Economic Analysis

ICPS provides training for united territorial communities on how to manage finances

01.06.2017
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ICPS Press

ICPS in the framework of the project "Financial transparency of united territorial communities", supported by the Embassy of the Kingdom of the Netherlands continues to actively teach how to manage finances. Specialized seminars were already held in 14 regional centers and scores of representatives of the united territorial communities got important information on how to create a budget, to optimize costs and to raise additional funds after joining grant programs.

"In order to make communities less dependent on government subsidies, it is necessary to use all resources that exist in the territories of united territorial communities," - said the ICPS expert Vasyl Povoroznyk. Strengthening of control over use of funds and prevention of corruption are also important.

Publications with tag «Economic Analysis»
Economic Analysis

Reliability and Indicators of the Ukrainian Banking System: Growth Driver or Burden?

The banking system is a source of economic growth in the developed countries, but in Ukraine not-efficient and badly managed banks became a burden for Ukrainian taxpayers – or even a tool for stealing the funds. The recent news on increasing number of non-performing loans and related NBU reports have been a new serious alert that urgent actions to fix the situation are on the agenda again. Current actions of Ukrainian authorities have not been effective so far, therefore new efficient strategy of how to develop  the banking sector is urgently needed. According to the quarterly "Survey on lending conditions", that was conducted by the National Bank of Ukraine on the results of the 1st quarter of 2018, the increase of banks' activity in approving the applications for loans to enterprises and for consumer loans was noted. At the same time, 76% of banks expect an increase in the loan portfolio of businesses throughout the year, and 69% of banks forecast an increase in loans to individuals. However, it should be noted that the volume of non-performing loans in Ukrainian banks remains unchanged and sometimes it even shows a tendency to increase, despite the NBU's requirements to solve the problem. Accordingly, even after the "purification" of the banking system in 2014-2016, the risk of non-repayment of loans has not decreased in any way. Moreover, 31 out of 82 functioning banks violate the norms set by the National Bank of Ukraine (data on compliance of banks with the economic norms of the NBU) that only complicates the situation and may lead to further actualization of the problem of non-performing loans, together with a growing distrust in banks. At the same time, instead of effectively addressing the issue, the government continues to writing off the non-performing bank loans. In particular, only "PrivatBank" in 2017 wrote off ₴ 5.863 billion of unpaid loans issued prior to the nationalization of the bank that became known from its financial statements. What do we have today? Traditionally, the leaders in terms of the amount of non-performing loans are Ukrainian state banks. Moreover, the ratio of "non-working" to "working" loans is also an issue. It turns out that while the standard is not more than 30%, in Ukraine, every second loan is not returned - in average, this ratio is equal to 56%. The total volume of such "assets" reaches ₴ 630 billion. At the same time, according to the deputy chairman of the National Bank of Ukraine Kateryna Rozhkova, almost 70% of "bad" debts are concentrated by 20% of borrowers. Banks, in turn, cover non-performing loans with an increase of interest rate on issued loans, which reduces their attractiveness and shallows the prospects for economic growth of the country.   