EURO-ASIA

UKRAINE

UNITARY COUNTRY

Disclaimer

This country profile provides a picture of the situation in Ukraine prior to Russia’s invasion of Ukraine in February 2022.

BASIC SOCIO-ECONOMIC INDICATORS

INCOME GROUP: LOWER MIDDLE INCOME

LOCAL CURRENCY: UKRAINIAN HRYVNIA (UAH)

POPULATION AND GEOGRAPHY

  • Area: 603 550 km2 (2018)
  • Population: 44.135 million inhabitants (2020), a decrease of 0.5% per year (2015-2020)
  • Density: 73 inhabitants / km2
  • Urban population: 70.0% of national population (2020)
  • Urban population growth: -0.4% (2020 vs 2019)
  • Capital city: Kyiv (6.6% of national population, 2020)

ECONOMIC DATA

  • GDP: 545.0 billion (current PPP international dollars), i.e. 13 055 dollars per inhabitant (2020)
  • Real GDP growth: -4% (2020 vs 2019)
  • Unemployment rate: 8.9% (2021)
  • Foreign direct investment, net inflows (FDI): 304 (BoP, current USD millions, 2020)
  • Gross Fixed Capital Formation (GFCF): 13.0% of GDP (2020)
  • HDI: 0.779 (high), rank 74 (2019)

MAIN FEATURES OF THE MULTI-LEVEL GOVERNANCE FRAMEWORK

Ukraine is a unitary republic with a semi-presidential system of government. The 1996 Constitution provides for a directly elected president and an appointed prime minister, who both hold executive power. Ukraine’s highest body of executive power is the Cabinet of Ministers, which is accountable to the parliament. Legislative power is vested in a unicameral parliament (Verkhovna Rada), which consists of 450 deputies elected by universal suffrage, and is headed by a chairman, who is elected from among the parliament’s deputy ranks.

Ukraine has a complex three-tier system of subnational government. The Constitution of 28 June 1996 establishes the general structure, fundamental rights, state organisation, territorial structure (Chapter IX) and provisions governing the exercise of power at the level of the territorial units. Chapter XI of the Constitution is dedicated to “local self-government” (Art. 140 to 146), comprising political, organisational and financial provisions, specifying that more precise provisions will be determined by law. The 1997 Law “on Local Self-Government”, amended in 2014, the 2009 Law “on Service in Local Government Bodies”, the Tax code and the Budget code complement the legal framework for local government in Ukraine.

Decentralisation was a key measure included in the 2014 Minsk II ceasefire agreement, which prompted the government to pursue ambitious local government reforms in 2014-2015. The main legislative framework for decentralisation was defined in the “Concept Framework of Reform of Local Self-Government” and the “Territorial Organisation of Power in Ukraine”, which were approved by the Cabinet of Ministers in 2014. This framework was combined with the approval of the “Law on the Principle of State Regional Policy” in 2015 to promote regional development policy. The Concept Framework covers all three areas of decentralisation: political, administrative and fiscal. It also contains proposals for constitutional amendments to territorial administrative structures that are still pending. The adoption of the Concept Framework prompted the passing of several decentralisation laws, which were introduced between 2014 and 2018, encompassing the process of voluntary municipal amalgamations, promoting inter-municipal co-operation and devolving administrative and service delivery tasks. It also led to changes in the Budget Code towards greater fiscal decentralisation, as well as measures aimed at promoting transparency fairness and improved organisation of existing procedures for the election of local councillors.

In November 2021, there was a further attempt to amend the Constitution to significantly alter the tiers and powers of subnational governments and resolve contradictions in the Constitution and the decentralisation that had been adopted since 2014. The proposed amendments notably include the creation of a deconcentrated prefecture-like system to replace the current state administrations at the district and regional levels. If approved, oblast and rayon councils would establish their own executive bodies. The amendments also propose providing territorial communities with decision-making powers on any issues of local importance that are not under the responsibility of other levels of government, and with additional financial resources.

