Mind is taking stock of the year, marking out persons and structures in each sector of the national economy that have distinguished themselves especially strikingly after 24.02 – even if not always successfully – or encountered unprecedented challenges, even general crisis adjusted. The list is not any rating, though it reflects the opinion of the industry specific part of our team about what were the most important things that occurred in the operation of this or that industry.
"Victim of the Year" is a company/brand that suffered irreparable damage due to the war.
"Unbreakable of the Year" is a company/brand significant for the industry and suffered huge losses due to the war, but managed to resume and continue its work.
"Deal of the Year" is the most meaningful deal for the country/industry, the largest in size and/or impact, becoming even more important given the war and future reconstruction of the country.
"Positive Surprise of the Year" is a company/brand/person who, against the backdrop of armed aggression, managed to become a leader/increase profits/take a proactive position, becoming a surprise for the industry/professional community/markets and contributing to additional stability of the industry/country.
"Disappointment of the Year" is a company/brand/person who, against the backdrop of armed aggression, having huge resources, failed to properly dispose of them or took a destructive position.
"Unlucky of the Year" is a company/brand/person who had invested heavily in a project/asset/niche on the eve of the war, but the war destroyed it radically or the initiative lost its relevance for many years.
"Failure of the Year" are structures, individuals, and institutions that made the most unsuccessful/controversial/inappropriate decisions in wartime.
War's beneficiary" is a company/brand/person who gained more profit than losses in the face of armed aggression.
Since the operations format and the intensity of events differ considerably in various fields, there can be from four to seven nominees in each industry.
The next chapter of the Mind Nominations 2022 project is Public Finance and Fiscal Sector
The war was as much a shock for public finance as it was for business. The Cabinet of Ministers, the National Bank and MPs had to urgently address three main tasks: to find sources to cover the budget deficit, to maintain the hryvnia exchange rate and to preserve tax revenues. It cannot be said that the authorities coped with all these tasks perfectly. But after 10 months of war we can make a clear conclusion: the collapse of the fiscal sector was averted.
The Ukraine's economy has generally adapted to the war realities and continues to work, though with difficulty. The fact that the economic decline slowed down by autumn is evidence of this. In Q1 of 2022, Ukraine's GDP (hereinafter the data comes from the State Statistics Service on a year-on-year basis) decreased by 15.1%, in Q2 – by 37.2%, in Q3 – by 30.8%. More than that, given the seasonal factor, GDP grew by 9% in the third quarter compared to the second one. The decline in gross domestic product in 2022, according to both the government and the NBU, will exceed 30%.
Inflation rate is the second important indicator of economic health. Prices for products and services began to go up straight after the invasion, and in November their annualised growth was 26.5%. The forecast for the entire 2022 is about 30%. Unfortunately, the acceleration of inflation was inevitable. It is associated with disruptions in logistics, rising costs for producers, and a cut in output in all sectors due to the destruction of facilities, the occupation of territories, and the shutdown of enterprises in the face of energy shortages. At the same time, an even greater acceleration of inflation was avoided, as the NBU has kept the discount rate at 25% for more than six months, thus stimulating the rise in the cost of borrowed resources in the economy and slower price growth.
But the condition of the state treasury can not but disturb. The state budget deficit is steadily growing and the domestic resources to cover it are severely insufficient. By December, the deficit exceeded UAH 807 billion, which is four times more than for the whole of 2021. So far, the Ministry of Finance and the NBU have been patching up this hole at the expense of emission and international assistance. On the one hand, such measures are justified under current conditions, but they result in the accumulation of external and internal debt (its level is more than 83% of GDP) and reduce the potential for economic recovery in the long run.
Amid all these macroeconomic turmoils, tax policy is gradually being tightened. The argument is simple: We need to replenish the budget somehow, and things are not brilliant. For example, by the end of November, the State Tax Service underperformed the revenue plan by 1.7%.
We should also not forget that in 2023, state budget expenditures on defence will exceed UAH 1.14 billion, which is almost half of all expenditures. It is clear that the army and security are a priority for a country at war. However, since UAH 1.15 billion of the state budget revenues in 2023 are to be generated by tax revenues, it is not worth talking about reducing fiscal pressure in the near future.
Still, macroeconomic forecasts for 2023 have some small but shoots of optimism. The NBU, the government, and Ukraine's main creditor in the person of the International Monetary Fund (IMF) agree that our country's GDP will grow next year. Not very much – by 3-5%, but there will be growth. Inflation will slow down by 2–2.5 times. However, this is provided that the active phase of the military conflict will end in the first half of 2023. If the hostilities continue longer, then, according to the NBU, the full recovery of the Ukrainian economy will begin no earlier than 2024.
At the same time, Ukraine's dependence on external monetary support will remain high, as well as the need for debt financing of the state budget involving the Ministry of Finance.
