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Ukraine is reforming its welfare system as the cost of war rises

Social support will become means-tested as millions of Ukrainians face war, displacement and poverty

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Kateryna Semchuk Thomas Rowley
26 April 2023, 12.27pm

Millions of Ukrainians have been displaced – and face poverty – as a result of Russia's invasion


(c) Anadolu Agency / Getty Images. All rights reserved

The Ukrainian government is continuing with wide-reaching reforms to its social welfare system as the country faces the ever-increasing cost of war with Russia, now in its second year.

National policymakers and international financial institutions have both expressed concern about the extent of state spending on social assistance, and the pressing financial need to switch to a much leaner model of state support for vulnerable people. Experts are worried that these reforms could reduce the level of state assistance in the long-term.

Indeed, the country’s recent $15.6bn loan agreement with the International Monetary Fund (IMF) – regarded as a breakthrough for the country’s financial stability – has tied the government into cutting back on social expenditure.

Despite the decline of the Ukrainian economy and state budget deficit, the Ministry of Social Policy’s budget increased by almost 20bn hryvnias (£435m) this year compared to last year. In total, it amounts to more than 445bn hryvnias (£9.7bn).

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Spending on social programmes and pensions makes up 17% of Ukraine’s entire state budget for 2023, and is second only to spending on the army and security (43%).

The Ministry of Social Policy argues that a new framework is needed because the administration of social benefits is inefficient, and the benefits system itself is opaque and complex.

However, these reforms are coming at a time when millions of Ukrainians face displacement, job losses and rising prices in a war-ravaged economy.

The invasion has caused at least $130bn in direct damage to Ukraine, as well as a further $290bn worth of damage to the country’s economic activity, according to the World Bank’s “needs assessment” report from March. The same report says the poverty rate – the number of people living on less than $6.85 per day – has increased from 5.5% to 24% of the population in the past year.

Ukraine’s social policy reforms have been given new impetus by the existential challenge of the Russian invasion

To date, several million Ukrainians have lost their homes, five million people are displaced inside the country and more than eight million are refugees abroad.

Survivors of the Russian invasion are likely to have complex needs. The Ukrainian government estimates that, by the end of the war, veterans could make up more than 10% of the population. So far, 14,000 Ukrainian civilians have been injured, according to the UN.

All this begs questions about how a more “targeted” model of social assistance could leave Ukrainians literally out in the cold.

‘Strengthening control’ of state benefits

Ukraine’s social policy reforms have been given new impetus by the existential challenge of the Russian invasion, but the process was started by president Zelenskyi’s administration several years ago.

Under the reform, the government has sought to move away from Soviet-era status-related benefits – whereby, for example, single mothers, veterans, or people with disabilities receive financial assistance and privileges on the basis of belonging to a group.

“In recent years, the system of social support of the population in Ukraine has undergone significant changes, but it still needs to be reformed,” Ukraine’s Ministry of Social Policy told openDemocracy. “Additional challenges have fallen on the social protection system regarding the ability to quickly respond to new and significant challenges that have arisen as a result of the war.”

We want our people to stop living with the feeling that someone owes them something. We want to give everyone a fishing rod that will help them catch fish – to gain economic independence, and with it a decent life

Oksana Zholnovych, Ukrainian Minister of Social Policy

In March, prime minister Denys Shmyhal outlined the main changes that await Ukrainians, promising “a new social contract between the state and citizens” as part of the government’s action plan for 2023.

This involves “strengthening control” of social benefits by digitalisation, reviewing the state’s financial obligations with a view to reducing their number; checking if a citizen really requires state assistance; and providing people with social services (rather than funds) to help them “overcome their difficult circumstances” and become economically independent again.


The city of Dnipro has become a humanitarian hub for people fleeing their homes in eastern Ukraine


(c) Anadolu Agency / Getty Images. All rights reserved

The government says it will improve how social payments are targeted, improve databases of recipients and increase payments after someone’s needs are assessed. It also plans to introduce guaranteed basic social assistance, which will be means-tested and aimed at the most vulnerable sections of the population.