TERRITORIAL ORGANISATION

MUNICIPAL LEVEL INTERMEDIATE LEVEL REGIONAL LEVEL TOTAL NUMBER OF SNGs (2021)
Local self-government (Hromadas):
1 469 rural, settlement and urban territorial communities
136 districts (Rayons)
24 regions (Oblasts)
1 Autonomous Republic of Crimea (ARC)
2 cities:Kyiv and Sebastopol
Average municipal size:
21 783 inhabitants
1 469 136 27 1 632

OVERALL DESCRIPTION: In practice, Ukraine’s three-tier subnational government structure is composed of regional entities (oblasts), districts (rayons), as well as rural, settlement and urban territorial communities (all classified as hromadas). The Constitution also mentions the city of oblast significance, although they do no longer exist.

Between 2015 and 2020, the Cabinet of Ministers undertook a strong municipal amalgamation reform, which led to the creation of 1 469 territorial communities (down from around 11 250 prior to the 2014 reform). In parallel, the Verkhovna Rada approved a resolution creating 136 new rayons to replace the former 490 rayons. These legislative changes were followed by significant amendments to the Election Code in July 2020, which comprised: (i) the introduction of a party system of elections in territorial communities with more than 10 000 voters (from 90 000 previously) and (ii) an imperative representative mandate for local council members (e.g. members can be recalled by the party if they are not in line with the party programme).

REGIONAL LEVEL: The regional level is composed of 24 regions (oblasts), along with the Autonomous Republic of Crimea and the two cities of Kyiv and Sevastopol. Two branches of power co-exist at the oblast level: elected regional councils and regional deconcentrated state administrations, which are headed by governors appointed by the country’s president. Regional councils, which are headed by chairpersons, function as legislative councils without executive functions. These functions are performed by the regional state administrations. The country’s capital, Kyiv, is an exception. It has an elected mayor in addition to an executive body nominated by the president. If the 2021 proposed amendments to the Constitution are approved, prefectural bodies will replace the regional state administrations and the regional councils will have their own executive bodies, with clear and complementary powers.

Economic, well-being disparities and territorial inequalities are considerable in Ukraine. Since 2010, the national economy has become increasingly reliant on the Kyiv agglomeration, with other regions struggling to catch up. In 2020, the gross regional product (GRP) per capita was 16.8 times higher in the city of Kyiv, the wealthiest, than in the region of Luhansk, the poorest.

INTERMEDIATE LEVEL: Following the territorial reform of 2020, there are 136 districts. District governing structures are formed of both directly-elected (self-governing) district councils and deconcentrated district state administrations. District self-governing councils are headed by chairpersons that are elected from among the council members. Similarly to the regional level, the proposed constitutional amendments of 2021 aim to create prefectural bodies to replace the district state administrations and to provide district councils with their own executive bodies.

MUNICIPAL LEVEL: The municipal level is composed of 1 469 self-governing territorial communities (rural, settlement and urban). The average municipal size is around 21 800 inhabitants, well above the OECD and EU averages (10 250 and 5 960 respectively) and the median size is 9 269. 21% of territorial communities have less than 2 000 inhabitants and 34% have less than 5 000 inhabitants. The main governing bodies of territorial communities are the local council, mayor and an executive committee. The mayor and members of the local council are directly elected by universal suffrage every five years. Since 2020, territorial communities with fewer than 10 000 residents are headed by directors of territorial units, together with councillors, all of them are elected through a first-past-the-post system.

HORIZONTAL COOPERATION: In response to Ukraine’s high degree of municipal fragmentation, laws on voluntary municipal amalgamations (Law no. 157-VIII) and on inter-municipal cooperation (Law no. 1508-VII) of territorial communities were adopted in 2015. Following the amalgamation law, between 2015 and 2019 more than 4 700 of local self-governments merged voluntarily to form 980 new territorial communities. In order to support infrastructure development in amalgamated communities, between 2016 and 2019, the central government provided infrastructure funding through the Local Infrastructure Subvention. The allocation of the subvention depended on the population and the area of the territory. Non-amalgamated local governments were not eligible to receive these funds.

Inter-municipal cooperation has been slowly expanding since the “Law on Cooperation of Territorial Communities” was adopted in 2015. Inter-municipal cooperation mainly covers the delivery of services such as healthcare, waste management, and to a lesser extent, public transport, and co-operation in “second-tier” services, such as internet, administrative and financial functions.