Name of the bank Banking group (by origin of banks' capital) The percentage of non-performing loans Non-performing loans, thousand UAH 1 PJSC "BTA Bank" Bank of foreign bank groups 98,63% 753983 2 PJSC "VTB BANK" Bank of foreign bank groups (Russia) 94,60% 20108232 3 JSC "BM BANK" Bank of foreign bank groups (Russia) 94,36% 2095905 4 PJSC "JSCB Trust-Capital" The bank with private capital 88,90% 125562 5 PJSC "PRIVATBANK" Bank with a state share 86,69% 235555104 6 PJSC "UKRSOTSBANK" Bank of foreign bank groups 84,54% 36516685 7 PJSC "BANK FAMILNIY" The bank with private capital 80,89% 55850 8 PJSC "Prominvestbank" Bank of foreign bank groups (Russia) 76,65% 35445306 9 "CLEARING HOUSE" The bank with private capital 72,76% 803570 10 PJSC "CREDIT EUROPE BANK" Bank of foreign bank groups 68,50% 611500 11 JSC "Ukreximbank" Bank with a state share 64,92% 83072616 12 JSC "OSCHADBANK" Bank with a state share 64,38% 80235272 13 PJSC "BANK CREDIT DNIPRO" The bank with private capital 62,46% 4091593 14 PJSC "VS Bank" The bank with private capital (Russia) 58,40% 1179665 15 PJSC "SBERBANK" Bank of foreign bank groups (Russia) 56,65% 32835471 16 JSC "City Bank" The bank with private capital 54,53% 746337 17 PJSC "UNEKS BANK" Kyiv The bank with private capital 53,65% 276818 18 Polycombank The bank with private capital 47,80% 169758 19 PJSC "UNIVERSAL BANK" The bank with private capital 47,25% 2257838 20 PJSC "BANK FORWARD" Bank of foreign bank groups 46,70% 813759 Source: calculations according to the NBU data The NBU's actions to keep inflation under control is important  in this situation. As a result of NBU actions the discount rate has recently reached 17% and, according to the latest decision, remained unchanged, while affecting the interest rate on the issued loans. In turn, high interest rates frighten the business. Taking that into account, banks are lending money to questionable projects, which allegedly guarantee higher returns. Nevertheless, there is a hope that the increase of inflation processes will be stopped, resulting in the decrease of the discount rate over the next three years and, accordingly, in the decrease of interest rates on issued loans.   Data Forecast 2014 2015 2016 2017 2018 2019 2020 Interest rate for loans in national currency, at the end of the year, % per annum 16,6 20,4 15,2 17,5 17,0 15,0 14,0 Source: "Economic Analysis and Current Trends: Forecast for 2018-2020", ICPS, 2018     The problem of unprofitability of some banks also remains important. According to the results of the 1st quarter of 2018, the banking system of Ukraine in general reached the profitable level (₴ 8.672 billion), however 14 out of 82 working banks still remained unprofitable. Profitable banks, top 3 Loss-making banks, top 3 Profit, UAH billions Loss, billions UAH "PrivatBank" 3,654 "Prominvestbank" 0,294 "Raiffeisen Bank Aval" 1,381 "Ukrsotsbank" 0,290 "OTP Bank" 0,612 "Credit Dnipro" 0,117 Source: according to the NBU data In this regard, further competition for the profit and market share will push the banks to risk activities and will worsen their loan portfolio. In addition, there is a share of consumer lending in the portfolio of many banks. Under conditions of insufficient growth of the Ukrainian economy and high level of inflation, the prospects of returning such loans are worsening. On the other hand, such loans are the easiest way for the banks to earn money and therefore, in the absence of the required demand from the business side, the share of consumer loans is steadily increasing, although it is not yet significant. In general, according to the monitoring conducted by the International Center for Policy Studies together with the Independent Association of Ukrainian Banks, the most widespread and accessible Ukrainian banks are not ranked first in the financial health rating. This fact only emphasizes the systematic problems of Ukrainian banks.   