Comments to the closure of the budget for fiscal year 2018

1/2/19

Fiscal year 2018 is over. Despite the big challenges the financial system of Ukraine was confronted with, we can now say with confidence that we have managed them and that our well-coordinated work has made it possible to deliver on all of our main budgetary commitments. Thus, we ensured funding for the protected budget lines, reacted promptly to current issues and took steps to remedy underperformance concerning some of the budget indicators. That allowed us to make relevant conclusions for our budget allocations for 2019. The Ministry of Finance took measures to compensate the budget expenses in December that are traditionally above the average spending figures – that allowed us to reduce the possible negative impact on the exchange rate and inflation figures for the first time over the last several years. In general, the budget deficit in 2018 stayed in line with the planned figures.

Below is the information on the revenues and expenses of the state budget in 2018, presented by the State Treasury Office:

Revenues. In the course of the year, the Ministry of Finance regularly reported on a number of core factors that affected the efforts to achieve the planned revenue figures. Some of the key factors affecting the tax revenues were as follows: advance rent payments (UAH 4.8 billion planned for 2018 were actually paid in December 2017), downturn in tobacco production (by 10.1% in the first 11 months of 2018), lower prices for oil products compared to the figures assumed for the state budget, outstanding devaluation of the Hryvna as well as lower volume of the gas import. At the same time, the VAT refund that runs automatically turned out to be higher than the forecast. Also, the tax revenues for the state budget were corrected by UAH 3.2 billion that were transferred to the local budgets for road repair works (customs experiment). Based on that, the tax revenues to the general fund of the state budget were UAH 8.1 billion lower compared to the plan – despite the overperformed corporate tax revenues – and amounted UAH 716.6 billion (source: State Treasury Office).

The non-tax revenues of the state budget’s general fund were equal to 99.1% of the plan because the lower transfer of the profit from the National Bank had been compensated by a strong performance for other revenues, mainly contributed by dividends and profits of state-owned companies.

Revenues of the general fund of the state budget in 2018

Revenues

ResultIn % of the plan
Personal income tax91,7100,7
Corporate profit tax95,8118,5
Rent payments45,197,4
Excise86,992,0
Domestic VAT (balance)79,193,9
VAT on imported goods295,198,4
Profit of the National Bank44,688,3
Dividends of companies with state assets in their charter capital31,1122,1

Funding. The break in the cooperation with the IMF under the EFF program persisting since September 2017 and a significantly less favourable situation on the financial market, especially for developing countries, made it impossible to attract capital from foreign creditors in the first half of 2018. It was only in Q4 of 2018 that the Ministry of Finance successfully placed Eurobonds amounting USD 2 billion. That action was preceded by the launch of a new program of cooperation with the IMF in July 2018 scheduled for 14 months (compared to the previous program that was planned to end in March 2019), complicated negotiations with the IMF about the content of the new program and the adoption of the realistic state budget for 2019 – the fastest budget adoption in the history of the modern Ukraine.

At the same time, the interest rate on public commercial loans to Ukraine increased in 2018 compared to 2017, which was mainly due to the generally less favourable market situation and a lower demand by investors for loans to developing countries. Apart from that, the ongoing military aggression of Russia in the East as well as its actions in the Crimea and in the Azov Sea affect the attractiveness of Ukraine for investors and its credit rating.

The commitment of Ukraine to its reforms and to European integration made it possible to receive the first tranche under the fourth micro-financial aid program of the EU (EUR 500 million) and the first tranche of the loan received with the guarantee of the World Bank (EUR 349 million).

On the domestic market, the Ministry of Finance regularly organized auctions to place domestic public bonds denominated in the domestic as well as in foreign currency. However, the interest rate on the domestic public bonds increased as well due to the interest rate of the National Bank of Ukraine increased as a step to check the inflation process as part of inflation targeting measures. Since the end of 2017, investors has been preferring short-term bonds whose share in the total volume of the domestic public bonds issued in 2018 was equal to approx. 60%.

Due to the extremely low privatization revenues equal to UAH 0.3 billion (only the privatization of smaller state-owned objects started in 2018), the Government decided in December to compensate them with additional domestic bonds. The planned public loans for the general fund of the state budget were increased in the course of the year from UAH 215 billion to UAH 289 billion. The actual volume of loans taken by the state for the general fund of the state budget were equal to approx. UAH 277 billion, which makes 96% of the corrected plan. Loans taken on the external and on the domestic market were equal to UAH 103 billion and UAH 174 billion respectively.

Funding in 2018

LoansUAH 277 billion129% of the plan
PrivatisationUAH 0.3 billion1.4% of the plan

Expenses. The Government completely financed all protected budget lines for 2018. The total expenses of the general fund of the state budget amounted UAH 884.5 billion, which is 2.4% under the plan. The main budget line contributing to the actual expenses UAH 12.2 billion under the plan due to the exchange rate difference referred to the expenses for serving the public debt.

It must also be noted that in December, when amendments to the state budget for 2018 were adopted, the transfer to the Pension Fund was increased by UAH 10.8 billion, in order to minimize the Fund’s liquidity gap. Revenues from the payroll tax were under the plan due to the underperformance by businesses applying the general tax mode. That came along with increasing pension-related expenses. This is the reason why the Pension Fund received loans from the United State Treasury Account in the course of 2018 year that accrued to UAH 4.8 billion in pending amounts by the end of the year (though in some months these loans were equal to more than UAH 16 billion).

2019. The realistic state budget for 2019 was adopted in November 2018, and the budget allocations were approved in December 2018 already. This was important due to high amounts required to serve the public debt (UAH 417.4 billion are allocated in this year’s budget to serve and to re-pay the public debt). The first debt payments are to start on the first banking day of 2019, and the Ministry of Finance is ready to cover them. As per January 2, 2019, UAH 9.9 billion are available on the United State Treasury Account. The equivalent of UAH 47 billion is available on the currency accounts of the National Bank of Ukraine and state-owned banks.

The Ministry of Finance and the State Treasury Office of Ukraine has started the new budget year according to the plan.

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