ECONOMY
are countries that are taking some reforms just to move up in the rankings; the reforms may be only in the books and actual implementation may be lagging. We are keenly aware that we cannot rely only on the Doing Business Indicators to assess the business climate. For that reason we are talking to private business people. In the past few months, I have been traveling around Ukraine and, in fact, we have had consultations with private sector representatives to find out that what constraints they are facing. So what is the most prevalent problem that companies have in Ukraine? Corruption is the number one issue that comes up, not just from the companies, but also from ordinary people. Companies also talk about tax administration and its unpredictability, and then about permits, licenses, inspections and certification. Some companies mention access to a skilled labour force. Of course, there is the ongoing military conflict. Yes, the military conflict in Ukraine has had a very widespread impact. It has affected economic activity and the prospects for the whole country. It has also impacted the people, as there has been a human cost. The biggest economic impact has been in Donetsk and Luhansk, which used to be the industrial heartland of the country. They accounted for almost one-quarter of Ukraine’s industrial activity and the same share of Ukraine’s exports. So when that all but disappeared, the economy was hurt. Secondly, the conflict has significantly undermined investor confidence in Ukraine. Obviously, when investors see that there is a military conflict going on in one part of the country, they become hesitant to enter. Thirdly, there have been widespread job losses. Then there is the human cost. In addition to the about 10,000 people that have been killed in the conflict, there are 2.7 million people that have been displaced – that’s about five per cent of the population. Some of them, about one million people, have left the country, and 1.7 million have moved elsewhere in Ukraine. Do you think there is a chance of higher economic growth now, despite the conflict? In Q4 2016 the GDP growth equalled 4.7 per cent. Yes, I think that the biggest economic impact of the conflict we have already seen, given that the revenues from the region under conflict went down by 40 per cent already as far back as 2014. There should be no further revenue effects, but the conflict is not over yet and it is continuing to affect the country fiscally, as military expenditures are taking a large share of the budget. In fact, up to five-percentage points of GDP is allocated to military spending. That’s a significant amount of money that could be otherwise allocated to services that benefit ordinary people. At the beginning, we touched briefly on exports. How do you the Deep and Comprehensive Free Trade
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Area (DCFTA), which is part of the Association Agreement (AA), can help offset the fall of exports to CIS countries and increase exports to the EU? The trade diversion is something we have expected to see, but the increase is not showing up in the numbers yet. We know that the movement is there, but it will take time for Ukraine to see the full advantage of the trade agreement. There is also the issue of certification and standards that some Ukrainian companies have yet to meet, before they can start trading with the EU. Yes, it is a challenge. I have talked to agribusinesses and one of the issues they are facing is meeting the phytosanitary standards, which are different from those in the CIS countries. At the same time there areas, such as engineering and IT services, in Ukraine that