Archive 2011

  • Macroeconomic assumptions of Draft State Budget for 2012: are they realistic?


    The draft State Budget for 2012 is based on realistic macroeconomic assumptions. The real GDP growth is assumed at 5.0%, which is by 1.5 p.p. lower than the growth envisaged in the State Program of Social and Economic Development of Ukraine. At the same time, the Government claimed that this forecast is pessimistic (in the Explanatory Note of the draft State Budget Law). However, it is similar to the IMF estimate of 4.9% growth and the IER estimate at 5.3% for next year in base scenario. At the same time, IER’s estimate of economic growth under pessimistic scenario is much lower at 2.6%.

    Official “pessimistic” estimate of economic growth at 5.0% assumes that Ukrainian economy is now more protected from effects of possible worsening of world economic situation. Economic reforms and changes in the structure of economy are the reasons for this kind of thinking. However, economic reforms were not substantial enough to have significant impact in 2012, while economy remains highly dependent on energy imports and export of steel, chemicals and machinery.

    Table: Estimates of key macroeconomic indicators for 2012

    The State Budget Draft Law

    IER estimates (base scenario))

    Nominal GDP, UAH bn



    Real GDP growth, %



    CPI, % eop



    Monthly average wage, UAH



    Unemployment rate (ILO methodology, economically active individuals aged between 15 and 70 years old)



    Trade balance in goods and services, USD m



    Exports of goods and services, % yoy



    Imports of goods and services, % yoy



    The Government expects further deceleration of the consumer price growth. In particular, the CPI is officially forecast to increase by 7.9% in December-on-December terms in 2012. Government expects lower inflation than that forecasted by the IER. At the same time, GDP deflator is close to IER estimates. It is traditional for the government to underestimate inflation as it allows officials to claim higher increase in social standards and base wage for public employees in real terms.

    It is expected that the households’ consumption will remain the driving force of economic growth in 2012. Its growth is to be attributed to increase in social standards and wages. In particular, wages are forecasted to grow by 16% to UAH 3127 (which is similar to the IER forecast).

    According to the Explanatory Note, investments are expected to grow due to improved investment climate and implementation of innovative investment projects in different sectors. In particular, the Government anticipates investments into energy efficiency, which will help to reduce imports of natural gas from Russia.

    In 2012 the imports are forecasted to grow faster than exports. They will grow by 9.2% and 13.3%, respectively, which is lower than IER’s estimates. Higher imports are favourable for the budget as create higher fiscal revenues from VAT and import duties. However, larger exports could create risks for accumulation of VAT refund arrears in 2012 as amendments to the State Budget Law are likely to be needed to allocate more funds for refunds.

    Overall, the State Budget Draft Law for 2012 is based on realistic rather than pessimistic macroeconomic outlook. The Government tried to take into account possible slowdown in world economic growth. If the growth appears to be higher than estimated, the Government will have additional revenues, which hopefully will be allocated for capital outlays. Allocation of additional revenues is easier task than cutbacks in budget spending or looking for sources of deficit financing. In particular, capacity of the Government to generate more funds for deficit financing in pessimistic scenario would be more likely limited to quasi-fiscal operations of state banks and the NBU.

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