Ukraine 2016

The objective of the 2015 PEFA assessment is to provide the Government of Ukraine with an up-todate

diagnostic of public financial management performance based on internationally recognized PEFA

methodology and taken into account recent upgrade of the PEFA methodology. The PEFA Assessment

is carried out jointly by a group of partners - USAID, EU, GIZ, and the World Bank. The joint assessment

should help streamline policy dialogue and align messages to the Government across development

partners.

The PEFA assessment is an evaluation of PFM system performance in 2015, with the last completed

fiscal year taken into account for the purposes of assessment being 2014. The coverage of the assessment

is central government where possible, with some indicators focusing on budgetary central government

due to omissions in reporting as indicated in the indicator PI-6.

The period since the 2011 PEFA assessment was marked by persistent macro-economic crisis, civil

unrest of 2013-2014 and conflict in the East of Ukraine. In the face of substantial fiscal pressures, fiscal

management was dominated by short term consolidation needs. While the government succeeded in

maintaining fiscal discipline, short term crisis management has crowded out more long term institutional

reforms to strengthen public financial management.

Budget outturns in 2012-2014 show Ukraine’s ability to contain fiscal deficit with support of the IMF

program. Despite revenue shortfalls, the strong treasury function and control structure effectively contained

expenditures and expenditure arrears have been minimal. That said considerable fiscal risks materialized

– the large Naftogaz deficit, recapitalization of failed banks and Deposit Insurance Fund – weakening

the overall fiscal position. Weak governance of SOEs and fragmented asset management further

exacerbate fiscal risks.

The PFM system in Ukraine hampers efficient service delivery. The budget process does not have a

strong policy or strategic focus. There is no medium-term fiscal strategy to guide the budget process.

The Government has managed to contain the fiscal deficit during recent crises. But this has come at the

cost of budget predictability as expenditures have been cut through extensive reallocations during budget

execution. Performance information is included in program budgets but tends to focus on outputs

rather than outcomes and results. Weak links between sector plans and budget allocations and weaknesses

in public investment management both at selection and implementation stages are not conducive to

efficient targeting of resources to strategic policy priorities.

Ukraine’s PFM system is control oriented and rigid. The control environment is burdensome and obliges

those responsible for the delivery of public services to focus their efforts on compliance rather than

improving performance and the effectiveness of service delivery. Cash rationing practices have helped

curtail the deficit during the fiscal crisis, but will add further rigidity budget system once the fiscal situation

normalizes. Ongoing efforts to improve internal audit and external audit and focus on performance

auditing are only likely to have an impact on the performance orientation of the PFM system over the

longer-term.

In terms of performance change, the Ukrainian PFM system was characterized in the 2011 PEFA as

highly centralized with a focus on input controls. The structure of controls was found to be heavy and

not conducive to improvements in resource allocation and operational efficiency. This did not change.

Since 2011 notable progress has been made with the adoption of amendments to the Tax Code changes

related to data disclosure and transfer pricing controls, amendments to the Budget Code established a

multi-year budgeting framework, revamped intergovernmental transfers, and changes to procurement

law allowed for implementation of e-procurement and reduced number of exemptions. There was also

notable progress on budget transparency. However, in several important areas, such as medium term

budgeting and internal control, implementation of the new legal provisions has been slow.

The Government embarked on reforms to address poor governance after it took office in March 2014.

PFM is a key component of many of the needed changes: transparency and efficiency of public expenditure

allocations, strengthening external oversight of public funds are essential pre-requisites of improved

accountability and public service delivery. However, the National PFM Strategy and Action Plan

focuses on legislative initiatives and less on implementation. The Strategy does not provide a framework

that can guide and monitor PFM reform going forward. Progress in implementation will require

improvements in the mobilization of human resources, purchase of equipment and information systems,

regulatory and administrative provisions, and institutional coordination mechanisms.