Subnational government responsibilities

Ukrainian subnational government responsibilities are described in the Constitution and in the Law on “Regional State Administrations” and the Law “on Local Self-Government in Ukraine” (Chapter 3, Art. 27- 41). Further details are provided in the Budget Code and in a series of sectoral laws (Water Code, Land Code, etc.). In general, a distinction is made between delegated competences and exclusive competences. The central government is formally responsible for delegated functions and provides subnational governments with targeted funds to carry out these tasks.

Distribution of competences among levels of government is complex and, depending on the sector, relatively unclear. The transfer of responsibilities to territorial communities has caused tension with the rayon level. Territorial communities have been empowered to take planning and development decisions, to assume specific devolved responsibilities and to negotiate their budgets with their corresponding oblast. In addition, rayons were mandated to transfer ownership of key infrastructure (e.g. medical and cultural facilities) to the territorial communities. Furthermore, following the reform of 2020, territorial communities received the powers and financial resources of the formerly known ‘cities of oblast significance’.

Main responsibility sectors and sub-sectors

SECTORS AND SUB-SECTORS Subnational government level
1. General public services (administration) Internal administration; Licensing and registration; Management of municipal properties and enterprises
2. Public order and safety
3. Economic affairs / transports Construction and maintenance of local roads; Local transportation; Ensuring integrated social/economic and cultural development of the territory of the community
4. Environment protection Waste collection; Sanitation
5. Housing and community amenities Planning; Local programmes for development of housing; Municipal utilities; Heating; Water management
6. Health Outpatient clinics; Polyclinics; Hospitals; Maternity centres; Primary medical care centres; First and emergency aid stations
7. Culture & Recreation Local libraries; Museums; Exhibitions; Theatres; Clubs; Philharmonics; Zoos; Sport schools for children and youth; Sport centres and facilities
8. Education Preschool, general primary and secondary education, including specialised educational institutions; Extracurricular activities
9. Social Welfare Support of children and low-income individuals


Subnational government finance

Scope of fiscal data: local government units include regions, the Republic of Crimea, cities with special status (Kyiv and Sevastopol), municipalities, districts, rural settlements and urban territorial settlements. SNA 2008 Availability of fiscal data:
High
Quality/reliability of fiscal data:
High

GENERAL INTRODUCTION: The subnational finance structure in Ukraine has become more decentralised following the passage of the laws “on Co-operation of Territorial Communities” and “on Voluntary Consolidation of Territorial Communities”, the changes to the State Budget Code in 2016 and the territorial reform in 2020. These include a reallocation of spending mandates across subnational governments and the growing fiscal importance of the territorial communities, which have their proper independent budget and direct fiscal relations with the central government.

Subnational government expenditure by economic classification

Dollars PPP / inhabitant % GDP % general government % subnational government
Total expenditure 13 98 11.3% 25.0% 100.0%
Inc. current expenditure 1 117 9.1% 21.9% 80.0%
Compensation of employees 609 4.9% 45.3% 43.5%
Intermediate consumption 238 1.9% 21.1% 17.0%
Social expenditure 26 0.2% 1.4% 1.9%
Subsidies and current transfers 240 1.9% 57.0% 17.2%
Financial charges 4 0.0% 1.2% 0.3%
Others 0 0.0% 0.0% 0.0%
Incl. capital expenditure 280 2.3% 57.4% 20.1%
Capital transfers 116 0.9% 47.0% 8.3%
Direct investment (or GFCF) 164 1.3% 68.2% 11.7%

% of general government expenditure

  • Total expenditure
  • Compensation of employees
  • Current social expenditure
  • Direct investment
  • 25%
  • 45.3%
  • caché
  • 1.4%
  • caché
  • caché
  • caché
  • caché
  • 68.2%
  • 0%
  • 20%
  • 40%
  • 60%
  • 80% 100%

SNG expenditure by economic classification as a % of GDP

  • Compensation of employees
  • Intermediate consumption
  • Current social expenditure
  • Subsidies and other current transfers
  • Financial charges + other current expenditures
  • Capital expenditure
  • 12,5% 10%
  • 7,5%
  • 5%
  • 2,5%
  • 0%
  • caché
  • 4.9%
  • 1.9%
  • 1.9%
  • 2.3%

