Moratorium on land: the extent of losses for the Ukrainian economy

Moratorium on land: the extent of losses for the Ukrainian economy

Ukraine is one of the few European countries where land market relations are absent. According to Central Intelligence Agency our country is ranked 11^th in the world as regards the land use.

The total land area of Ukraine amounts 60354,9 thousands hectares and 1,25 hectares per capita. Agricultural lands occupy the biggest part of the territory of Ukraine – 71%, inlc. 54% of all land in Ukraine – arable land.

Cultivated lands (arable lands) with total area of 32541,3 thousands hectares are concentrated in steppe districts and forest-steppe zones of Ukraine – Odesa, Mykolayiv, Kherson, Dnipro, Zaporizhzhia, Donetsk, Lugansk regions, parts of Kirovograd, Poltava and Kharkiv regions, and plain part of Crimea (temporary occupied territory).

Almost half of agricultural land resources belongs to enterprises – 49% (incl. arable land 46%), and significant part belongs to citizens – 37% (incl. arable land 27%).

Government enterprises account for only 5% of agricultural land (4% – cultivated lands). Dynamics of agricultural land areas of government enterprises indicates their average annually reduction of 2%.

Whereas land areas of non-government enterprises are growing by 1% on average. This is due to buying of state assets by private enterprises.

Land of the citizens of Ukraine – is mostly land shares (shares). The special feature of land relations is that the citizens lease their land to agricultural enterprises, farm enterprises at low cost (in Kyiv region 6000 UAH/year per share of 2.18 ha) or under the terms of barter (in Kyiv region one bag of sugar per share of 1 ha in 2008, etc.).

Having analyzed the resource potential of Ukrainian land market, we need to emphasize that in the agricultural lands structure the biggest part accounts for arable lands, i.e. cultivated lands. Among 71% of agricultural lands 62% are in active use for sowing (incl. grain crops – 34%, sunflower – 11,9%, potatoes – 3%, open ground vegetables – 1,03%, sugar beets – 0,5%). Land resources are concentrated in non-government enterprises and citizens of Ukraine.

Opening of the market is the most favourable for the citizens of Ukraine as the land resource at present brings low income. In 2015 according to the results of auction selling of leasehold rights on state agricultural land – the most expensive lease per 1 ha was in Khmelnytskyy, Rivne, Lviv, Poltava regions and it was less than 2,5 thousands UAH. This situation can be changed by the market mechanism of demand and supply that will influence the increase in lease rates.

Today land market in Ukraine is de facto in the “shadow sector” and is formed by means of long-term court processes. Lifting of moratorium on land will ensure the liberalization of land market and help demonopolization and establishment of market value of land under competitive conditions.

The development of market relations in EU member countries was at different times. In the countries of the post-socialist camp the land market opening was at the beginning of the 90s.

Poland.

In Poland 75 % of agricultural land at the moment of land market opening was in private property, unlike other countries of post-socialist camp. The price on Polish market is formed by demand and supply, without government interference. The land tax is charged from the buyer at the moment of purchase and amounts 2-5%. The market value of land in 2014 was 10270 USD (7723 Euros) per 1 hectare and in 2016 – 10300 USD/ha. In the period from 2011 to 2016 the value of land was increasing by 59%.

Romania.

The second example of land market liberalization – is Romania, where after secession from the communist block the lands were transferred by the government into private property in two ways – distribution and restitution. While selling the land there was a selective approach to the buyer, firstly, the buyer must have professional experience or special qualification in agrarian sector management, secondly, there was a limitation for buying 100 hectares. After joining the EU, in Romania there was a moratorium on land sale to non-residents that lasted 7 years. Comparing the market value of land before and after the moratorium, the price has increased tenfold. For example, in 2011 1 hectare of land was 212,6 USD, in 2014 – 2967,2 USD, and in 2016 – 6150 USD. The sales taxes amount from 2 to 3%, and land use tax – 2% from the sum of agreement.

Croatia.

In Croatia the final formation of land market finished in 2010 when the non-residents received the right to return land provided that they proved their heredity. However, the Croatia land market is still closed for foreign citizens. In 2013 Croatia joined the EU and during the first year the value of land increased by 16%, in 2014 1 hectare cost 4980 USD, and in 2016 – 7000 USD. The sales tax and land use tax amounts 5%.

Estonia.

In Estonia the land market forming began at the beginning of 90s of the last century. The processes of distribution and restitution raised difficulties on the way of reforms. The special feature of land market liberalization in Estonia was absence of prohibited access of foreigners to market, however, the land had to be used only for agriculture. The comparative advantage of the land market in Estonia is law sales tax 0,1-2%. The land price in Estonia in 2014 was 3226,5 USD and in 2016 – 5000 USD.

Generally speaking about EU countries the most expensive land is in Malta, the Netherlands and Luxemburg. As concerns land lease in EU countries, the highest lease payment per year is in the Netherlands, Denmark, Greece, Luxemburg, Finland and Poland.

Ukraine.

