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Garry Poluschkin, Robert Kirchner

Reform proposals for improving Ukraine’s investment climate

Ukraine’s economy returned to growth. GDP expanded by 5.3% yoy last year and is projected to further increase by 4.0% this year. On the one hand, this development demonstrates Ukraine’s economic resilience during the full-scale war. On the other hand, a long road of recovery is still ahead after a GDP decline by 29% in 2022. Hereby, foreign investment is a “cornerstone” of growth acceleration.

  • Ukraine
NL 186 | April 2024
Private Sector Development

Against this background, the German Economic Team (GET), in cooperation with the German-Ukrainian Chamber of Industry and Commerce (AHK Ukraine), has published a study with 30 reform proposals for improving the investment climate. Based on a questionnaire for AHK member companies, these “bottom-up” proposals have been identified keeping in mind macro-financial stability and a level playing field for businesses. It follows the approach taken in a similar study in 2018. Now, the focus is on incremental reforms that can be implemented during the war. All in all, these reforms can support and accelerate Ukraine’s economic resilience and recovery.

Economic background

Ukraine’s economy grew by 5.3% in 2023 according to flash estimates, very similar to the previous estimate by GET and IER. In 2024, we estimate a further increase by 4.0%. However, Ukraine remains far from the pre-war level after the GDP decline by 29% in 2022.

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Before the full-scale war, Ukraine’s economy was dominated by private sector business activities, accounting for roughly 4/5 of gross value added (GVA) and 3/4 of employment. However, these activities were primarily driven by domestic companies (ca. 88% of GVA), rather than by foreign ones (ca. 12% of GVA). There is a vast majority of economic literature demonstrating that FDI contributes to economic productivity gains, thereby lifting the growth trajectory. This is why economists (see for example Becker et al. 2022, Link) also emphasize the importance of FDI as a “cornerstone” for modernising and rebuilding Ukraine’s economy. FDI attractiveness thereby depends on two critical factors – the investment climate and security against political / war risks. In this context, the AHK Ukraine and GET have prepared a joint study focussing on the first aspect.

Methodology of the study

Based on a questionnaire developed by GET, AHK Ukraine’s member companies organised in various committees have provided a set of suggestions. Thus, the study applies a bottom-up approach. These suggestions have undergone a rigorous review and verification process, involving both GET and member companies of the AHK Ukraine and have led to the final identification of 30 reform proposals. The focal point of the review was intended to ensure the alignment with a broader reform trajectory towards a transparent and competitive investment climate, macro-financial stability, consistency with Ukraine’s existing contractual obligations, such as those in the EU accession process, and contribute to inclusive and sustainable growth. The proposals primarily reflect the needs of incumbent companies, particularly the membership profile of the AHK Ukraine. While the study represents approximately 200 companies across various sectors, the proposals have led to certain sectoral concentration that is attributed to AHK Ukraine’s specific membership structure. Thereby, the omission of certain sectors (e.g. mining) does not imply a lack of importance for reforms in these areas. Furthermore, the questionnaire should not be considered representative. The reform proposals can be broadly split into a horizontal policy area, that affects all economic sectors, as well as vertical policy area, with sector-specific proposals.

40% of the proposals can be attributed to the energy and construction sectors. In these sectors, reform progress is of key importance to advance green transition and energy efficiency for the path to reconstruction according to the “Build Back Better” concept. The large share of the proposals reveals the significant private sector interest in this crucial topic. While not directly addressing the needs of companies not yet operating in Ukraine, the identified proposals do intend to create conditions favourable for both existing and potential new entrants.

10 reform priorities as “Quick Wins”

Based on the reform proposals identified, 10 of them can be quickly implemented. They can be split into three categories:

  1. Directly linked to the recovery and reconstruction process
  2. Removing unnecessary bureaucratic and administrative burden to reduce transaction costs
  3. Easy-to-implement measures towards creating a level, competitive playing field not discriminating against new, foreign or private companies.

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The above proposals are set to be prioritised by the responsible ministries, state agencies and by Parliament to generate tangible benefits for business activity, investment, and hence economic growth in Ukraine. For some of these proposals, draft laws or similar legal documents already exist. However, this does not imply that the proposals not listed under the “Quick Wins” should be neglected. On the contrary, they should be promoted with significant efforts, as the legal background is often less prepared. Some of those proposals will have very large benefits if enacted, but will take more time to solidly prepare and enact.

Next steps: Implementation

The study was recently presented in Ukraine at the AHK annual assembly, during a public event with decision makers as well as in bilateral meetings with the Ministry of Economy, the Verkhovna Rada and state agencies. The next steps will focus on monitoring the implementation. After the initial study was published in 2018, the implementation progress was analysed one year later. During that time, the monitoring showed that more than half of the proposals were already fully or at least partly implemented. Also in the current context, the implementation of the identified proposals would improve Ukraine’s investment climate and lift the economy on a higher economic growth path. Therefore, keeping track of the future reform implementation will be decisive.

This newsletter is based on the joint Investment Study by the AHK Ukraine and the German Economic Team.

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