% of general government expenditure

  • Total expenditure
  • Compensation of employees
  • Current social expenditure
  • Direct investment
  • 25%
  • 45.3%
  • caché
  • 1.4%
  • caché
  • caché
  • caché
  • caché
  • 68.2%
  • 0%
  • 20%
  • 40%
  • 60%
  • 80% 100%

SNG expenditure by economic classification as a % of GDP

  • Compensation of employees
  • Intermediate consumption
  • Current social expenditure
  • Subsidies and other current transfers
  • Financial charges + other current expenditures
  • Capital expenditure
  • 12,5% 10%
  • 7,5%
  • 5%
  • 2,5%
  • 0%
  • caché
  • 4.9%
  • 1.9%
  • 1.9%
  • 2.3%

EXPENDITURE: Subnational government expenditure is below the OECD average both as a share of GDP (17.1% in the OECD) and as a share of public expenditure (36.6% in the OECD in 2020). In addition, most subnational spending is made on behalf of the central government with subnational governments having little influence on spending priorities. Over 43% of subnational government expenditure is spent on payroll, since subnational governments are responsible for the payment of employees in charge of delegated functions (e.g. education, social protection and healthcare).

DIRECT INVESTMENT: Ukrainian subnational government investment as a portion of subnational government expenditure is close to the OECD average (11.3% in 2020), while it is slightly below the OECD average as a share of GDP (1.9%). However, subnational government investment accounts for a significant share of total public investment, well above the OECD average (54.6% in 2020). This high level is partly explained by a low level of total public investment (2.0% of GDP in 2020), despite huge investment needs, particularly in infrastructure. This is due to a long period of underinvestment, especially in transport and municipal utilities (water and heating), and a lack of capacity to manage public investment at both central and subnational levels.

In response, the “State Fund for Regional Development“ (SFRD) was established in 2013 for financing subnational government investment projects. The Fund is legally mandated to receive 1% of all planned revenues from the General Budget Fund of Ukraine, which is then redistributed to the regions, according to criteria based on population and GDP. However, the threshold of 1% has never been met. Between 2015 and 2021, the percentage of funds allocated to the SFRD fluctuated between 0.4% and 0.8% of planned General Budget fund revenues. In addition, two other development funds, the “Subsidy for development of infrastructure“ and the “Subsidy for Social and Economic Territorial Development“ were created in 2016 for the financing of infrastructure projects, and targeted at territorial communities.

Subnational governments also have recourse to public-private partnerships (PPPs) to finance their investment projects. A “State Organisation Agency on Support Public-Private Partnership” was established in 2018, under the Ministry of Economics, with the aim of supporting the implementation of PPP contracts in several sectors, notably infrastructure, at both the central and subnational levels. As part of its “National Economic Strategy 2030“, the central government aims to significantly develop PPPs in the country to finance infrastructure investment.

Subnational government expenditure by functional classification

Dollars PPP / inhabitant % GDP % general government % subnational government
Total expenditure by economic function 1 398 11.3% - 100.0%
1. General public services 142 1.2% 12.9% 10.2%
2. Defence 0 0.0% 0.0% 0.0%
3. Security and public order 5 0.0% 1.2% 0.4%
4. Economic affairs/transports 277 2.2% 36.5% 19.8%
5. Environmental protection 7 0.1% 26.7% 0.5%
6. Housing and community amenities 95 0.8% 99.7% 6.8%
7. Health 150 1.2% 28.9% 10.7%
8. Recreation, culture and religion 64 0.5% 69.0% 4.6%
9. Education 587 4.8% 79.1% 42.0%
10. Social protection 71 0.6% 2.7% 5.1%

SNG expenditure by functional classification as a % of GDP

  • General public service
  • Defence
  • Public order and safety
  • Economic affairs / Transport
  • Environmental protection
  • Housing and community amenities
  • Health
  • Recreation, culture and religion
  • Education
  • Social protection
  • 12,5% 10%
  • 7,5%
  • 5%
  • 2,5%
  • 0%
  • 1.1%
  • 2.2%
  • 1.2%
  • 4.8%

