Week’s balance: surprise from Groysman, Gontareva’s counterattack, and threat to GTS
The Ukrainian Cabinet came up with a surprise to certain politicians by proposing to double the minimum wage, confrontation between the MPs and Governor of the National Bank Valeria Gontareva is growing, while Ukraine will lose millions of dollars if the European Commission allows Gazprom to pump more gas bypassing the Ukrainian gas transportation system.
Top economic news this week is the Cabinet’s initiative to double the minimum wage in 2017, making it UAH 3,200 per month. "The minimum wage cannot be lower than UAH 3,200. The living wage and the minimum wage will be the same, for the first time in 25 years. People have always lived below the required level,” said Prime Minister Volodymyr Groysman Wednesday, to everyone’s apparent surprise.
"No one in Ukraine will not make less than UAH 3,200 [per month]. And it's not only about the private sector, but the public sector as well," he added.
Meanwhile, Groysman hastened to assure that the decision to raise the minimum wage goes in line with the real possibilities of the economy and instructed Minister of Finance Oleksandr Danyliuk to calculate everything.
"Due to de-shadowing of salaries, due to the fact that we will begin to pay fair wages, the budget will be balanced. The deficit will not exceed 3% of GDP. We will see no problems. I confirm and I emphasize: everything corresponds to our overall balance," the press service of the Cabinet quoted Groysman as saying.
The Ministry of Finance has estimated that the increase of salaries will require an additional UAH 28 billion.
However, this increase for the government is not just about additional expenditures, it is also about a sharp boost in tax revenues. This is primarily a single social contribution, a personal income tax, VAT, and excise duties. Minister for Social Policy Andriy Reva said additional revenues on the SSC are expected at UAH 18 billion and another UAH 9 billion – on the income tax.
In fact, the state will almost immediately return to the coffers almost half of the funds allocated for salaries, at the same time being able to report on improving the living standards of workers.
President Petro Poroshenko expressed full support for the government's plans, making it clear that everything had been agreed with him.
But as for the other politicians who planned to exploit the fact of the people’s impoverishment in order to destabilize the situation in the country, this unexpected move of the government caught them off their guard. It took 24 hours for the Opposition Bloc and Yulia Tymoshenko’s Batkivshchyna to come to their senses. And there came flowing the statements that the wage increase was in fact due to their efforts and pressure on the government.
In fairness, it must be said that not everyone supports the government's plans to double the minimum wage. In particular, co-chairman of the Strategic Advisers Group Leszek Balcerowicz said that the move was an “unpleasant surprise” for him. Moreover, the strategic adviser said that neither he nor the international organizations knew about the Cabinet’s plans, adding that poverty shall be overcome by economic growth and in no way by a trivial wage increase.
"There are several thousand laws and regulations that use minimum wage as a kind of a measure. The increase in the absolute size of the minimum wage should be preceded by a detailed analysis of whether or not the new size of the minimum wage will allow the requirements of this legislation to remain justified and feasible," said Halyna Melnik from Ilyashev and Partners law firm.
But the biggest mystery is how the businesses will react to the government's initiatives. It is no secret that the entrepreneurs have a standard response to any increase of the fiscal burden – they go into the shadows. There are many ways to do so - part-time employment in order to reduce the costs of the official salary, a complete refusal from the official registration of employees, a formal switch from employment relations to contracts with physical persons-entrepreneurs, etc.
Not to mention the fact that the banal problem of non-payment of salaries has not gone anywhere. By the way, arrears of wages in Ukraine in September 2016 increased by 4% compared to August, according to the State Statistics Service, amounting to almost UAH 2 billion as of October 1.
Deterioration of forecast of economic growth
As we can see, the Cabinet is counting on economic growth next year that will allow the government to draw resources to improve social standards. However, this might not be easy to reach, as evidenced by the forecasts of the National Bank. The thing is that the NBU has worsened the forecast for GDP growth in 2017 from 3% projected earlier to 2.5%. And that is all because of the deteriorating external environment for Ukrainian exporters. Although the National Bank vows to continue to hold the inflation down.
Reducing risks to price stability has allowed the National Bank to continue easing monetary policy and reduce the discount rate for the sixth consecutive month. This time, it was by 1 percentage point down to 14% per annum. The decision on the rate exceeded analysts' expectations, but the market has not yet reacted to the move.
But perhaps the main news from the National Bank is that it has begun the process of transfer to the treasury of UAH 38 billion of its profit. For a long time, the regulator could not reach out to assist the government and close the hole in the budget due to the fact that the NBU Council remained non-functioning. For more than two years, the Head of State did not appoint his representatives to this body. And then a miracle happened: the President appointed to the NBU Council ex-Minister of Economy of Ukraine Bohdan Danylyshyn, academician Bohdan Danylyshyn, and rector of the Kyiv Institute of Banking Vasyl Furman. A meeting of the NBU Council was held right away and the long-awaited decision was taken on the transfer of UAH 38 billion to the state budget.
