Free trade: chances for small businesses

On 10 June 2014, IBF International Consulting presented its first draft report assessing the major challenges facing Ukrainian small and medium-sized enterprises (SMEs) under Association Agreement, including Deep and Comprehensive Free Trade Area (DCFTA). The assessment was financed by the European Union under a special project* and presented under the auspices of the EU Delegation to Ukraine. During the presentation, the following topics were raised: 

SME developmentOn EU assistance to the SMEs sector. Theimplementation of the EU-Ukraine Association Agreement, including its DCFTA provisions, will have an effect on Ukrainian SMEs. The DCFTA requires effective cooperation between Ukrainian authorities and the private sector, enabling businesses to swiftly adapt to norms and regulations of the European Single Market. Acknowledging these needs, Andrew Rasbash, Head of Cooperation at the EU Delegation to Ukraine, announced the EU’s readiness to allocate over €100 million in the coming years to support SMEs in adjusting to the DCFTA. These funds will target the major challenges to the growth of SMEs in Ukraine.

The first draft report prepared by IBF International Consulting will be further examined by the European Commission before the EU makes final decisions on allocating support to the development of Ukrainian SMEs.

On the main barriers preventing the development of SMEs. SMEs suffer most from corruption, excessive regulation, the challenging macroeconomic context, and the complicated finance system.

Jean Claude Duplouy, the project team leader at IBF, stressed Ukraine’s devastating ranking in Transparency International’s Corruption Perceptions Index (Ukraine ranks 144th out of 177 countries). Over-regulation creates favourable conditions for corruption and establishes yet another major barrier to the growth of SMEs. “Excessive regulation and many inconsistencies in the norms and regulations governing SMEs, combined with a lack of legal awareness and relevant knowledge among entrepreneurs, create an environment for rent-seeking behaviour among bureaucratic structures responsible for the registration, control and closure of SMEs,” Duplouy underlined.

Ukrainian real GDP growth is expected to be at -4% in 2014 after the country experienced zero growth in 2013. The previously-signed agreements with the IMF, the EU, and other international donors, however, will allow Kyiv to fully cover its foreign liquidity shortages in 2014 and 2015. Duplouy noted that lack of sufficient access to financial support is another obstacle to the sustainable growth of Ukrainian SMEs, and adds that banks are reluctant to invest in small enterprises.

On ways to overcome the indicated barriers.  Bill McConkey, the project’s senior SMEs expert, noted the importance of a clear policy strategy in the field of SMEs development and appropriate budget, including a medium-term expenditure framework. This policy should focus on the development of governance capabilities, deregulation, and improving the business climate. Duplouy emphasised that cutting the red tape, in particular for tax administration and licensing permits, requires strict and decisive action. He added that making these improvements would likely also reduce corruption.

McConkey and Duplouy both also suggested that the government should develop loan guarantee schemes to reduce the risk banks face when loaning to SMEs. As to the current macroeconomic challenges, the IMF is taking the steps necessary to improve Ukraine’s situation.

*Background. Since 19 May 2014, IBF International Consulting has been implementing the EU-financed programme, “Ukraine – Sustainable Private Sector Development.” The project is aimed at uncovering the major barriers to the success of Ukrainian SMEs.