SNG expenditure by functional classification as a % of SNG expenditure

  • General public service: 10,15%
  • Defence: -
  • Public order and safety: 0,39%
  • Economic affairs / Transport: 19,79%
  • Environmental protection: 0,51%
  • Housing and community amenities: 6,77%
  • Health: 10,72%
  • Recreation, culture and religion: 4,61%
  • Education: 42,02%
  • Social protection: 5,06%

SNG expenditure by functional classification as a % of GDP

  • General public service
  • Defence
  • Public order and safety
  • Economic affairs / Transport
  • Environmental protection
  • Housing and community amenities
  • Health
  • Recreation, culture and religion
  • Education
  • Social protection
  • 12,5% 10%
  • 7,5%
  • 5%
  • 2,5%
  • 0%
  • 1.1%
  • 2.2%
  • 1.2%
  • 4.8%

SNG expenditure by functional classification as a % of SNG expenditure

  • General public service: 10,15%
  • Defence: 0%
  • Public order and safety: 0,39%
  • Economic affairs / Transport: 19,79%
  • Environmental protection: 0,51%
  • Housing and community amenities: 6,77%
  • Health: 10,72%
  • Recreation, culture and religion: 4,61%
  • Education: 42,02%
  • Social protection: 5,06%

The main category of subnational government spending is education, which is a delegated function (42% of subnational spending in 2020). Education is followed by economic affairs and transport, which accounted for around little under 20% of subnational expenditure in 2020. Almost all public spending in housing and community amenities is done at the subnational level, and more than half in education and in recreation, culture and religion. In the economic affairs and transport sectors, as well as in environmental protection, around a third of public spending is managed by subnational governments. The share of subnational government spending in social protection and healthcare dropped in 2020 as a result of amendments in the model of financing of these two areas (i.e. social benefits for citizens and allowances for households with children are now directly financed from the state budget; medical services are also directly paid by the National Health Service).

Subnational government revenue by category

Dollars PPP / inhabitant % GDP % general government % subnational government
Total revenue 1 378 11.2% 28.0% 100.0%
Tax revenue 780 6.3% 24.7% 56.6%
Grants and subsidies 475 3.9% - 34.5%
Tariffs and fees 51 0.4% - 3.7%
Income from assets 72 0.6% - 5.2%
Other revenues 0 0.0% - 0.0%

% of revenue by category

  • 75% 60%
  • 45%
  • 30%
  • 15%
  • 0%
  • 56.6%
  • 34.5%
  • 3.7%
  • 5.2%
  • -
  • Tax revenue
  • Grants and subsidies
  • Tariffs and fees
  • Property income
  • Other revenues

SNG revenue by category as a % of GDP

  • Tax revenue
  • Grants and subsidies
  • Tariffs and fees
  • Property income
  • Other revenues
  • 12,5% 10%
  • 7,5%
  • 5%
  • 2,5%
  • 0%
  • 6.3%
  • 3.9%

% of revenue by category

  • 75% 60%
  • 45%
  • 30%
  • 15%
  • 0%
  • 56.6%
  • 34.5%
  • 3.7%
  • 5.2%
  • 0%
  • Tax revenue
  • Grants and subsidies
  • Tariffs and fees
  • Property income
  • Other revenues

SNG revenue by category as a % of GDP

  • Tax revenue
  • Grants and subsidies
  • Tariffs and fees
  • Property income
  • Other revenues
  • 12,5% 10%
  • 7,5%
  • 5%
  • 2,5%
  • 0%
  • 6.3%
  • 3.9%

OVERALL DESCRIPTION: Along with the various decentralisation reforms implemented between 2014 and 2020, as well as the amendments of the Budget and Tax Codes, more fiscal autonomy has been allocated to subnational governments. The share of own-source revenue in their revenue structure significantly increased, while their reliance on central government transfers decreased. In 2020, tax revenue accounted for more than half of subnational revenue, above the OECD average (42.4%), while grants and subsidies represented around a third of subnational revenue, below the OECD average (41.2%). The subnational budget is composed of two parts: (i) a general fund, which comprises PIT, CPT, property tax, single tax, some non-tax receipts, and is dedicated to current expenditures; and (ii) a special fund, composed of non-tax revenue and capital grants, which is earmarked to capital expenditure, debt repayment and an Environmental fund.

