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The Parliament approved the government's amendments to the State Budget for 2023 to provide for more and more sustainable funding for defense and security, as well as funds for urgent reconstruction. In particular, the expenditures for the reserve fund were doubled. They also optimized the structure of spending units and merged two ministries into a single Ministry of Community Development, Territories and Infrastructure, which was given the Fund for the Elimination of the Consequences of Armed Aggression.

To this end, the Parliament registered a draft law that, among other things, allowed the Rada to consider only those changes to the state budget that had received an expert opinion from the Ministry of Finance, and restored medium-term budget planning. In June, the Budget Committee updated the text, which later became the law (see more details in benchmark #10).

The Ministry of Finance has prepared a corresponding action plan, as evidenced by the document of the first evaluation of the IMF program. However, this plan is not publicly available. The document should serve as a basis for the preparation of the National Revenue Strategy (see Benchmark 20)

These changes are intended to promote higher debt sustainability of the state. The norms for the implementation of this Benchmark were introduced in the draft law No. 9346 together with the norms for the implementation of Benchmark No. 2 (see more on Benchmark No. 10)

In April 2023, the Parliament passed a law (No. 3035-IX) to increase the transparency and accountability of accounts opened with the NBU by managers of funds for charitable assistance and donations. This primarily concerned accounts on the UNITED24 platform. This finally provided a legal framework for transparent fundraising and spending from public charity accounts.

Right at the beginning of the full-scale invasion, the National Bank fixed the hryvnia and imposed strict currency restrictions. This was the right move, which prevented panic, reduced inflationary pressures, and stabilized Ukrainians' currency expectations.

Over time, the fixed exchange rate began to lose its benefits as the acute phase of the crisis passed. In general, a flexible exchange rate is much better for the economy. This benchmark provides for a gradual return to such an exchange rate and the necessary easing of currency restrictions. The NBU has approved the relevant Strategy, thus fully and timely fulfilling the conditions of this Benchmark.

More details: On June 29, 2023, the NBU Board approved the Strategy for easing currency restrictions, moving to greater exchange rate flexibility, and returning to inflation targeting. The public version of the Strategy was published on July 7. At the same time, the IMF has not set any deadlines for the implementation of this Strategy. The implementation of the strategy depends on whether macroeconomic conditions are favorable for the gradual removal of restrictions and the transition to a flexible exchange rate and inflation targeting.

The NBU is now gradually working on this and is removing currency restrictions in stages. For example, on October 3, the NBU switched to a regime of managed hryvnia flexibility, which is an intermediate stage between a fixed exchange rate and full flexibility.

Back in December 2022, the Ukrainian authorities promised to abolish the 2% tax for individual entrepreneurs, resume documentary inspections, and return penalties for violations of the use of cash registers. This step was supposed to increase the budget's own revenues. This was and still is important given the unprecedentedly large wartime budget deficit, which is currently being covered by foreign aid and loans. However, even foreign aid is not enough, and more resources are needed to finance the state's defense capabilities.

At the end of June 2023, the Verkhovna Rada adopted the relevant draft law. However, this law returned inspections only for manufacturers of excisable goods, gambling, and financial companies. Other businesses could operate without inspections. IMF representatives were not satisfied with this: the Fund said they were waiting for a new law to be passed on the resumption of tax audits.

On November 9, the Parliament adopted in the second reading the draft law No. 10016-d with an expanded range of taxpayers who may be subject to documentary scheduled audits starting from December 1, 2023. At the same time, the President of Ukraine signed Law No. 3453-IX only in early December, so it came into force on January 08, 2023.

The implementation of the benchmark will create a more transparent and efficient model for managing Ukraine's gas transmission system.

On July 28, 2023, the Verkhovna Rada adopted Law No. 3293-IX, which provides for the transfer of the corporate rights of LLC "Ukrainian Gas TSO" (GTSOU) to the management of the state represented by the Ministry of Energy of Ukraine. The law also obliges the appointment of an independent supervisory board of the GTSOU, which in turn will be responsible for appointing the head and members of the executive body of the Operator.

The first part of the benchmark was completed on September 22, when the Cabinet of Ministers transferred the corporate rights of GTSOU to the Ministry of Energy.

A month later, on October 27, JSC "Mahistralni Gazoprovody Ukrainy" , which was the parent company of the GTSOU, was liquidated. The termination of the company is one of the steps towards the corporate reform of the GTS Operator and the transition to the target model of a single company.

The second part was completed only at the end of October, when the Ministry of Energy approved the updated GTSOU charter agreed with the Energy Community Secretariat. The document appeared on the company's website on October 31.

Thus, the benchmark was completed only by the end of October, three months late.

One of the important steps on the way to returning to pre-war anti-corruption policies and procedures was to restore asset declarations by public officials.

In September 2023, the parliament passed a bill stipulating that the register of declarations would remain closed for another year. Declarants could voluntarily open their data for public access. The public and international partners reacted negatively to this news. As a result, the President of Ukraine vetoed the law and submitted his own proposals, which opened the register of declarations immediately.

On September 20, 2023, the Parliament reconsidered the above-mentioned draft law and adopted it with the President's proposals. Law No. 3384-IX entered into force on October 12, 2023. On December 10, 2023, the National Agency on Corruption Prevention announced the opening of public access to the Register of Declarations.

In July, the Parliament adopted the necessary amendments to the Budget Code (BCU) to increase the predictability and predictability of fiscal policy in the medium term.

The government has already presented some indicators and targets for the three-year perspective in the materials for the draft State Budget for 2024. In the spring, the government promised to adopt the Budget Declaration for 2025-2027, which should reflect the priorities of budget expenditures and the vision of the government's strategy in general.

In accordance with this benchmark, the government was supposed to adopt a Medium-Term Public Debt Management Strategy by the end of October 2023, which was done (corresponding to benchmark 12). Such a step is extremely important, as during the full-scale war, the level of public and publicly guaranteed debt increased from 50% of GDP to almost 80% of GDP and will continue to grow. This is an unsustainable level for countries with not very strong institutions, but in Ukraine it is caused by the need to borrow for economic stability.

The Budget Code also removed guarantees provided by the government for projects financed by international financial organizations (IFIs) from the budget rules. Previously, this provision limited the government's ability to receive funds from IFIs. Now, the absence of the restriction will allow the government to increase borrowing for reconstruction and recovery projects, as there is a lack of domestic sources of funding.

The steps outlined in the benchmark are intended to increase the predictability and resilience of the fiscal system.

On September 15, 2023, the government submitted to Parliament a draft law on the State Budget for 2024 with a long list of explanatory documents. The package, in particular, contained the following documents:

➔ planned KPIs of budget programs in 2022-2026; ➔ forecasts of budgetary and macroeconomic indicators for 2025-2026, and priority goals of fiscal policy; ➔ maximum expenditures for the period 2022-2026

The documents also contained a report assessing the impact of macroeconomic risks and risks of state-owned enterprises on the budget situation. For example, the government assessed the impact of three macroeconomic scenarios on the operations of major state-owned enterprises, including Naftogaz, Energoatom, Ukrenergo, and Ukrhydroenergo.

In the Memorandum with the IMF, the Ukrainian side promised to resume enhanced financial monitoring of top officials (politically exposed persons, PEPs) in accordance with FATF standards. This step "should ensure a more effective fight against money laundering."

As a reminder, on November 19, 2022, amendments to the law on financial monitoring came into force, which reduced the term of the status of a politically exposed person (PEP) from lifetime to 3 years after leaving office. Thus, financial institutions had the right to conduct enhanced financial monitoring of PEPs only for 3 years after their dismissal. The adopted changes were not in line with international anti-money laundering standards.

Therefore, on October 17, 2023, the Verkhovna Rada adopted a bill that effectively restores the lifetime status of a politically exposed person (PEP). At the same time, it increases the liability of banks for unreasonable refusal to provide financial services to users. Law No. 3419-IX came into force on October 29, 2023.

*Politically exposed persons are persons who perform or have performed significant public functions in Ukraine. The full list of such positions is defined in Article 1 of the Law on Financial Monitoring.

The implementation of the benchmark will bring banking supervision in Ukraine in line with the EU directives. This is necessary to bring Ukraine closer to EU accession. The NBU fully and timely fulfilled the relevant requirements.

Point I: On April 21, 2023, the National Bank of Ukraine separated the Department for Monitoring of Related Parties and the Department for Integrated Banking Supervision.

Point II: The NBU has introduced supervisory panels without publicly communicating this. Supervisory panels are supposed to advise the Supervisory Committee on issues and additionally independently analyze its decisions, facilitate horizontal communications between stakeholders, and highlight particularly important issues.

Point III: On July 29, 2023, the NBU resumed scheduled on-site inspections of banks and non-bank institutions in a remote format in order not to expose its employees to danger.

The State Tax Service (STS) and the State Customs Service (SCS) are important implementers of the upcoming National Revenue Strategy (see Benchmark 20). To ensure that the National Revenue Strategy is coherent and consistent, the IMF program added a structural Benchmark to develop reform plans for both services.

The STS and the SMS had to prepare action plans by the end of October, which will be further integrated into the overall National Revenue Strategy (see Benchmark 20). On October 23-27, representatives of the STS and the SMS met with the IMF to discuss the progress. The second review of the IMF program revealed that this benchmark was met on time and in full.

More details: On October 23, the STS announced that it would participate in the IMF technical mission together with the SMS to continue working on its reform plans. On October 31, following the meeting, the STS announced progress in fulfilling the task.

The State Tax Service and the State Migration Service are systemically important institutions not only for filling the budget, but also for shaping the attitude of business and citizens to the state. Studies show a low level of trust in the activities of fiscal authorities. The low level of trust is mainly due to non-transparency, slow customs clearance, and corruption. At the same time, the trust index has remained low since the beginning of the invasion, unlike many other institutions. Numerous attempts to reform these bodies by previous governments have not resulted in sustainable positive changes.

The medium-term strategy for public debt management will increase the transparency and predictability of fiscal policy and optimize the structure of public debt.

In accordance with the amendments to the Budget Code (see Benchmarks #2 and #10), the government had to update the Medium-Term Public Debt Management Strategy. Public debt and publicly guaranteed debt to GDP has already increased from 50% at the end of 2021 to about 80% at the end of 2022 and may exceed 100% of GDP in 2024. Therefore, a clear Strategy should provide the necessary predictability of the government's debt policy.

A challenge for the preparation of the Strategy is the need to restructure the public debt in 2024, which is only at the initial stage of negotiations.

On October 27, the Ministry of Finance adopted a separate Strategy, which clearly plans to conduct a public debt management operation and intends to adopt an updated Strategy afterwards. The document states that the Ministry of Finance plans these steps in order to: "(i) gradually restoring Ukraine's debt sustainability, (ii) preserving liquidity and reducing the state budget deficit during the IMF program period, and (iii) creating the necessary conditions for the commercial sector to participate in the post-war reconstruction of Ukraine to restore Ukraine's market access as soon as possible."

In addition to restoring asset declarations by public officials (Benchmark 9), the Ukrainian side promised to improve the declaration system. The changes should allow officials to automatically fill in information from other related databases and registries.

The draft law on the renewal of the declaration process, adopted in September 2023, stipulates that the NACP will provide access to and automatic transfer of data from other registers and databases to the declaration form. At the same time, the function of automatically filling in the available data does not relieve the declarant of the obligation to indicate in the declaration all the information known to him or her, even if it is not available in other databases.

Law No. 3384-IX came into force on October 12, 2023.

