A week ago a working visit to Ukraine was started by the IMF technical mission. The fund’s experts have to assess whether Ukraine has fully complied with its obligations. As a result of this visit, the executive board will decide on the allocation of the next tranche and its level. Moreover, it will be either the last tranche under the current extended funding program, which ends in spring of the next year or the first tranche on a new program, that will open for Ukraine access to new borrowings. In addition, the resumption of cooperation with the fund unlocks the monetary assistance that other donors have to provide us with, in particular, the World Bank. Also, it will allow the Ukrainian government to raise funds from private foreign investors at a better interest rate and for a longer term. Taking into account that for the period from 2018 to 2020 Ukraine has to deal with the peak payments for external debt, this financing is absolutely necessary. And participation in the new IMF program is perhaps the only possibility for Ukraine to avoid default. But do we fulfill the terms of the Memorandum with the fund to the fullest extent to receive its support?
In addition to two well-known conditions – the creation of the Anti-corruption Court and bringing the price of gas to the level of import parity, Ukraine also has to convince the lender of last resort, that our macro-financial situation is stable and predictable, that the state budget deficit fits into the established norm (2.4% of GDP this year and 2.2% the next year), and the budget itself is balanced. Moreover, experts of the fund will analyse not only the draft budget for the next year, which the government must present to the parliament by September 15, but also the realization of the current State Budget, which, we remind you, at the approval stage was called “The Development Budget” by the Ministry of Finance.
Despite the fact that GDP growth this year exceeded the expectations of the government, commodity prices have contributed to increased export earnings, and the purchasing power of the population has increased, reviving demand in the domestic market, the risks of nonfulfillment of the State Budget this year still exist. The situation has deteriorated significantly since the second quarter when it became clear that the real average annual exchange rate of the hryvnia to the dollar deviates from the projected by more than three hryvnias. The stabilization of the hryvnia, which is an absolute positive for ordinary citizens, has caused troubles with public finances. Tax and customs receipts sharply dropped in comparison with the planned calculations. At present, the failure of the consolidated State Budget due to the “exchange rate factor” amounted to 14 billion USD. But not only tax revenue earners were executed with a deviation from the plan.
The plan for revenues from state-owned enterprises – Naftogaz of Ukraine, which has to transfer 75% of the profit received in the form of dividends to the government’s coffers, has not been fulfilled. It sent to the State Budget only 30% of the full amount (11.7 billion UAH), the remaining funds are left unallocated “until a separate decision is made”. In fact, the dividends of Naftogaz are a sort of stock for a “rainy day”. It is clear, that by the end of the year, Naftogaz will return money to the state, but late payments to the government’s coffers, spoil not only the reporting but also performance of the expenditure part of the State Budget. Therefore, if the funds arrive, as usual, on the 20th of December, then to spend them will be impossible, only to draw up a balance sheet.
According to the Ministry of Finance, the income tax plan is also fulfilled only thanks to Naftogaz, in particular, thanks to a positive decision in the Stockholm Arbitration. And the domestic VAT (from manufactured goods in Ukraine) increased by 19%, according to inflation and inflation expectations – manufacturer prices grew by 17.7% over the previous year, and consumer prices by 12.6%. This suggests that production and sales remained at the last year’s level, and only the increases in retail prices, and the introduction of future inflation in manufacturer’s prices, had an impact on the growth of payments to the budget. Again, for reporting, it does not play a huge role, but in reality, it speaks of negative economic trends.
At the same time, the tax debt to the state continues to grow, by 5.2% in the first half-year, and already makes 81.8 billion UAH. Moreover, only 12.7 billion UAH of this amount – is the debt of taxpayers-bankrupts, the rest is the tax debts of operating companies.
Income from the rent for the use of the underground resources fell for 17.5 billion USD (or 30% compared to the first half of last year), revenues from excise taxes also decreased – by 2 billion USD or 7%.
A tangible devaluation of the hryvnia will help the government to cope with the implementation of revenue and import tax plans and customs duties, but it will indirectly influence the “internal” taxes. It is clear, that the consequence of devaluation is usually the growth of inflation, which in the long run increases the revenue from the “domestic” VAT, but this effect is usually postponed in time and more likely to have an impact on the budget revenues of the upcoming year.
Of course, problems with the implementation of the State Budget affect the financing of state expenditures. Especially it happens now when all reserves, whether of the Ministry of Finance, or the ones of NBU, are directed towards the payment of external debts, and the system of state finances actually depends on the regular and planned revenues.
A certain imbalance was introduced into the State Budget from the very beginning, as its revenues would have grown by 20% and expenditures by 25.4%. In particular, current expenditures increased by 23% due to the increase in the cost of grants for housing and utilities, pensions and salaries of state sector employees, while capital expenditures increased almost threefold, in particular, due to the introduction of a new subvention for the construction, reconstruction, and repair of highways.
