State debt has hovered over Ukraine: The country brings itself into a dead end

Author : Olexandr Honcharov

Source : 112 Ukraine

Ukraine does not have the capacity to continue accumulating debt without stimulating economic growth and the inflow of direct investment
23:21, 29 May 2018

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Do you remember how at the beginning of 2018 PM Groysman confidently declared that everything was under his control, and even he was not embarrassed by the external state debt that had reached 83% of Ukraine's GDP? And this is about $ 2,000 for every Ukrainian! However, despite these statements, the aggregate state and publicly guaranteed debt of Ukraine in February this year rose to $ 76.76 billion, and to $ 77.37 billion in March.

What do we see now? The Cabinet of Ministers and the Verkhovna Rada are ready to meet all the requirements of the International Monetary Fund in order to receive the fifth tranche of the loan in the amount of $ 1.9 billion in 2018. Also, at the stock market, the Ministry of Finance of Ukraine continues to raise the yield on domestic government bonds (YDGB), reaching almost 17, 5% per annum without taxation. Ukrainian banks entered into a tough competition for client’s money. Although it is fair to admit that in recent weeks some commercial banks have sharply raised the maximum rates on deposits of individuals, while others have reduced the yield on deposits.

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As a result, bank deposits are now formed from 210 to 364 days and from 366 to 450 days with a maximum yield in the first case of 16.5% per annum, in the second - 15.5% per annum. At the same time, it should be taken into account that the tax is to be paid at the rate of 18% from the income received, plus 1.5% of the military duty. And this is in conditions of instability in the Ukrainian financial market. This means that, in order to attract new investors to government securities and depositors of banks to keep the financial and economic bloc afloat, the government will have to pick up interest yield on short-term government bonds and the National Bank (NBU) discount rate to those record levels, not affordable for our financial authorities.

Then this process in the Ukrainian market, in general, can become irreversible, and the expected slowdown in economic recovery and the growth of public debt in this connection can accelerate even greater financial upheavals. Therefore, unfortunately, now the experts have the feeling that the time when the Cabinet without IMF loans will not be able to service this record national debt comes very quickly.

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At the same time, Western investors and analysts constantly warn us: they say that the credit crisis cannot be treated only by new loans since new lending is a further growth of debts. And if Ukraine continues to build up its debts, it will thereby inflate the debt, or credit "bubble", which burst at some moment. I have a feeling that this "bubble" is already big enough to burst. When it bursts, the financial authorities will not have anything that they could still inflate in order to disguise the problems. And this means that we do not have the capacity to continue accumulating debt without stimulating economic growth and the inflow of direct investment.

From the point of view of the majority of macroeconomic indicators, we will have to begin negotiations with the creditors about debt restructuring again. But do not repeat the bitter experience of ex-Minister of Finance Natalia Yaresko! After all, after her arrangements, it did not become easier. Moreover, the burden on the budget-2018 is only growing due to the servicing of public debt. Currency debt in 2018 is $ 7.1 billion against $ 6.9 billion in 2019. And about 50% of this debt load of the current year falls on the currency YDGB, placed by the Ministry of Finance on the Ukrainian stock market.

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In this regard, it should also be noted that for 2019-2020, without taking into account the repayment of Eurobonds, the Cabinet still has to return two Eurobonds under US state guarantees of $ 1 billion each. That is why such contractual obligations as the cost of debt servicing and the terms of their repayment are very important for us. Especially in conditions when the deficit of the state budget continues to grow. So, the revenue part of the state budget-2018 for the first four months of 2018 was 10,4 billion USD, which is 200 million USD less than planned. Plus, the tax reform of Nina Yuzhanina, head of the parliamentary committee on tax and customs policy, can increase the budget hole.

What should we do? First of all, we must honestly say that now no one has universal means to resolve this debt problem in the near future. However, the leading Western analysts and foreign investors argue that an effective socio-economic policy of the Cabinet of Ministers and fair competition principles could become a powerful driver of economic growth in Ukraine so that reliable sources for debt servicing are formed inside the country. We need structural and institutional reforms, new opportunities and incentives for the development of small and medium-sized businesses.

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During such business meetings with foreign colleagues they often pay attention to the need to increase the real incomes of the entire population of Ukraine, they say, if the incomes of the richest people in the country grow by 1%, then on average for 5 years the gross domestic product falls by 0.1% , and when the incomes of the least well-off citizens increase by 1%, the GDP grows by the same amount. In fact, our big capitalists have not created new jobs for a long time. On the contrary, labor migration from Ukraine to the EU countries is growing uncontrollably. And we should not forget about our labor migrants and their share that in the first quarter of this year industrial production in Poland increased by 6.4%. For example, in March of this year, Ukraine’s industrial production grew by only 1% compared to March 2017 (if we take into account the effect of a low base).

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Over the past two years, the share of entrepreneurial incomes of small and medium-sized businesses in the incomes of the population has almost halved. Accordingly, Ukrainian business cannot work effectively under the current institutional conditions. But what can legislators and the government offer us now? The main thing is that we, first of all, rely on our own financial resources and production potential. After all, the US and the EU no longer have budgetary opportunities to give us free credits. If we do not start real economic reforms and conduct an effective fight against corruption, there will be no money.

This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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