In accordance with data of State Cadastre in Ukraine as of the date January 01, 2017:

-standard cost of 1 hectare of agricultural land amounts 30927,8 UAH (1145,5 USD);
-average lease payment for agricultural government-owned lands by means of land auction – 2249,8 UAH (83 USD), without auction – 940 UAH (34,8 USD).

Capitalization of Ukrainian agricultural land today amounts 48,9 billion dollars, incl. cultivated lands – 37,3 billion dollars.

Having analyzed the experience of EU, in particular post-socialist states, the average annual increase in land value was at the level of 32.5% in the countries that restricted access for foreigners and 208% in the countries that opened their market for non-residents.

For reproduction of scenario of land market opening we use the experience of countries that prohibited land sale to foreigners (Czech Republic, Hungary, Poland, Slovakia) and countries that opened their market for non-residents (Estonia, Bulgaria, Lithuania, Romania).

Scenario 1 provides the restricted access for foreigners, purchase of land within 500 ha per 1 beneficiary. Scenario 2 – opening of land market for foreigners under conditions of purchase within 500 ha per 1 beneficiary.

Performed calculations allowed to determine that during the first year after liftingof moratorium the market value of land would increase by 4,9% with restricted access for non-residents, and without restriction – by 28%. In 2025 the market value of agricultural land, even with restricted access for foreigners, will increase by 2 times, and demand from foreigners will assist the increase of price by 4 times comparing with today standard cost.

Along with the growth of the market value of land, the land lease prices will be increased too. In 2017 it will be 100 USD, but, according to scenario “without foreigners” already in the second year after lifting of moratorium on land sale, this amount will be exceeded. In 2025 the lease payment will increase by 2.5 times under the conditions of restricted access for foreigners and by 5 times – with allowed access.

Opening of the land market does not provide selling of 100%, in particular, it is affirmed by the experience of EU countries, e.g. in Estonia the bigger part of lands is on lease – 60%, and 4,5% sold to foreigners. According to our scenario only 2%-10% will be sold.

Market formation of prices for agricultural land will promote its capitalization. At present, the market capitalization of the cultivated agricultural land amounts 37.3 billion dollars. In the first year after the lifting of moratorium it will increase up to 39.1 billion dollars according to scenario without non-residents, and up to 47.8 billion dollars – with non-residents. In the long-term perspective this figure will reach 76.4 billion dollars and 156.7 billion dollars in 2025, with restricted and unlimited access for foreigners respectively.

Opening of land market will affect natural persons, business and state. Thus, state budget will receive income from selling and lease operations. For making calculations we use average value of contributions in post-socialist countries – 3%.

So revenues to state budget from land operations will be from 0,10% to 0,18% GDP in scenario “without foreigners” and from 0,14% to 0,35% GDP – “with foreigners”.

In such a way, after lifting of moratorium total budget revenues for the projection period according to scenario 1 will be 2,5 billion dollars, according to scenario 2 – 4,3 billion dollars.

The agricultural branch of Ukraine will receive additional investment resource after opening of land market. In accordance to data of FAO and EBRD the necessary amount of annual investment in agro-industrial complex is 4,2-5,2 billion dollars.

The land market at realization of scenario “without foreigners” will allow to attract on the average 3,6 billion dollars annually, at unlimited access for foreigners – 6,1 billion dollars.

Along with increasing of investments in agro-industrial complex, the efficiency of labour also increases due to modernization and introduction of agricultural innovations.

This volume of investments will provide creation of new work places in agriculture from 11 thousands in 2018 to 35 thousands in 2025 under conditions of restricted access. With foreigners’ access to the land market the number of work places in agro-industrial complex will significantly increase. Despite the automatization of many processes, there will be increased the demand for labour in the production processes of deeper products processing, that would increase the number of specialists.

Thus, the liberalization of land relations will ensure the market formation of land price, will positively influence competitive relations, increase of innovative activity of farms in order to form a competitive agro-industrial complex and increase of domestic investments, that is one of the components of economic growth.

Resume.

Index	Scenario 1		Scenario 2
Index	2018	2025	2018	2025
Market value of land, USD/ha	1 202	2 348	1 468	4 817
Market value of land lease, USD/ha	91.4	211.3	111.5	433.5
Market capitalisation of agricultural land, billion dollars	39.1	76.4	47.7	156.7
Revenues to state budget, billion dollars	131.4	427.9	177.2	822.8
Investments in AIC, billion dollars	1.5	4.8	2.0	9.3
Efficiency of labour, per 1 employed, thousand dollars	9	22.8	10	27.8
New work places, thousand units	10.7	34.8	14.4	67

The opening of land market will ensure an average annual increase in nominal GDP by 6-7% due to attraction of investments in agriculture and growth of efficiency of labour. Therefore, at absence of a free land market, we can talk about the slowdown of the Ukrainian economy due to the loss of investments in agriculture for 28,9 billion dollars according to the first scenario or 49.1 billion dollars – to the second scenario.

Accordingly, the sooner we lift the moratorium on the sale of land, the faster we will realize our economic potential and accelerate the economic growth rate of one of the key sectors of the Ukrainian economy – agriculture.