Social policy minister Oksana Zholnovych said the ministry’s “priority” would be to “provide certain categories of people with a certain set of social services that will allow them to overcome difficult life circumstances”.

“We want our people to stop living with the feeling that someone owes them something. We want to give everyone a fishing rod that will help them catch fish – to gain economic independence, and with it a decent life,” Zholnovych said.

Natalia Lomonosova, senior analyst on social policy at Ukrainian think tank Cedos, told openDemocracy the changes would include a “more scrupulous” assessment of people’s incomes when dealing with applications for assistance.

Most forms of financial assistance “will be tied to people's incomes rather than status,” Lomonosova said.

One of the recent changes is that officially unemployed Ukrainians can now be made to carry out community work, paid at minimum wage, instead of receiving social benefit payments. This was already in evidence last year, when, for example, 139 unemployed people in the Kyiv region were involved in “socially useful work”.

Priority to social services

In summer 2022, Ukraine started work on a new “Social Code”, which would systematise the country’s “chaotic and outdated” social legislation, according to the government.

The current system, reformers argue, has too many status- or group-related benefits, part of which are, in practice, delayed or not paid out because of the budget deficit.

The government is introducing a new national purchaser of social services. The idea is based on the country’s new healthcare system, in which a central National Health Service pays hospitals for the services they provide.

“Each local community has to assess how many social services need to be provided, then they have to choose the best provider of these services. What’s interesting is that [the reform] allows competition between private and municipal providers of social services. The state compensates the cost of providing services,” Lomonosova explained.

Social policy minister Zholnovych is optimistic: “I think we will be able to scale this successful experience in our social policy and create a similarly effective, proactive network of social service providers, mostly non-state.”


Russia has destroyed and occupied Ukrainian cities, seizing economic capacity and displacing millions


(c) Dimitar Dilkoff/AFP via Getty Images. All rights reserved

Reforming social legislation will also “stop the wave of legal decisions” by both national courts and the European Court of Human Rights against the Ukrainian government for violating social rights, claimed MP Halyna Tretiakova, head of the parliamentary committee on social policy.

Tretiakova said these legal decisions aren’t being implemented, so “the amount of compensation that the state owes is only rising.”

Lender of last resort

As a prerequisite for financial assistance from the IMF, the Ukrainian government committed to drawing up a final version of its new social policy vision – together with assistance from the World Bank – by the end of January 2023.

openDemocracy asked the Ukrainian Ministry of Social Policy and Ministry of Finances for a copy of the new social policy concept note, but they refused to share it. The World Bank did not respond to a request for comment.

The IMF’s new $15.6bn loan, which was announced in late March, has locked Ukraine into a range of fiscal policy measures. Notably, the country is required to make “substantial changes to pension and social safety nets” to offset wartime pressure on public finances, reduced tax income and the need to service its extensive foreign debt. The IMF calculates that Ukraine will have a debt-to-GDP ratio of 98% for 2023 – and that without debt restructuring, its debt will be “unsustainable”.

Ukraine has already had a severe demographic crisis. This should fuel a discussion about how to attract and retain labour in Ukraine as part of reconstruction

Barrie Hebb, development economist

“Given the [external] debt burden and the difficulty in repaying, [the Ukrainian government and IMF] want to change the country’s social programmes to find a way to limit who gets government benefits,” Barrie Hebb, a development economist who advises on international aid, told openDemocracy.

“What they are talking about is dealing with Ukraine’s debt burden over time, by making sure that the government reforms cut back on structural expenditures sufficiently so it can deal with debt and cyclical expenditures,” Hebb said.

However, there is concern that a reduced social safety net could dissuade people from returning to Ukraine, even after the war is over.

“Ukraine has already had a severe demographic crisis,” said Hebb. “This should fuel a discussion about how to attract and retain labour in Ukraine as part of reconstruction. Why would someone want to stick around and work for 20 years if there is no pension guarantee in the country? And no social protection?”

Lomonosova believes that a strong reaction from Ukrainian society to the reforms is unlikely because “only a relatively limited” number of people receive social assistance.

“You have to understand that the reform is moving slowly, gradually,” Lomonosova told openDemocracy.

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