The implementation of the benchmark is important for the corporate governance reform of state-owned enterprises. Supervisory boards should eliminate the "manual control" regime in state-owned companies. This helps to transform state-owned enterprises into transparent, efficient, competitive companies that are able to attract investment and generate profits.

The benchmark can be considered a logical continuation of Benchmark No. 8 on the introduction of a single company to manage the gas TSO of Ukraine. On October 31, the Government approved the company's Supervisory Board: three independent members and one state representative, completing this benchmark in time. At the same time, the issue of appointing another state representative to form a full 5-member board remains.

According to the Charter, the Supervisory Board of GTSOU should consist of five members, three of whom should be independent. As of mid-January, 5 members have not been appointed and there are no governmental statements on this matter. In turn, it was reported that Prime Minister Denys Shmyhal was promoting the candidacy of Viktor Pynzenyk for the position of state representative in the supervisory board of GTSOU, who previously held the same position in the supervisory board of JSC "Mahistralni Gazoprovody Ukrainy".

Thus, the benchmark is considered to be fulfilled, but the Government should keep in mind the quality of such fulfillment and appoint 5 members of the Supervisory Board of GTSOU.

Improving the quality of public investment management (PIM) will allow for more economical and efficient use of public funds in the context of limited budgetary resources. One of the steps should be the unification of PIM approaches and the competitive selection of projects for budget financing.

According to the World Bank, in February 2023, Ukraine's reconstruction will require $411 billion. US DOLLARS. Private business should become one of the most important sources of financing for reconstruction. An important tool for attracting companies will be public-private partnerships (PPPs), which, unfortunately, are not yet working in Ukraine. Revising approaches to PPPs could help.

Accordingly, to change approaches to PIM, in December, the CMU adopted a draft Roadmap for Public Investment Management Reform by a protocol decision, which is intended to "create a context, vision of the basic principles and directions for building an integrated, sustainable and effective public investment management system that ensures planning of investment projects based on strategic priorities and a medium-term budgetary framework, their selection in accordance with unified and transparent procedures and clear criteria, and implementation of

In fact, this framework document envisages the creation of a targeted OGP model that meets the reconstruction principles developed by RRR4U: prioritization, sustainability, efficiency and effectiveness, transparency and accountability.

Details: In the context of a full-scale war, Ukraine finances half of its state budget expenditures with foreign aid. This situation is not sustainable, and this dependence must be gradually eliminated. The National Revenue Strategy aims to create conditions for increasing domestic budget revenues. To do this, Ukraine needs to strengthen its ability to collect tax and customs revenues.

The strategy includes the following measures mentioned in the IMF program:

➔ strengthening the tax and customs authorities; ➔ closing the possibility to use the simplified taxation system instead of official employment of full-time employees; ➔ bringing VAT and excise taxes in line with EU legislation; ➔ strengthening anti-corruption measures; ➔ reforms in the tax system.

On December 27, 2023, the government approved the National Revenue Strategy, meeting the conditions for the IMF program's Benchmark to be activated. The adopted Strategy does not mention the reform of the Bureau of Economic Security, although the IMF program envisaged the inclusion of relevant proposals in the Strategy.

In the Memorandum with the IMF, the Ukrainian side indicated its intention to strengthen the effectiveness of anti-corruption institutions. The changes should also affect the Specialized Anti-Corruption Prosecutor's Office (SAPO). On September 15, to fulfill the benchmark, the government submitted to the Verkhovna Rada draft law №10060, which meets the requirements of the IMF and the EU and is aimed at:

➔ improving the procedure for competitive selection of SAPO heads and prosecutors; ➔ strengthening the SAPO's ability to regulate its own organizational structure and activities; ➔ clarifying the powers of the head of the SAPO; ➔ creation of a Specialized Disciplinary Commission of SAPO prosecutors; ➔ conducting regular audits of SAPO activities with the participation of external experts with international experience.

On December 08, 2023, Ukraine's parliament adopted the above draft law. The law came into force on January 1, 2024.

Financing defense and mobilizing its own tax and non-tax revenues remains one of the most important items on the fiscal agenda. Based on the conclusions of the Revenue Working Group established in December 2023, the government was to prepare short-term measures to increase revenues by at least 0.5 percent of GDP, with the aim of amending the 2024 budget as necessary.

The measures proposed by the Ministry of Finance to mobilize additional revenues are expected to increase budget revenues by UAH 44.2 billion. The measures include an increase in revenues from military and excise duties, and the introduction of monthly advance payments of income tax by companies engaged in fuel retailing.

The Ministry of Finance expected that by the end of the first quarter of 2024, the necessary draft laws will be submitted to the Cabinet of Ministers and considered by the Verkhovna Rada. However, the issue of tax increases was postponed until July, when a new draft law with a larger tax increase was proposed.

Limited budgetary funding requires a review and conditional streamlining of the 5-7-9% loan program for businesses.

Initially, in 2020, the program "Affordable Loans 5-7-9%" was created to support small and medium-sized enterprises (SMEs) for which conventional bank loans were not available. Such loans were also issued for investment and startup support. After the full-scale invasion began, working capital coverage was added to the program and expanded to large companies. In fact, in 2022, the program became the main tool for business support and a "lifeline" for individual companies. In some banks, 80-90% of loans were issued under this program.

At the same time, due to the limited amount of funds in the budget, there is a need to return the program to supporting SMEs. Instead, in September, the government expanded the 5-7-9% program, which contradicts its commitment under the IMF Memorandum. For example, the government allowed companies in the energy efficiency and recycling sectors to use affordable loans. In addition, the maximum term of the program was increased to 10 years, and the program limit was raised to UAH 150 million, which is important for large companies.

In December 2023, the government adopted amendments to the decree on providing support under this program, narrowing the provision of compensation for investment projects and working capital for non-priority sectors to small and medium-sized enterprises only (for working capital in priority sectors, large companies can still receive support).

In March 2024, the government submitted a concept for the 5-7-9 program to the IMF, but it has not been made public or officially approved.

Ukraine should adopt a new law on the BES, which should provide it with clear powers to investigate major economic crimes in line with best practices, and create a legal framework for the BES to select its management and staff. The law should respect the existing division of investigative powers between the BES and the NABU.

The new legislation will pave the way for the renewal of the BES management and detectives through transparent competitions. This will give the bureau a chance to turn into an effective body that will prevent economic crimes and schemes that cause budget losses.

On June 20, the Verkhovna Rada passes Bill 10439, the text of which is in line with the requirements of international partners. On June 28, it is signed by the President.

Next, it is necessary to select a professional, independent head of the BES and begin the process of reforming the institution. The law provides for a change of leadership and re-certification of all BES employees. The head will be selected by a six-member commission, three of whom will be appointed by international experts and three by the Cabinet of Ministers.

The revision of tax privileges should be a step towards broadening the domestic revenue base without raising tax rates. By the end of September 2024, the government should estimate the losses from all tax privileges and propose measures to help reduce budget losses due to preferential taxation.

This step will help Ukraine increase its ability to raise domestic revenues, which is a crucial task given the need to ensure high defense spending and the expected decline in international support for Ukraine.

Ukraine has a large number of state-owned enterprises, which sometimes create fiscal risks, but also fiscal and quasi-fiscal losses. An important reason for the deterioration in the financial condition of SOEs was the full-scale war. However, this is partly due to the government's policy (in particular, refraining from raising tariffs for electricity, natural gas, and other utilities for households). To cover the financial gaps, large SOEs either accumulate debts, which can then be covered by direct transfers from the state budget or by new borrowings from international official partners or IFIs. The latter, ceteris paribus, could be directed to the budget to finance urgent expenditures. SOEs' borrowings are guaranteed by the state, and therefore, in case of problems, the debt falls on the state.

That is why it is important to monitor the current financial situation of state-owned enterprises and conduct stress testing. This is exactly the kind of analysis and assessment that should be carried out within the framework of this structural Benchmark for large SOEs that are most affected by a full-scale war. The results should be reflected in the fiscal risk report prepared annually by the Ministry of Finance as part of the budget process.

The resumption of medium-term budget planning was among the important areas of changes in the already implemented structural Benchmarks. Thus, medium-term forecasts of expenditures and revenues and a report on fiscal risks were submitted as additional materials to the draft State Budget for 2024. Medium-term budget planning increases sustainability by ensuring a predictable budget policy.

That is why, with the help of IMF experts, the government plans to analyze its experience in preparing the Budget Declaration (not very rich, since only one Budget Declaration has been adopted).

The diagnostic assessment will be the basis for the preparation of the Budget Declaration for 2026-2028. It is intended to slightly change the approach to preparing for the bottom-up public finance management process to reflect a larger share of expenditures and losses on public service financing.

The analysis will also include the process of preparing the Budget Declaration for 2025-2027, which the CMU adopted on June 28, 2024 with a delay (according to the Budget Code, it was supposed to be done by June 1).

This benchmark is actually a continuation of steps to improve the efficiency of public investment management, the roadmap for reforming which was adopted to implement Structural benchmark 19.

Given the need to finance the reconstruction, the government is expected to adopt a resolution that will provide for a clear link between medium-term budget planning and recovery priorities. The Ministry of Finance should play a key role in this process (which is actually a response to the confrontation between the Ministry of Finance and the Ministry of Reconstruction that actually occurred in the fourth quarter of 2023).

It also identifies the important role of coordination between the Ministry of Finance and line ministries responsible for the implementation of investment projects in the public sphere.

Ukrainian state represented by the Cabinet of Ministers is the registered owner of the three publicly owned banks (Oschadbank, Ukreximbank, and Privatbank). Ukrgasbank and Sens Bank are owned by Ukrainian state as represented by the Ministry of Finance. In practice, the Ministry of Finance acts as the shareholder of all state-owned banks, although the Government formally takes key decisions upon the proposal of the Ministry of Finance.

During the war, Sens Bank (formerly Alfa) and PINbank (First Investment Bank) were nationalized. Sense Bank was sold to the state for UAH 1 by the DGF as part of the bank resolution procedure due to sanctions against its owners. On January 17, 2024, 89% of PINBank's shares were registered to the state, represented by the State Property Fund, based on a decision of the HACC that came into force in March 2023.

Currently, the benchmark is fulfilled: all state-owned banks except PINbank are systemic banks and the Ministry of Finance is responsible for their management either directly or through government decisions developed by the Ministry of Finance. PINbank does not need public funds. It remains under the management of the SPFU, which is currently preparing the bank for privatization. As the Benchmark is permanent, the status of its implementation may change in the future.

The Deposit Guarantee Fund (DGF), the Ministry of Finance, and the NBU should prepare a framework for the rehabilitation of the banking system.

The framework for bank rehabilitation will include: (i) mechanisms to support the DGF; (ii) measures to strengthen the banking system's operational readiness for unforeseen situations; (iii) improved procedures for bank resolution and early intervention measures; and (iv) alignment of the criteria for counterparty eligibility for NBU monetary policy operations and lender of last resort operations with international best practices.

As an interim step, the DGF and the NBU will prepare, in consultation with IFI stakeholders, (i) a diagnostic note by the end of February 2024 to assess the current infrastructure for resolving insolvent banks, including an analysis of current challenges; and (ii) based on the diagnostic, adopt a roadmap by the end of April 2024 that will set out a reform agenda to further strengthen the authorities' capacity to resolve and manage financial sector crises, in particular to address key gaps by the end of December 2024.

The NBU is to introduce risk assessment methodologies for supervision in order to make informed decisions on supervisory priorities. The methodology will be applied to all banks, and a supervisory action plan will be prepared by the end of December 2024. While improving supervisory results, the NBU also plans to increase supervisory efficiency by improving the allocation of resources and processes by adjusting the organizational structure of banking supervision. This will be complemented by strengthening the professional capacity of banking supervision by developing the necessary professional profiles and introducing a multi-year training program for new employees.

