How to implement state budget 2020 without IMF tranches and money for gas transit?

Author : Mykyta Sinitsyn

Just two weeks after the adoption of the new budget for next year, it became known that the budget deficit for January-October 2019 amounted to UAH 30,278 billion (USD 1,2 billion), which is 5 times more than the figures for the same period last year. So what to expect in 2020?
22:17, 2 December 2019

Mirror Weekly

On November 14 Ukraine’s parliament adopted bill No. 2000 on the state budget of Ukraine for 2020. Just two weeks after the adoption of the new budget for next year, it became known that the budget deficit for January-October 2019 amounted to UAH 30,278 billion (USD 1,2 billion), which is 5 times more than the figures for the same period last year. So what to expect in 2020, will the budget be implemented even if the state cannot fulfill the current budget of income?

The unfavorable situation with a number of external sources of funds to Ukraine, one of which is very considerable, adds some concerns. We are talking about cooperation with the International Monetary Fund (IMF) - the last tranche of which was $ 1.4 billion from Ukraine in December 2018. There are also concerns about the transit of Russian natural gas through Ukraine to Europe.

According to the Minister of Energy and Environmental Protection of Ukraine Oleksiyy Orzhel, we are talking about the amount of about $ 3 billion that the Russian Gazprom pays for transit annually. This money goes to the budget. The current transit agreement expires on January 1, 2020, however, according to Yury Vitrenko, Executive Director of Naftogaz Ukraine, the deadline for extending the current or concluding a new contract is December 13. But what if there will be no contract?

The experts polled by agreed that the implementation of the 2020 budget for Ukraine will not be easy, but at the same time they diverged in assessing potential threats to the country's main financial estimate.

Optimism is not dead

So according to the financial expert Vasyl Nevmerzhitsky, the main problem of the domestic budget is the constant growth of expenditure side, for which there is not enough revenue from income. And this has to be compensated with new borrowings and another increase in expenses to pay off the latter.

Of course, according to interlocutor, the problems of continuing cooperation with the IMF and gas transit will cause some damage to the budget, but their impact is unlikely to be decisive.

"Yes, cooperation with the IMF is a kind of signal for investors about the stability of the situation in the country and the possibility of investing, but its influence is not absolute. The recent mission left Ukraine without a definite answer, but non-residents’ interest in buying Ukrainian bonds did not fall - the currency starts flowing into the country and continues to strengthen the hryvnia exchange rate. There is a similar story with the transit of natural gas - these funds do not go to the treasury, but to a state-owned enterprise that pays taxes to the budget. As a result, the termination of transit, of course, will reduce taxes from this enterprise, but you should not consider this critical for the state treasury,"  Nevmerzhitsky said.

As the expert emphasizes, the possibility of yet another failure to fulfill the privatization plan, albeit significantly reduced, and the high hryvnia exchange rate, which will automatically reduce customs revenues received from VAT on imports, pose a much greater danger to the Ukrainian budget revenues. But, on the other hand, a high hryvnia exchange rate against the dollar will help to save money on financing a public debt denominated in dollars.

Related: 2020 state budget bill passed for Zelensky’s sign

The economic expert of the Ukrainian Institute of the Future Danylo Monin also speaks of exaggerating the influence of the IMF on revenues to the state budget.

“The IMF tranche doesn’t really affect the state of the budget, but rather, it will save on debt servicing, albeit a little, up to about UAH 0.5 billion. Gas transit takes a slightly larger amount in budget losses, for example, the same 20% of VAT from moving it in Ukraine. So, according to the calculations of the Institute, with a gas transit of 65 billion cubic meters of gas in 2020 (in 2018, transit amounted to 86.8 billion cubic meters, -, losses on import VAT will amount to 2-3 billion UAH (120 million USD), " - the expert notes.

And pessimism too

But not all experts are so optimistic. Financial analyst Borys Kushniruk is sure that the termination of Russian natural gas transit is the main risk for the 2020 budget, which could lead to the loss of about 30-35 billion hryvnias (1,4 billion USD) by the state. There is a risk in terminating cooperation with the IMF, although it is impossible to calculate specific figures here because of the indirect nature of influence.

“IMF tranches are mainly directed to replenishing the National Bank’s gold and foreign exchange reserves and therefore have no direct influence on the state budget or its revenues. But there is influence here, just its mechanism is somewhat more complicated. So, financial support from the World Bank, the USA, the EU falls into the state budget. If the IMF stops cooperation with Ukraine, this will be a bright negative signal to our other partners, as well as investors and creditors. As a result, investors will invest less in our economy, that is, the budget will not receive those taxes, which could have been obtained with the opening of new industries. The state will be able to continue to use such a mechanism for financing the state budget deficit as the sale of government bonds, but due to problems with the IMF, Ukraine will have to offer large interest rates on them, which again will lead to an increase in debt servicing costs and the state treasury deficit, "the expert explains the importance of" friendship "with the IMF for Ukraine.

Also, very serious losses from a possible loss of revenues on the transit of Russian gas and “expensive loans” are predicted by Oleksiyy Kushch, an expert at the Growford Institute.

“The IMF and its tranches have no direct impact on the state budget revenues, but the interest rates on its loans are much lower than the rates on the same bonds on the domestic market. That is, if Ukraine received loans at a low interest rate from the IMF, it could borrow much less, offering creditors lower interest rates than today, since they would have needed much less money. As a result, budget expenditures on interest payments and servicing the public debt would be much less than what we have today," expert explains the IMF’s role for Ukrainian budget.

The termination of Russian gas transit is fraught for the Ukrainian state treasury with direct losses in the amount of 30-40 billion hryvnias (1,6 billion USD).

At the same time, at least four other risks are expected for the Ukrainian budget in 2020:

1) another failure of privatization - although the plans for privatization revenues for 2020 compared to 2019 have decreased to UAH 12 billion (480 million USD), given the constant failure of recent years, when the plan was carried out only by several hundred million hryvnias – there are big doubts. Failure to implement the privatization proceeds plan will mean a budget deficit;

2) economic growth - 3.7% of GDP growth, laid down in the 2020 budget, may turn out to be an unattainable dream if a global financial and economic crisis breaks out next year, the inevitability of which has been warned recently by experts. In such a case, all plans and calculations of the Cabinet of Ministers will inevitably fail;

3) a high hryvnia exchange rate - on the other hand, if the crisis still does not happen, the bonds pyramid may continue to flourish, which will lead to the fact that the current hryvnia exchange rate will remain, and if budgeted at the rate of 27 hryvnias for 1 dollar, this will be fraught with under-receipt of funds from VAT on imports, that is, the history of the second half of 2019 will be repeated;

4) Risks of National Bank - the latter is all derivative of the same high hryvnia exchange rate and in practice means losses incurred by the National Bank due to the current exchange rate difference. But the budget contains future profits that the National Bank should contribute to the state treasury as part of its profits.

All this suggests that without significant economic growth, it will be very difficult to implement the state budget 2020. And since the new government has already outlined plans to get into the pockets of Ukrainians in order to somehow make ends meet (rising tariffs for gas and electricity), it seems already clear that the end of the era of poverty is not visible on the horizon.

Related: Zelensky instructed Cabinet of Ministers to diversify energy supplies

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