Vahram Stepanyan, IMF Resident Representative to Ukraine
IMF will examine tax law for its compliance with structural benchmarks
09.07.2023 18:39

The first review of the IMF-supported Extended Fund Facility (EFF) program for Ukraine was successfully completed, which allowed Ukraine to receive about $890 million (SDR 663.9 million). The positive decision of the IMF Executive Board was based on the significant progress achieved by the Ukrainian authorities in fulfilling their commitments under the EFF program. Moreover, progress was made despite the difficult circumstances in the country. The Board's decision also reflects the agreement on a renewed set of economic and financial policy commitments that will be the basis of the second review of the program, which is currently planned for later this year. Vahram Stepanyan, the International Monetary Fund (IMF) Resident Representative to Ukraine, spoke in an interview with Ukrinform about what new tasks Ukraine faces and whether the next reviews will be carried out according to the schedule.

- What was and will remain pivotal in the IMF's decisions regarding Ukraine’s implementation of the EFF program – timing, sequence of implementation of the Memorandum paragraphs, some other (conditionally) formal things, or just moving in the right direction? For example: formally, Ukraine allegedly did not fulfill the obligation to return to the pre-war taxation system from July 1, but this issue is fundamentally resolved: the return will happen soon, probably from August.

- The implementation of the IMF-supported program is monitored and assessed based on commitments that are described in the updated Memorandum of Economic and Financial Policies, which was published last week. The Memorandum includes specific measures and numerical targets. Important structural measures are formulated as structural benchmarks which have specific due dates for implementation. There are also key economic indicators that are set as numerical targets and assessed as of a specific date. For the first review, the authorities met all applicable quantitative performance criteria and all structural benchmarks.

The measure you are referring to was about adoption of the draft law on tax policy and administration to restore pre-war provisions including those related to tax audits. This law is very important for several reasons including to maintain the tax base and to level the playing field; it has been under discussion since last November. The deadline for this structural benchmark was reset from end-June to end-July 2023, to allow more time for discussion, adoption, and implementation. On June 30, the Rada adopted the legislation; we will review the final version of the law to assess its consistency with the agreed strategy which will determine whether the structural benchmark was met or not. If there are significant deviations relative to the underlying objectives, corrective actions may be required.

In this context, it is important to understand the intended objectives. Aside from the estimated revenue impact of this law, what is also important here is the signal about Ukraine’s commitment to making efforts to mobilize domestic revenues to complement the external assistance in order to cover its very large financing needs, and to strengthening governance by restoring fundamental tax compliance tools. An additional point that bears repeating is that Ukraine needs to maintain a strong tax revenue base including by refraining from measures that would erode the tax base.

- A separate topic is the fight against corruption, painful for Ukrainian society and indicative for our international partners. On the one hand, we seem to have some successes, on the other hand, the anti-corruption system is constantly stalling...

- Rigorous structural reforms to strengthen institutions promoting good governance and combating corruption are critical for several reasons. They are essential if Ukraine is to attract foreign investment because investors want to be sure that there is a level playing field in Ukraine. It is also essential to support Ukraine’s aspiration to join the EU, and to retain confidence of foreign donors providing financial support to Ukraine. The combination of very large financing needs and limited resources calls for an even stronger focus on transparent and efficient governance and expectations of continuous anti-corruption efforts.

The authorities agree that building strong governance is essential for a bright future for Ukraine and have made commitments to advance crucial governance and anti-corruption reforms. These include reforms supporting asset declarations, anti-money laundering, and the Specialized Anti-Corruption Prosecutor Office (SAPO). These will help mitigate corruption risks during Martial Law and promote public trust and donor confidence in the post-war period.

The agenda and room for improvement on this front are large, and we welcome that efforts to combat high-level corruption are ongoing: the NABU and SAPO recently investigated and arrested a top judicial official; the agreement for information sharing and improving control mechanisms between the NABU and the Agency for Restoration is expected to contribute to transparency and accountability in the recovery and reconstruction efforts.

- What will the Fund focus on during the next program review? Could you, please, remind what tasks Ukraine needs to accomplish in these few months?