The benchmark will help determine the amount of debt and the financial condition of district heating companies (DHCs), including the reasons for the accumulation of debt before and after the start of the war, on the eve of the 2024/25 heating season. Thus, according to Naftogaz of Ukraine, as of February 21, 2022, the total overdue debt of DHCs and CHP plants to Naftogaz is 49.1 billion UAH (including 39.3 billion UAH for gas for heat production). At the beginning of the heating season in 2023, the state's debt on the difference in tariffs amounted to about 36 billion UAH, and according to preliminary estimates, it will exceed 54 billion UAH in 2024. At the same time, the debt of heat producers (heat supply companies, condominiums, housing cooperatives, and apartment building managers) for natural gas consumed as of April 25, 2024, amounts to 100.4 billion UAH, which is significantly higher than the difference in heat supply tariffs of 34.9 billion UAH, as confirmed by the protocols of territorial commissions. Therefore, the improvement of the financial condition of the heating companies primarily depends on the measures taken to repay the natural gas debts of these companies, which are not related to the difference in tariffs. Thus, the total amount of debt of the population for consumed utilities in the field of heat supply as of 01.03.2024 is 35.9 billion UAH.

In the Letter of Intent dated December 1, 2023, the Ukrainian side noted that DHCs had accumulated a significant amount of debt to Naftogaz before and after the war, which is a result of the accumulated difference in tariffs and the impact of the war. The issue will be resolved in a comprehensive manner when the war-related pressure on the budget is reduced by developing a new tariff methodology. However, the signatories (the President, the Prime Minister, the Minister of Finance, and the Governor of the NBU) also added that the amount of debt and the financial condition of the DHCs will be determined through a desk audit conducted by a reputable audit firm, which will distinguish between debt incurred before and after February 2022. In addition, based on the results of consultations with the IMF held pursuant to clause 6.1 of Minutes No. 64 of the meeting of the Cabinet of Ministers of Ukraine dated 06.06.2023, it was established that the sources for making settlements on the difference in tariffs should be budget-neutral for the State Budget of Ukraine and not violate the fiscal sustainability of the state, the preservation of which is one of the key priorities of the IMF Program.

At the end of December 2023, the Verkhovna Rada registered Draft Law No. 10383 "On Amendments to the Law of Ukraine "On the State Budget of Ukraine for 2024" on Compensation of the Tariff Difference", which was developed, in particular, to address the problem of the debt of the DH companies. However, as of March 2024, the draft law is still under consideration, and the expert opinion of the Ministry of Finance does not support the adoption of this draft law.

In turn, on May 20, the Verkhovna Rada registered a new draft Law No. 11273 “On Amendments to Certain Laws of Ukraine on the Settlement of Accounts Payable of Heat, Water and Wastewater Companies” to clarify and specify certain provisions of legislative acts on the settlement of accounts payable of heat, water and wastewater companies. As of the end of June 2024, the draft law is under consideration.

The issue of auditing district heating companies is not new. Back in 2019, the government instructed the Ministry of Regional Development and the State Audit Service to audit all district heating companies to ensure that the cost of heat and water was fair. In January 2022, before the full-scale invasion began, the Cabinet of Ministers again commissioned an audit of the extent to which Naftogaz's activities (in particular, fixed-price contracts) subsidise gas prices for households and DH companies. From February to September 2023, the State Audit Service of Ukraine inspected a number of heat supply companies in different regions that are entitled to reimbursement of tariff differences from the budget and found that the amount of reimbursement of tariff differences was overstated by more than UAH 4 billion.

Taken together, the above information cannot indicate that the benchmark has been completed, which should reflect an accurate diagnosis of the problem of the DHCs' debts before the war and after February 2022, which will allow for a comprehensive settlement

The need to implement the benchmark is due to the excessively long consideration of criminal proceedings by the High Anti-Corruption Court of Ukraine (HACC) due to the heavy workload of judges. To solve this problem, the Ukrainian side undertook to amend the legislation in terms of consideration of cases in the first instance by one anti-corruption judge or a panel of three anti-corruption judges.

In late March 2024, Draft Law No. 11130 was submitted to the Parliament. According to the explanatory note, the draft law is aimed at improving the efficiency of court proceedings without violating procedural deadlines, and therefore proposes to allow the court to consider certain cases by a judge alone.

On April 24, 2024, the Verkhovna Rada adopted the draft law as a whole. It is envisaged that cases in the court of first instance will be heard by a single judge. At the same time, it is possible to consider cases by a panel of three judges only at the request of the accused in certain categories of crimes.

The issue of conducting an external audit of the NABU has been on the Ukrainian agenda for quite some time. Both the International Monetary Fund and the European Commission have repeatedly pointed out the need for it. In the Memorandum on Economic and Financial Policy of December 5, 2018, the Ukrainian side promised to complete the external audit of the NABU by the end of July 2019. However, this promise was never realized.

As part of the current program, the Ukrainian side is to conduct an external audit of the NABU with the participation of three independent experts with international experience by the end of September 2024 and publish its report.

In mid-February 2024, NABU Director Semen Kryvonos announced that the audit process had already begun. In particular, the Government has sent the relevant letters to nominate candidates for the commission to review the bureau's activities.

The updated Memorandum of June 17, 2024 states that the CMU is cooperating with international partners to appoint independent experts for the planned external audit of the NABU and will provide further support to this external audit commission, as necessary, once the external auditors are nominated and appointed.

Thus, there is not much time left to conduct the NABU audit, so efforts should be accelerated to ensure timely completion of the benchmark

In December 2022, the Parliament liquidated the Kyiv District Administrative Court, which considered disputes involving central executive authorities. The KDAC's cases were to be transferred to the Kyiv District Administrative Court until a new Kyiv City Administrative Court was established.

However, the European Commission in its Report published in November 2023 noted that after the liquidation of the KDAC, access to justice in cases involving central authorities is deteriorating, as a new court has not yet been established and the court with temporary powers is overcrowded. Therefore, the EC, as well as the IMF, points to the need to create a new administrative court staffed by properly vetted judges.

Therefore, the Ukrainian government committed to adopt a law establishing a new court that will be proceeding administrative cases against national government agencies (e.g., NBU, NABU, NAСP) by judges who have been duly vetted for professional competence and integrity, with the decisive and determining vote of independent experts with international experience.

At the end of March 2024, it became known that the CMU had drafted a bill on the High Administrative Court of Ukraine. However, as of mid-July 2024, the draft law has not yet been submitted to the Parliament.

For years, state-owned enterprises (SOEs) have been a source of inefficiency and fiscal risks. To improve efficiency, a corporate governance reform of SOEs was introduced but has not yet been completed.

In the Memorandum, the Ukrainian side indicated its intention to improve the efficiency of SOE management through further reform of SOE corporate governance in close cooperation with international partners, in particular:

➔ to adopt a law on corporate governance of SOEs (this refers to the draft law No. 5593-d on improving corporate governance, which was adopted as a basis in July 2021 and in general in February 2024; ➔ implementation of relevant bylaws; ➔ assessment of the financial condition and fiscal risks of state-owned enterprises in the state ownership policy by the end of March 2024 (as an intermediate step in the implementation of Structural Benchmark No. 28) ➔ As a structural Benchmark, it is envisaged to develop a comprehensive policy on state ownership and dividends, as well as a privatization strategy. It is likely that the privatization strategy will take into account past approaches to triage.

This is an important Benchmark, since today there is virtually no ownership policy, which prevents SOEs from operating efficiently. The share of dividends that should be allocated to the budget is determined each year based on the budget's needs rather than the need for SOEs to operate efficiently. It should be added that the IMF does not support the idea voiced by Ukrainian politicians to create a state holding company that would unite all state-owned enterprises. According to the Fund's experts, this is premature given the financial and potential management risks.

Today, business identifies customs issues as problematic, and experts often describe the work of the State Customs Service as inefficient. Various shortcomings in both legislation and practice lead to smuggling and minimization of customs value, which means a loss of budget revenues that are essential for financing defense and security.

That is why it has been determined that by the end of October, the Parliament should adopt amendments to the Customs Code, which should also come into force by that date. As stated in the Memorandum, these changes should be harmonized with the EU norms. The State Customs Service should continue to be subordinated to the Ministry of Finance. Since businesses often complain about corruption in the SMS, one of the areas of change should be to strengthen the integrity of the staff and introduce a process of selecting management based on a transparent competition with the participation of international experts. It is also noted that other reforms in 2024 include (i) modernization of the framework conditions for bringing to administrative responsibility for violation of customs rules and (ii) development of criteria for assessing the impact of the Anti-Corruption Program of the SCS.

Today, two draft laws have been registered in the Parliament, which together mostly comply with the above provisions: No. 10411 (tabled for second reading on 22.07.2024) and No. 6490-d (adopted as a basis on 11.04.2023).

The updated Memorandum of June 17, 2024 provides that in order to strengthen effective procedures for investigating corruption crimes, amendments to the Criminal Procedure Code will be introduced, in particular regarding: enabling the Prosecutor General to delegate to the SAPO the management of extradition and mutual legal assistance requests in connection with the investigation of corruption crimes; abolishing the mandatory closure of pre-trial investigations in connection with the expiration of the pre-trial investigation after the notification of suspicion (the so-called "Lozovyi’s amendments"*); empowering the investigating judge, after the deadline has passed and at the request of the accused or victims, to promptly induce prosecutors to make a decision on the pre-trial investigation (either to close the proceedings or to complete the pre-trial investigation) or to dismiss the request.

The issue of repealing the “Lozovyi’s amendments” has long been on the Ukrainian agenda. However, in recent years, its resolution has been either postponed or partially considered. At the same time, our partners have also emphasized the need to repeal the “Lozovyi’s amendments”. The ambassadors of the Group of Seven (G7) countries in a letter dated November 2023 to the Speaker of the Verkhovna Rada noted the need to abolish the restrictions on the time limits for pre-trial investigation before the notification of suspicion in the Criminal Procedure Code "to prevent premature closure of cases". It is not surprising that the Memorandum with the IMF has been supplemented with such a benchmark.

* ”Lozovyi's amendments" are a number of changes to the Commercial Procedure Code, the Civil Procedure Code, the Criminal Procedure Code, as well as the Code of Administrative Procedure of Ukraine and other regulatory acts proposed by MP Andriy Lozovyi.

The Parliament approved the government's amendments to the State Budget for 2023 to provide for increased and more sustainable funding for defence and security, as well as funds for urgent reconstruction. In particular, the expenditures appropriated to the reserve fund were doubled. In addition, two ministries were merged into a single Ministry of Communities, Territories and Infrastructure, which was given responsibility for the Fund for the Elimination of the Consequences of Armed Aggression.

To this end, the Parliament registered a draft law that, among other things, allowed the Rada to consider only those changes to the state budget that had received an expert opinion from the Ministry of Finance, and restored medium-term budget planning. In June, the Budget Committee updated the text, which later became law (see more in Benchmark #10).

The Ministry of Finance has prepared an action plan, as noted in the IMF assessment under the first review.. The document should serve as a input for the preparation of the National Revenue Strategy (see benchmark №20)

These changes are intended to contribute to higher debt sustainability of the state. The provisions for the implementation of this milestone were included in the draft law No. 9346 together with the provisions for the implementation of milestone №2 (see more in benchmark №10)

In April 2023, the Parliament passed a law (No. 3035-IX) to enhance the transparency and accountability of accounts opened with the NBU by the spending units for charitable assistance and donations. This primarily concerned accounts on the UNITED24 platform. This finally provided a legal framework for transparent fundraising and spending from public charity accounts.

