KYIV – The Cabinet of Ministers of Ukraine led by Prime Minister Arseniy Yatsenyuk on December 23 presented to Parliament its 2015 central budget, which decides who will carry the economic burden as the country attempts to preserve its statehood in what is promised to be the most turbulent year since independence.
The 2015 budget will also determine whether the government will qualify to receive the next IMF tranche of $2.8 billion expected in early February, as estimated by Ukraine’s top economists. The tranche is the Ukrainian government’s only hope for survival as its international reserves have dwindled to $7 billion – an 11-year low. Meanwhile, it has $11 billion in foreign debt obligations.
Parliament voted to approve a calendar that would require a vote on the budget on December 30, with three sessions and two committee hearings before then. Already National Deputy Oleh Liashko said his deputies from the Radical Party won’t vote for the budget, despite the party being a coalition member. Mr. Oleshchuk said he expects the Self-Reliance and Batkivshchyna parties won’t support it either, which will threaten the stability of the coalition government.
Based on what was revealed in the budget presented to the Verkhovna Rada, the nation’s leading economists said they’re pessimistic about the future of Ukrainian statehood. Most notably, the budget calls for a 30 percent revenue increase, which is unrealistic even for prosperous times, and extensive money printing to finance its deficit, which raises the risk of hyperinflation.
“Maybe the government has an unwritten agreement with the IMF, but based on what I know about what the IMF wants and what the government has proposed, they are suggesting entirely different things and the prospects of another tranche are questionable,” said Dmytro Boyarchuk, the executive director of the CASE Ukraine Center for Socio-Economic Research.
“The IMF wants to see realistic figures and remedies. It certainly doesn’t want to see money printing. So either this government is behaving utterly insolently and irresponsibly, or it knows something that we don’t,” he added.
The Ukrainian government became dependent on the International Monetary Fund (IMF) after the collapse of the administration of President Viktor Yanukovych, which bled dry the state’s international reserves (foreign currency and precious metals) and left behind budget-draining corruption schemes. Not only were the schemes not eliminated, but they were taken advantage of by successors, several economists said.
So far this year, the IMF has loaned Ukraine $4.6 billion (as part of a $17 billion stand-by loan program), owing to reforms organized by Mr. Yatsenyuk. But in order to loan more money, the IMF wants to see more structural reforms that will make the Ukrainian economy more stable, Mr. Boyarchuk said.
The most fundamental of these requirements is a realistic 2015 budget that ensures economic stability and development. Yet the government demonstrated on December 23 that it has failed to achieve that, economists said.
Besides what’s described as an unrealistic benchmark of 475 billion hrv ($29.0 billion U.S.) in revenue, which raises the risk for a swelling deficit, the budget plans for 200 billion hrv ($12.2 billion) to be printed, which raises the risk of destabilizing money supply flowing into the market, Mr. Boyarchuk noted.
The budget doesn’t even assume that the hryvnia will be further devalued; it is based on an exchange rate of 17 hrv per U.S. dollar, which is close to the current official rate and what’s being offered on the black market in Kyiv.
Then there are the hidden deficits of the state natural gas monopoly Naftohaz Ukrainy and the Pension Fund, said Andriy Novak, the head of the Committee of Economists of Ukraine. The term “hidden deficits” means that these state bodies bear the burden of incurring deficits that truly belong to the central state budget, and they eventually have to be financed.
There’s also the state foreign debt, which is projected to grow 30 percent to 1.2 trillion hrv ($73 billion) by the end of 2015 (despite payments of $11 billion to be made in the same year).
“The government hasn’t satisfied the main demand of the IMF, which is balancing the budget with a low deficit and reducing, or at least not increasing, the state debt,” Mr. Novak said. “Instead, the government went down the deficit-debt path. I don’t understand why the government isn’t tightening belts while cutting the deficit and keeping the debt under control. Instead, it’s tightening belts but gaining nothing in the way of the deficit and debt. So what’s the point?”
It’s the belt-tightening that raised public alarm, in the two weeks leading up to the budget’s release, about who would be most adversely affected.
The proposals that drew the most controversy were increases in the pension eligibility age to 65 for both men and women (when the average life span of Ukrainian males is 62 years old), and eliminating stipends for university students. Student leaders were threatening nationwide strikes should their state stipends – cash payments that average $45 a month and can be used for any expenses – be eliminated.
A week and a half after they were leaked to the media from within the Finance Ministry, as part of its recommended budget cuts, Vice Prime Minister Viacheslav Kyrylenko announced on December 22 that these two measures were not included in the proposed spending cuts.
Petro Oleshchuk, a political science lecturer at Taras Shevchenko National University in Kyiv, said, “The scare could have been one of two things, namely an unfriendly act from within the Cabinet, as the coalition lacks unity,” or, a continuation of “a long tradition from Soviet times – first raise fears and then reduce the threat to demonstrate that the government is offering compromises and reducing tension.”
The lack of unity within the coalition government was apparent in the weeks leading up to the budget’s presentation. Yurii Lutsenko, the parliamentary faction head of the Poroshenko Bloc, described the Cabinet’s program in mid-December as an “ABC book with pictures” and “student slapdash.”
During the budget’s parliamentary discussion on December 23, former Finance Minister Viktor Pynzenyk, also a national deputy of the Poroshenko Bloc, offered his own scathing attack.
In a populist, made-for-TV harangue, he dismissed it as a “sad” document that shifts economic burdens on society’s poorest by postponing inflation adjustments for the minimum wage and minimum living standards – upon which many social payments are based – until December of next year.
This notion that the belt-tightening will come at the expense of the poor has also been fueled by Kyiv’s pro-Putin media, which remain active.
But Borys Kushniruk, an independent Kyiv economist, said the budget will also tax the oligarchs, “who won’t suffer any less than the general public,” a point that Mr. Yatsenyuk and Finance Minister Natalie Jaresko tried to make while being bombarded with expressions of moral indignation in the Verkhovna Rada.
Ms. Jaresko pointed out that natural gas extraction rents would be increased to 70 percent on some firms that cooperate with state operators and royalties would remain in place for others. Many of these firms are controlled by Ukraine’s top oligarchs.
Nevertheless, the identified burden on the oligarchs – described as a caste of 10 percent who control 90 percent of the nation’s wealth – wasn’t enough to lend optimism to economists, who didn’t shy away from apocalyptic forecasts. Mr. Boyarchuk said hyperinflation is “very possible,” while Dr. Oleh Soskin of the Institute of Society Transformation said he expects economic collapse in 2015.
Indeed, their sentiments echoed the pessimism expressed earlier this year by The Economist and the Financial Times, leading global publications that both cast doubt upon the Ukrainian government’s ability to remain solvent and avoid default in 2015.
Without financial aid in addition to $17 billion stand-by agreement, “Kiev [sic] would have to massively slash its budget or be forced to default on its sovereign debt obligations,” the Financial Times reported.
The 2015 budget deficit is projected at 63 billion hrv, or 3.7 percent of GDP, a decline from 88.4 billion hrv projected for this year, yet a number at great risk of swelling.
In fact, the Standard & Poors rating agency estimated the deficit will swell to 8.5 percent of GDP, far above IMF requirements, and even that figure would require “considerable effort at fiscal consolidation.”
Ukraine’s financial situation is “precarious,” the agency stated, assigning it its worst rating of 10 on a scale of 1 to 10, with 10 being the riskiest.
“The IMF program itself remains at risk of not going ahead,” as there “have been significant deviations from its base-case assumptions,” S&P said in the report released on December 19.