"Deal of the Year"
Receipts from foreign partners – $28 billion which helped the Ukraine's economy to survive
Ukraine received strong financial (and otherwise) support from other countries and international organisations. According to the Kiel Institute for the World Economy (Germany), the total amount of announced and provided assistance (financial, military and humanitarian) exceeded $120 billion for 11 months of 2022. If only cash injections are considered, more than $28 billion has been received for the needs of the state budget, of which 42% were grants. Due to this support, covering more than half of the state budget's needs (its deficit) was possible, according to the NBU.
By November, the largest amount of funding was allocated to Ukraine (the data by the Ministry of Finance): $10 billion from the US, $7.4 billion from various EU institutions (European Commission, Council of Europe, etc.), $2.7 billion from the IMF, $1.5 billion from Canada, $1.4 billion from Germany, and $1.1 billion from the UK.
In 2023, Ukraine expects to receive no less, or even more money. Finance Minister Sergiy Marchenko expects that Ukraine's international partners will provide $38 billion in financial assistance this year.
This is, by the way, even a bit more than the deficit envisaged in the state budget-2023, its size is about $ 35.5 billion.
The National Bank estimates that the lion's share of this amount will be provided by the European Union. In late November, the EU Parliament approved a macro-financial assistance package for Ukraine totaling €18 billion. The second largest donor will be the United States. The US Senate has already approved a $45 billion financing programme for Ukraine in 2023, of which $13.4 billion is economic and budgetary support.
"Funds from the US are likely to come in the form of grants, and from the EU are envisaged as preferential interest-free loans for up to 35 years with a ten-year grace period until the first repayment," the NBU said in its December Financial Stability Report.
In addition, Ukraine does not abandon hopes to resume credit cooperation with the IMF. The Fund has approved a four-month monitoring programme for the Ukrainian economy, which may become a preparatory stage for obtaining a new loan.
Also, the IMF believes that Ukraine's need for international financing in 2023 will be up to $57 billion, but not less than $3 billion per month.
"Positive surprise of the Year"
Hryvnia held on, its devaluation exceeded 50%, but it could have been much worse
The national currency always reacts to any force majeure events. Thinking that such a shock as war would be an exception would be naive. Within the very first days after February 24, the hryvnia exchange rate on the black market exceeded 30 UAH/$ and moved to 35–40 UAH/$. The National Bank, however, kept the official exchange rate at the pre-war level of 29.6 UAH/$ until the middle of summer and lowered it to 36.6 UAH/$ only on July 21. However, the official rate serves only as an indicator for transactions on the interbank market. Because the cash market still lives by its own rules. But even there the rate has been calm for several months in a row.
The National Bank was able to get things going and save the hryvnia from crash in time. The most important thing the NBU did was to cut down the demand for currency and gradually destroy loopholes for speculators.
For example, it restricted instant private currency transfers outside of Ukraine, blocked P2P transfers from hryvnia cards to foreign bank cards and banned non-cash currency purchases for citizens. Now it is possible to buy currency in non-cash form only by placing it on a three- or six-month deposit.
Furthermore, exporters and importers can make transactions on the interbank market only at the official rate, which is substantially "firmer" than ready money and amounts to 36.6 UAH/$. This approach avoids instability in the market and protects the NBU's international reserves.
Ukraine approached the end of 2022 with a relatively stable and predictable cash exchange rate, which did not go far beyond 40 UAH/$. In the state budget-2023, the average annual exchange rate is set at 42.2 UAH/$, which is also encouraging.
The amount of foreign exchange interventions to support the hryvnia is declining. In September, the NBU sold more than $2.79 billion on the interbank market, in November $1.63 billion. The cash market is almost in equilibrium: over the past three months, the population has been buying in banks and exchange offices within $1.4 billion and selling $1.1-1.3 billion per month.
Though it should be noted that without external injections, the National Bank would be much more difficult. It is thanks to international assistance that the NBU reserves are constantly replenished (their level from January 1 to December 1, 2022 decreased by only 10%, to $ 28 billion), enabling it to restrain devaluation.
"Disappointment of the Year"
The printing press in 24/7 mode – it is impossible to survive without emission during the war, but the economy will not thank for it
Since the aid from abroad is not able to fully solve the budget problems and to provide the most important social benefits (pensions, subsidies, etc.) in particular, the Cabinet of Ministers resorts to emission financing of the state treasury.
Of course, no one is physically printing hryvnia. But the emission is in full swing due to the fact that the National Bank buys military bonds (Domestic government bonds) placed by the Ministry of Finance. From February 24 to December 29 inclusive, the NBU's portfolio of government bonds "swelled" 2.3 times – from UAH 310 billion to UAH 705 billion. In simple terms, 395 billion unsecured hryvnias entered the economy. Given other factors, of course, the negative impact of the emission in the form of inflation and devaluation is partially smoothed out. But in the future, it will still echo to Ukraine.