Top 10 banks for compliance with standards   Top 10 banks for the ability to generate profits   Top 10 banks for the overall indicator of financial health 1 Ukr. Bank for Reconstr. and Development 1 PJSC "Idea Bank" 1 PJSC "Idea Bank" 2 PJSC "ALPARI BANK" 2 PJSC "A-BANK" 2 PJSC "A-BANK" 3 PJSC "AP BANK" 3 PJSC "SITIBANK" 3 PJSC "SITIBANK" 4 PJSC "CREDIT EUROPE BANK" 4 PJSC "MIB" 4 PJSC "CREDIT AGRICOLE BANK" 5 PJSC "SEB CORPORATE BANK" 5 PJSC "ALFA-BANK" 5 PJSC "ALFA-BANK" 6 PJSC "BANK 3/4" 6 JSC "TASKOMBANK" 6 JSC "TASKOMBANK" 7 PJSC CB "Center" 7 PJSC "CREDIT AGRICOLE BANK" 7 JSC "Raiffeisen Bank Aval" 8 PJSC "BANK" PORTAL" 8 JSC "OTP BANK" 8 PJSC "BANK AVANGARD" 9 PJSC "BANK FAMILNIY" 9 JSC "Raiffeisen Bank Aval" 9 JSC "UkrSibbank" 10 JSC "ALTBANK" 10 PJSC "KREDOBANK" 10 PJSC "BANK ALLIANCE"   Source: "The Rating of Financial Health of Ukrainian Banks", ICPS and NABU, 2018 What to do? It is clear that problem loans are the consequence of the careless and sometimes "purposeful" policy of the banks. The recent creation of a "Credit register" (where the debtors that owe the bank more than ₴ 372 300 will be listed) will simplify the client verification process for the bank. However, it will not solve the problem with the existing non-performing loans. The issue can not be also solved by the adopted law (in the first reading) "On Amendments to Certain Legislative Acts of Ukraine Regarding Restoration of Lending", since this document is more focused on simplifying the process of collecting the debts, rather than overcoming the root causes of the appearance of the "problem" loans. Therefore, as long as the banking market is not sufficiently transparent and open, the NBU's monitoring systems will be bypassed by financially unhealthy banks, that conduct risky operations, and businesses, that create "fake" companies or deliberately declare themselves bankrupt. Moreover, the share of such "bankrupts", according to the message of the chairman of the Committee on financial policy Mykhailo Dovbenko, has reached 80% of the total number of legal entities-borrowers. Accordingly, today, mainly the problem loans are the funds that companies have fraudulently taken out abroad through the banking system or consider not necessary to return. Taking into account the above-mentioned aspects and the insufficient financial health of the key Ukrainian banks, it is necessary: - to conduct in-depth monitoring and audit of not only the allocated funds, but also the borrowed funds; - to adopt the experience of sustainable foreign banks in risk management and loan portfolio management; - to invest in training of staff for proper assessing the solvency of bank clients; - to implement the corporate social responsibility practices; - to increase the market share of foreign banks in order to ensure the healthy competition; - to avoid the emergence of informational "fakes" that are created due to the "war" between debtors and creditors; - to implement legislative improvements that will improve the business climate in Ukraine; - to support the NBU's independence from political decisions and fraudulent actions of the market participants. Unless the banks will qualitatively invest in government securities instead of the business projects, while not being the "blood system" of the real sector of economy, and unless the banks will be used for money laundering and withdrawal, while undermining the confidence, the population will have nothing else but to keep its money in a "glass jar", thus deepening the "financial starvation" of the banking system and its burden of non-performing loans, as a result, slowing down the economic development of Ukraine. And the only way, in the absence of qualitative Ukrainian management, will be selling the banks with a portfolio of bad loans, while on the one hand, attracting investments, and on the other hand, losing the remedies to somehow positively affect the banking market and its development strategy in the long run.

