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  • BUDGET 2011: Realistic fiscal indicators for 2011


    On December 10, the Cabinet of Ministers submitted the Draft State Budget Law for 2011 to the Verkhovna Rada. The Draft is based on the provisions of the recently approved Tax Code. Simultaneously, another draft law was submitted to the Parliament envisaging the amendments to the Budget Code, as some provisions of two Codes are contradicting.

    Bother draft laws were approved by the Parliament in the first reading. It is expected that Ukraine will have approved State Budget Law for 2011 on December 24, 2010. This is later than terms foreseen in the Budget Code, but still earlier than beginning of new fiscal year.


    Macroeconomic indicators

    Fiscal parameters for 2011 are based on rather realistic macroeconomic assumptions. In particular, real GDP growth is expected at 4.5%, which corresponds to the IER’s forecast. Official estimates of exchange rate are also realistic. However, official forecast of inflation at 8.9% yoy in December is lower than our estimate. We expect that inflation will be higher due to delayed increase in housing and utility tariffs, further growth in food prices. At the same time, we are more optimistic about external trade recovery.


    Fiscal revenues

    According to the government estimates the Consolidated fiscal revenues in 2011 will increase by 12.5% to UAH 360 bn. At the same time, they will decline in relation to GDP to 28.7% due to lower rate of enterprise profit tax (EPT), introduction of zero EPT rate for small companies and several types of economic activity, changes in the EPT base, zero VAT rate of gas imports, elimination of several local taxes and duties, etc. However, there is a risk that the Government underestimates funds needed for VAT refunds, which could result in problems with further accumulation of VAT refunds arrears. In particular, the planed restriction of VAT refunds is partially related to new provisions on the VAT administration, the role of which could have been overestimated by the Government.

    Overall, for the first time for last years we can evaluate fiscal revenues plan as realistic. The Government is very careful in planning this parameter of the Budget, which, according to our estimates, could turn higher against the background of further economic recovery.


    Fiscal deficit
    In 2011 the Government will again finance central fiscal deficit at the expense of borrowings. While net borrowings at UAH 29.3 bn will be lower than in 2010, gross borrowings will remain high at 7.3% of GDP. Therefore, execution of fiscal expenditures will largely depend on the successful state debt refinancing.

    Large fraction of new borrowings will be used for debt redemption and interest rates on old debts. External borrowings are planned at near USD 5.4 bn, from which USD 3.1 bn will be directed for debt redemption, including repayment of the credit received in 2010 from the Russian VTB. Most issued domestic government bonds (77.2%) will be also used for redeeming old bonds. Privatization receipts are expected at UAH 10 bn, which is realistic in case of receiving money for the sale of the Ukrtelecom in the beginning of next year. Overall, the central fiscal deficit is planned at UAH 38.8 bn or 3.1% of GDP.


    Cooperation with the IMF

    Therefore, the Government attempts at approving fiscal indicators, which comply with Ukrainian liabilities in the framework of the Stand-by Agreement. Planned increase in fiscal revenues is rather conservative. However, indicator of fiscal deficit does not contain possible issue of domestic state bonds for financing deficit of the Naftogaz, which is envisaged by a separate article of the Draft State Budget Law. This creates risk for meeting fiscal target approved by the IMF.

    Tags:  budget, IMF
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