TAX REVENUE: Subnational government tax revenue accounted for 6.3% of GDP in 2020, slightly below the OECD average (7.2% of GDP). As a result of changes to the Budget and Tax Codes, a smaller portion of subnational government tax revenue comes from tax-sharing arrangements with the central government. The power of subnational governments over local taxes has increased since they can now set rates and grant exemptions, within certain limits set out in the Tax Code. However, they cannot create new taxes that are not listed in the Code.

In terms of shared taxes, oblasts receive a 15% share of personal income tax (PIT), territorial communities receive 64%, and the remaining 21% goes to the national government. An exception is Kyiv, which receives 40% of PIT collected within its jurisdiction (this means the remaining 60% of Kyiv’s PIT revenues flow into the national budget). As part of a 2020 amendment to the Budget Code, rayons no longer receive a share of the PIT fund. The distribution mechanism for allocating PIT across to subnational governments is not linked to taxpayers’ place of residence. Rather, current legislation allows companies and institutions to choose where to transfer the PIT of their employees: their actual place of work or residence, or the place where the company is formally registered. To encourage municipal amalgamations, since 2014, only local self-governments that merged voluntarily could retain their share of PIT. PIT remains the largest source of subnational government revenue. Other shared taxes include the corporate profit tax (a national CPT and a CPT from local enterprises), environmental taxes and rents for the use of natural resources.

In addition to shared taxes, subnational governments are entitled to raise local taxes, namely the property tax, the single tax, the parking fee and the tourist tax. The property tax was reformed in 2015. It now encompasses three components: (i) a land tax/rent (the main component), (ii) a tax on “real estate tax other than land”, and (iii) a transport tax. The “real estate tax other than land”, is now paid by owners of residential real estate properties and owners of non-residential properties, both individuals and legal entities, including non-residents. Cities may impose tax rates based on the location (location bands) and type of real estate property. Local authorities can also decide on exemptions and reduced rates. The property tax (excluding the transport component) accounted for 7% of subnational government tax revenue, 4.0% of subnational government revenue and 0.4% of GDP in 2020 (compared to 1.0% on average in OECD countries).

In addition, subnational government own-source tax revenue includes the single tax (or unified tax), which is levied on entrepreneurs, small businesses and farmers registered as unified taxpayers, and the parking fee and tourist tax, which are optional. Finally, they benefit from an excise tax (5% rate) on tobacco products, alcoholic beverages and petroleum products sold in local territories.

GRANTS AND SUBSIDIES: The 2014 reform simplified the system of earmarked grants through the creation of new sectoral funds, funded directly from line ministries. These included the social protection grant, education grant, utilities grant and health grant. A new system of equalisation transfers was also set up with the 2014 reform. It is mainly composed of basic and reverse grants. The basic grant consists of vertical transfers from the central government to local budgets, whereas the reverse grants consist of funds transferred from local to national budgets to ensure horizontal equalisation across territories. Territorial communities with a tax capacity index of less than 0.9 – measured against the national average – receive a basic grant amounting up to 80% of the difference between their tax capacity and the 0.9 threshold. However, if a territorial community’s tax capacity index is more than 1.1, then 50% of their revenue surplus (i.e. 50% of the PIT revenue that exceeds the threshold) is deducted and transferred back into the state budget through a reverse grant. Territorial communities with revenues between 90% and 110% of the country’s average are not subject to compensation or deduction.

Intergovernmental transfers decreased from 53.7% in 2016 to 34.5% in 2020. A large portion of the decrease came between 2019 and 2020. This can be attributed to the government’s decision to cut the size of several funds in 2020, including the SFRD, to create the “COVID Stabilisation fund”. Other reasons for the reduction include the aforementioned amendments of the Budget and Tax Codes and the introduction of new models of financing for social protection (i.e. social subsidies and allowances paid directly from the state budget rather than through the intermediary of subnational governments) and healthcare (i.e. direct contracts between healthcare institutions and the National Health Service of Ukraine for medical services). Intergovernmental transfers comprise earmarked transfers for delegated functions and equalisation grants. In 2020, 85.1% of total grants were current grants and 14.9% were capital grants.