ICPS Press
29.05.2018
Economic Analysis

Energy interests and economic security of Ukraine

The decision of Germany and other EU countries to permit the construction of the “North Stream-2” gas pipeline again raised the issue of the future of Ukraine's gas transportation system and energy security of the country as a whole. Despite certain tactical achievements (reducing the volume of Russian gas consumption, the acceptable for “Naftogaz” decision of the Stockholm arbitration, etc.), the question of a strategy for achieving the energy security in general remains one of the most important challenges for Ukraine's national interests. At the same time, the government announced plans for achieving energy independence of Ukraine in 2020 and its sustainable development in 2035, however the way towards remains blurred. In addition, the implementation of Russian alternative gas pipeline projects may leave Ukraine at the edge of such an important element of economic activity as gas transit, leading to significant financial and political losses. Main figures and trends In 2017, “Gazprom” increased its exports of gas to Europe by 8.1%, reaching 193.6 billion cubic meters. In total, EU consumption in 2017 is estimated at 560.5 billion cubic meters of gas. Thus, “Gazprom's” market share in Europe has reached 34.7%. At the same time, Germany remained its largest market, while having imported 53.4 billion cubic meters of gas. Ukraine's GTS in 2017 provided 44% of Russian gas supplies to the EU. The transit of gas through Ukraine last year amounted up to 93 billion cubic meters. Compared to the volumes of 2016, transit has increased by 13.7%. This allowed Ukraine to earn nearly $ 3 billion due to the transit of Russian gas. Given that the country's GDP in 2017 was equal to $ 110 billion, this amount has made up to 2.7% of its volume. At the same time, in mid-January 2018, “Gazprom” received permission from Turkey for the construction of the second line of the "Turkish Stream" gas pipeline. Later, on March 26, Germany allowed to construct the “Nord Stream-2” in the Baltic Sea. The Russian gas monopolist has also made concessions to change the gas prices for the markets of Central and Eastern Europe. Such actions can have a positive impact on the European Commission's decision to address “Gazprom's” antitrust legislation in the European markets, which is expected in late April. These facts indicate that, despite complicated political relations, the EU Member States' own interests in the sphere of economic cooperation and, especially, energy, remain crucial. The construction of new gas pipelines, alternative to the Ukrainian GTS, can marginalize Ukraine's role in the issue of gas transit, transforming such a strategic national resource as a gas transportation system into a scrap in the future. In order to avoid the implementation of such a scenario, fast and effective actions are needed to preserve the role and place of the Ukrainian gas pipeline in the transit of gas from Russia to European countries. Consequences of Russian gas streams “North Stream-2” and “Turkish Stream” projects envisage the launch of a gas pipeline with a total throughput of about 85 billion cubic meters of gas per year. Given the recent data on transit through the Ukrainian GTS, the launch of the above-mentioned streams can take away nearly 90% of Ukrainian transit or nearly $ 2.7 billion in revenue per year. Main gas pipelines from the Russian Federation to Europe TITLE OF THE GAS TRANSPORT SYSTEM STATUS CAPACITY “Ukrainian GTS” Functioning 288 billion cubic meters per year 142,5 billion cubic meters per year (near EU border) “Yamal – Europe” Functioning 32,9 billion cubic meters per year “Nord Stream” Functioning 55 billion cubic meters per year “North Stream 2” Project The launch is planned in 2019-2020 55 billion cubic meters per year “Turkish Stream” Project The launch is planned in 2019-2020 31,5 billion cubic meters per year “South Stream” Project Frozen 63 billion cubic meters per year Source: Information from public sources Approximately the same figures are announced by “Naftogaz”, which estimates the financial losses at $ 3-3.5 billion dollars from the launch of alternative gas pipelines by Russia and from the complete stop of the Ukrainian GTS. In addition, the term of the current contract with “Gazprom” on the gas transit expires in 2019. According to the head of the Russian company, Alexei Miller, “Gazprom” can provide transit through Ukraine in the amount of 10-15 billion cubic meters per year, which is up to 10% of its capacity and less than 20% of the current volume of transit. For that, according to the head of the Russian monopolist, Ukraine must justify the "economic feasibility" of a new transit contract. In turn, the Ukrainian side announced that its main goal would be to preserve the transit of Russian gas through Ukraine after the expiration of the contract with “Gazprom”. However, it has not informed yet in what volumes and how it is planned to be reached. Nevertheless, the Cabinet of Ministers of Ukraine has already said that it is looking for a company to manage the Ukrainian gas transportation system. It also presented the idea that Ukraine would be able to further operate the gas transportation system by importing or transiting gas from Romania, however it is unlikely that the Romanian transit would be able to replace the vacuum created due to the redirection of the current transit flows. Additional aspects of energy relations In addition to the gloomy prospects in relations with the Russian Federation on gas transit and while taking into the account the blockade of the Donbas, Ukraine has to solve the issue of own energy supply and the reduction of its import dependence. This is confirmed by the fact that in 2017 Ukraine significantly increased the volume of imports of natural gas, coal and petroleum products. Moreover, Slovakia, Belarus and Russia were the main energy resource supply countries in 2016-2017.                                                                  