UNDP Ukraine1 Investment Climate in Ukraine: Old and New Challenges Iryna Akimova, Chief Economic Advisor, UNDP Ukraine ABCDE, Amsterdam, th of May, 2005

UNDP Ukraine2 Some statistics on capital investment in Ukraine in 2004 Volume– 20% of GDP Growth rate- 28% (higher than GDP growth rate) Main source- retained profits of the firms (62%) Main sectors- industry, transport, communication FDI: Volume- US$ 1.93 bln (cum. US$ 8.54 bln, US$ 177 per capita), 2.5% of GDP Growth rate- 23% Main sectors- wholesale trade, food industry

UNDP Ukraine3 Investment climate components Investment climate is a general term for factors that provide incentives or disincentives for private sector investment, including : Investment potential resource endowment and operation costs; physical, financial and technological infrastructure; openness to international trade and access to international markets; Investment risks macroeconomic performance and political stability; the regulatory and policy framework and policy coherence, i.e. quality and stability of public policies including: a) rule of law and protection of property rights (including corruption issues) ; b) competition policy; c) entry barriers, operational and exit restrictions; d) tax policy.

UNDP Ukraine4 Investment climate in 2004 and changes in the 1 st quarter of st quarter 2005 physical, financial, technological infrastructure + ? openness to international trade+ macroeconomic performance++ corruption- rule of law/ protection of property rights- competition policy+/-? Entry barriers, operational/exit restrictions++? Tax policy+/-

UNDP Ukraine5 Barriers to investment in Ukraine in 2003 (% of firms in the sample) Barriers to investment Total sample Firms with foreign capital Instability of tax and regulatory policy Macroeconomic instability High tax rates Tax administration High interest rates High corruption Access to credits Customs and trade regulations Weak protection against criminality Registration and licensing of entrepreneurial activity

UNDP Ukraine6 Risks: Macroeconomic situation GDP growth rates: %, %, 1 st quarter of %, 2005 (forecast) Inflation: %, %, 1 st quarter of %, 2005 (forcast)-13% Budget deficit (as % of GDP): %, , 2005 (forecast) official- 1.6%, unofficial- 4%

UNDP Ukraine7 Risks: security of property rights Privatisation strategies: a) Re-privatisation (unclear criteria, scale, procedures, no credible protection of good faith purchases); b) Slowing down of privatisation process, focus on state sector. Weak corporate law; Moratorium on bankruptcy of the firms with state shares ; Weak court system.

UNDP Ukraine8 Risks: unstable regulatory and tax policies Cancellation of tax privileges in FEZ; Dangerous changes in simplified system of taxation for SMEs; Postponement of tax cuts and tax simplification; State interference in price setting; Low transparency of public policies; Absence of an efficient ad hoc monitoring of new legislation.

UNDP Ukraine9 Conclusions After “orange revolution”, Ukraine received a window of opportunity for attracting domestic and foreign investors; Efforts in improvement of investment climate should be supported by sound macroeconomic policies and fiscal stability; Ensure security of property rights. Re-privatisation (if not stopped) should be limited in scale and pursued via transparent procedures as quick as possible; Continue liberalization of trade and financial markets; Changes in regulatory and tax policies should be predictable and constrained in terms of time; Reduce the level of state interference in the economy and strengthen anti-trust institutions.