Right at the beginning of the full-scale invasion, the National Bank fixed the hryvnia and imposed strict currency restrictions. This was the right move, which prevented panic, reduced inflationary pressures, and stabilized Ukrainians' currency expectations.

Over time, the fixed exchange rate began to lose its benefits as the acute phase of the crisis passed. In general, a flexible exchange rate is much better for the economy. This benchmark provides for a gradual return to flexible exchange rate and the necessary easing of currency restrictions. The NBU has approved the relevant Strategy, thus fully and timely fulfilling the conditions of this benchmark.

More details: On June 29, 2023, the NBU Board approved the Strategy for easing currency restrictions, moving to greater exchange rate flexibility, and returning to inflation targeting. The public version of the Strategy was published on July 7. At the same time, the IMF has not set any deadlines for the implementation of this Strategy. The implementation of the strategy depends on whether macroeconomic conditions are favorable for the gradual removal of restrictions and the transition to a flexible exchange rate and inflation targeting.

The NBU is now gradually working on this and is removing currency restrictions in stages. For example, on October 3, the NBU switched to a regime of managed hryvnia flexibility, which is an intermediate stage between a fixed exchange rate and full flexibility.

Back in December 2022, the Ukrainian authorities promised to abolish the 2% tax for individual entrepreneurs, resume documentary inspections, and return penalties for violations of the use of cash registers. This step was supposed to increase the budget's own revenues. This was and still is important given the unprecedentedly large wartime budget deficit, which is currently being covered by foreign aid and loans. However, even foreign aid is not enough, and more resources are needed to finance the state's defense capabilities.

At the end of June 2023, the Verkhovna Rada adopted the relevant draft law. However, this law returned inspections only for manufacturers of excisable goods, gambling, and financial companies. Other businesses could operate without inspections. IMF representatives were not satisfied with this: the Fund said they were waiting for a new law to be passed on the resumption of tax audits.

On November 9, the Parliament adopted in the second reading the draft law №10016-d with an expanded range of taxpayers who may be subject to documentary scheduled audits starting from December 1, 2023. At the same time, the President of Ukraine signed the law only in early December, so it came into force on January 08, 2023.

The implementation of the benchmark will create a more transparent and efficient model for managing Ukraine's gas transmission system.

On July 28, 2023, the Verkhovna Rada adopted Law No. 3293-IX, which provides for the transfer of the corporate rights of LLC "Ukrainian Gas TSO" (GTSOU) to the management of the state represented by the Ministry of Energy of Ukraine. The law also obliges the appointment of an independent supervisory board of the GTSOU, which in turn will be responsible for appointing the head and members of the executive body of the Operator.

The first part of the benchmark was completed on September 22, when the Cabinet of Ministers transferred the corporate rights of GTSOU to the Ministry of Energy.

A month later, on October 27, JSC "Mahistralni Gazoprovody Ukrainy" , which was the parent company of the GTSOU, was liquidated. The termination of the company is one of the steps towards the corporate reform of the GTS Operator and the transition to the target model of a single company.

The second part was completed only at the end of October, when the Ministry of Energy approved the updated GTSOU charter agreed with the Energy Community Secretariat. The document appeared on the company's website on October 31.

Thus, the benchmark was completed only by the end of October, three months late

One of the important steps on the way to returning to pre-war anti-corruption policies and procedures was to restore asset declarations by public officials.

In September 2023, the parliament passed a draft law stipulating that the register of declarations would remain closed for another year. Declarants could voluntarily open their data for public access. The public and international partners reacted negatively to this news. As a result, the President of Ukraine vetoed the law and submitted his own proposals, which opened the register of declarations immediately.

On September 20, 2023, the Parliament reconsidered the above-mentioned draft law and adopted it with the President's proposals. The law entered into force on October 12, 2023. On December 10, 2023, the National Agency on Corruption Prevention announced the opening of public access to the Register of Declarations.

In July, the Parliament adopted the necessary amendments to the Budget Code to make fiscal policy more predictable in the medium term.

The government has already presented some indicators and targets for the three-year perspective in the materials for the draft State Budget for 2024. In the spring 2024, the government promised to adopt a Budget Declaration for 2025-2027, which should reflect the priorities of budget expenditures and the vision of the government's strategy in general.

The government committed to approve the Medium-Term Public Debt Management Strategy by the end of October 2023 (which corresponds to benchmark 12). This step is extremely important, as the level of public and publicly guaranteed debt increased from 50% of GDP to almost 80% of GDP during the full-scale war and will continue to grow. This is an unsustainable level for countries with weak institutions, but in Ukraine it is driven by the need to borrow for economic stability.

The Budget Code also made budget rules not applicable to the guarantees provided by the government for projects financed by international financial institutions (IFIs). Previously, this provision limited the government's ability to receive funds from IFIs. Now, the absence of the restriction will allow the government to increase borrowing for reconstruction and recovery projects, as there is a lack of domestic sources of funding

The steps outlined in the benchmark are intended to increase the predictability and resilience of the fiscal system.\

On 15 September 2023, the government submitted to Parliament a draft law on the State Budget for 2024 with a long list of explanatory documents. The package included the following documents:

➔ planned KPIs for budget programmes in 2022-2026; ➔ forecasts of budgetary and macroeconomic indicators for 2025-2026, and priority fiscal policy objectives; ➔ Limit expenditures for the period 2022-2026

The documents also contained a report assessing the impact of macroeconomic risks and risks of state-owned enterprises on the budget. For example, the government assessed the impact of three macroeconomic scenarios on the operations of major state-owned enterprises, including Naftogaz, Energoatom, Ukrenergo and Ukrhydroenergo.

In the Memorandum with the IMF, the Ukrainian side promised to resume enhanced financial monitoring of top officials (politically exposed persons, PEPs) in accordance with FATF standards. This step "should ensure a more effective fight against money laundering."

As a reminder, on November 19, 2022, amendments to the law on financial monitoring came into force, which reduced the term of the status of a politically exposed person (PEP) from lifetime to 3 years after leaving office. Thus, financial institutions had the right to conduct enhanced financial monitoring of PEPs only for 3 years after their dismissal. The adopted changes were not in line with international anti-money laundering standards.

Therefore, on October 17, 2023, Ukraine's parliament adopted a draft law that effectively restores the lifetime status of a politically exposed person (PEP). At the same time, it increases the liability of banks for unreasonable refusal to provide financial services to users. The law came into force on October 29, 2023.

*Politically exposed persons are persons who perform or have performed significant public functions in Ukraine. The full list of such positions is defined in Article 1 of the Law on Financial Monitoring.

The implementation of the benchmark will bring banking supervision in Ukraine in line with the EU directives. This is necessary to bring Ukraine closer to EU accession. The NBU fully and timely fulfilled the relevant requirements.

Point I: On April 21, 2023, the National Bank of Ukraine separated the Department for Monitoring of Related Parties and the Department for Integrated Banking Supervision.

Point II: The NBU has introduced supervisory panels without publicly communicating about it. Supervisory panels are supposed to advise the Supervisory Committee on issues and additionally independently analyze its decisions, facilitate horizontal communications between stakeholders, and highlight particularly important issues.

Point III: On July 29, 2023, the NBU resumed scheduled on-site inspections of banks and non-bank institutions in a remote format in order not to expose its employees to danger.

The State Tax Service (STS) and the State Customs Service (SCS) are important implementers of the upcoming National Revenue Strategy (see benchmark 20). To ensure that the National Revenue Strategy is coherent and consistent, the IMF program added a structural benchmark to develop reform plans for both services.

The STS and the SMS had to prepare action plans by the end of October, which will be further integrated into the overall National Revenue Strategy (see benchmark 20). On October 23-27, representatives of the STS and the SMS met with the IMF to discuss the progress. The second review of the IMF program revealed that this benchmark was met on time and in full.

More details: On October 23, the STS announced that it would participate in the IMF technical mission together with the SMS to continue working on its reform plans. On October 31, following the meeting, the STS announced progress in fulfilling the task.

The State Tax Service and the State Migration Service are systemically important institutions not only for filling the budget, but also for shaping the attitude of business and citizens to the state. Studies show a low level of trust in the activities of fiscal authorities. Low trust is mainly due to non-transparency, slow customs clearance, and corruption. At the same time, the trust index has remained low since the beginning of the invasion, unlike many other institutions. Numerous attempts to reform these bodies by previous governments have not resulted in sustainable positive changes.

The medium-term strategy for public debt management will increase the transparency and predictability of fiscal policy and optimize the structure of public debt.

In accordance with the amendments to the Budget Code (see benchmarks #2 and #10), the government had to update the Medium-Term Public Debt Management Strategy. Public debt and publicly guaranteed debt to GDP has already increased from 50% at the end of 2021 to about 80% at the end of 2022 and may exceed 100% of GDP in 2024. Therefore, a clear Strategy should provide the necessary predictability of the government's debt policy.

A challenge for the preparation of the Strategy is the need to restructure the public debt in 2024, which is only at the initial stage of negotiations.

On October 27, the Ministry of Finance adopted a separate Strategy, which clearly plans to conduct a public debt management operation and intends to adopt an updated Strategy afterwards. The document states that the Ministry of Finance plans these steps in order to: "(i) gradually restoring Ukraine's debt sustainability, (ii) preserving liquidity and reducing the state budget deficit during the IMF program period, and (iii) creating the necessary conditions for the commercial sector to participate in the post-war reconstruction of Ukraine to restore Ukraine's market access as soon as possible."

In addition to restoring asset declarations by public officials (benchmark №9), the Ukrainian government promised to improve the declaration system. The changes should allow officials to automatically fill in information from other related databases and registries.

The draft law, adopted in September 2023, stipulates that the National Agency on Corruption Prevention will provide access to and automatic transfer of data from other registers and databases to the declaration form. At the same time, the function of automatically filling in the available data does not relieve the declarant of the obligation to indicate in the declaration all the information known to him or her, even if it is not available in other databases.

The law came into force on October 12, 2023.

The implementation of the benchmark is important for the corporate governance reform of state-owned enterprises. Supervisory boards should eliminate the "manual control" regime in state-owned companies. This helps to transform state-owned enterprises into transparent, efficient, competitive companies that are able to attract investment and generate profits.

The benchmark can be considered a logical continuation of Benchmark No. 8 on the introduction of a single company to manage the gas TSO of Ukraine. On October 31, the Government approved the company's Supervisory Board: three independent members and one state representative, completing this benchmark in time. At the same time, the issue of appointing another state representative to form a full 5-member board remains.

According to the Charter, the Supervisory Board of GTSOU should consist of five members, three of whom should be independent. As of mid-January, 5 members have not been appointed and there are no governmental statements on this matter. In turn, it was reported that Prime Minister Denys Shmyhal was promoting the candidacy of Viktor Pynzenyk for the position of state representative in the supervisory board of GTSOU, who previously held the same position in the supervisory board of JSC "Mahistralni Gazoprovody Ukrainy".

Thus, the benchmark is considered to be fulfilled, but the Government should keep in mind the quality of such fulfillment and appoint 5 members of the Supervisory Board of GTSOU.

Improving the quality of public investment management (PIM) will allow for more efficient use of public funds in the context of limited budgetary resources. One of the steps should be the unification of PIM approaches and the competitive selection of projects for budget funding.