Main energy resources: import, export, transit   Import, 2017 Change in imports to the previous year Export, 2017 Change in exports to the previous year Transit, 2017 Change in transit to the previous year Natural gas 14,6 billion cubic meters +49% - - 93 billion cubic meters +13,7% Coal 19,777 million tons + 26,4% $105,5 million +200% - - Petroleum products 9,7 million tons +11% 0,8 million tons +100% 16,4 million tons +1% Nuclear fuel $533,4 million -2,9% - - - - Electricity 0,05 billion kW per year -38% 5,2 billion kW per year +37% 1,4 billion kW per year +218% Source: According to the data of Energy Customs and State Fiscal Service On the other hand, the development of the renewable energy sector is positive for Ukraine. In particular, according to the State Department of Energy Efficiency, its total launched capacity reached 121 MW in 2016 and 257 MW in 2017. At the same time, only during the 1st quarter of 2018 Ukraine launched nearly 159.4 MW of renewable energy. In general, since 2015 more than 550 million euro has been invested in "green energy" and the total capacity of renewable energy entities is now equal to 1.5 GW. At the same time, in the near future, renewable energy will not replace the traditional energy sources, and only the implementation of real market conditions in the energy sector while promoting investments, increasing own gas production and strengthening the energy-saving technologies, will allow the country to approach the minimum acceptable standards of energy security. The ways of balancing the energy interests The nearest tasks for the Ukrainian government in the energy sector include: liberalization and opening the energy markets; preservation of the transit infrastructure of the state, restoration of confidence of external partners and financial organizations in the reliability of Ukraine as a transit country; well-balanced tariff policy for the transit of energy resources and domestic energy consumption; the fulfillment of requirements of the Third Energy Package, namely the separation of the “Naftogaz” activities for the transportation and distribution of natural gas; "Energy Euro-integration", synchronization of the energy systems with the European market (ENTSO-E, ENTSOG); diversification of sources of the energy resources; decreasing the energy consumption for own production, increasing the energy efficiency of the country; growth of Ukrainian energy resources production; stimulating the alternative renewable energy. In the near future, Ukraine has to settle the issues of “Gazprom's” supply of 2 billion 427 million cubic meters of gas to the occupied Donbass area and the $ 1.3 billion invoice. In addition, the decision result of the Court of appeals in the County of Svea (Sweden) on the dispute between “Naftogaz” and “Gazprom” about $ 2.5 billion of fines due to the Stockholm arbitration is being expected. The solution of the above-mentioned issues will eliminate the possible risks of Ukraine's energy and economic security. Otherwise, Ukraine risks losing a significant share of transit, which will result in the further increase in tariffs for the population and in the disruptions in functioning of its GTS. However, even under these circumstances, there is a hope that the growing demand in the European market and the interests of “Gazprom” to constantly increase its market presence there (as evidenced by data - its market share reached only 26% in 2012) may partly save Ukraine from the total loss of the GTS. Thus, the chess game on the energy interests of all interested parties has not finished yet. The fact that “Gazprom” will not be able to completely stop the transit of gas through the Ukrainian territory plays in favor of Ukraine. This is supported by the growing demand for gas in Europe, by the load of gas pipelines branches, by the relative loyalty of neighbors and by the favorable infrastructure of the Ukrainian GTS. However, it is not possible to win due to only these factors. Therefore, in order to ensure the transit of gas after 2019 in the amount not less than 40 billion cubic meters per year (minimum economically profitable volume) and to attract investments in modernizing the Ukrainian GTS, the government should not continue the only rhetoric of confrontation and should not feed the illusion of independence, but it should take the concrete steps, negotiate with all parties and propose alternatives to achieve long-term goals rather than short-term benefits. Otherwise, the levers of influence can finally disappear and economic security together with the energy interests will be once again solved at the expense of the Ukrainian population.