OTHER REVENUE: Tariffs and fees represented 3.7% of subnational government revenue in 2020, well below the OECD average (13.3%). subnational governments receive administrative fees, which includes fees for registration of real estate ownership rights, registration of companies, registration of residence, passports, etc. These fees are increasing as subnational governments are being allocated new administrative responsibilities. In addition, subnational governments receive revenue from the delivery of local public services. They have the power to establish some user charges and fees, within the limits of the regulatory system.

Subnational government revenue from property is particularly high compared to the average of OECD countries (5.2% vs 2.0% of subnational revenue in 2020). They primarily come from property privatisation, the sale and lease of lands, and dividends from municipal enterprises.

Subnational government fiscal rules and debt

Dollars PPP / inh. % GDP % general government debt % SNG debt % SNG financial debt
Total outstanding debt 83 0.7% 1.2% 100.0% -
Financial debt 73 0.6% 1.1% 88.1% 100.0%
Currency and deposits 0 - - 0.0% 0.0%
Bonds / debt securities 13 - - 16.5% 18.7%
Loans 59 - - 71.7% 81.3%
Insurance pensions 0 - - 0.0% -
Other accounts payable 10 - - 11.9% -

SNG debt by category as a % of total SNG debt

  • Currency and deposits: -
  • Bonds/Debt securities: 16,45%
  • Loans: 71,65%
  • Insurance pensions: -
  • Other accounts payable: 11,9%

SNG debt by level of government as a % of GDP and as a % of general government debt

  • 1,5% 1,2%
  • 0,9%
  • 0,6%
  • 0,3%
  • 0%
  • 0.67%
  • 1.1%
  • % of GDP
  • % of GG Debt

SNG debt by category as a % of total SNG debt

  • Currency and deposits: 0%
  • Bonds/Debt securities: 16,45%
  • Loans: 71,65%
  • Insurance pensions: 0%
  • Other accounts payable: 11,9%

SNG debt by level of government as a % of GDP and as a % of general government debt

  • 1,5% 1,2%
  • 0,9%
  • 0,6%
  • 0,3%
  • 0%
  • 0.67%
  • 1.1%
  • % of GDP
  • % of GG Debt

FISCAL RULES: Fiscal rules for subnational government budgets in Ukraine are set by the Budget Code of Ukraine, which is supplemented every year by the “Law on the State Budget of Ukraine”. Subnational government fiscal rules are relatively loose and vary according to budget funds (general and special funds).

DEBT: Subnational governments’ borrowing framework is determined in the Budget Code and Resolution No. 110 of the Cabinet of Ministers “On Approving the Regulation on Local Borrowings Implementation”. Subnational governments can only access borrowing to fund investment projects (“Golden Rule”) and with the prior authorisation of the central government. Most subnational loans are contracted with the national treasury, although they also have access to loans from international financial organisations. Only regional councils and local councils of urban territorial communities have access to capital markets within the limits of the law and under the strict supervision of the central government. Pending approval by the Ministry of Finance, local debt can be issued under the following conditions: (i) the amount of borrowed fund does not exceed the deficit of the special fund of the local budget; (ii) debt service spending does not exceed 10% of the local budget during any year of debt servicing; and (iii) the overall amount of direct debt and guaranteed debt by the territorial community does not exceed 200% (or 400% for the city of Kyiv) of the average annual forecasted special fund‘s revenue.

In 2020, Ukrainian subnational government debt was low compared with OECD countries, where subnational government debt amounted to 27.9% of GDP and 20.2% of public debt on average. Subnational financial debt was mainly composed of loans (81.3%), while bonds accounted for 18.7%.



The impact of the COVID-19 crisis on subnational government organisation and finance

TERRITORIAL MANAGEMENT OF THE CRISIS: The COVID-19 crisis put significant pressure on Ukraine’s healthcare system, with high disparities among regions. The sector suffered from years of underinvestment, which resulted in a shortage of qualified medical staff and equipment to deal with the crisis, especially in rural areas. The central government reacted rapidly, by declaring a state of emergency and introducing a national quarantine as of March 2020. The president also gathered 15 of the largest investors in the country, requesting that they take over the responsibility of regional governors, in order to compensate for the lack of regional capacity to fight the pandemic. The private investors seem to have played their role, organising regional healthcare and purchasing medical supplies at their own expense. A number of healthcare facilities also reformatted their operations internally to be able to react more effectively (e.g. reallocation of their human and material resources across units).

