Budget 2011: Ukraine's Deficit Below IMF Schedule in H1 But Outlook Still Darkened by Gas Prices
2011-08-02 12:38:04
Ukraine's national budget deficit amounted to 10.4 billion hryvnia in the first six months of 2011, according to a report from the Finance Ministry, which compares with a UAH16.1-billion deficit in the first half of 2010 and equals 28% of the planned deficit for the entire year.
Following the adoption of a budget supplement, the deficit schedule for 2011 had been cut to UAH35.3 billion, taking into account part of the windfall revenue this year so far (seeUkraine: 16 June 2011:). Indeed, total revenues yielded UAH139.4 billion after a 24.4% bounce on the year in the first half.
Value-added tax (VAT) and excise tax revenues benefitted from inflating consumer prices, which ensured that revenues growth outpaced spending by far, which increased by 6.3% year-on-year. Corporate income tax revenues, being a minor source of revenue, surged by 50% on the year, a surprising result against the backdrop of Ukraine's still shaky recovery. Meanwhile, discretionary and automated refunding of VAT for exporters has accelerated considerably over the year, with VAT revenues equal to UAH21 billion being refunded in the first half alone.
Lagged VAT refunding had been a burning issue for many exporters and the IMF, but the government apparently made progress in this respect. Serious concerns remain in other areas, however, notably Ukraine's state-owned and notoriously loss-making gas distribution company Naftogaz Ukrainy.
In the face of a likely steep increase of gas import prices from Russia in the final quarter of 2011, and with the government remaining reluctant to raise retail gas prices at the same time, Naftogaz's financial deficit could even exceed the previous year's UAH16-billion shortfall in 2011, rather than shrink as was agreed with the IMF.
Furthermore, the government pledged to bring forward the planned wage hikes for public-sector workers from 1 October to 1 September, which will obviously increase overall fiscal spending and make a violation of the deficit target for 2011 more likely again.
Significance:Fiscal results for the first half of 2011 are encouraging, but the government is at risk of squandering budget consolidation efforts on short-sighted spending pledges ahead of parliamentary elections in 2012. Moreover, leaving retail gas tariffs untouched will not only increase Naftogaz's deficit, but also make a deal with the IMF and the transfer of another loan tranche fairly unlikely.
Even the pension reform, which had recently been rammed through parliament, has been questioned again as parliament's speaker Volodymyr Lytvyn refused to sign the bill and forward it to President Viktor Yanukovych while appeals from opposition lawmakers are still pending. Another vote on the bill cannot be excluded at present.
Our baseline still expects the government to gradually trim the deficit further in 2011 and 2012, complying with IMF targets, but the reluctance to raise gas tariffs and populist spending tendencies increase risks that the deficit could fail to remain below the target in 2011 and even increase again in 2012. Clearly, this would force the IMF to suspend its loan programme.