The World Bank estimates that $411 billion will be needed to rebuild Ukraine. Private business should become an important source of funding for reconstruction. An important tool for attracting companies will be public-private partnerships (PPPs), which, unfortunately, are not yet working in Ukraine. Revising the approach to PPPs could help.

To change approaches to PIM, in December, the CMU adopted a draft Roadmap for Public Investment Management Reform, which is intended to "create a context, vision of the basic principles and directions for elaborating an integrated, sustainable and effective public investment management system that ensures planning of investment projects based on strategic priorities and a medium-term budgetary framework, their selection in accordance with unified and transparent procedures and clear criteria, and implementation according to planned timing and financing”.

This framework document envisages the creation of a targeted PIM model that meets the reconstruction principles developed by RRR4U: prioritization, sustainability, efficiency and effectiveness, transparency and accountability

Details: In the context of a full-scale war, Ukraine finances half of its state budget expenditures with foreign aid. This situation is not sustainable, and this dependence must be gradually eliminated. The National Revenue Strategy aims to create conditions for increasing domestic budget revenues. To do this, Ukraine needs to strengthen its ability to collect tax and customs revenues.

The strategy includes the following measures mentioned in the IMF program:

➔ strengthening tax and customs authorities; ➔ closing the possibility to use the simplified taxation system instead of official employment of full-time employees; ➔ bringing VAT and excise taxes in line with EU legislation; ➔ Strengthening anti-corruption measures; ➔ reforms in the tax system.

On December 27, 2023, the government approved the National Revenue Strategy, meeting the conditions for the IMF program's benchmark to be activated. The adopted Strategy does not mention the reform of the Bureau of Economic Security, although the IMF program envisaged the inclusion of relevant proposals in the Strategy.

In the Memorandum with the IMF, the Ukrainian side indicated its intention to strengthen the effectiveness of anti-corruption institutions. The changes should also affect the Specialized Anti-Corruption Prosecutor's Office (SAPO). On September 15, to fulfill the benchmark, the government submitted to the Verkhovna Rada draft law №10060, which meets the requirements of the IMF and the EU and is aimed at:

➔ improving the procedure for competitive selection of SAPO heads and prosecutors; ➔ strengthening the SAPO's ability to regulate its own organizational structure and activities; ➔ clarifying the powers of the head of the SAPO; ➔ creation of a Specialized Disciplinary Commission of SAPO prosecutors; ➔ conducting regular audits of SAPO activities with the participation of external experts with international experience.

On December 08, 2023, Ukraine's parliament adopted the above draft law. The law came into force on January 1, 2024.

Financing defence and mobilizing tax and non-tax revenues remains one of the most important items on the fiscal agenda. Based on the conclusions of the Revenue Working Group established in December 2023, the government was to prepare short-term measures to increase revenues by at least 0.5 percent of GDP, with the aim of amending the 2024 budget as necessary.

The measures proposed by the Ministry of Finance to mobilise additional revenues are expected to increase budget revenues by UAH 44.2 billion. The measures include an increase in revenues from military and excise duties, and the introduction of monthly advance payments of corporate income tax by companies engaged in fuel retailing.

The Ministry of Finance expects that by the end of the first quarter of 2024, the necessary draft laws will be submitted to the Cabinet of Ministers and considered by the Verkhovna Rada.

Limited budget funding requires a review and conditional streamlining of the 5-7-9% loan program for businesses.

Initially, in 2020, the program "Affordable Loans 5-7-9%" was created to support small and medium-sized enterprises (SMEs) for which conventional bank loans were not available. Such loans were also issued for investment and startup support. After the full-scale invasion began, working capital coverage was added to the program and expanded to large companies. In fact, in 2022, the program became the main tool for business support and a "lifeline" for individual companies. In some banks, 80-90% of loans were issued under this program.

At the same time, due to the limited amount of funds in the budget, there is a need to return the program to supporting SMEs. Instead, in September, the government expanded the 5-7-9% program, which contradicts its commitment under the IMF Memorandum. For example, the government allowed companies in the energy efficiency and recycling sectors to use affordable loans. In addition, the maximum term of the program was increased to 10 years, and the program limit was raised to UAH 150 million, which is important for large companies.

In December 2023, the government adopted amendments to the resolution on providing support under this program, narrowing the provision of compensation for investment projects and working capital for non-priority sectors to small and medium-sized enterprises only (for working capital in priority sectors, large companies can still receive support).

In March 2024, the government submitted a concept for the 5-7-9 programme to the IMF, but it has not been made public or officially approved.

Ukraine should adopt a new law on the Bureau of Economic Security (BES), which should provide it with clear powers to investigate major economic crimes in line with best practices, and create a legal framework for the BES to select its management and staff. The law should respect the existing division of investigative powers between the BES and the NABU.

The new legislation will pave the way for the renewal of the BES management and detectives through transparent competitions. This will give the bureau a chance to turn into an effective body that will prevent economic crimes and schemes that cause budget losses.

The Verkhovna Rada was considering a draft law No. 10088-1, which was recommended by the relevant committee for adoption in the first reading. However, at the end of December, the government prepared its own draft law No. 10349, which was criticized by both specialized experts and the Speaker of the Verkhovna Rada for not meeting the standards agreed with the partners.

On 11 April, the Verkhovna Rada passed draft law No. 10349 in the first reading. The draft law does not yet fully meet the commitments Ukraine has made to its international partners; the shortcomings are to be addressed before the second reading.

The review of tax privileges should be a step towards broadening the domestic revenue base without raising tax rates. By the end of July 2024, the government should estimate the losses from all tax privileges and propose measures to reduce budget losses due to preferential taxation.

This step will help Ukraine increase its ability to increase domestic revenues, which is a crucial task given the need to ensure high defense spending and the expected decline in international financial support for Ukraine.

Ukraine has a large number of state-owned enterprises, which sometimes create fiscal risks, but also bring fiscal and quasi-fiscal losses. An important reason for the deterioration in the financial situation of SOEs was the full-scale war. However, this is partly due to the government's policy of refraining from raising tariffs for electricity, natural gas, and other utilities for households. To cover the financial gaps, large SOEs either accumulate debts, which can then be covered by direct transfers from the state budget or by new borrowings from international official partners or IFIs. The latter, ceteris paribus, could be directed to the budget to finance urgent expenditures. SOEs' borrowings are guaranteed by the state, and therefore, in case of problems, the debt falls on the state.

That is why it is important to monitor the current financial situation of state-owned enterprises and conduct stress testing. This is exactly the kind of analysis and assessment that should be carried out within the framework of this structural benchmark for large SOEs that are most affected by a full-scale war. The results should be reflected in the fiscal risk report prepared annually by the Ministry of Finance as part of the budget process.

The resumption of medium-term budget planning was among the important areas of changes in the already implemented structural benchmarks. Thus, medium-term forecasts of expenditures and revenues and a report on fiscal risks were submitted as additional materials to the draft State Budget Law for 2024. Medium-term budget planning increases sustainability by ensuring a predictable budget policy.

That is why, with the help of IMF technical assistance , the government plans to analyze its past experience in preparing the Budget Declaration (not very extensive, since only one Budget Declaration has been adopted).

The diagnostic review will become the basis for the preparation of the Budget Declaration for 2026-2028. It is intended to slightly change the approach to preparing for the bottom-up public finance management process to capture more detailed spending needs and ensuring better costing of public service financing.

This structural benchmark is a continuation of steps to improve the efficiency of public investment management, the roadmap for reforming which was adopted to implement Structural benchmark #19.

Given the need to finance the reconstruction, the government is expected to adopt a resolution that will provide for a clear link between medium-term budget planning and recovery and reconstruction priorities. The Ministry of Finance should play a key role in this process (which is actually a response to the confrontation between the Ministry of Finance and the Ministry of Reconstruction that occurred in the fourth quarter of 2023).

At the same time, the important role of coordination between the Ministry of Finance and line ministries responsible for the implementation of investment projects in the public sphere is defined.

Three state-owned banks are registered with the CMU (Oschadbank, Ukreximbank, and Privatbank). Ukrgasbank and Sens Bank are state-owned, represented by the Ministry of Finance. In practice, the Ministry of Finance acts as the shareholder of state-owned banks, although key decisions are made by the Government upon the proposal of the Ministry of Finance.

During the war, Sens Bank (formerly Alfa) and PINbank (First Investment Bank) were nationalized. Sense Bank was sold to the state for UAH 1 by the DGF as part of the procedure for withdrawal from the market due to sanctions against its owners. On January 17, 2024, 89% of PINBank's shares were registered to the state, represented by the SPFU, based on a decision of the HACCU that came into force in March 2023.

The benchmark has now been fulfilled: all state-owned banks except PINbank are systemic and the Ministry of Finance is responsible for their management either directly or through government decisions developed by the Ministry of Finance. PINbank remains under the management of the SPFU, but does not require recapitalization. Since the beacon is permanent, the status of its implementation may change in the future.

The deadline for this benchmark has been moved from March 2024 to December 2024. The DGF, the Ministry of Finance, and the NBU should prepare a framework for the rehabilitation of the banking system.

The framework for bank rehabilitation will include: (i) mechanisms to support the DGF; (ii) measures to strengthen the banking system's operational readiness for unforeseen situations; (iii) improved procedures for bank resolution and early intervention measures; and (iv) alignment of the criteria for counterparty eligibility for NBU monetary policy operations and lender of last resort operations with international best practices.

As an interim step, the DGF and the NBU will prepare, in consultation with IFI stakeholders, (i) a diagnostic note by the end of February 2024 to assess the current infrastructure for resolving insolvent banks, including an analysis of current challenges; and (ii) based on the diagnostic, adopt a roadmap by the end of April 2024 that will set out a reform agenda to further strengthen the authorities' capacity to resolve and manage financial sector crises, in particular to address key gaps by the end of December 2024.

The NBU is to introduce risk assessment methodologies for supervision in order to make informed decisions on supervisory priorities. The methodology will be applied to all banks, and a supervisory action plan will be prepared by the end of December 2024. While improving supervisory results, the NBU also plans to increase supervisory efficiency by improving the allocation of resources and processes by adjusting the organizational structure of banking supervision. This will be complemented by strengthening the professional capacity of banking supervision by developing the necessary professional profiles and introducing a multi-year training program for new employees.

The lighthouse will help determine the amount of debt and the financial condition of district heating companies, including the reasons for the accumulation of debt before and after the start of the war, on the eve of the 2024/25 heating season. Thus, according to Naftogaz of Ukraine, as of February 21, 2022, the total overdue debt of district heating companies and CHP plants to Naftogaz is UAH 49.1 billion (including UAH 39.3 billion for gas for heat production). At the beginning of the heating season in 2023, the state's debt on the difference in tariffs amounted to about UAH 36 billion, and according to preliminary estimates, it will exceed UAH 54 billion in 2024.

In the Letter of Intent dated December 1, 2023, the Ukrainian side noted that district heating companies (DHCs) had accumulated a significant amount of debt to Naftogaz before and after the war, which is a result of the accumulated difference in tariffs and the impact of the war. The issue will be resolved in a comprehensive manner when the war-related pressure on the budget is reduced by developing a new tariff methodology. However, the signatories (the President, the Prime Minister, the Minister of Finance, and the Governor of the NBU) also added that the amount of debt and the financial condition of the DHCs will be determined through a desk audit conducted by a reputable audit firm, which will distinguish between debt incurred before and after February 2022. In addition, based on the results of consultations with the IMF held pursuant to clause 6.1 of Minutes No. 64 of the meeting of the Cabinet of Ministers of Ukraine dated 06.06.2023, it was established that the sources for making settlements on the difference in tariffs should be budget-neutral for the State Budget of Ukraine and not violate the fiscal sustainability of the state, the preservation of which is one of the key priorities of the IMF Program.