The pandemic was managed centrally in Ukraine. The Cabinet of Ministers took several containment measures, monetary and fiscal policies and healthcare measures against the pandemic (including vaccination campaigns). Subnational governments were responsible for the territorial enforcement of the measures. However, most subnational governments faced difficulties in implementing the measures due to rapidly changing rules at the national level and public protests against restrictions, which resulted in high variation of compliance rates within territorial communities. Some communities refused to close businesses despite national regulation and some decided to soften the quarantine rules in response to business protests. The central government responded by conceding protesters’ demands and allowing several services to remain open.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: As a response to the crisis, local tax relief and deferrals were implemented to help sustain companies. In May 2020, the central government adopted Law no. 553, which temporarily abolished the local land fees (including land tax and lease payments) and the property tax (different from respective land plots) between March and April 2020. These revenue losses for subnational governments were not compensated by the central government, which is contrary to Art. 142 of the Constitution, stipulating that losses of local self-government bodies resulting from the decisions of state authorities shall be compensated by the government. On the spending side, local councils were reluctant to adopt special funding programmes against COVID-19. These extraordinary expenditures (e.g. purchase of protective equipment, medicines) were mainly financed by the central government.

In March 2020, the Cabinet of Ministers adopted a resolution to provide UAH 1.75 billion to subnational governments for COVID-19 control measures. In April 2020, it amended the Law “On the State Budget of Ukraine for 2020”, which establishes the UAH 80.9 billion “Fund to fight COVID-19 and its consequences“. However, the largest share was used to finance non-pandemic related items (i.e. the construction and repair of roads) and an audit revealed weak allocation planning and several breaches in tender rules.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The pandemic sharply decreased Ukrainian subnational revenue between 2019 and 2020 (23.6%), which reflects a drop in grants and subsidies (-43.7%), followed by a decline in fees and revenue from assets. This resulted from the quarantine and restrictive measures implemented in 2020. By contrast, subnational tax revenue was more resilient due to robust PIT and solid property tax, the latter being less dependent on the economic cycle. The robustness of the PIT, despite adverse economic conditions, relied on the increase of the average minimum wage (by 15%) and of the average wage (10%) between 2019 and 2020.

On the expenditure side, overall subnational spending decreased in 2020. This resulted from the closure of facilities and the cancellation of events during quarantine. It also resulted from the recent amendments in the financing models of social protection and healthcare (see above), which compensated for the one-off spending items linked to the crisis. The pandemic also changed the structure of subnational expenditure in 2020, with an increased share of salary expenditure in the public sector and a reduced portion of goods and services.

Subnational debt increased in 2020 as a result of higher local deficits. The high percentage change of debt between 2019 and 2020 (almost 60%) is also explained by the initial low level of debt at the subnational level, as well as inflation. This growth was financed by loans and additional issuance of bonds. However, the share of subnational debt in total public debt decreased due to higher level of public debt to finance the pandemic.

ECONOMIC AND SOCIAL STIMULUS PLANS: The ”Ukraine National Economic Strategy 2030” has several priorities: (i) increasing investment, (ii) developing PPPs, (iii) modernising and transforming coal regions, and (iv) improving digitalisation as a means of fighting corruption. In addition to this national plan, the country signed a Stand-By Agreement with the IMF in June 2020 in order to help subnational governments address the effects of the pandemic and to help sustain their recovery. The IMF approved a USD 700 million disbursement of the agreement in November 2021 and its extension to June 2022. The IMF reforms notably include fiscal consolidation and tax reforms, a better regulatory framework for private investment and improvement in the governance of state-owned enterprises (SOEs). The World Bank also provided USD 2.3 billion to support public budget and investment projects during the pandemic. A first EUR 350 million Development Policy Loan (DPL) was approved in June 2020 to support a land reform and promote public investment in land. A second USD 300 million DPL was approved in June 2020 to further mitigate the consequences of the crisis.

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