I am just reading the details of the Ukrainian government’s draft three-year budget planning resolution and I cannot quite believe what I am reading.
So the cabinet expects real growth in gross domestic product to accelerate from the 2.5 percent in 2017, to 3.4 percent in 2018, rising to 3.6 percent in 2019, 4 percent in 2020 and then 6.3 percent in 2021.
I have to say I almost fell off my chair when I saw the 2021 “forecast” thinking this must be a typo.
I am all for long-term budget planning, but there has to be a degree of credibility in terms of the forecasts which underlie any such budget plans.
Now I kind of have a problem even for 2018, in terms of how the economy goes from 2.5 percent growth to more or less a percentage point higher than this, on the back of a higher base and I don’t really see much in terms of higher frequency indicators to suggest a major step up in growth. But okay, let’s assume some big pre-election fiscal pump priming, but then how on earth do you then get to 6.3 percent by 2021?
Thinking through this, I could see it with
a) discovery of oil/gas (unlikely I would think);
b) Ukraine getting Crimea back (+2-3% of GDP addition therein), which would entail I guess a normalization with Russia and a general feel-good factor around that eventuality, which is unlikely in reality let’s face it.
c) Some major reform impetus which sees a thorough clean up in the business environment, which would have to be absolutely transformational or revolutionary, herein you would need to think like a move to a Baltic or Georgian style reform environment. Guess we are talking a leap (20-30 places) up the World Bank Doing Business tables and something even greater in Transparency International‘s consumer price index.
Some might argue scenario C is possible. But I am afraid the sad fact is that despite a clamor post-EuroMaidan Revolution (which ousted President Viktor Yanukovych) from the population for such change, Ukraine’s elites have failed to deliver such a remarkable transformation. Just look at the glacial pace around fighting corruption and the current logjam around reforms associated with the anti-corruption courts.
I just don’t see the forecast of 6.2 percent real GDP growth in 2021 as in any way achievable, in reality, or even sustainable. Indeed, I would tend to think that pushing for such a high growth rate without massive and really far-reaching structural reform, would raise major issues over fiscal and balance of payments sustainability.
I am all for ambition, but Ukrainian policymakers need to be realistic. Indeed, this forecast just smacks of populist electioneer, that surely cannot instill confidence from official creditors or indeed institutional investors.
And on the fiscal side, just imagine, 6.2 percent real GDP growth in 2021, if sustained would entail payouts on VRIs of something like $1.4 billion, so how are they going to be paid?
I cannot imagine the International Monetary fund would look favorably on such pie in the sky fiscal frameworks. Indeed, if anything this is just going to further complicate an already difficult relationship with the Fund, where problems are if anything growing. So alongside no progress on passing an IMF compliant anti-corruption cCourt bill at second reading, the gas price hike/reform issue remains outstanding, plus now additional strains over the supplemtary budget passed for 2018 which looks set to create a fiscal gap of 1-1.5 percetn of GDP, and then there are the plans to get rid of corporate income tax in 2019 and replace with a dividend redeistribution tax which creates huge uncertainties over fiscal impact, and could, in theory, see a 2 percent loss in fiscal revenues which may or may not be counterbalanced by some real GDP growth uptick.
The speaker of parliament has recently indicated that a second reading of the anti-corruption court bill will be tabled in the Rada by mid-May (others tell me August, which means the autumn in reality), albeit it is unclear if this will be IMF compliant. Even in the best case this only means an IMF review mission in mid-May, and it’s tough to see all this fitting together before the scheduled Copenhagen donor confidence scheduled for early June.
All this just smacks of populism which is I guess reflective of the fact we are moving into the 2019 election year, with President Petro Poroshenko trailing now quite badly behind the populist Yulia Tymoshenko.
It looks as though that through the growth forecasts as above, and the shift off track with the IMF, that the Poroshenko administration has opted to itself shift towards the populist agenda being touted by Tymoshenko, which does not bode well for the future course of relations with the IMF.