- The overarching program objectives are to sustain economic and financial stability at a time of exceptionally high uncertainty, restore debt sustainability in both baseline and downside scenarios, and promote reforms that support Ukraine’s recovery on the path toward EU accession in the post-war period. The focus remains on the implementation of policies to achieve these objectives.

Specifically, in the near term, fiscal policies will continue to focus on ensuring adequate resources for priority spending, maintaining a strong tax revenue base, including by refraining from measures that would erode the tax base, and preserving fiscal and debt sustainability.

The key goals of monetary and exchange rate policies remain supporting steady disinflation and exchange rate stability, including through maintaining an adequate level of FX reserves, while prudently managing the wartime liquidity surplus. The NBU has developed, in consultation with the IMF staff and in line with program commitments, a conditions-based strategy to transition to a more flexible exchange rate, ease FX conditions, and return to an inflation-targeting framework.

In the financial sector, bank diagnostics, reforms to banking supervision, governance of state-owned banks and contingency planning remain high priorities.

On governance, as noted earlier, the government has made commitments to advance crucial governance and anti-corruption reforms, including with respect to asset declarations, anti-money laundering, and the SAPO.

In addition, four new structural benchmarks have been agreed to reinforce near-term macroeconomic and financial stability and underpin reform momentum. These refer to measures for the tax and customs administrations; changes in the Budget Code to support preparation of the 2024 Budget; proposals for containing potential fiscal risks, and reinvigorating needed corporate governance reform at the Gas Transmission System Operator.

- You stressed that the current EFF program is designed taking into account both the baseline and the downside scenario. What scenario are we currently working with? Or is it “somewhere in the middle”?

- The program is designed to achieve its objectives under both a baseline scenario and a downside scenario, which are both well specified. Regarding the baseline, despite the ongoing war, economic developments have been more positive than expected at the time of program approval. Growth outturns have been higher, disinflation has continued, and the foreign exchange market has been stable. We have therefore upgraded the outlook: baseline real GDP growth in 2023 has been revised up to a range of 1 to 3 percent. At the same time, external financing inflows have materialized as expected. The downside scenario, which continues to assume a more severe and protracted contraction in output, remains broadly unchanged.

- And in general, how do you assess the implementation of monetary and fiscal policies in the context of the war? How did the NBU and Ministry of Finance perform their tasks? Is there anything that needs to be changed or improved?

- Macroeconomic policy-making in the middle of a war is extremely challenging. From the very beginning of the war, we have been impressed with the tireless efforts, resilience, and professionalism of our counterparts at the NBU and the Ministry of Finance.

Monetary and fiscal policies have been designed and implemented in close consultation with the IMF staff and have been broadly successful in maintaining macroeconomic and financial stability despite the war. And the outlook already looks better than at the start of the program.

At the same time, we are in uncharted territories of policy making in a war economy, uncharted at least from our generation’s point of view, and adjustments to policies may be needed as situation evolves. Also, some policy choices can be very difficult and not popular among certain groups, and continued support from the highest political level is needed.

Both the NBU and the Ministry of Finance have dedicated and experienced teams of professionals to implement the needed policy measures, and the IMF staff stand ready to help with policy advice and technical assistance as needed. There is also a lot of support for Ukraine from international partners, and strong implementation of the key reforms will help sustain that partnership.

- Tell us about the calendar of further contacts between the IMF and Ukraine. What events and decisions should we expect in the near future? As far as I understand, the new mission whose conclusions will be used by the IMF Executive Board to decide on the next program review will start working in late summer - early autumn?

- The next review is scheduled for later this year. But in practice, both I and my colleagues at our headquarters are in almost daily contact with the NBU and Ministry of Finance counterparts. Also, importantly, we continue our engagement with the authorities in the area of capacity development. There have been several capacity development missions recently, and this will continue in the coming months.

As for the major tasks in the near future, we plan to engage soon with the MoF on the preparation of the Budget 2024. This will be a major challenge as spending needs are high. It will be critical to align these needs with available resources, recognizing that there are limits on the available external resources. It is therefore all the more important that the authorities deliver on their commitments under the program to enhance tax revenues through a National Revenue Strategy and supportive reforms to improve tax compliance.

Vladyslav Obukh

Photo credit: NV, Thomas Trutschel

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