Nearly Quarter of Ukraine’s GDP, or UAH 846 Billion, Is in Shadow – Study of Shadow Economy Finds

Informal transactions account for a quarter of Ukraine’s official GDP (or UAH 846 billion), according to preliminary findings of a joint Ernst & Young and Mastercard study of Ukraine’s shadow economy. The study has been conducted under the Memorandum of Cooperation between the Ministry of Economic Development, Trade, and Agriculture of Ukraine, the NBU, and the State Statistics Service of Ukraine.

Preliminary results of the study, entitled Reducing the Shadow Economy in Ukraine through Electronic Payments, have been presented at a working meeting between representatives of a number of government agencies that the NBU has hosted today.

Ernst & Young has conducted similar surveys in 33 countries around the world, including the Czech Republic, Poland, Slovenia, Slovakia, Croatia, Bulgaria, Bosnia and Herzegovina, Serbia, and others. Historically, the estimated level of the shadow economy in these countries has ranged from 10.1% to 26.9% of GDP.  

The study of Ukraine’s economy has found that UAH 846 billion, or 23.8% of Ukraine’s official GDP in 2018, is in the shadow. That includes:

• the cash-based shadow economy, which accounts for 19.7% of GDP (or UAH 702 billion)
• the production of goods at home for own use, i.e. the nonmonetary shadow economy, which makes up 4.1% of GDP (or UAH 144 billion).

“Among the priorities of the Ministry of Economic Development, Trade, and Agriculture of Ukraine is the legalization of labor relations and overall economic activity in the country. The development of cashless payments can be one of important methods of achieving this goal, as the study shows. We also agree with the researchers in that the greatest potential for the development of cashless payments now lies in encouraging business entities, especially small businesses and microenterprises, to use cashless payments, in particular by reducing the cost of payment infrastructure to them,” said Sergiy Nikolaychuk, Deputy Minister of Economic Development, Trade, and Agriculture of Ukraine.

In general, the study looks into Ukraine’s 2018 GDP, monetary economy, etc. The study distinguishes between the committed and the passive shadow economy, depending on their beneficiaries. In the so-called committed shadow economy, both parties to a deal benefit from it. For example, in the case of a cash payment, the buyer does not require an invoice and receives a discount, while the seller saves on tax expenses, as the transaction is made off the books. In the so-called passive shadow economy, only the seller benefits from the transaction. The seller sells goods or services without a receipt, for instance, and thus evades taxes.

The study in Ukraine shows that more than a quarter (26.2%) of the cash-based shadow economy (the equivalent of 5.3% of GDP or UAH 190 billion) is the so-called committed shadow economy, in which both the seller and the buyer take interest in using cash settlements. And the rest (73.8%) of the Ukrainian shadow economy (14.4% of GDP or the equivalent of UAH 512 billion) is the so-called passive shadow economy, which results from cash settlements initiated by sellers. Encouraging cashless electronic payments should give a significant impetus to reducing the passive shadow economy.

“The task of unshadowing the economy remains relevant for Ukraine. To this end, consolidating the efforts of businesses, the government, the NBU, and all other interested government agencies is vital,” said Dmytro Sologub, NBU Deputy Governor. “Curbing the shadow economy, which requires only cash to operate, will take our country’s economy to a new level as noncash funds remain in the economy and fuel its development. Among other things, this will indirectly contribute to the reduction of credit costs for individuals and businesses and the further progress of currency liberalization. Transparent business practices will also support the growth in the tax base, i.e. there will be an increase in state budget revenues.”

NBU Deputy Governor Sergii Kholod, in his turn, said that the NBU is making great effort to promote cashless payments and give the people a good habit of paying cashless. “We are actively working to expand the scope of cashless payments and payment infrastructure in Ukraine. This focus area, along with boosting financial inclusion of the public, is one of the priorities in the Strategy of Ukrainian Financial Sector Development until 2025,” he said. “The NBU’s main goal in this regard is accessible and convenient financial services for all Ukrainians. This is going to be achieved through the development of a consumer rights protection system, measures to improve the financial literacy of Ukrainians, and the development of the cashless economy.”

“The experience of different European countries that use electronic payments confirms that electronic payments have positively affected their economies and transparency levels. Ukraine is confidently going cashless, thanks to its developed cashless infrastructure: the country already operates over 333,000 POS terminals¹. Eight out of ten card transactions are noncash. This suggests that Ukrainians are ready and willing to embrace the cashless lifestyle. At the same time, there is considerable potential for developing the cashless payment infrastructure, and this is especially true for Ukraine’s regions. Today, Mastercard and its partners are actively developing their financial infrastructure and inclusion in Ukraine, implementing cashless settlement solutions for urban social projects, retail, and SMEs. Electronic payments are a powerful driver of a transparent economy, and we believe that it is important to study, on a regular basis, the factors that improve the transparency of the country’s economy,” said Inga Andreieva, CEO of Mastercard in Ukraine.

In addition to measuring the level of the shadow economy, the study also includes a range of potential activities that aim to reduce the passive shadow economy and to boost cashless payments. In general, it is possible to fight the shadow economy by introducing cashless-only social security benefits, tax exemptions, retail POS terminals for SMEs, and additional incentives for merchants and consumers to use cashless payments. Thus, previous studies conducted in European countries confirm that a 100% increase in the share of cashless payments contributes to lowering the level of shadow economy by 0.6% to 3.7%, with government revenues increasing by 0.1% to 0.8% of the GDP of the countries covered by the study².

According to Mastercard, today only 38% of SMEs in Ukraine take cashless payments for goods and services, meaning that 62% of businesses operate exclusively in cash². To support SMEs in implementing the payment infrastructure, Mastercard and its partners have been launching platform projects around the globe. One of the most successful is Cashless Foundation in Poland, with over 130,000 merchants participating to date. The Foundation has facilitated the installation of 172,000 terminals throughout the country. At the same time, 95% of the program participants would recommend other entrepreneurs to have terminals installed, as doing so has significantly boosted the culture of cashless payments in Poland.

Detailed findings of the study will be published on the NBU’s website in March of 2020 after all of the participants have discussed them as part of the Memorandum of Cooperation noted above.