To secure the latest $17.5 billion four-year loan from the International Monetary Fund, Ukraine has to revise its state budget. Lawmakers are expected to consider the changes drafted by the Cabinet of Ministers next week, but critics are already saying the currency rate predictions are unrealistic and have slammed the energy policy as wasteful.
Energy subsidies
The government wants to allocate Hr 12.5 billion on top of Hr 12 billion already dedicated to subsidizing residents who won’t be able to afford the new gas and heating tariffs required by the IMF. For example, the monthly tariff for gas, which now varies from Hr 1,000 to Hr 4,000 ($37 – $148) per 1,000 cubic meters depending on annual consumption, will be raised by 280 percent, Valeria Gontareva, the National Bank of Ukraine governor, said on Feb.18.
With Ukraine’s average salary in 2015 estimated to be Hr 3,990 ($148) per month, paying gas bills along with other utilities will be unaffordable for most Ukrainians and could lead to social unrest. Current subsidies will not be able to cover those needs, but further subsidies will exacerbate devaluation, experts warn. “There is a realistic option – return to the 2014 memorandum with the IMF, which implied a gradual increase in tariffs,” Dmytro Marunych, head of the Energy Strategies Institute, says.
The revenue generated from the new tariffs should cover part of national gas producer Naftogaz’s deficit. Annually, it sucks 7-9 percent worth of of gross domestic product out of the budget. Some of that loss is due to embezzlement during gas sales, but much of the problem is due to the disparity between a high gas market price and low gas tariffs paid by the population. “Why do we have to subsidize an ineffective Naftogaz at the expense of ordinary people,” Viktor Kryvenko, deputy head of parliament’s committee on budget, says. “We need economically feasible tariffs which will allow for development of domestic gas extraction.”
Currency rate
The revised budget is based on an exchange rate of Hr 21.7 to the dollar. But after the National Bank switched to a flexible monetary policy, that rate has already dropped to Hr 27 per dollar. Assuming that the IMF money cannot be used to stabilize the rate, it’s not clear how the National Bank will be able to reverse the current slide, rendering the budget hopelessly inaccurate. “I don’t understand where this figure came from,” Kryvenko says.
Serhiy Yahnych, director of the business investment department at UkrSibbank says that the current hryvnia depreciation is “largely exaggerated” due to a rapidly shrinking current account deficit. External aid and the restructuring of external debt are likely to balance financial outflows, according to him. “Provided Ukraine delivers improvements to the business climate, we think that hryvnia would fluctuate in a broad range of between 20 and 25 per dollar,” Yahnych says.
Despite the criticism, ministers hope their budget changes will get approval. “We hope that parliamentary coalition will support the bill we suggested, which will open the way for the loan,” Natalie Jaresko, finance minister said, when presenting amendments on Feb.16. “If the parliament does not approve these changes, it will deprive us of this vital financial support.”
Kyiv Post staff writer Anastasia Forina can be reached at [email protected]
Current version of 2015 state budget*
Revenues Hr 476 billion ($17.6 billion) | Expenses Hr 528 billion ($19.5 billion) |
Taxes – Hr 365.6 billion | State institutions (parliament, ministries, courts, etc) – Hr 331.1 billion highlights: – Interior Ministry – Hr 30.2 billion – Ministry of Defense – Hr 39.4 billion – Anti-Corruption Bureau – Hr 249 million – Anti-Corruption Agency – Hr 112 million |
Non-tax revenues (from property, administrative services, etc) – Hr 100.5 billion | Subsidies, reserves – Hr 194 billion highlights: energy subsidies – Hr 12 billion Naftogaz – Hr 31.5 billion |
Revenues from capital transactions – Hr 735 million | State administrations – Hr 2.9 billion |
Official transfers from foreign governments, international organizations – Hr 3.7 billion | |
Reverse subsidies – Hr 3.5 billion | |
Other revenues (from special-purpose funds, etc) – Hr 1.7 billion |
Source: Verkhovna Rada
*note: doesn’t include changes suggested by the government