At the end of December 2023, the Verkhovna Rada registered Draft Law No. 10383 "On Amendments to the Law of Ukraine "On the State Budget of Ukraine for 2024" on Compensation of the Tariff Difference", which was developed, in particular, to address the problem of the debt of the DH companies. However, as of March 2024, the draft law is still under consideration, and the expert opinion of the Ministry of Finance does not support the adoption of this draft law.

The issue of auditing district heating companies is not new. Back in 2019, the government instructed the Ministry of Regional Development and the State Audit Service to audit all district heating companies to ensure that the cost of heat and water was fair. In January 2022, before the full-scale invasion began, the Cabinet of Ministers again commissioned an audit of the extent to which Naftogaz's activities (in particular, fixed-price contracts) subsidise gas prices for households and DH companies. From February to September 2023, the State Audit Service of Ukraine inspected a number of heat supply companies in different regions that are entitled to reimbursement of tariff differences from the budget and found that the amount of reimbursement of tariff differences was overstated by more than UAH 4 billion.

The audit process has partially begun, but this cannot indicate that the lighthouse has been completed, which should reflect an accurate diagnosis of the problem of the DHCs' debts before the war and after February 2022, which will allow for a comprehensive settlement. However, there is still time to fulfil the benchmark.

The need to implement the lighthouse is due to the excessively long consideration of criminal proceedings by the HACC due to the heavy workload of judges. To solve this problem, the Ukrainian government should amend the legislation to allow cases to be considered in the first instance by one anti-corruption judge or a panel of three anti-corruption judges.

At the end of March 2024, draft law No. 11130 was submitted to the Parliament. According to the explanatory note, the draft law is aimed at improving the efficiency of court proceedings without violating procedural deadlines, and therefore proposes to allow the court to consider certain cases by a single judge.

On April 24, 2024, the Verkhovna Rada adopted a law to improve the procedure for criminal proceedings. It is envisaged that cases in the court of first instance will be heard by a single judge. At the same time, consideration of cases by a panel of three judges is possible only at the request of the accused in certain categories of crimes.

In December 2022, the Parliament liquidated the Kyiv District Administrative Court, which considered disputes involving central executive authorities. The KDAC's cases were to be transferred to the Kyiv District Administrative Court until a new Kyiv City Administrative Court was established.

However, the European Commission in its Report published in November 2023 noted that after the liquidation of the KDAC, access to justice in cases involving central authorities is deteriorating, as a new court has not yet been established and the court with temporary powers is overcrowded. Therefore, the EC, as well as the IMF, points to the need to create a new administrative court staffed by properly vetted judges.

Therefore, the Ukrainian government committed to adopt a law establishing a new court that will be proceeding administrative cases against national government agencies (e.g., NBU, NABU, NAСP) by judges who have been duly vetted for professional competence and integrity, with the decisive and determining vote of independent experts with international experience.

At the end of March 2024, it became known that the CMU had drafted a bill on the Supreme Administrative Court. However, the bill has not yet been submitted to the Parliament.

The issue of conducting an external audit of the NABU has been on the Ukrainian agenda for quite some time. Both the International Monetary Fund and the European Commission have repeatedly pointed out the need for it. In the Memorandum for Economic and Financial Policy of December 5, 2018, the Ukrainian government promised to complete the external audit of the NABU by the end of July 2019. However, this promise was not implemented.

According to the updated Memorandum, the Ukrainian government has until the end of September 2024 to conduct an external audit of the NABU with the participation of three independent experts with international experience and publish its report.

According to the Foundation's experts, "the external audit of NABU will provide an impartial and formal assessment of NABU's activities since its establishment in 2015 and may identify areas for improvement and contribute to strengthening NABU's accountability, especially in light of the proposed draft law to increase its staff from 700 to 1000 people".

In mid-February 2024, NABU Director Semen Kryvonos announced that the audit process had already begun. In particular, the Government has sent the relevant letters to nominate candidates for the commission to review the bureau's activities.

For years, state-owned enterprises (SOEs) have been a source of inefficiency and fiscal risks. To improve efficiency, a corporate governance reform of SOEs was introduced but has not yet been completed.

In the Memorandum, the Ukrainian side stated its intention to improve the efficiency of SOE management through further reform of SOE corporate governance in close cooperation with international partners, in particular:

➔ to adopt a law on corporate governance of SOEs (this refers to the draft law №5593-d on improving corporate governance, which as of the end of January 2024 is being prepared for the second reading (adopted as a basis in July 2021)); ➔ implementation of relevant bylaws; ➔ assessment of the financial condition and fiscal risks of state-owned enterprises in the state ownership policy by the end of March 2024 (as an interim step in the implementation of Structural benchmark 28) ➔ Structural benchmark #35 envisages the development of a comprehensive state ownership and dividend policy, as well as a privatization strategy. It is likely that the privatization strategy will take into account past approaches to triage.

This is an important benchmark, since today there is virtually no ownership policy, which prevents SOEs from operating efficiently. The share of dividends that should be allocated to the budget is determined each year based on the budget's needs rather than the need for SOEs to operate efficiently.

It should be added that the IMF does not support the idea voiced by Ukrainian politicians to create a state holding company that would be responsible for all state-owned enterprises. According to the Fund's experts, this is premature given the financial and potential management risks.

The Parliament approved the government's amendments to the State Budget for 2023 to provide for increased and more sustainable funding for defence and security, as well as funds for urgent reconstruction. In particular, the expenditures appropriated to the reserve fund were doubled. In addition, two ministries were merged into a single Ministry of Communities, Territories and Infrastructure, which was given responsibility for the Fund for the Elimination of the Consequences of Armed Aggression.

To this end, the Parliament registered a draft law that, among other things, allowed the Rada to consider only those changes to the state budget that had received an expert opinion from the Ministry of Finance, and restored medium-term budget planning. In June, the Budget Committee updated the text, which later became law (see more in Benchmark #10).

The Ministry of Finance has prepared an action plan, as noted in the IMF assessment under the first review.. The document should serve as a input for the preparation of the National Revenue Strategy (see benchmark №20)

These changes are intended to contribute to higher debt sustainability of the state. The provisions for the implementation of this milestone were included in the draft law No. 9346 together with the provisions for the implementation of milestone №2 (see more in benchmark №10)

In April 2023, the Parliament passed a law (No. 3035-IX) to enhance the transparency and accountability of accounts opened with the NBU by the spending units for charitable assistance and donations. This primarily concerned accounts on the UNITED24 platform. This finally provided a legal framework for transparent fundraising and spending from public charity accounts.

Right at the beginning of the full-scale invasion, the National Bank fixed the hryvnia and imposed strict currency restrictions. This was the right move, which prevented panic, reduced inflationary pressures, and stabilized Ukrainians' currency expectations.

Over time, the fixed exchange rate began to lose its benefits as the acute phase of the crisis passed. In general, a flexible exchange rate is much better for the economy. This benchmark provides for a gradual return to flexible exchange rate and the necessary easing of currency restrictions. The NBU has approved the relevant Strategy, thus fully and timely fulfilling the conditions of this benchmark.

More details: On June 29, 2023, the NBU Board approved the Strategy for easing currency restrictions, moving to greater exchange rate flexibility, and returning to inflation targeting. The public version of the Strategy was published on July 7. At the same time, the IMF has not set any deadlines for the implementation of this Strategy. The implementation of the strategy depends on whether macroeconomic conditions are favorable for the gradual removal of restrictions and the transition to a flexible exchange rate and inflation targeting.

The NBU is now gradually working on this and is removing currency restrictions in stages. For example, on October 3, the NBU switched to a regime of managed hryvnia flexibility, which is an intermediate stage between a fixed exchange rate and full flexibility.

Back in December 2022, the Ukrainian authorities promised to abolish the 2% tax for individual entrepreneurs, resume documentary inspections, and return penalties for violations of the use of cash registers. This step was supposed to increase the budget's own revenues. This was and still is important given the unprecedentedly large wartime budget deficit, which is currently being covered by foreign aid and loans. However, even foreign aid is not enough, and more resources are needed to finance the state's defense capabilities.

At the end of June 2023, the Verkhovna Rada adopted the relevant draft law. However, this law returned inspections only for manufacturers of excisable goods, gambling, and financial companies. Other businesses could operate without inspections. IMF representatives were not satisfied with this: the Fund said they were waiting for a new law to be passed on the resumption of tax audits.

On November 9, the Parliament adopted in the second reading the draft law №10016-d with an expanded range of taxpayers who may be subject to documentary scheduled audits starting from December 1, 2023. At the same time, the President of Ukraine signed the law only in early December, so it came into force on January 08, 2023.

The implementation of the benchmark will create a more transparent and efficient model for managing Ukraine's gas transmission system.

On July 28, 2023, the Verkhovna Rada adopted Law No. 3293-IX, which provides for the transfer of the corporate rights of LLC "Ukrainian Gas TSO" (GTSOU) to the management of the state represented by the Ministry of Energy of Ukraine. The law also obliges the appointment of an independent supervisory board of the GTSOU, which in turn will be responsible for appointing the head and members of the executive body of the Operator.

The first part of the benchmark was completed on September 22, when the Cabinet of Ministers transferred the corporate rights of GTSOU to the Ministry of Energy.

A month later, on October 27, JSC "Mahistralni Gazoprovody Ukrainy" , which was the parent company of the GTSOU, was liquidated. The termination of the company is one of the steps towards the corporate reform of the GTS Operator and the transition to the target model of a single company.

The second part was completed only at the end of October, when the Ministry of Energy approved the updated GTSOU charter agreed with the Energy Community Secretariat. The document appeared on the company's website on October 31.

Thus, the benchmark was completed only by the end of October, three months late.

One of the important steps on the way to returning to pre-war anti-corruption policies and procedures was to restore asset declarations by public officials.

In September 2023, the parliament passed a draft law stipulating that the register of declarations would remain closed for another year. Declarants could voluntarily open their data for public access. The public and international partners reacted negatively to this news. As a result, the President of Ukraine vetoed the law and submitted his own proposals, which opened the register of declarations immediately.

On September 20, 2023, the Parliament reconsidered the above-mentioned draft law and adopted it with the President's proposals. The law entered into force on October 12, 2023. On December 10, 2023, the National Agency on Corruption Prevention announced the opening of public access to the Register of Declarations.

In July, the Parliament adopted the necessary amendments to the Budget Code to make fiscal policy more predictable in the medium term.

The government has already presented some indicators and targets for the three-year perspective in the materials for the draft State Budget for 2024. In the spring 2024, the government promised to adopt a Budget Declaration for 2025-2027, which should reflect the priorities of budget expenditures and the vision of the government's strategy in general.

The government committed to approve the Medium-Term Public Debt Management Strategy by the end of October 2023 (which corresponds to benchmark 12). This step is extremely important, as the level of public and publicly guaranteed debt increased from 50% of GDP to almost 80% of GDP during the full-scale war and will continue to grow. This is an unsustainable level for countries with weak institutions, but in Ukraine it is driven by the need to borrow for economic stability.

The Budget Code also made budget rules not applicable to the guarantees provided by the government for projects financed by international financial institutions (IFIs). Previously, this provision limited the government's ability to receive funds from IFIs. Now, the absence of the restriction will allow the government to increase borrowing for reconstruction and recovery projects, as there is a lack of domestic sources of funding

The steps outlined in the benchmark are intended to increase the predictability and resilience of the fiscal system.

