the EU acquis; bolstering anti-corruption measures and governance procedures to address integrity risks; and tax reforms for post-crisis reconstruction and investment.

As reported, since the beginning of the crisis, Ukraine has been covering only half of the state budget expenditures from taxes, duties, and other revenue, while the other half is financed by foreign grants and loans. Due to the lack of funds, last year, 400 billion UAH of expenditures were covered by emission financing of the National Bank, which is avoided in 2023.

The need for foreign funding of the state budget is estimated at about $42 billion this year. In addition, there are plans to raise another $11 billion for Ukraine's rapid recovery, according to the Rapid Damage and Needs Assessment (RDNA2) undertaken by the World Bank, in which the total needs are estimated at $411 billion, and at $14 billion for this year.

"Why is there a need for a National Revenue Strategy at all? This is because we are now 50% dependent on foreign assistance. Ukraine cannot live like this, it cannot! [...] The National Revenue Strategy aims to create conditions for a revenue base inside the country to reduce external dependence," Finance Minister Sergei Marchenko said in an interview with Ukrainian media in mid-April of this year.

On March 24, the government instructed the Finance Ministry to begin elaborating the NRS for 2024-2030. By the end of May, an action plan should be drawn up, including to address key issues identified through the survey of taxpayers, which will be an input into the NRS roadmap. This requirement is one of the program's 19 structural beacons.

A gap analysis, which is backed by IMF technical assistance, will then be undertaken to use this information in a roadmap for the NRS (2024-2030) with clear revenue and other policy targets, as well as the guidelines for coordination between the government agencies, donors, the private sector and civil society, led by the Finance Ministry. This should be completed by the end of July 2023, and the final strategy will be adopted by the end of 2023, which is another structural beacon.