Page 15 - BNE_magazine_02_2020

bne February 2020 Companies & Markets I 15
Ukraine land market reforms watered down but on track
to be introduced
in 2020
Ben Aris in Berlin
Ukraine is grappling with creating a market for farmland that could boost economic growth by as much as 3% and increase the value of the economy by $85bn if introduced. But land sales are a highly sensitive political question and just suggesting the creation of a land market has already cost Ukrainian President Volodymyr Zelenskiy some of his political popularity.
A draft bill to create the market was passed in its first reading in December and the remaining two readings are due at the start of this year. However, while the idea has been accepted in principle, many of the details remain to be worked out. As the government has decided to exclude foreign participation in the land market the effect of the reform has already been significantly watered down.
A moratorium on farmland sales in Ukraine has been in place since 2001 and affects close to 70% of the territory and 16% of Ukraine’s population, which cannot freely dispose of their farmland plots.
Zelenskiy ordered the government and the parliament to approve land reform by December 1 and the Prime Minister of Ukraine Oleksiy Honcharuk announced that the land market will be operational as of October 1, 2020.
The end of the moratorium is expected to have a major impact and could dramatically boost economic growth, according to a study jointly authored by the World Bank and the Kyiv School of Economics, published by Vox Ukraine at the end of 2019.
Another report by UIF released in 2017 entitled, "Moratorium on land: the extent of losses for the Ukrainian economy” forecasts average annual nominal GDP growth of 6-7% after the moratorium is lifted, depending on the conditions that are applied. The UIF study evaluates two scenarios. In both scenarios land ownership per beneficiary is limited to 500 hectares (ha), with foreigners excluded from the market in the first scenario and foreigners are allowed to participate in the second.
Another report from Easybusiness released in 2019, “Life After: Key aspects of land market opening”, predicts that
Ukraine is on track to create a watered down version of a land market in 2020.
lifting the moratorium on land sales in Ukraine will generate an additional $14bn to $85bn of GDP over the next 10 years under different scenarios compared to the status quo or continued moratorium scenario. Again the study looks at different scenarios, which materially impact the development of the market, particularly the thorny question of if foreigners will be allowed to participate.
Zelenskiy eventually rejected the idea of foreign participation until there is a nationwide referendum on the question in several years' time in a bill that was passed in its first reading in mid-December.
The International Monetary Fund (IMF) and foreign investors have criticised the ban on foreigners participating in the land market , as they believe it will lower the value of the land on sale by limiting the pool of investors.
Under the most liberal scenario without regulations and with the access of foreigners, the average farmland sales price is expected at $5,640/ha and the effect on GDP will be an additional $85bn over the following 10 years. That is equivalent to an expansion of GDP by 70% from the $124bn the economy was worth at the end of 2018.
“This in turn implies additional annual GDP growth of 5.4pp – a result very similar to the UIF (2017) report,” says Klaus Deininger, the lead economist at the World Bank, and Oleg Nivievskyi of the Kyiv School of Economics, who authored the study published by Vox Ukraine.
Pros and cons
The introduction of pricing for farms means the market should trigger structural changes and sort the farms by productivity and profit that will lead to an overall increase in the value of land and farms.
The private ownership of land should also trigger investment into land to improve productivity and yields. Under the current leaseholding system there is little incentive for farmers to invest heavily into developing land the leaseholder doesn't own.
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