You're reading: Social program could empty state coffers

President Viktor Yanukovych pledged a whopping Hr 16 billion in handouts on March 7, kicking off the campaign of his Party of Regions for parliamentary elections on Oct. 28.

The program is ambitious, perhaps fatally so, and foresees a Hr 100 increase in pensions to over nine million pensioners and the return of Hr 1,000 to the six million deposit holders in the defunct Soviet Sberbank.

On top of this, the president announced plans to set up a subsidized home loan program, offering 10-15 year mortgage loans to purchase housing at an annual interest rate of 2-3 percent. The plan is to stimulate the real estate sector, which has been flagging, and help alleviate Ukraine’s housing shortage. “In addition to solving social issues, the affordable housing program will definitely assist the economic development of the state.” Yanukovych said.

But given that Ukraine’s finances are already stretched to the breaking point, it remains unclear just how the president plans to finance this extravaganza.

National Bank chief Serhiy Arbuzov has already pledged that no unconventional schemes would be involved. “We definitely won’t print money,” he said.

Deputy Prime Minister Serhiy Tihipko, who put the bill at Hr 16 billion plus the cost of the loan program, said that funding would come from increased customs revenues and the introduction of a luxury tax. The idea of raising the income on high earners from 17 to 20 percent has also been floated in recent months as a means of raising state revenues.

The European Business Association has previously spoken out against such taxes, claiming that they would push even more of the economy into the shadows, and would increase social stratification.

Meanwhile, Ukraine faces a difficult financial position and a tough credit environment going into 2012. A revival of the International Monetary Fund program appears unlikely, meaning the government will have to look elsewhere to pay off the $6 billion in 2012 external debt.

Investment bank Dragon Capital estimates that Ukraine should be able to attract enough foreign financing to cover its estimated $13.2 billion funding gap – its debt repayments and budget deficit for this year, not including the costs of the proposed social program.

Even then, however, keeping the hryvnia at its current exchange rate will cost the country one-third of its foreign reserves.

The president’s social program will make the job more difficult, and more costly, still.

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