Was there any option to do without the printing press in the current circumstances? Hardly any. But to reduce the volume of emission – easily.
Since the summer, the NBU has been urging the MoF to increase the yield on government bonds so that not only the National Bank, but also banks, businesses and households would buy them. Then military bonds would work more efficiently for the economy. But the MoF started raising interest rates on government bonds only in early autumn. And only in early December they became of more or less "market" sort – up to 19.5% per annum, although they still cannot materially interest buyers at this level of inflation.
"Unlucky of the Year"
The state budget and its gigantic deficit – despite multibillion-dollar aid and emission, there is still not enough money
When the Verkhovna Rada approved the state budget for 2022 at the end of 2021, no one included war perils in it. Therefore, with the beginning of the invasion, money from the budget began to flow out rapidly, while revenues fell.
The result is that Ukraine has been living with a permanent budget deficit of about $5 billion for months. This figure was announced in the spring by Prime Minister Denys Shmygal, who explained that the state budget is being executed at the 50-70% of the pre-war level, and spending on social programmes, the army and security has increased dramatically.
After the launch of the "grain deal", the situation with filling the state budget has become slightly better, because tax and customs payments have increased. But this is still not enough. Besides, with the onset of cold weather and the beginning of the bombing of the energy infrastructure, many business spheres started to stall again, and this will inevitably affect the revenues to the state budget. In November, for example, customs payments amounted to UAH 33.4 billion, which is 32% worse than a year earlier.
In addition to this, expenditures do not become less. There are many social programmes that simply cannot be curtailed. At the beginning of December, the Cabinet of Ministers allocated UAH 12.6 billion to cover housing subsidies and benefits for housing and communal services, and just the other day – UAH 600 million for additional payments to the military and UAH 400 million for grants to business.
And since the main efforts in 2023 will be devoted to security and defense, it will not be possible to reduce the gap in the state budget on our own. The real level of the budget deficit (excluding foreign aid) this year will be 21% of GDP. This is another argument that the government's desire to abandon the emission looks too optimistic.
"Failure of the Year"
Inconsistent tax policy – business tries to work regardless of anything, but the increased tax burden kills it
At the beginning of the war, the authorities took the path of tax liberalisation. "We need small and medium-sized businesses back. We need to remove everything that hinders it. To weaken taxes as much as possible, to remove all difficulties, absolutely everything," President Volodymyr Zelensky said in early March with an initiative to stimulate business under martial law.
The parliament then reduced fuel taxes, banned business inspections, introduced a special regime for III group payers of the single tax (the ability to pay the single tax at the 2% rate instead of 5% of turnover), removed fines for failing to submit tax returns, exempted imported goods from import duties and VAT. But during the summer and autumn, most of these benefits were canceled.
On the one hand, MPs warned that such relaxations are temporary. On the other hand, the return of full taxation occurs simultaneously with the deterioration of the regulatory climate. For example, at the end of May, the law No. 2260-IX came into force, granting the tax authorities the right to conduct desk, ex post, and documentary unscheduled audits. And in early December, the Cabinet of Ministers adopted Resolution No. 1363, allowing each and every agency to carry out unscheduled inspections, no matter the martial law.
At the same time, the government rejects any dialogue with business on tax reform. For example, Danylo Hetmantsev, the Head of the Parliamentary Committee on Taxation, Customs and Financial Policy called "irresponsible" and "unreasonable" the 10-10-10 concept (these are the rates of three key taxes – income tax, VAT and personal income tax), which was initiated by the Deputy Head of the Presidential Office Rostyslav Shurma.
But the most troubles the business has now are due to massive and groundless blocking of VAT invoices. The problems with the registration of VAT invoices have been repeatedly reported by both the European Business Association and the Union of Ukrainian Entrepreneurs. In addition, the Business Ombudsman Council carried out its analysis of the situation and concluded that the system of blocking VAT invoices works incorrectly, which is why the budget is actually subsidised at the expense of working capital of enterprises.
The problems with VAT arose after the Cabinet's Resolution No. 1154 came into effect on October 14. Long story short, the provisions of this act allowed the tax authorities to block even VAT invoices that have already been registered, as well as to grant a risky status to companies (it means that the taxpayer has signs of fraudulent transactions) that have no violations.
Blocking of invoices causes another trouble – the inability to receive VAT refunds from the budget. In November, the state owed businesses about UAH 14 billion of VAT.
Hetmantsev denied the problems with VAT invoices, saying that it was not he who changed the rules of their registration, but the Cabinet of Ministers. Therefore, all claims should be addressed to the government. And it seems to have heard the business: On December 23, the Cabinet of Ministers amended the algorithm of tax invoice blocking and registration. Now these processes will become "non-burdensome" for diligent taxpayers, the government assured. Only time will tell whether this is true or not. Because since January 1, 2017, when the system of registration of tax invoices was introduced, it has never worked without flaws and without manual intervention by the tax authorities.