ICPS Press
23.04.2018
Economic Analysis

Macroeconomic forecast "Economic analysis and current trends"

The International Centrе for Policy Studies has prepared the next issue of the brochure "Economic Analysis and Current Trends" for January 2018. It contains a detailed analysis of indicators of the manufacturing sector, prices, financial market and forecast for 2018-2020 years. Data analysis on key areas for 2017 indicates that: The following indicators have decreased: - production in industry by 0.1% y/y, in particular through trade blockade. - production in agriculture by 2.7% y/y, due to a lower yield of main crops. - the purchasing power of the population due to the high level of consumer inflation, which was 13.7%, and the inflation rate of industrial producers, which was 16.5%. - interest rates on loans and deposits, in particular due to the large offer of such deposits and, at the same time, limited lending to business and population. The following indicators have increased: - turnover of wholesale and retail trade by 2.8% and 8.8% respectively. - cargo turnover and passenger turnover by 5.8% and 7.4%. - the volume of construction products by 20.9%. - the volume of deposits left by 13%; - the amount of loans left by 1.9%. According to the forecast, in 2018 there will be an increase in domestic consumption and investments, and exports of goods and services. Increasing the minimum wage and raising pensions will help increase consumption, although they will contribute to inflation in 2018. It is also noted that in 2018 there are two main risks that, if implemented, will significantly change the economic situation: - firstly, there is a probability of non-fulfillment of the requirements of the IMF, as a result of the government will not receive money from the IMF and other international organizations  and large payments on external debt will lead to a significant reduction of foreign exchange reserves and a sharp devaluation of the hryvnia. - secondly, in 2018, world prices of resources may decrease significantly after their rapid growth in 2017, which will result in lower revenues from exports of goods and an increase in the current account deficit, which will increase the pressure on reserves and hryvnia.

