On September 14, the Cabinet of Ministers of Ukraine finished drafting the 2012 State Budget (having to submit it to the Ukrainian Parliament before September 15 under the law.
According to Finance Minister Fedir Yaroshenko, Ukraine’s GDP will show 5.5 percent increase next year. Andrii Kliuiev, First Vice Minister of Economy, said the cabinet expects 8.3 and 5.1 growth in the industrial and agrarian sectors respectively, while lowering the inflation rate to 7.9 percent per annum. The Ukrainian Cabinet promises to keep the hryvnia exchange rate at eight per one dollar, with the state budged deficit remaining at 2.5 percent of GDP.
Ukrainian Prime Minister Mykola Azarov refers to experts saying the situation on the foreign market remains unstable. The domestic manufacturer needs support and he will receive it from the central budget, said Azarov, adding: “This budget is meant to support the national manufacturer.” He went on to say that for the first time some five percent of the GDP (75 billion hryvnias) has been allocated for direct budget investments in the real sector of the economy. Another 17.3 billion hryvnias is put aside to finance regional innovative projects.
Azarov says the 2012 budget program will guarantee economic stability in Ukraine, considering that the Cabinet has decided to lower the GDP expenses in the public sector from 3.5 to 2.5 percent [in 2012]. “This will be our guarantee of stability,” said Azarov.
The Ukrainian Cabinet also forecasts lower central budget expense items in terms of added value. The 2012 budget bill envisages VAT refunds worth 45.8 billion hryvnias, compared to over 40 billion quoted by the incumbent finance minister.
Ukraine’s current government is convinced that today’s gas prices must not influence this country’s foreign policy. Azarov says innovative trends should be uppermost on the political agenda. The government intends to channel most funds into energy-saving projects, in 2012-14. “Higher gas prices mean that our people will have to pay more for their daily bread,” explains Azarov, adding that the government expects higher central budget incomes next year from company revenues.
Prime Minister Azarov is sure that “the Tax Code of Ukraine will yield some 47 billion hryvnias worth in the investment sphere, so we can expect 16.7 percent business revenues [in the central budget]. The current Ukrainian administration sounds optimistic, expecting the 2012 regulations to lower the income tax by 2 percent, making it 21 rather than 23 percent in 2011. Azarov says the VAT holidays will continue for the newly established and existing small businesses; that there will be preferential terms and conditions for the industries on Ukraine’s priorities list in 2012, including ship- and aircraft and machine-building in the agrarian sector, light industry, and hotel networks.
Experts have passed judgment on the Cabinet bill. Valerii Lytvytsky, head of the team of experts with the National Bank of Ukraine, says the macroeconomic basis of the 2012 budget is quite realistic. Interfax Ukraine quotes him as saying, “We believe that the government has adopted the right attitude to the next year’s budget program… I further believe that this budget bill is on the right course, aimed at exchange rate stability and that it realistically meets the challenges it may face in the second half of the year. Personally I support this policy.”
Lytvytsky, however, doesn’t deny that the current GDP 5-6 percent increment is “too high a level for an economy that threatens to lower the world level by several times… In the presence of a high inflation rate, over 10 percent, there will be no foreign inland investments in Ukraine… Ten percent and over in terms of inflation will consume our GDP and real incomes… The central bank will support the Cabinet policy, determined over the past two years.”
Volodymyr LANOVY, Ph.D. (Economics), president, Market Reform Study Center:
“This government isn’t likely to show 5.5 percent GDP growth because those upstairs are narrowing the hard cash channels and squeezing money out of the economy. Proof of this is the status of the correspondent bank accounts that are either meager or empty. It’s here where they are feverishly selling dollars to get their equivalent in hryvnias. For the Ukrainian businesses, this means lack of hard currency funds. Under the circumstances, expanding business and foreign inland investments is wishful thinking. In other words, Ukraine’s GDP isn’t likely to increase simply because the local businesses are unable to help it. Long gone are the times when the Soviet government could order an industrialization campaign, including all those five-year plans that could increase the economic indices by several percent. I expect Ukraine’s GDP index to lower this year and lower even further next year. The European economic crisis that resumed in 2011 will continue in 2012. The Ukrainian exporters will have to suffer the world market consequences, and the same will apply to Ukraine’s foreign-exchange market. Under the circumstances the government should be concerned about the existing debt, rather than making new ones. Social expenditures will also have to be lowered. This will affect the Ukrainian economy. An attempt to balance inflation by lowering consumption rate will have its negative effect, sooner or later.”
Yaroslav ZHALILO, president, Anti-Crisis Study Center:
“I think the inflation rate is underestimated, yet this is standard practice when drafting a budget program. Inflation forecasts have to do with social mentality rather than what’s actually happening. By forecasting a higher inflation rate you can receive additional budget revenues later through the inflation tax. This government stands a real chance of achieving other [planned] macroeconomic indices. However, the 2012 budget bill stands the highest macroeconomic risk. Should there be another wave of world economic crisis (although I don’t see it in the foreseeable future), it would certainly lower the GDP rate and thus lower the central budget revenues. Another aspect is providing for the budget deficit, keeping it within the limits of 2.5 percent. This will spell lower budget appropriations in the social sphere and possible public unrest. Considering the elections slated for 2012, there is a big populist temptation. There is also the economy mode that has been used by all the previous budgets, even if on paper only. Straightening out the Ukrainian economy takes time. There are many challenges to be faced. Ukraine needs hard cash to repay its debts, including the Euro-2012 expenses, so next year the government will have to rationalize its central budget appropriations.”
Oleksandr ZHOLUD, economist, International Perspective Study Center:
“The indices planned can be reached, considering today’s favorable macroeconomic statistics, although there is the high risk of the world financial crisis getting from bad to worse, and inevitable effect on Ukraine, lowering foreign capital influx and exports. This budget bill can’t be balanced simply because there is budget deficit. I don’t think that the crisis will end in 2012. In other words, it will be necessary to carefully increase central budget appropriations in 2012, handle the public debt, and borrow less.”
Viacheslav BYKOVETS, first vice president, director general, Union of Small, Medium and Privatized Enterprises of Ukraine:
“In regard to the issues discussed between the government and businessmen last week, the 2012 budget bill envisages the same sum for helping the small businesses as in 2011: 10.3 million hryvnias in terms of micro-crediting, to help the small businesses start ticking. Also, if my memory doesn’t play me false, 3.6 million hryvnias has been allocated for a national program to help our small businesses. In other words, the central budget will keep supporting these businesses in 2012 the way it did in 2011. Naturally, this central budget support is ridiculously small. What is 10.3 million hryvnias? Peanuts compared to the Kyiv municipal budget, so the sum should be 20-30 times more. However, the biggest problem isn’t money but the rules of the game imposed by the government. This year’s situation is lamentable and we’re afraid the same will happen next year. It is September, yet this program hasn’t been launched. We’re faced with a situation in which there are nominal budget funds but no way to implement them. Those upstairs started working on this on July 27, 2011 (sic). Our business people are afraid that what happened last year will happen this year, with budget appropriations officially readily available, but with access procedures making it practically impossible to implement them until the end of the year, with less than three months left until the end of the budget year and the Cabinet being unable to show us precisely how we can use these micro-crediting mechanisms to help our small businesses. Therefore, we have to figure out the access to these budget appropriations, so we can get this money not on December 29-30, but when we actually need it, otherwise this money will be left in the central budget.”