On 15 September 2023, the government submitted to Parliament a draft law on the State Budget for 2024 with a long list of explanatory documents. The package included the following documents: ➔ planned KPIs for budget programmes in 2022-2026; ➔ forecasts of budgetary and macroeconomic indicators for 2025-2026, and priority fiscal policy objectives; ➔ Limit expenditures for the period 2022-2026

The documents also contained a report assessing the impact of macroeconomic risks and risks of state-owned enterprises on the budget. For example, the government assessed the impact of three macroeconomic scenarios on the operations of major state-owned enterprises, including Naftogaz, Energoatom, Ukrenergo and Ukrhydroenergo.

Limited budget funding requires a review and conditional streamlining of the 5-7-9% loan program for businesses.

Initially, in 2020, the program "Affordable Loans 5-7-9%" was created to support small and medium-sized enterprises (SMEs) for which conventional bank loans were not available. Such loans were also issued for investment and startup support. After the full-scale invasion began, working capital coverage was added to the program and expanded to large companies. In fact, in 2022, the program became the main tool for business support and a "lifeline" for individual companies. In some banks, 80-90% of loans were issued under this program.

At the same time, due to the limited amount of funds in the budget, there is a need to return the program to supporting SMEs. Instead, in September, the government expanded the 5-7-9% program, which contradicts its commitment under the IMF Memorandum. For example, the government allowed companies in the energy efficiency and recycling sectors to use affordable loans. In addition, the maximum term of the program was increased to 10 years, and the program limit was raised to UAH 150 million, which is important for large companies.

The government is currently working on the concept. At the same time, in December 2023, the government adopted amendments to the resolution on providing support under this program, narrowing the provision of compensation for investment projects and working capital for non-priority sectors to small and medium-sized enterprises only (for working capital in priority sectors, large companies can still receive support).

In the Memorandum with the IMF, the Ukrainian side promised to resume enhanced financial monitoring of top officials (politically exposed persons, PEPs) in accordance with FATF standards. This step "should ensure a more effective fight against money laundering."

As a reminder, on November 19, 2022, amendments to the law on financial monitoring came into force, which reduced the term of the status of a politically exposed person (PEP) from lifetime to 3 years after leaving office. Thus, financial institutions had the right to conduct enhanced financial monitoring of PEPs only for 3 years after their dismissal. The adopted changes were not in line with international anti-money laundering standards.

Therefore, on October 17, 2023, Ukraine's parliament adopted a draft law that effectively restores the lifetime status of a politically exposed person (PEP). At the same time, it increases the liability of banks for unreasonable refusal to provide financial services to users. The law came into force on October 29, 2023.

It should be added that as part of the EU's macro-financial assistance, Ukraine also has to improve its anti-money laundering regulations. The program provides for changes in secondary legislation on beneficial ownership (commitment №14).

*Politically exposed persons are persons who perform or have performed significant public functions in Ukraine. The full list of such positions is defined in Article 1 of the Law on Financial Monitoring.

The implementation of the benchmark will bring banking supervision in Ukraine in line with the EU directives. This is necessary to bring Ukraine closer to EU accession. The NBU fully and timely fulfilled the relevant requirements.

Point I: On April 21, 2023, the National Bank of Ukraine separated the Department for Monitoring of Related Parties and the Department for Integrated Banking Supervision.

Point II: The NBU has introduced supervisory panels without publicly communicating about it. Supervisory panels are supposed to advise the Supervisory Committee on issues and additionally independently analyze its decisions, facilitate horizontal communications between stakeholders, and highlight particularly important issues.

Point III: On July 29, 2023, the NBU resumed scheduled on-site inspections of banks and non-bank institutions in a remote format in order not to expose its employees to danger.

The State Tax Service (STS) and the State Customs Service (SCS) are important implementers of the upcoming National Revenue Strategy (see benchmark 20). To ensure that the National Revenue Strategy is coherent and consistent, the IMF program added a structural benchmark to develop reform plans for both services.

The STS and the SMS had to prepare action plans by the end of October, which will be further integrated into the overall National Revenue Strategy (see benchmark 20). On October 23-27, representatives of the STS and the SMS met with the IMF to discuss the progress. The second review of the IMF program revealed that this benchmark was met on time and in full.

More details: On October 23, the STS announced that it would participate in the IMF technical mission together with the SMS to continue working on its reform plans. On October 31, following the meeting, the STS announced progress in fulfilling the task.

The State Tax Service and the State Migration Service are systemically important institutions not only for filling the budget, but also for shaping the attitude of business and citizens to the state. Studies show a low level of trust in the activities of fiscal authorities. Low trust is mainly due to non-transparency, slow customs clearance, and corruption. At the same time, the trust index has remained low since the beginning of the invasion, unlike many other institutions. Numerous attempts to reform these bodies by previous governments have not resulted in sustainable positive changes.

The medium-term strategy for public debt management will increase the transparency and predictability of fiscal policy and optimize the structure of public debt.

In accordance with the amendments to the Budget Code (see benchmarks #2 and #10), the government had to update the Medium-Term Public Debt Management Strategy. Public debt and publicly guaranteed debt to GDP has already increased from 50% at the end of 2021 to about 80% at the end of 2022 and may exceed 100% of GDP in 2024. Therefore, a clear Strategy should provide the necessary predictability of the government's debt policy.

A challenge for the preparation of the Strategy is the need to restructure the public debt in 2024, which is only at the initial stage of negotiations.

On October 27, the Ministry of Finance adopted a separate Strategy, which clearly plans to conduct a public debt management operation and intends to adopt an updated Strategy afterwards. The document states that the Ministry of Finance plans these steps in order to: "(i) gradually restoring Ukraine's debt sustainability, (ii) preserving liquidity and reducing the state budget deficit during the IMF program period, and (iii) creating the necessary conditions for the commercial sector to participate in the post-war reconstruction of Ukraine to restore Ukraine's market access as soon as possible."

In addition to restoring asset declarations by public officials (benchmark №9), the Ukrainian government promised to improve the declaration system. The changes should allow officials to automatically fill in information from other related databases and registries.

The draft law, adopted in September 2023, stipulates that the National Agency on Corruption Prevention will provide access to and automatic transfer of data from other registers and databases to the declaration form. At the same time, the function of automatically filling in the available data does not relieve the declarant of the obligation to indicate in the declaration all the information known to him or her, even if it is not available in other databases.

The law came into force on October 12, 2023

The implementation of the benchmark is important for the corporate governance reform of state-owned enterprises. Supervisory boards should eliminate the "manual control" regime in state-owned companies. This helps to transform state-owned enterprises into transparent, efficient, competitive companies that are able to attract investment and generate profits.

The benchmark can be considered a logical continuation of Benchmark No. 8 on the introduction of a single company to manage the gas TSO of Ukraine. On October 31, the Government approved the company's Supervisory Board: three independent members and one state representative, completing this benchmark in time. At the same time, the issue of appointing another state representative to form a full 5-member board remains.

According to the Charter, the Supervisory Board of GTSOU should consist of five members, three of whom should be independent. As of mid-January, 5 members have not been appointed and there are no governmental statements on this matter. In turn, it was reported that Prime Minister Denys Shmyhal was promoting the candidacy of Viktor Pynzenyk for the position of state representative in the supervisory board of GTSOU, who previously held the same position in the supervisory board of JSC "Mahistralni Gazoprovody Ukrainy".

Thus, the benchmark is considered to be fulfilled, but the Government should keep in mind the quality of such fulfillment and appoint 5 members of the Supervisory Board of GTSOU.

Improving the quality of public investment management (PIM) will allow for more efficient use of public funds in the context of limited budgetary resources. One of the steps should be the unification of PIM approaches and the competitive selection of projects for budget funding.

The World Bank estimates that $411 billion will be needed to rebuild Ukraine. Private business should become an important source of funding for reconstruction. An important tool for attracting companies will be public-private partnerships (PPPs), which, unfortunately, are not yet working in Ukraine. Revising the approach to PPPs could help.

To change approaches to PIM, in December, the CMU adopted a draft Roadmap for Public Investment Management Reform, which is intended to "create a context, vision of the basic principles and directions for elaborating an integrated, sustainable and effective public investment management system that ensures planning of investment projects based on strategic priorities and a medium-term budgetary framework, their selection in accordance with unified and transparent procedures and clear criteria, and implementation according to planned timing and financing”.

This framework document envisages the creation of a targeted PIM model that meets the reconstruction principles developed by RRR4U: prioritization, sustainability, efficiency and effectiveness, transparency and accountability.

Details: In the context of a full-scale war, Ukraine finances half of its state budget expenditures with foreign aid. This situation is not sustainable, and this dependence must be gradually eliminated. The National Revenue Strategy aims to create conditions for increasing domestic budget revenues. To do this, Ukraine needs to strengthen its ability to collect tax and customs revenues.

The strategy includes the following measures mentioned in the IMF program:

➔ strengthening tax and customs authorities; ➔ closing the possibility to use the simplified taxation system instead of official employment of full-time employees; ➔ bringing VAT and excise taxes in line with EU legislation; ➔ Strengthening anti-corruption measures; ➔ reforms in the tax system.

On December 27, 2023, the government approved the National Revenue Strategy, meeting the conditions for the IMF program's benchmark to be activated. The adopted Strategy does not mention the reform of the Bureau of Economic Security, although the IMF program envisaged the inclusion of relevant proposals in the Strategy.

In the Memorandum with the IMF, the Ukrainian side indicated its intention to strengthen the effectiveness of anti-corruption institutions. The changes should also affect the Specialized Anti-Corruption Prosecutor's Office (SAPO). On September 15, to fulfill the benchmark, the government submitted to the Verkhovna Rada draft law №10060, which meets the requirements of the IMF and the EU and is aimed at:

➔ improving the procedure for competitive selection of SAPO heads and prosecutors; ➔ strengthening the SAPO's ability to regulate its own organizational structure and activities; ➔ clarifying the powers of the head of the SAPO; ➔ creation of a Specialized Disciplinary Commission of SAPO prosecutors; ➔ conducting regular audits of SAPO activities with the participation of external experts with international experience.

On December 08, 2023, Ukraine's parliament adopted the above draft law. The law came into force on January 1, 2024.

It is worth noting that a similar obligation is provided for in the EU's macro-financial assistance program (commitment № 16).

The deadline for this benchmark has been moved from March 2024 to December 2024. The DGF, the Ministry of Finance, and the NBU should prepare a framework for the rehabilitation of the banking system.

The framework for bank rehabilitation will include: (i) mechanisms to support the DGF; (ii) measures to strengthen the banking system's operational readiness for unforeseen situations; (iii) improved procedures for bank resolution and early intervention measures; and (iv) alignment of the criteria for counterparty eligibility for NBU monetary policy operations and lender of last resort operations with international best practices.

As an interim step, the DGF and the NBU will prepare, in consultation with IFI stakeholders, (i) a diagnostic note by the end of February 2024 to assess the current infrastructure for resolving insolvent banks, including an analysis of current challenges; and (ii) based on the diagnostic, adopt a roadmap by the end of April 2024 that will set out a reform agenda to further strengthen the authorities' capacity to resolve and manage financial sector crises, in particular to address key gaps by the end of December 2024.

The NBU is to introduce risk assessment methodologies for supervision in order to make informed decisions on supervisory priorities. The methodology will be applied to all banks, and a supervisory action plan will be prepared by the end of December 2024. While improving supervisory results, the NBU also plans to increase supervisory efficiency by improving the allocation of resources and processes by adjusting the organizational structure of banking supervision. This will be complemented by strengthening the professional capacity of banking supervision by developing the necessary professional profiles and introducing a multi-year training program for new employees.