ICPS Press
20.02.2018
Economic Analysis

ECONOMIC DEVELOPMENT OF UKRAINE 2017: ACHIEVEMENTS, FAILURES, PROSPECTS

The year 2017 was characterized both by achievements and failures of the Ukrainian government in economic policy. Rebalancing of economic, social and resource components of the development was the main result of its activity. At the same time, Ukraine's economy continued to grow slowly in 2017 and this growth rate is not enough for the economic breakthrough in 2018. Moreover, the forthcoming year will not be easier than the current one. Achievements of the Ukrainian economy in 2017 The following achievements were the most significant in the economic sphere: 1) Obtaining the fourth tranche of the IMF amounting $ 1 billion in early April 2017. Ukraine has made the necessary reforms and was able to increase its gold and foreign exchange reserves, that made it possible to postpone the default, to stabilize the macroeconomic situation and to increase the trust of partners, investors and donors in the country. 2) Eurobond placement. Due to entering the external borrowing market in September, Ukraine for the first time since 2015 has raised $ 3 billion. This operation will reduce the burden on the state budget for repayment of government debt in the coming years. This fact also indicates a partial restoration of foreign investors` confidence in Ukraine. 3) Steps taken by the government to diversify exports in order to reduce the dependence of exporters on the volatility of traditional markets and to ensure a stable flow of currency into the country. This was facilitated by the adoption of the exports strategy “Road Map for Strategic Development of Trade 2017-2021” in the end of March 2017, the full entry into force of the Association Agreement between the European Union and Ukraine in the beginning of September 2017, the regional convention on pan-Euro-Mediterranean preferential rules of origin, the development of trade relations with Canada. Negotiations on free trade agreements with Israel and Turkey are being conducted. 4) Relative business deregulation in 2017, especially in the construction industry, and optimization of fiscal policy, along with improvement of taxpayers` service, in particular due to introduction of electronic VAT refund system, significantly increased the tax base, providing a surplus of state and local budgets, and contributed to the decrease in shadow economy. As a result, these improvements had a positive impact on the investment climate and pushed Ukraine on the 76th place in the Doing Business-2018 rating. The failures of Ukraine's economy in 2017 The following problems were faced by Ukraine in 2017: 1) Economic blockade of the non-government controlled areas. As the result there was an increase in Ukraine's dependence on imports of energy resources, primarily coal, a change in the ratio of capacities of various types of power plants, which excessively exceeded the permissible loads on some of them. Also, this event significantly influenced the economic situation of enterprises that had industrial ties with the region. According to various estimates, Ukraine loses about 1% of GDP due to the economic blockade of the non-government controlled areas. 2) Negative trade balance. Asymmetries in foreign trade, insufficient lobbying of national interests, difficulties in product certification require further reforms and capacity building to ensure Ukraine's sustainable growth. 3) Undeveloped banking sector. The tendency of reduction in the number of banks has continued in 2017. This has resulted in additional burden on the Deposit Guarantee Fund and in the increase of the number of non-performing loans. Also, the access to financial resources was still limited. 4) Strengthening of inflation processes. According to the government's forecast, the inflation rate will be 11.2% by the end of 2017. This was caused by cancellation of state regulation of food prices, by increase of minimum wages and pensions without adequate economic growth, by continuation of trends in household tariff increase, which led to approximation of recipients of subsidies up to 60%, and by delayed decision of the NBU to raise the discount rate from 12.5% to 13.5%. The questions of the future Next year Ukraine will have to solve the following issues: 1) Issues related to economic development: - The budget 2018 may have unbalanced character, in particular due to excessive pressure of spending on the security forces. In addition, further decentralization processes and the transition to three-year medium-term budget planning in 2018 will require a clearer development strategy from the government. - Insufficient GDP growth rates and high inflation due to the lack of comprehensive government measures to address these developmental issues are also the threats in 2018. - The price situation of the world market of raw materials, high-tech goods and energy resources can be unfavorable for Ukraine. In addition, the issue of stable supply of liquefied petroleum gas and mineral fertilizers remains unresolved. 2) Issues related to the repayment of debts: - The first external debt payments amounting up to $ 7 billion are foreseen in 2018. In the absence of the state's strategy of managing external and internal debt, additional challenges are encountered for the development of the country. - The Russian Federation has announced the possibility of reassigning Yanukovych's debt in the amount of $ 3 billion to another country. This event may lead to the additional debt burden on the Ukrainian economy. - The Stockholm Arbitration Court postponed its decision on the dispute between “Gazprom” and “Naftogaz”. The results on key issues of this case are expected in the next year. 3) Issues related to the energy sector: - The construction and development of the North and South Stream, the reduce of the pressure in the Ukrainian gas pipeline system increases Ukraine`s risk of losing the status of a transit state and reducing revenues to the budget. - The problem of stability of Ukraine's energy supply, especially in the context of economic blockade of the non-government controlled areas, is acutely facing the Ukrainian government. In addition, the issues of efficiency and green energy, the issues of attracting investment in alternative energy and monitoring energy consumption, the issues of further synchronization of Ukrainian and foreign energy networks also require development. 4) Issues related to reforms: - The proper implementation of pension and medical reform in Ukraine is important. The problem in this issue is the balance between the needs of society and the needs of the government to save. - The proper implementation of other reforms, in particular regarding the fight against corruption, decreasing the shadow economy, maintaining key development indicators, land reform are vital for obtaining the next tranche of IMF in 2018. Moreover, Ukraine has a chance to get macro-financial assistance from the EU after solving the issue of moratorium on the export of logs. - The regulation of the lottery market can also contribute to additional revenue to the state budget. Thus, Ukrainian government demonstrated both achievements and failures to ensure the economic development of the country in 2017. In its turn, the year 2018 will not be easier than the current one, and it will be necessary to minimize the mentioned risks to the economic growth. At the same time, the question of achieving the GDP growth at 3% in 2018, that is projected by the Cabinet of Ministers, remains unclear, while having almost twice lower growth at 1.8% in 2017 and while the absence of concrete steps to achieve such figures. The government has nothing distinctively new to offer in 2018 yet. It is vitally urgent to rethink the tasks for economic development in order to change the stagnation trends, to provide new incentives and to avoid the label of populism. Only systemic reforms and search for the drivers of economy can pave the way for more dynamic economic growth.  

