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The Ukrainian government will launch a $1.2bn “Made in Ukraine” subsidy scheme this year to encourage domestic production of goods in an attempt to raise tax revenues and make the economy less reliant on foreign aid.
The war-torn country depends on budget support from western allies to cover half of its expenditure needs. While Russia has adopted a policy of import substitution under pressure of western sanctions, sustaining economic growth and tax revenues, much of Ukraine’s public spending leaves the country to pay for imported goods.
“Our task is that Ukrainian money stays in Ukraine and works in Ukraine,” President Volodymyr Zelenskyy said in Kyiv on Monday at a conference laying out the subsidy programme, the most significant long-term economic vision he has put forward since Russia’s full-scale invasion two years ago.
Zelenskyy said the programme will consist of cheap credit lines and grants for Ukrainian manufacturers, including arms makers, as well as incentives for using Ukraine-made materials for reconstruction and cashback for citizens who purchase local goods.
Ukraine’s budget for this year is running at $43bn deficit, much of which is being filled by the EU and the IMF. But US failure to pass a $60bn financial package for Ukraine and a two-month delay in the EU approving its own four-year €50bn lifeline for Kyiv have added a sense of urgency for authorities in the country to also look at domestic solutions.
Economy minister Yulia Svyrydenko said: “We understand perfectly well that macro-financial aid might decrease from year to year, and if the war is going to last, it means that we should be more self-sufficient.”
“Made in Ukraine” will prioritise domestic manufacturing of war-related components, weapons and goods such as demining equipment and reconstruction materials. State procurement in these areas will require a product to comprise of 20 per cent Ukraine-made components.
As for the cash back initiative, which Svyrydenko said will be implemented by June, the benefits will be accrued on a special card which will only be used in the country.
The initiative also includes 1bn hryvnia ($26mn) worth of compensation for domestic producers of agricultural machinery.
“Our goal is to really change the structure of the economy . . . to increase the share of [our] manufacturing industry,” said Svyrydenko.
Some business people said the scheme had the potential to attract foreign capital. Kostiantyn Yefymenko, chief executive of Biopharma, said that unless foreign investors “understand that we are doing well here . . . no one will come here”.
Business in Ukraine has been plagued by bribery and corruption since its independence, with courts and tax authorities often playing a key role or even leading the schemes. As a consequence, Ukrainian businesses routinely evade their tax obligations.
Zelenskyy on Monday vowed to reward only businesses that paid taxes and did not work with Russia and announced a direct hotline which would allow CEOs to flag any irregularities straight to the presidential office.
“Anyone who adheres to such rules should receive the full and complete assistance of the state, all institutions,” Zelenskyy said.