Financing defense and mobilizing its own tax and non-tax revenues remains one of the most important items on the fiscal agenda. Based on the conclusions of the Revenue Working Group established in December 2023, the government should prepare short-term measures to increase revenues by at least 0.5 percent of GDP, with the aim of amending the 2024 budget as necessary.

0.5% of GDP is about UAH 38 billion. The measures developed can be applied in 2024 if additional pressure on expenditures arises. The likelihood of such a need arising is quite high, given that defense spending will remain at a significant level throughout the year.

Ukraine should adopt a new law on the BES, which should provide it with clear powers to investigate major economic crimes in line with best practices, and create a legal framework for the BES to select its management and staff. The law will maintain the existing separation of investigative powers between the BES and the NABU.

The new legislation will pave the way for the renewal of the BES management and detectives through transparent competitions. This will give a chance to turn the Bureau into an effective body that will prevent economic crimes and schemes that cause damage to the budget.

Currently, the Verkhovna Rada is considering the relevant draft law No. 10088-1, recommended by the relevant committee for adoption in the first reading. However, at the end of December, the government prepared its own draft law, which was criticized by both specialized experts and the Speaker of the Verkhovna Rada for not meeting the standards agreed with the partners.

The review of tax privileges should be a step towards broadening the domestic revenue base without raising tax rates. By the end of July 2024, the government should estimate the losses from all tax privileges and propose measures that will help reduce budget losses due to preferential taxation.

This step will help build Ukraine's capacity to increase domestic revenue sources, which is a crucial task given the need to ensure high defense spending and the expected decline in international support for Ukraine.

The resumption of medium-term budget planning was among the important areas of changes in the already implemented structural beacons. Thus, medium-term forecasts of expenditures and revenues and a report on fiscal risks were submitted as additional materials to the draft State Budget for 2024. Medium-term budget planning increases sustainability by ensuring a predictable budget policy.

That is why, with the help of IMF experts, the government plans to analyze its experience in preparing the Budget Declaration (not very rich, as only one Budget Declaration has been adopted).

The diagnostic assessment will become the basis for the preparation of the Budget Declaration for 2026-2028. It is intended to slightly change the approach to the preparation of the bottom-up public finance management process to reflect a larger share of expenditures and losses on the financing of the civil service.

Ukraine has a large number of state-owned enterprises, which sometimes create fiscal risks, but also fiscal and quasi-fiscal losses. An important reason for the deterioration in the financial condition of SOEs was the full-scale war. However, this is partly due to the government's policy of refraining from raising tariffs for electricity, natural gas, and other utilities for households. To cover the financial gaps, large SOEs either accumulate debts, which can then be covered by direct transfers from the state budget or by new borrowings from international official partners or IFIs. The latter, ceteris paribus, could be directed to the budget to finance urgent expenditures. SOEs' borrowings are guaranteed by the state, and therefore, in case of problems, the debt falls on the state.

That is why it is important to monitor the current financial situation of state-owned enterprises and conduct stress testing. This is exactly the kind of analysis and assessment that should be carried out within the framework of this structural beacon for large SOEs that have suffered the most from a full-scale war. The results should be reflected in the fiscal risk report prepared annually by the Ministry of Finance as part of the budget process.

This structural benchmark is in fact a continuation of steps to improve the efficiency of public investment management, the roadmap for reforming which was adopted in pursuance of Structural Beacon 19.

In view of the need to finance the reconstruction, the government is expected to adopt a resolution that will provide for a clear link between medium-term budget planning and reconstruction priorities. The Ministry of Finance is to play a key role in this regard (which is actually a response to the confrontation between the Ministry of Finance and the Ministry of Reconstruction that actually arose in the fourth quarter of 2023).

At the same time, the important role of coordination between the Ministry of Finance and line ministries responsible for the implementation of investment projects in the public sphere is defined.

Ukraine represented by the Cabinet of Ministers is the registered owner of the three publicly owned banks (Oschadbank, Ukreximbank, and Privatbank). Ukrgasbank and Sens Bank are owned by Ukraine as represented by the Ministry of Finance. In practice, the Ministry of Finance acts as the shareholder of all state-owned banks, although the Government formally takes key decisions are upon the proposal of the Ministry of Finance.

During the war, Sens Bank (formerly Alfa) and PINbank (First Investment Bank) were nationalized. Sense Bank was sold to the state for UAH 1 by the DGF as part of the bank resolution procedure due to sanctions against its owners. On January 17, 2024, 89% of PINBank's shares were registered to the state, represented by the State Property Fund, based on a decision of the HACC that came into force in March 2023.

The status of implementation of the benchmark depends on whether it applies to already nationalized banks at the time of its establishment and whether it requires expanding the powers of the Ministry of Finance to act as a shareholder of state-owned banks in all matters. In our opinion, the current rules for the management of state-owned banks provide sufficient powers to the Ministry of Finance, and the requirement to transfer non-systemic banks to the DGF applies to banks nationalized after the completion of the IMF program review.

The benchmark will help determine the amount of debt and the financial condition of district heating companies (DHCs), including the reasons for the accumulation of debt before and after the start of the war, on the eve of the 2024/25 heating season.

Thus, according to Naftogaz of Ukraine, as of February 21, 2022, the total overdue debt of DHCs and CHP plants to Naftogaz is 49.1 billion UAH (including 39.3 billion UAH for gas for heat production). At the beginning of the heating season in 2023, the state's debt on the difference in tariffs amounted to about 36 billion UAH, and according to preliminary estimates, it will exceed 54 billion UAH in 2024.

In the Letter of Intent dated December 1, 2023, the Ukrainian side noted that DHCs had accumulated a significant amount of debt to Naftogaz before and after the war, which is a result of the accumulated difference in tariffs and the impact of the war. The issue will be resolved in a comprehensive manner when the war-related pressure on the budget is reduced by developing a new tariff methodology. However, the signatories (the President, the Prime Minister, the Minister of Finance, and the Governor of the NBU) also added that the amount of debt and the financial condition of the DHCs will be determined through a desk audit conducted by a reputable audit firm, which will distinguish between debt incurred before and after February 2022.

The issue of auditing district heating companies is not new. Back in 2019, the government instructed the Ministry of Regional Development and the State Audit Service to audit all DHCs to ensure that the cost of heat and water was objective. In January 2022, before the full-scale invasion, the Cabinet of Ministers again ordered an audit of the extent to which Naftogaz's activities (in particular, fixed-price contracts) subsidize gas prices for households and DHCs. Therefore, the benchmark is a logical continuation of the previously launched process to accurately diagnose the problem of district heating companies' debts, which will allow for their comprehensive settlement.

At the end of December 2023, the Verkhovna Rada registered Draft Law No. 10383 "On Amendments to the Law of Ukraine "On the State Budget of Ukraine for 2024" on Compensation of the Tariff Difference", which was developed, in particular, to address the problem of the debt of the DH companies. However, as of March 2024, the draft law is still under consideration, and the expert opinion of the Ministry of Finance does not support the adoption of this draft law.

The issue of auditing district heating companies is not new. Back in 2019, the government instructed the Ministry of Regional Development and the State Audit Service to audit all district heating companies to ensure that the cost of heat and water was fair. In January 2022, before the full-scale invasion began, the Cabinet of Ministers again commissioned an audit of the extent to which Naftogaz's activities (in particular, fixed-price contracts) subsidise gas prices for households and DH companies. From February to September 2023, the State Audit Service of Ukraine inspected a number of heat supply companies in different regions that are entitled to reimbursement of tariff differences from the budget and found that the amount of reimbursement of tariff differences was overstated by more than UAH 4 billion.

The audit process has partially begun, but this cannot indicate that the lighthouse has been completed, which should reflect an accurate diagnosis of the problem of the DHCs' debts before the war and after February 2022, which will allow for a comprehensive settlement. However, there is still time to fulfil the benchmark.

The need to implement the benchmark is due to the excessively long consideration of criminal proceedings by the High Anti-Corruption Court (HACC) due to the heavy workload of judges. To solve this problem, the Ukrainian side should amend the legislation to allow cases to be considered in the first instance by one anti-corruption judge or a panel of three anti-corruption judges.

It should be added that in October 2023, the relevant draft law №10178 was registered in the Parliament. The draft law provides for the exclusion from the Criminal Procedure Code of Ukraine of special provisions on mandatory criminal proceedings for crimes within the jurisdiction of the High Anti-Corruption Court in the first instance by a three-judge panel. According to its authors, the adoption of the draft law will help improve the efficiency of the HACC by significantly reducing the workload of each judge and ensuring proper dynamics of criminal proceedings in compliance with reasonable time limits.

The issue of conducting an external audit of the NABU has been on the Ukrainian agenda for quite some time. Both the International Monetary Fund and the European Commission have repeatedly pointed out the need for it. In the Memorandum for Economic and Financial Policy of December 5, 2018, the Ukrainian government promised to complete the external audit of the NABU by the end of July 2019. However, this promise was not implemented.

According to the updated Memorandum, the Ukrainian government has until the end of September 2024 to conduct an external audit of the NABU with the participation of three independent experts with international experience and publish its report.

According to the Foundation's experts, "the external audit of NABU will provide an impartial and formal assessment of NABU's activities since its establishment in 2015 and may identify areas for improvement and contribute to strengthening NABU's accountability, especially in light of the proposed draft law to increase its staff from 700 to 1000 people".

In December 2022, the Parliament liquidated the Kyiv District Administrative Court, which considered disputes involving central executive authorities. The KDAC's cases were to be transferred to the Kyiv District Administrative Court until a new Kyiv City Administrative Court was established.

However, the European Commission in its Report published in November 2023 noted that after the liquidation of the KDAC, access to justice in cases involving central authorities is deteriorating, as a new court has not yet been established and the court with temporary powers is overcrowded. Therefore, the EC, as well as the IMF, points to the need to create a new administrative court staffed by properly vetted judges.

Therefore, the Ukrainian government committed to adopt a law establishing a new court that will be proceeding administrative cases against national government agencies (e.g., NBU, NABU, NAСP) by judges who have been duly vetted for professional competence and integrity, with the decisive and determining vote of independent experts with international experience.

According to IMF experts, the creation of a new administrative court will help strengthen the independence of the judiciary and predictability of dispute resolution for businesses.

For years, state-owned enterprises (SOEs) have been a source of inefficiency and fiscal risks. To improve efficiency, a corporate governance reform of SOEs was introduced but has not yet been completed.

In the Memorandum, the Ukrainian side stated its intention to improve the efficiency of SOE management through further reform of SOE corporate governance in close cooperation with international partners, in particular: - to adopt a law on corporate governance of SOEs (this refers to the draft law №5593-d on improving corporate governance, which as of the end of January 2024 is being prepared for the second reading (adopted as a basis in July 2021)); - implementation of relevant bylaws; - assessment of the financial condition and fiscal risks of state-owned enterprises in the state ownership policy by the end of March 2024 (as an interim step in the implementation of Structural benchmark 28) - Structural benchmark #35 envisages the development of a comprehensive state ownership and dividend policy, as well as a privatization strategy. It is likely that the privatization strategy will take into account past approaches to triage.

This is an important benchmark, since today there is virtually no ownership policy, which prevents SOEs from operating efficiently. The share of dividends that should be allocated to the budget is determined each year based on the budget's needs rather than the need for SOEs to operate efficiently.

It should be added that the IMF does not support the idea voiced by Ukrainian politicians to create a state holding company that would be responsible for all state-owned enterprises. According to the Fund's experts, this is premature given the financial and potential management risks.