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Week's balance: gas price hike, IMF agreement, and budget battles

The Verkhovna Rada made the first step toward adopting the Budget 2019 and considered amendments to the Tax Code, which imply an increase in a number of excises and fees. Meanwhile, Prime Minister Volodymyr Groysman keeps scolding his predecessors for the accumulation of “major debts,” while he himself follows the vicious practice of living beyond means. But perhaps the most important news of the outgoing week is the increase in gas prices for the households, followed by a new agreement with the IMF.

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So, it happened. Prime Minister Groysman decided to raise the price of gas for the households by 23.5% from November 1. The fateful decision was approved at an extraordinary government meeting on Friday. Thus, from November, 1,000  cubic meters of gas will cost UAH 8,550. “We began negotiations [with the IMF] to equalize prices by 60%, to raise the current price by 60%, but as a result of our negotiations and compromises, we found a different approach. From November 1, prices will rise only by 23.5%, not by 60%. This is what we managed to achieve through incredible efforts as a result of these negotiations,” said Groysman.

No one expected this to happen. After all, the Cabinet of Ministers earlier, also urgently and secretly, met and extended by its resolution of October 17 the current price of gas for the households, UAH 6,958, until October 27. Moreover, the “gas” decision was being postponed for eight months: first from March to April, then to the end of May, then to the end of July, August, September, and then October.

Now the most important question arises: is the new gas price for the households really a compromise and does it suit our key creditor, the IMF? If so, we must pay tribute to the premiere - he fought to the last. But what if not? Then, by the end of the year, another gas increase is waiting for us. And there is practically no other way out. After all, the country will face the hardest election year, 2019, when it will be necessary to pay a record amount on foreign debts – over $10 billion. And without the IMF, it will be unrealistic to cope with this task. And the actions of the Fund are a litmus for investors and sponsors - the EU, the World Bank, etc.

For the people not to be particularly outraged, the Prime Minister took another important decision - to send almost 90% of the profits of Naftogaz to the country's budget.

“I think this is fair - instead of excessive salaries and bonuses, all this should be allocated for the state treasury. This is a matter of principle,” Groysman said.

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As a result, on Friday that the International Monetary Fund agreed with the Ukrainian authorities a new 14-month stand-by program, instead of the current Extended Fund Facility, in the amount of 2.8 billion SDR (equivalent to $3.9 billion). “The International Monetary Fund staff and the Ukrainian authorities have reached agreement on economic policies for a new 14-month Stand-By Arrangement (SBA). The new SBA will replace the arrangement under the Extended Fund Facility (EFF), approved in March 2015 and set to expire in March 2019,” the Fund said in a statement handed over to UNIAN.

The new agreement is yet to be approved by the IMF management and the IMF Executive Board. The issue will be considered after the approval by the Ukrainian parliament of the state budget for 2019 in accordance with the recommendations of the IMF, and an increase in gas and heating tariffs for households.

Budget reading

The budget process started this week. On Thursday, the Verkhovna Rada adopted the draft in the first reading. On September 21, the Rada received a draft state budget for the following year approved by the Cabinet of Ministers. During this time, deputies filed to the budget committee 2,071 edits. But not all were taken into account, more than half – 1,249 proposals – were rejected.

“I want to thank everyone who submitted the proposals worth UAH 2.2 trillion – this is double the figure of what we submitted. I understand that the budget is the art of the possible, but our main task now is to adopt a balanced budget, in which every hryvnia of expenses is covered with real incomes,” Acting Finance Minister Oksana Markarova said during the presentation of the budget in parliament.

In the first reading, the draft state budget did not undergo significant changes; the government managed to defend the document. But this does not mean that it will be adopted in this form as a whole, since each faction has its own vision for its improvement. As for the Prime Minister, he called the draft state budget for 2019 a “development budget,” and he hopes that by the second reading it will not be “inflated” in terms of expenditures.

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What did the deputies agree with? The draft state budget for 2019 laid the growth of income by more than 9%, compared with 2018 - up to UAH 1.008 trillion. Costs will also grow to UAH 1.094 trillion. Thus, the budget deficit will not exceed UAH 90 billion. According to Markarova, this indicator is key for the government.

“Fiscal consolidation or, in simple words, the ability to live according to our own capabilities, is our priority. For all four years, the state budget deficit was being reduced, and for 2019 we set a clear priority - not to exceed 2.28%, not to exceed UAH 90 billion,” Markarova said.

The draft state budget is based on real GDP growth of 3% with inflation of 7.4%. Of course, the most interesting point for Ukrainians is the target level of average salary and the forecast of the hryvnia exchange rate. So, the minimum wage from January 1, 2019 will increase by 12% - to UAH 4,173, while the national currency exchange rate at the end of 2019 will be at UAH 29.4 to the dollar.