According to NBU Governor Valeria Gontareva, transfers will take place in tranches and partially be offset by the Ministry of Finance’s repayment of government bonds in the NBU's portfolio and the coupons for them. These words were confirmed by Prime Minister Volodymyr Groysman. The latter also reassured that the very fact of transferring the NBU’s billions would not shake the hryvnia exchange rate. It will remain in the previously forecasted corridor at the end of the year and in 2017, Groysman said.
By the way, for next year, the National Bank predicts that will be able to put to the state coffers as much as UAH 41 billion.
In addition to reporting on a state of the national economy in general and the banking sector in particular, NBU Governor Valeria Gontareva had to make efforts to protect herself from the attacks of MPs demanding her resignation.
In particular, Sunday night she told ICTV that some members of parliament during their U.S. visit spread false information about her activities.
"A certain ‘pamphlet’ was distributed… I can’t find another word for it. It was a collection of, on the one hand, innuendo and utterly false information from dubious websites, and, on the other hand, there was a compilation of theses why Gontareva is a ‘threat to the economic stability of the country’, some very unreliable and unprofessional data," she said.
Gontareva decided to go for a counterattack against her abusers. In response to the decision of the Finance Committee of the Verkhovna Rada, urging the president to dismiss her, the NBU Governor in an open letter addressed the Verkhovna Rada Speaker, Andriy Parubiya, with a statement that the NBU cannot work along with head of the Rada Banking Committee Serhiy Rybalka, as she believes he is politically biased and unable to ensure effective work of the committee.
The National Bank also raises questions regarding some other members of the committee, who, according to the regulator, are not engaged in rehabilitation and development of the financial sector, but rather pursue their own political and personal business interests.
The confrontation reached such a pitch that even the president and members of the National Reform Council had to speak out in Gontareva’s defense.
"All members of the National Reform Council condemned the public persecution, which is frankly staged and adversely affects the operations of the NBU. In the wake of a hybrid war being waged against our country, this is one of the destabilizing factors. At a time when Ukraine has to fulfill a number of obligations and the national currency has become stable, this is unacceptable. The National Reform Council expressed support for Valeria Gontareva, calling for a constructive dialogue on all political forces in the country," Deputy Head of the Presidential Administration Dmytro Shimkiv said after a Council meeting.
Realizing that Gontareva will be quite difficult to dismiss, the People's Deputies came up with another idea – to limit the powers of the NBU chief.
But here is when Ukraine’s key creditor, the International Monetary Fund, reacted with a lightning speed, saying that cooperation is possible only under the condition of preserving the independence of the central bank and non-interference in its work on the part of politicians and officials of various ranks.
The IMF representative last week also said that the IMF mission would arrive in Ukraine early November, while the Finance Ministry earlier expected its arrival October 27. This is a scheduled visit, aimed at discussing a wide range of issues of bilateral cooperation in the coming years. In particular, depending on its results, it will become clear whether Ukraine gets the fourth $1.3 billion tranche of financial aid before year-end. Everything will depend on how Ukraine’s main lender and auditor will assess the implementation of reforms.
Threat to GTS
The end of the outgoing week was marked by both bad and good news for the Ukrainian energy sector. Let's start with the good one. On Friday, in the framework of Ukrainian-French business forum in Paris, in the presence of Prime Minister of Ukraine Volodymyr Groysman and Minister of Economy and Finance of France Michel Sapin, contracts were signed for transportation and storage of natural gas between the operator of the Ukrainian gas transportations system UkrTransGaz and one of the largest energy companies in Europe with an annual turnover of some EUR 60 billion, France’s Engie.
The signing of the framework agreements for the first time ever will allow a Western company to supply its own gas to Ukraine to save and further directly sell gas to Ukrainian traders and industrial users. That, in fact, goes in line with the intended course of Ukraine toward reforming the gas market, confirming that the chosen path was right. Commercial director of the state energy holding Naftogaz of Ukraine Yuriy Vitrenko wrote on Facebook that the deal with Engie is "a concrete result of the reform of the gas market." "We look forward to the imminent adoption of the European Code of balancing: then there will be more of these companies in our market, and the market will become more transparent and competitive."
Now comes the bad news. Naftogaz of Ukraine has distributed an alarming message that the European Commission may allow Gazprom to use the capacity of OPAL gas pipeline, which allows to connect Nord Stream to the gas pipeline system of Central and Western Europe, bypassing Ukraine. And this will lead to significant financial losses for Ukraine – a minimum of $290-320 million per year. At the same time, the transit will be reduced to 10-11 billion cubic meters. We will know Monday, October 31, which side the European Commission will take – either it will be Ukraine’s or that of the aggressive Russia.
Oleksandra Danko (UNIAN)