Speech by the Minister of Finance Natalie Jaresko at the Board of the Ministry of Finance on 27 July 2015

7/28/15

Prime Minister, colleagues, and guests,

Today I will summarize the results of our joint work for the first 7 months of 2015, and outline the areas for strategic reform in the near future.

First of all, I should note the challenges we faced at the Ministry at the beginning of this year. When we formed the government little more than half a year ago, the Ukrainian economy was in a critical condition. Real GDP fell by 6.8% in 2014. Over 30 of Ukraine’s 178 banks had been declared insolvent. Inflation was up 70%, and the reserves of the National Bank were only sufficient to pay for little more than one month’s imports. If the Ukrainian economy were a medical patient, it was in “intensive care”.

Taking all of this into account, in my opinion, one of the most important achievements of the Ministry of Finance in the past half year is the fact that we have managed to maintain the stable and steady functioning of Ukraine’s budgetary and financial systems, which has been critical for the country’s survival.

In order to ensure this, we undertook the following steps:

· We agreed a new four-year loan facility with the IMF, amounting to $17.5 billion USD, which became the first anchor of stability for the country’s economy;
· We met the conditions of the IMF program, enabling Ukraine to receive the first tranche, amounting to $5 billion USD in March 2015. This doubled the National Bank’s reserves;
· This week saw the completion of the first review of the IMF Program. IMF Managing Director Christine Lagarde was sent a letter of intent with reference to the memorandum on economic and financial policy. This step makes it possible for Ukraine to receive the second IMF tranche, amounting to $1.7 billion USD, which will further increase the country’s currency reserves;
· We have secured additional financial aid from our other official and multilateral partners, totaling $7.2 billion USD, which we are due to receive over the next 18 months;
· We have already received:
o $1 billion USD, in accordance with the Loan Guarantee Agreement with the United States. We expect to receive a further $1 billion USD before the end of this year if we achieve real progress with our reforms;
o €600 million EUR in macro-financial aid from the European Union (EU), part of a €1.8 billion EUR package, negotiated in May 2015;
o A loan from the Canadian Export Agency equivalent to $158 million USD.
· In addition, we have agreed the following:
§ Loans from the World Bank amounting $1 billion USD, the first tranche of which is expected in August;
§ Macro-financial aid from Japan amounting to the equivalent of $300 million USD, also expected in August;
§ Budget support loans from Germany amounting €200 million EUR, as part of the KfW loan package for the recovery of Eastern Ukraine.

To stabilize the balance of payments, we undertook the following steps:

· Introduced a temporary import charge;
· Began negotiations with international creditors on debt-restructuring: as a part of this process, we have managed to reach an agreement to prolong the bonds of Ukreximbank, which helps us save $1.4 billion USD over the next 4 years, thus improving our balance of payments; we reached the same agreement with the creditor’s panel of Oschadbank, helping save a further $1.3 billion USD.

To stabilize the banking sector and increase the efficiency of state-held banks, we undertook the following:

· Backed the adoption of the law on the liability of affiliated parties, which allows owners and management of banks to be prosecuted for actions which result in a bank’s bankruptcy;
· Contributed to the adoption of a law enhancing the rights of customers of all banks in Ukraine, by improving the management of the financial capacity of the Savings Guarantee Fund for private individuals;
· Selected the new CEO of the Ukrgazbank through an open contest – for the first time in the history of Ukraine’s state-held banks;
· Contributed to the adoption of regulations which allow bad banks to be removed from the market, by transferring their assets and liabilities to healthy counterparts, and thus to give account holders of bad banks full-access to their savings. This procedure above has already been accomplished for the first time with the transferring of the assets and liabilities of Kyiv Bank to the state owned Ukrgazbank. On 25 June, account holders of Kyiv Bank received unlimited access to their savings at Ukrgazbank;
· Began to formulate a development strategy for state-owned banks;
· Privatized the Ukrainian Bank for Reconstruction and Development.

Another important achievement of the Ministry of Finance in the past half year has been the balancing of state finances and cutting the real budget deficit. To do that, a realistic state budget was adopted for 2015, which granted a moderate deficit of 4.1% of GDP. This budget secured defense expenditure amounting to over UAH 90 billion – equal to approximately 5% of GDP. Further, it provided higher social welfare for the most affected groups of citizens, by providing direct subsidies to compensate for increased gas and heating tariffs. In total, UAH 24.4 billion have been assigned for those subsidies in 2015. At the same time, we substantially reduced the deficit of Naftogaz, the national oil and gas company of Ukraine. This has helped us reduce the monetary pressure on the economy and Ukraine’s currency. We have been able to substantially reduce the deficit in the public administration from 11.6% of GDP in 2014, to an expected 8.8% of GDP in 2015.

In July we increased funding for defense within the framework of the existing budget, without increasing overall expenses. At the same time, all social welfare payments, including pensions and salaries for the public sector, have been regularly paid on-time.

Another important step has been fiscal decentralization in Ukraine, securing necessary resources for local self-government. This aims to increase the efficiency of the budgetary system, and is considered one of our main obligations in the coalition agreement. One of the results of this reform has been the increase of the resource base of local budgets by 37.7%, compared with the previous year. In addition, there has been a simultaneous enhancement of powers at the local level and a transfer of decision-making in important local issues closer to the local communities.

Last week we completed the preliminary analysis of the results of the local budgets for the first 6 months of 2015.

The impact of our reforms on some of the local budgets is in line with our forecasts. Economically active communities have been rewarded for their efforts, retaining a major part of their revenues. These are mostly cities of regional significance.