According to the Auditing Chamber, the expenditure plan for the results of the half-year was not executed by almost 42 billion UAH or 9%. Generally, funding for 47 budget programs has not started, 365 budget programs are implemented with a lag behind the plan, and only 13 budget programs are funded under the plan. Of the 54 budget programs that are to be financed from the Special Fund of the State Budget, only 4 are implemented in accordance with the approved schedule.
At the same time, the Ministry of Finance and budget administrators failed to ensure the proper use of even the funds that were provided to them. Out of 42 budget programs, funding for 17 of them hasn’t started at all, or it has but with significant delays. For the other 4, there is no certainty whether transfers were provided to local budgets. But even in the presence of approved procedures and distribution of funds, 14 budget spending units were unable to approve passports for budget programs and start financing projects. The leaders of anti-rating are the Ministry of Agriculture, the Ministry of Internal Affairs and the Ministry of Health.
Accounts payable of funds managers also grows. From the beginning of the year, it has increased by almost 30% or by 547 million UAH (up to 2.5 billion UAH), while half of this debt is already overdue.
The low level of the drawdown of the facility received from foreign creditors, as well as non-repayment to the special fund of previously granted loans, led to non-fulfillment of state credit programs. In this case, Ukraine should receive from the donors more than 7.7 billion UAH for 12 budget programs. However, officials managed to get only UAH 2.3 billion for 7 programs, and the rest of the funding had not even started. The main reason is traditional – Ukrainian officials are preparing the necessary documentation for too long, selecting projects, not checking the financial status of the final beneficiaries, etc. As a result, financing for the construction of the Rivne NPP-Kyiv high-voltage line hasn’t been started this year, as well as reconstruction of transformer substations in the east of Ukraine, reconstruction and technical re-equipment of the Urengoi – Pomary – Uzhorod gas pipeline and urban passenger transport development program in the cities of Ukraine.
Due to the untimely repayment of loans, a number of budget programs funded from the special fund of the State Budget were not financed. In particular, the formation of “the Intervention Fund“ by the Agricultural Fund and the buying of material and technical resources for agricultural producers and farmers.
Cooperation of the state with private investors can’t be called fruitful either. The inflow of foreign direct investment in the first half of the year amounted to only 1.1 billion American dollars; this is 28.5% less than last year. Most of them are investments in the banking sector, which in fact is a reissue of bank debt to the capital of banks. The remaining investments in the economy, including the real sector, which in comparison with last year, decreased by 51%. Unfortunately, despite the numerous investment forums and conferences that Ukraine holds and visits each year, investors look very carefully at the prospect of investing in our economy. According to the NBU, the majority of all direct foreign investments that are sent to Ukraine are Ukrainian business funds, which were then withdrawn to the offshore, and then, if necessary, returned back to the country. We still can’t talk of real interest for foreigners, and Ukrainian business has got a wait-and-see position and is in no hurry to return funds to the country.
For the IMF this is not a good sign. The lack of foreign investment primarily speaks of the insecurity of investor rights in Ukraine, the “risk” of working in its legal field, and the reluctance of the Ukrainian business to return funds and the state is a vivid indication that the real sector considers it possible both, another devaluation of the hryvnia, and problems with the payment of foreign debts.
So far, the only real investor for Ukraine is its own citizens working abroad – the amount of private money transfers only in January-May this year, according to the NBU, amounted to more than 4.5 billion American dollars. However, this is a rather dubious achievement, which more likely speaks of the government’s helplessness in resolving the issue of labor migration.
Obviously, such a level of implementation of the state budget is likely not to affect the IMF, because external factors have practically no effect on the situation. The vast majority of the blame lies precisely on high-level government officials, who failed to derive the macroeconomic indicators on which the State Budget is based, and on ordinary executives who, even in the presence of funding, are extremely ineffective, making the “human factor” the only reason why Ukrainian finances can’t be spent rationally.
And having made inconsolable conclusions about the current budget, experts of the fund will analyze the state budget for the next year and it will be full of surprises. The Government will file the IMF with the State Budget-2019 in two versions – on the basis of the current legislation, and taking into account the introduction of the tax on withdrawn capital. In fact, the fund must agree on another tax reform and confirm the possibility of its implementation without unnecessary losses for the budget. The replacement of the income tax with the tax on the withdrawn capital is a direct loss of about 40-45 billion UAH of tax revenues, the compensators for which has not yet been found. In the long run, these funds will come back, because tax reform will stimulate business development, but in the first two years, the situation will be complicated. For the sake of this long-awaited by business reform, the government should work all this year to convince the lender of last resort, that he is able to control public finances by filling them in time and fully spending money. However, taking into account the mess that occurred with the implementation of the State Budget in the first half of this year the IMF will surely have a lot of warnings about the next tax changes. Indeed, even in a stable situation, the government is not able to carry out the tasks assigned to it.
By Valentyna Yushchenko