You're reading: Economy humming along despite rising energy prices

With just over half a year left until Ukrainians vote in parliamentary elections, economic policy is now fully geared toward appeasing voters. A social spending increase of $4 billion will boost consumption and help poorer citizens in the near term, but experts warn that trouble may be lurking around the corner.

Recent months have been kind to Ukraine’s economy. Inflation has hit record lows, growth is hanging on despite a global slowdown, and state finances are looking healthier. Tax collection is growing and the central budget ran a surplus of Hr 4.8 billion ($600 million) in the first two months of the year, up from Hr 4.1 billion a year ago.

Positive sentiment is further reinforced by the recent nominations of Finance Minister Yuriy Kolobov and Economy Minister Petro Poroshenko. While admitting that the upcoming elections make strategic policy shifts unlikely, a recent report by Morgan Stanley highlighted both ministers’ business experience.

“Kolobov’s ties with the central bank and strong relationship with Governor [Sergiy] Arbuzov may improve coordination between the central bank and the ministry of finance,” analysts from the bank wrote.

The amendments passed by the Verkhovna Rada to the 2012 budget, however, are pure electioneering, experts say. In order to fulfill President Viktor Yanukovych’s pledge to increase pensions, subsidize mortgages, and compensate Soviet Sberbank’s depositors, parliament agreed to raise spending by Hr 33 billion to Hr 391 billion, representing an increase of 16 percent from last year.

Deputy Prime Minister Sergiy Tigipko initially put the costs of the social program at Hr 16 billion.

According to Kyiv-based investment bank Dragon Capital, this will push the yearly budget deficit to over Hr 50 billion, or 3.5 percent of gross domestic product.

Foreign currency reserves, which took a 20 percent hit in the second half of 2011 before stabilizing just over $30 billion, are also looking vulnerable as significant external debt repayments approach. In June alone the government will have to repay over $2.5 billion, including $2 billion to the Russian bank VTB (officials have indicated plans to roll it over until next year), while $3 billion has to be returned to the International Monetary Fund in 2012.

Government officials say they want to unlock lending from the IMF. This, however, seems unlikely as neither side is willing to back down on the issue of raising low household natural gas tariffs, which ensure citizens gas at a fraction of the market price but create a massive hole in the budget.

Meanwhile, increasingly expensive gas imports from Russia have widened the current account deficit to close to a third of central bank reserves and sped up the nation’s hard currency outflow.
In its quarterly report local investment bank ICU described the rising prices as having the effect of a “protracted external price shock.”

In light of this, a $2 billion loan that state gas giant Naftogaz plans to attract from Russia’s Gazprombank will only temporarily ease the situation.

Experts seem to agree that the current policy can carry the government through until after the October 28 elections. After that, however, all bets are off.

Total sovereign and private external debt liabilities for this year stand at a whopping $52 billion, close to a third of gross domestic product. Analysts expect that a large share of this will be rolled over, but next year external debt liabilities are set to increase even further.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].