For this reason, the Ministry of Finance has placed more focus on the communities which currently have a smaller tax base, and have suffered more stress from the reform as a result. As expected, the budgets of remote rural communities were the most affected, since they have a much lower capacity to collect new taxes, such as property tax and local excise tax. The revenue base of these communities was temporarily reduced.

Of 602 local budgets, our calculations have helps us identify 51 district budgets which are presently disadvantaged by the reform. These local budgets will receive aid by means of a stabilizing subsidy, amounting to UAH 2 billion. We are now elaborating procedures and conditions to provide this subsidy to the local budgets.

One more important area for us is tax reform. Part of the job is already complete. For instance, amendments to the tax law were put into force in December 2014, reducing the number of taxes from 22 to 11, and bringing financial reporting and accounting closer to each other.

We also significantly expanded the tax base and reduced opportunities for tax-avoidance by:

· Introducing electronic administration of VAT reimbursement;
· Enforcing obligatory use of cash registers for payers of the single tax belonging to category III, with annual revenues of more than UAH 1 million;
· Changing the regulations for the control of transfer pricing;
· Simplifying and regulating the breakdown of the single tax payers’ categories;
· Ratifying the Agreement with Ireland on the abolition of double taxation;
· Agreeing to sign a new agreement with Cyprus aimed at increasing tax rates and preventing the flight of capital off-shore.

In June, the Ministry of Finance and the State Fiscal Service presented a concept for the institutional restructuring of the State Fiscal Service, which aims to further simplify tax revenue management and to increase the tax base.

As part of the implementation of the Government Program for 2015 we produced a draft law of amendments with regard to the taxation of the gas-producing industry. This seeks to strengthen Ukraine’s energy independence and win investors in the field of oil and gas production. We will reduce the royalties from 55% for gas fields with a depth lower than 5000 meters, and 28% for gas fields with depth more than 5000 meters to 29 / 14 respectively and put these new rates into force starting from 1 October 2015. This will be enacted in tandem with the introduction of the new regulations on the natural gas market. Further, we plan to introduce a royalty rate of 20 / 10 for new gas fields starting from 1 January 2016, and to keep the current revenue tax, as well as the additional corporate tax of 30%. If these amendments are adopted by the Parliament in September, they will enter into force from 1 October 2015.

We are now working together with representatives of the executive and legislature, business associations, domestic and international experts, and the Ukrainian public as part of the task force for tax reform. The draft reforms will be presented to the Parliament in the Autumnand enter into force beginning 1 January 2016. The reform is designed to further simplify tax regulations, make tax administration easier, secure the fiscal needs of our country, and create a favorable business climate.

In the course of preparing for reform the Ministry has already held 16 meetings with the representatives of various branches of economy, and 6 meetings with public representatives to discuss their remarks on the current tax regulations, as well as their amendment proposals.

Finally, the Ministry of Finance has taken resolute steps to increase the efficiency of state property management and the Ministry itself. For instance:

· We have removed functions that overlap with the Ministry of Economy with regard to the interaction with international financial organizations related to financial cooperation, and completely transferred these functions to the relevant department of the Ministry of Finance.
· We have developed and launched the reform of the Ministry of Finance itself, designed to make its structure more effective and to increase its personnel capacity in the most important working areas, particularly with regard to creating a clear scoring system for the processing of investment projects.
· Creating a department which will be in charge of monitoring fiscal risks for the largest state-owned enterprises.
· Joined a system of electronic trading for procurement, helping halve the price of purchased commodities and ending unregulated public tenders.
· Began the liquidation of the State Assay Office, and elaborated a draft reform for the State Financial Inspection.
· We have consulted experienced advisors from the USA, Slovakia, Canada and Germany in order to learn best international practices.

Finally, I wish to emphasize that the Ministry of Finance, in its area of responsibility, is strictly following and implementing the Government Program, the Coalition Agreement and the Sustainable Development Strategy “Ukraine 2020”. Of the 10 tasks already due, we have completed 8, and are finalizing the remaining two: the elaboration of a strategy for the state debt management, and regulation on the maximum number of employees at the State Fiscal Service.

However, all these steps that I have listed here should not seduce us into believing that we have completed the job. The opposite is the case – this is only the beginning. We are well aware of external and domestic hazards for Ukraine, but we have a clear vision of how to take them into account and to prevent their negative impacts. The key priorities in the further reform implementation by the Ministry of Finance are as follows:

First, to reduce the pressure on the balance of payments and to bring the state debt to the acceptable level in the medium-term, we must complete the restructuring of our international financial obligations. The Government of Ukraine seeks to intensify negotiations with the Special Creditors’ Committee;

Secondly, as I have already said, the Ministry of Finance is going to present its vision of tax reform by September, with the aim of expanding the tax base, simplifying the administration and payment of taxes, bringing the economy out of the shadows, and fairly distributing the fiscal load in the economy and improve conditions for investors in Ukraine.

Third, based on the new tax reform and further fiscal decentralization, we must draft the state budget for 2016. It must secure defense expenditure at 5% of GDP – no lower than 2015. With the current complicated economic situation, we will only be able to achieve these targets by applying a very prudent approach to other expenses. This is what we shall talk about with all Ministries, and this is the point where we count on support for our proposals from our coalition partners. Our target is to reach a budget deficit of 3.75% of GDP in 2016.

Finally, our work must be transparent for our citizens – therefore we are introducing the revolutionary ІТ-platform, “Transparent Budget”, where we will publish all state budget transactions online.

All of these steps will contribute to the further recovery of the state financial system, and help set the course for the renewal of economic growth in 2016.

Thank you for your attention.

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