Currency regulation in Ukraine should be liberalized by introducing the free flow of capital. This is required for better implementation of export potential and improving the country’s investment attractiveness. It is also part of Ukraine’s commitments under the Association Agreement. Both experts and the National Bank of Ukraine recognize the need for reform. This was stressed by experts of the USAID program “Leadership in economic governance”, business representatives, MPs and NBU representatives at a debate held at Ukraine Crisis Media Center.
Experts noted that the current control system, according to the Government decree of 1993, does not meet the needs of the time any longer, does not ensure the stability of domestic monetary situation and creates significant barriers for Ukrainian businesses and investors. “There are five main groups of problems in the field of currency control. Firstly, it is excessive inflexibility, and secondly, discrepancy with the principles of entrepreneurship, including direct contradiction to the Commercial Code, which states that entrepreneurs have every right to dispose of the results of their activities, including foreign exchange earnings. The third problem is non-compliance with the provisions of the Association Agreement, in particular Articles 145, 146 and 147 specifying the free flow of capital: there cannot be any free trade zone if capital cannot move within this zone. This is uncertainty in the sequencing of the NBU restrictions […] and impossibility of rapid extension of operational payments,” said Lubomyr Chornii, senior expert of the USAID program “Leadership in economic governance”.
The results of focus groups with exporters show that due to strict currency regulation Ukrainian small and medium businesses use only 25-40% of their export potential; unjustified requirements lead to 15-20% higher transaction costs for exporters. Entrepreneurs try to keep money abroad for fear that eventually they will not be allowed to withdraw these funds: according to the NBU, Ukrainian businesses keep over $100 billion abroad. The situation is even worse for foreign companies because the NBU has de facto forbidden their permanent missions to receive currency earnings and conduct transactions with currency earnings. “We hope that changes will finally come, because currency regulation is a barrier that destroys business in Ukraine and does not give it an opportunity to develop, and sometimes even to start operation,” said Ihor Olekhov, partner at Baker & McKenzie.
On the basis of discussions with business representatives and MPs, experts of the USAID program “Leadership in economic governance” recommend to ensure the free flow of capital under the provisions of the Association Agreement, modernize and liberalize the currency payments system during foreign trade operations; reduce the administrative burden and transaction costs in export-import operations; remove inappropriate requirements and restrictions that create artificial barriers to foreign investors. “Both the parliament and the government will have to stick to the agenda set before us by the Association Agreement. Moreover, we have the FTA, but Ukrainian exporters are in a very unfavorable condition compared to European and other exporters. If we move to these markets and change our focus, we will inevitably have to harmonize our rules with those of our competitors,” emphasized Olena Sotnyk, MP of Ukraine (faction “Union “Samopomich”).
“Conditions for currency payments for headquarters of multinational companies should not be worse than those of our neighbors. Otherwise we will continue to remain a raw material producing country,” emphasized Ihor Olekhov. Olena Sotnyk added that increasing export potential is the only way to increase GDP, and GDP growth is the only non-populist way for increasing salaries and welfare of citizens.
“We draw attention of all stakeholders to the fact that now it is important to take a decisive step forward and find a balance that will allow us, on the one hand, to maintain macro-financial stability and, on the other hand, to allow business to grow, creating new products and paying more taxes to the state budget,” noted Tatiana Korotka, Deputy Business Ombudsman.
Emal Bakhtari, head of projects and programs of the open market department of the National Bank of Ukraine, assured that the National Bank also supports the currency control liberalization. “We have the Association Agreement under which we have obligations to gradually switch to free movement of capital […] This is our final and ultimate goal. Our landmark is the Association Agreement and the basic principles laid down in the EU Directives and the EU agreement, – he said. – We do not need the currency control just as it is. It should be transformed into the financial monitoring in accordance with European standards, when a risk-based approach makes it possible to identify transactions relating to money laundering, corruption and arms trafficking, to check and counteract them rather than to check everyone.”
The liberalization of currency regulation will be launched by the draft law “On foreign currency”, which is developed by the NBU. It will provide for free movement of capital and protection of the financial system against crisis developments. In case of adverse events the NBU reserves the right to introduce temporary measures for 6 months and extend this term, informed Emal Bakhtari. It will provide for gradual reduction of restrictions that will make it possible to monitor the impact of innovations step by step. The draft law is almost ready, it is to be submitted for consideration by the end of the month.
Tamara Solianyk, Director of the USAID LEV, stressed that to make liberalization successful, this reform should be conducted comprehensively.