Local Debt and Local Guaranteed Debt

According to the Budget Code of Ukraine, local debt means the total amount of liabilities of the Autonomous Republic of Crimea or the regional community of a city on outstanding loans as at reporting date arising from the local borrowings.

Local borrowings are the transactions of the receiving loans to the budget of the Autonomous Republic of Crimea or a city budget on the terms of repayment and maturity to finance the budget of the Autonomous Republic of Crimea or a city budget.

Local borrowings are carried out with the purpose of financing the development part of the budget of the Autonomous Republic of Crimea and local governments budgets and are used for the creation, increase or renewal of strategic objects of long-term use or facilities that ensure the fulfillment of the tasks of the Parliament (Verkhovna Rada) of the Autonomous Republic of Crimea and city councils aimed to satisfy the interests of the population of the Autonomous Republic of Crimea and municipal regional communities.

The Verkhovna Rada of the Autonomous Republic of Crimea and city councils have the right to carry out local domestic borrowings. Local external borrowing can solely be made by the Verkhovna Rada of the Autonomous Republic of Crimea, Kyiv, Sevastopol city councils, city councils of cities of regional significance. At the same time, all local councils can make local external borrowings by obtaining loans from international financial organizations.

The right to carry out local borrowings within limits determined by the decision on the local budget belongs to the Autonomous Republic of Crimea, the regional community of the city in the person of the head of the local financial institution on behalf of the Verkhovna Rada of the Autonomous Republic of Crimea, a city council.

Under the budget law, local borrowings can be made only under the following conditions:

  • the total amount of borrowings to the local budget cannot exceed the amount of budget deficit for the local budget for the relevant year;
  • funds from local borrowings are attracted to finance only development part of the corresponding local budget;
  • local debt servicing costs (interest payments) cannot exceed 10% of the total expenditures of the relevant local budget each year during any period during which debt servicing is planned;
  • the total amount of local debt and guaranteed by the Autonomous Republic of Crimea or the regional community of the city debt at the end of the budget period cannot exceed 200% (for the city of Kyiv – 400%) of the average annual indicative amount of budget revenues.

Local debt service payments are carried out at the expense of the general fund of the local budget and cannot exceed 10 percent of the general budget fund's expenditures of the local budget during a planned budget period. Redemptions of local debt are made from the development part of the corresponding local budget. The costs of redemption and debt-service payments are made by the local financial institution under loan agreements, as well as respective legal acts, regardless of the amount of funding determined for this purpose by the resolution on the corresponding local budget. If the expected amount of redemption and debt-service payments exceeds the amount determined by the decision on the localbudget for this purpose, the Verkhovna Rada of the Autonomous Republic of Crimea, the city council makes appropriate amendments to the decision on the corresponding local budget.

Local guarantee means an obligation of local authorities to pay all or part of the payments in favor of the creditor in case of non-fulfillment of the debt obligations by the borrower who received a loan under local guarantee.

Local guarantees may be provided by the decision of the Verkhovna Rada of the Autonomous Republic of Crimea, relevant city council in order to ensure full or partial fulfillment of the debt obligations of Ukrainian resident business entities belonging to the communal sector of the economy, located on the territory and conducting on this territory investment projects aimed to develop the municipal infrastructure or implement the resource-saving technologies. The decision on the local budget determines, in particular, the maximum amount of local guarantees, as well as the respective authorities.

Local guarantees may be provided by relevant local government bodies only subject to the following conditions:
  • paymentof the fee;
  • maturity;
  • property security in a manner prescribed by law.

Therefore, the entities subject to the decision to provide local guarantees are obliged to provide collateral or another pledge for the fulfillment of obligations and pay to the appropriate local budget a fee for receiving them in the amount determined by the relevant city council,unless otherwise provided by the decision of the local budget.Local guarantees are not provided if the direct source of repayment of loans involves funds from the local budget (except for debt obligations arising from loans from international financial institutions).The decision of the Verkhovna Rada of the Autonomous Republic of Crimea or a relevant city council on the provision of a local guarantee must contain the following information:

  • the investment project, for implementationof which the loan is taken under the guarantee;
  • full name and location of the entity, to secure the debt obligations of which the guarantee is provided;
  • the conditions of the loan: amount, term, interest rate and terms of repayment;
  • the duration of the guarantee;
  • size and type of collateral of debt obligations of the borrower;
  • the amount of the fee for the provision of the guarantee.

A prerequisite for the provision of a local guarantee is the conclusion of an agreement between the relevant local financial institution and the entity on repayment of the entity's indebtedness to the Autonomous Republic of Crimea or municipal regional community for the performance of the guarantee obligations.

The maximum amount of local debt and the maximum amount of local guarantees provided shall be determined for each budget period by a decision on the local budget.

The total amount of local debt and local guaranteed debt (excluding the guarantee obligations arising from loans provided by international financial organizations) at the end of the budget period cannot exceed 200% (for the city of Kyiv is 400%) of the annual indicative projections of development budget revenues (excluding the volume of local borrowings and capital transfers (subventions) from other budgets), asdetermined by the forecast of the respective local budget for the next two planned budget periods.

In case of expected exceedance of this limit, the local financial authority immediately addresses the Verkhovna Rada of the Autonomous Republic of Crimea, relevant city council for permission to temporarily exceed this limit, and submits for approval the plan of measures to bring such a total amount of debt in line with the provisions of the Budget Code of Ukraine preliminary agreed with the Ministry of Finance of Ukraine.

In order to effectively manage the local debt, the Verkhovna Rada of the Autonomous Republic of Crimea, a city council or, upon their decision, the local financial authority has the right to carry out transactions with local debt, including the exchange, issue, purchase, repayment and sale of debt obligations of the Autonomous Republic of Crimea, municipal territorial community, subject to compliance with the limit of local debt at the end of the budget period.

A local financial institution may involve business entities to provide agency, advisory, rating and other services necessary for managing local debt at the expense of local budget within budget allocations for local debt service payments.

According to the principle of independence, on which, under the Budget Code of Ukraine, the functioning of the budgetary system of Ukraine is based on, the state with the funds of the state budget is not responsible for budget commitments of the Autonomous Republic of Crimea and local self-government authorities. The authorities of the Autonomous Republic of Crimea and local self-government, with the funds of the respective local budgets, are not responsible for budget commitments of each other, as well as for state obligations.

At the same time, if in the process of redemption and local debt service payments, the schedule of payments is disrupted by the fault of the borrower, the Verkhovna Rada of the Autonomous Republic of Crimea, a relevant city council shall not be entitled to carry out new local borrowings within the next five years.

The volume and conditions of the local borrowings and the provision of local guarantees are subject to agreement with the Ministry of Finance of Ukraine.

The approval of the volume and conditions of provision of the local guarantee by the Ministry of Finance of Ukraine is not a state guarantee of fulfillment of the obligations of the borrower, related to the provision of a local guarantee and confirmation of its creditworthiness.

In order to ensure compliance with the limits of local debt and local guarantees, the Ministry of Finance of Ukraine maintains the Register of Local borrowings and Local guarantees. The register of local borrowings and local guarantees is an information system that contains information on local borrowings and local guarantees provided. The data from the register is published quarterly in the section "Debt statistics - Register of Local borrowings and Local guarantees".

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