National cashback under the “Buy Ukrainian” program: real support for domestic manufacturers or another profanation of the government?

In August, the Government of Ukraine adopted a decision on the National wait, which will allow Ukrainians to receive compensation for the purchase of goods and services of domestic production.

The program will debut on September 2 and will allow users to receive 10% of the cost of purchased Ukrainian goods.  The maximum amount of cashback is 3 thousand hryvnias per month. The received cashback can be spent on medical, communal, sports, entertainment services, or can be donated to the Armed Forces or buy military bonds. According to the plan of the developers of the initiative, the latter will contribute to the support of Ukrainian manufacturers and the development of the domestic market.

The tax committee of the Verkhovna Rada will “beat down” the changes proposed by the government regarding the cashback program. The government did not consult the parliament regarding this initiative. About it in a comment to journalists said First Deputy Chairman of the Tax Committee, People’s Deputy Yaroslav Zhelezniak. He considers the decision on the National Cashback to be a “stupid and populist initiative”.

The war certainly affected the welfare of the population and producers. The business of some entrepreneurs was literally destroyed, others suffer from the energy crisis and a shortage of personnel. The population as a whole did not become richer either. Also, the prospect of receiving additional protection from the state under the new program may seem tempting to both parties.

But what can gullible compatriots expect behind the promising facade of this promise? It follows from the definition of the project that the initiative encourages the consumption of Ukrainian products by our compatriots. But will this program help Ukrainian manufacturers?

Procrustean bed cashback

The first thing that causes dissonance and a sense of profanity is the government’s intention to allocate up to UAH 4 billion to the program by the end of the current year against the background of regular complaints about the state budget deficit of about UAH 500 billion. Simple arithmetic demonstrates the impossibility of fitting into the Procrustean box of the budget of the “Buy Ukrainian” program.

Even if this amount – UAH 4 billion – is allocated, it will not cover all necessary needs. Let’s turn to a simple calculation.  If, say, the average Ukrainian spends 5,000 hryvnias per month on purchases, then under the program he can expect to receive 10% cashback, i.e. 500 hryvnias. (and most likely less, since the cashback will still be taxable).

In four months, such a consumer will receive 2,000 hryvnias cashback for 20,000 hryvnias spent. Let’s assume that 20 million Ukrainians have similar spending dynamics. For the specified period – 4 months – the state must compensate them with 40 billion hryvnias. But the budget foresees ten times less. This is the first inconsistency.

IA “FACT” has already covered  that although Ukraine receives tangible support from the West, this funding cannot be spent on the state’s defense needs. Ukraine can finance the armed forces only through tax deductions, enterprise income or placement of government bonds.

The fact that the national cashback program is initiated when the government feels a pronounced shortage of funds to finance its army at the height of the war, reduces the powers of local self-government bodies, cuts spending on education, gives it certain signs of protectionism.

The road to hell is paved with good intentions

There are precedents in national history when protectionism played an evil joke on the one it sought to protect. For example, the Zaporizhzhia Automobile Plant has for many years lobbied for huge excise duties and taxes on used cars imported from Europe and the USA, making the purchase of the latter by domestic consumers absolutely unprofitable. Thus, ZAZ and its lobby in the government sought to make Daewoo Lanos as attractive as possible to Ukrainians.

Having thus weakened competition in the face of the foreign auto industry, domestic officials created hothouse conditions for the Ukrainian automaker. But ZAZ, having been in the comfort zone for a long time, could not take advantage of its competitive advantage and continued to release faceless models of the same type Daewoo Lanos for years. While Ukrainians could not buy modern, comfortable budget cars at an affordable price.

The “Buy Ukrainian” program is, of course, not pure protectionism.  Thanks to membership in the WTO, Ukraine cannot introduce embargoes, high taxes and excise duties on goods, except in cases where it is a threat to national security or outright dumping. That is why the Ministry of Economy of Ukraine was able to come up with such a simple scheme as compensation of 10% cashback for the purchase of goods and services of domestic manufacturers, which clearly bears the signs of import substitution.

Unfortunately, Ukrainians are forced to spend the lion’s share of their income on paying for communal services, and there is not much left to purchase goods and services for other purposes. That is, domestic producers will gain little from such protection.  The initiators of the program themselves assume that, if successfully implemented, the program will lead to an increase in the value of all produced goods and services by 0.14% and will contribute to the creation of 22,000 jobs. That is, the program’s ideological founders admit that the efficiency of their innovation is very moderate.

50 shades of “Ukrainianness”

The question of who will determine the national authenticity of origin, the “Ukrainianness” of goods seems to be particularly interesting. Even an inexperienced layman understands that there is a wide field for the implementation of various corruption schemes. So, if a small Ukrainian manufacturer produces goods from components bought abroad, but brands the finished product as Ukrainian, will such products be considered Ukrainian?

Let’s say, the Ukrainian analogue of Kola, which contains concentrates of imported production, dissolved in Ukrainian water and poured into Ukrainian bottles at Ukrainian production, is it Ukrainian Cola or imported?  Who and to what extent will determine the “Ukrainianness” of the product? Who will check the relevant reporting of enterprises, keep records, allocate money for this?

A love of simple solutions in an attempt to solve complex problems

The domestic economy is export-oriented and is forced to constantly compete in foreign markets for consumer interest. Now our exporters are facing a whole series of crises – in particular, logistical and energy. The drama of the situation is that Ukrainian producers of goods and services were overpaying for electricity even before the onset of the current energy crisis, paying for energy at a rate of UAH 5-6 per kV/h. Now the situation has worsened, as Ukrainian producers are forced to cover up to 4/5 of their energy needs at the expense of European energy generation. On the spot market during peak hours, the cost of electricity for business reaches UAH 9 per kV/h.

Ironically, in such a situation, operating from a generator may turn out to be more economical. It is noteworthy that in the West, electricity for business as an active wholesale consumer is cheaper than for the population. In Ukraine, the situation is exactly the opposite. As for the logistics crisis, thanks to the restoration of the sea corridor, the situation is gradually being optimized.

So, it seems obvious that low consumer demand is far from the biggest problem of Ukrainian manufacturers. That is why domestic business currently needs protection in other areas. And the love of simple solutions in an attempt to solve complex problems can lead to another soap bubble…

Tatyana Morarash