ICPS Press
26.12.2017
Economic Analysis

Budget resolution of 2018-2020 – the first step to the medium-term budget planning

According to the explanatory Memorandum, the main directions of budgetary policy for 2018 - 2020 (hereinafter — the budget resolution) are based on the provisions of the Program of Activities of the Cabinet of Ministers of Ukraine, the Coalition Agreement, the Medium-term plan of priority actions of the Government until 2020, Strategy for Sustainable Development “Ukraine—2020”, programs of cooperation with international financial organizations. For the first time this document envisages the introduction of mid-term budgeting for three years. The main problem of the budget resolution is its weak correlation with the provisions of the state budget, which makes it a purely formal document. The main directions of the budget resolution for 2018-2020 are, according to accompanying documents, as follows: • acceleration of economic growth by creating a favorable investment climate and maintaining macroeconomic stability, in particular, continued fiscal consolidation; • public administration reform, decentralization and public finance reform; • development of human capital through the reform of the health system and education, improving the provision of state social support; • establishing the rule of law and fight against corruption; • ensuring security and defense of the state. As regards foreign policy, in 2019 it is planned to successfully complete a program of cooperation with the International Monetary Fund and to obtain a stable position on foreign markets of borrowings. The most positive aspect of this document is the introduction of medium-term budget planning with the harmonization of several policy documents.  First, the three-year budget is necessary if a country is actively pursuing reform. The reform plan should not just be embodied in the form of strategy, but to have understandable financial security. Therefore, in the case of Ukraine a medium-term budget plan may be the financial reform agenda. This is especially necessary in the context of stability of tax policy in connection with the permanent non-systemic changes in the Tax Code. Secondly, the move to three-year planning in many cases became the reason of the decrease of populist decisions concerning increase of social expenditures in pre-election periods. Legislative increasing of the interdependence of formation of the budget for the current year and a medium-term fiscal plan will help to avoid political influence in making budget decisions. Thirdly, the introduction of a medium term budget plan will also help in improving the effectiveness of the government programs. This is important, given the possibility of resource planning and more effective and balanced allocation of budgetary funds. Very often certain projects, especially concerning construction and reconstruction, last decades because of annual changes in budget priorities and lack of funding. In case of medium-term budget planning, long-term infrastructure projects are possible, and the Ministries will be interested in the implementation of important programs, not only in the disbursement of funds. In the future, the medium-term plan will improve cooperation between the responsible bodies for the preparation of the budget and the budget forecast of the central and local level of government. Three-year budget plan can be the first step on the path to a long-term scenario that will generate long-term state strategy of the main directions of state policy. Moreover, the proposed cap in government spending may be a good benchmark for assessing the quality of state decisions. If we analyze the specifics of the document, its main problem is that the provisions of the budget resolution are very weakly correlated with the provisions of the state budget, which was passed in Parliament. This situation makes it a purely formal document. Other problematic issues are as follows: 1. The lack of explanation of the measures and directions of the state policy on achieving the proposed indicators. Most of them are quite declarative, making it impossible to assess how realistic they are. The question remains as following - on the basis of what calculations the main parameters of the budget resolution were determined. 2. One of the problems is the lack of a monitoring system and adjustments of the proposed expenditure caps, which makes it impossible to evaluate how realistic they are. This also applies to the planned revenues and expenditures for future years, for which the significant growth in the next 3 years is stipulated. In Ukraine, URS may depend not only on economic situation but also on the political one, which increases the risk. In addition, the law does not define any monitoring mechanism, there is no mechanism to adjust the proposed "cap" that is essential in the changing economic situation. The solution to this problem is to develop responsible planning of the necessary regulatory framework for the budget for monitoring and adjustment of deviations. The adjustment mechanism should be implemented with reference to previous plans and forecasts. 3. Problems of implementation of the three-year plan at the local level. This question is of particular relevance concerning fiscal decentralization. In Ukraine there is the situation when the budget is prepared without taking into account the real needs of the regions, preparation of budget requests of local authorities is purely formal, and all decisions are taken at the level of main managers of budgetary funds. Simple bringing medium-term budgetary planning figures to local authorities has nothing to do with the medium-term budget planning. Therefore, in the context of fiscal decentralization it is necessary to develop an effective mechanism of cooperation of competent authorities for its implementation in central executive authorities and at the local level. A three-year plan can give the local government an understanding of the importance of efficient use of resources and a constant search revenues of local budgets, and not only the expectation of permanent funding from the center. Scenarios. The future fate of the medium-term budget resolution can have 3 scenarios:  1) status quo - budget resolution will remain a formal document and its provisions will be poorly correlated with a budget proposed by the Cabinet of Ministers in September 2017. This will lead to the continuation of the chaotic and inconsistent state policy, the loss of state capacity to implement reforms and stimulate economic and social development, to the accumulation of systemic risks. 2) based on the proposed three-year budget resolution, the introduction of a medium term budget planning without a simultaneous reform of the entire system of strategic planning will not lead to the desired effect (predictability and consistency of the state budget policy). This can also create conditions for the permanent inconsistency of medium-term budget plans with the policy in relevant spheres of activity of state authorities. This scenario can bring all efforts spent on its preparation to nothing and does not protect against implementation of the risks associated with the uncertainty and frequent changes of economic policy priorities. 3) based on the proposed three-year budget resolution, the introduction of strict medium-term budget planning simultaneously with the reforms of the entire system of strategic planning is optimal. Medium-term budget resolution should be integrated into the system of state forecasting and program documents. Approval of the budget plan should be carried out annually together with the law on state budget for corresponding year, at the same time to prevent its refinement in subsequent years in the event of changes in the macroeconomic situation or state policy in a particular area. The lack of political will on transition to the medium-term budget planning on the basic of leading experience of European countries will not allow to achieve the following objectives: 1) conducting a balanced policy of forecasting of budget revenues and expenditures; 2) the realism of the budget decision-making and legislative interdependence of formation of the budget for the current year and medium-term fiscal plan will help to avoid political influence on the adoption of budgetary decisions; 3) improved cooperation between the responsible bodies for the preparation of the budget and the budget forecast of the authorities at the central level and local level; 4) avoiding populist decisions to increase social expenditures in pre-election periods; 5) improvement of the efficiency of public programs, taking into account capacity planning rather than annual dependence on the current budget, the budget funds will be more effectively distributed and balanced; 6) medium-term budget planning is the first step on the path to long-term scenario that will generate long-term state strategy of the main directions of the state policy.  

Angela Bochi
05.07.2017