As for expenses, according to Groysman, the priority will be defensive capability, UAH 209.5 billion, as well as energy independence and energy efficiency. Next year, UAH 56 billion will be allocated for the construction of roads, UAH 6.9 billion to support the agro-industrial complex, spending on education will amount to UAH 242 billion, and UAH 92.3 billion will go to healthcare.

The Rada adopted another important bill that is directly related to the budget process. By 231 votes, parliamentarians supported the introduction of medium-term budget planning. The relevant documents suggest the introduction in Ukraine of a three-year budget declaration, three-year plans for local budgets, cost ceilings, and their audits.

“The entire civilized world is already using this approach. The European Union, most countries of the European Union have been conducting their budgetary policies for more than a year now,” Markarova said, urging deputies to adopt bills as a basis so that the government could work with the relevant parliamentary committee by the second reading and implement a three-year budget planning from 2019.

Meanwhile, the state budget for 2019 is seeing some criticism. The head of the Accounts Chamber, Valery Patskan, criticized the document, in particular noting that state treasury revenues can be increased by UAH 17.6 billion due to corporate income tax and excise tax on goods imported into Ukraine, while borrowing in the amount of UAH 346 billion, or a quarter of financial resources of the state budget are prohibitively costly.

Then the Rada continued discussing taxes...

Tax issues

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After the budget draft, the bill on amendments to the Tax Code of Ukraine regarding certain taxes (No. 9085) was submitted for consideration. As stated in the explanatory note to the document, it is envisaged that, depending on the scope of taxes, excise tax rates, environmental tax and rent for the use of radio frequency resources, taking into account the projected consumer price index in 2018, will increase by 9%.

"The rental rates for the use of subsoil for purposes not related to mining, the rent for special use of water and the rent for special use of forest resources, taking into account the forecast index of industrial producer prices in 2018, were increased by 10.3%," said the explanatory note.

Representatives of relevant industries opposed such innovation, criticizing these proposals.

“The industry hopes that the 9% increase in the size (indexation) of rent in 2019 will not be supported by the parliament, thereby encouraging operators to channel this financial resource to the development of new technologies in Ukraine... Now the number one issue is the development of 3G and 4G- communication. Operators invest billions in the “digital breakthrough” of Ukraine. Against this background, plans to increase the cost of rent show that there is no intelligible strategy in the country to attract capital in the telecom industry,” Oleksandr Kohut, director for regulatory support at Kyivstar, told UNIAN.

In addition, the “renl” solution may lead to an increase in the tariffs for mobile communications of all operators. But, as Acting Finance Minister Oksana Markarova noted during the submission of the draft law, the adoption of the document was caused by the need to ensure an increase in revenues to the consolidated budget.

“The goal is to ensure that the size of the rates corresponds to inflationary processes and to obtain additional revenues to the consolidated budget of Ukraine. With this bill, we propose to revise the rates of excise tax, environmental tax, and rental fees for 2019,” she said.

According to the head of the parliamentary committee on tax and customs policy, Nina Yuzhanina, the committee recommended adopting the bill on first reading, but subject to revision, as there are many questions to it.

During the discussion of the document, a number of deputies indicated that the only reason for its adoption was to cover the state budget deficit. But in the end, the bill did not receive support - only 170 parliamentarians voted for it with the necessary minimum of 226 votes.

Groysman also borrows

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In the outgoing week, the Ministry of Finance reported that, at an unscheduled auction on the placement of an internal government loan, it attracted almost $ 242 million to the state budget. This is a record in the current year. At the beginning and in the middle of October, the government was able to attract $172 million and $127 million, respectively, to the budget through selling government bonds.

Almost twice a week, the Ministry of Finance sells bonds worth several billion hryvnias. And this is not done at 3%, but at a cost much higher. In total, as of October 18, the volume of government bonds in circulation on the basis of the principal debt amounted to UAH 742.272 billion, while the National Bank owns bonds worth UAH 348.100 billion, or 47% of their total volume.

The Prime Minister does not tire of scolding his predecessors for the accumulated debt obligations of the state, due to which there are not enough funds for social spending. “And now, with regard to the burden of this budget. Burdens, my dear colleagues, especially those who were in charge of the country for many years from 2005 to 2013, why did you take tens of billions of dollars and throw them into the unknown while leaving us, all Ukrainians, in debts that we must service today – a total of $5 billion annually? And this is your area of responsibility. You should stand up and repent,” Groysman said, addressing the parliament. But Groysman said nothing about the fact that every month a hole is poked in the budget, and he has no choice but to raise funds by selling government bonds at rather high interest rates. Meanwhile, the peak of payments on foreign debts is coming next year. It will be $10 billion in the very least.

Yaroslav Samoliuk

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