28 Jun 2022 09:27

Ukraine's Financial Stability Council approves measures to cut deficit

MOSCOW. June 28 (Interfax) - Ukraine's Financial Stability Council (FSC) has approved a list of measures to reduce the state budget deficit and decrease its monetary financing, including optimizing spending, boosting revenues, stepping up domestic market borrowing and increasing the predictability of when the country receives international aid.

"The members of the FSC discussed the extremely negative consequences for macroeconomic stability from excessive monetary financing of the state budget deficit. Such consequences are most clearly manifested in influence on the forex market," Ukrainian media quoted the National Bank of Ukraine's (NBU) statement published on Monday on the results of the June 23 FSC meeting.

The NBU said that, in order to meet demand for forex, it is constantly carrying out interventions, the scale of which is increasing every month, exhausting international reserves, and this reduction of reserves is not being offset by international aid at this point.

"If the NBU's international reserves run out due to monetary financing of the budget, this will create a threat of significant depreciation of the currency and rapid acceleration of inflation. This in turn will exacerbate risks for financial stability," the NBU said.

The Ukrainian government's current monthly financial needs are estimated at about $5 billion and, since the start of the military operation in Ukraine, NBU support for the government has become prevalent.

The NBU said optimizing spending means, among other things, limiting non-priority and ineffective expenditure items, while additional revenue can be generated foremost by raising taxes on imports, excises, such as on fuel, and rental payments. For example, the FSC proposed to eliminate tax breaks for motor fuel.

"The state budget deficit in January-May 2022 was greater than for all of 2021 and 2020. Budget revenues decreased, including due to tax breaks for imports, while spending increased significantly, foremost on military needs and social programs," the NBU said.

All steps should not run counter to the principles of Ukraine's cooperation with international donors and integration into the European Union, the NBU added.

The FSC also discussed the possibility of launching a new program of cooperation with the International Monetary Fund. "Specifically, the members of the FSC agreed with the need to refine macroeconomic forecast scenarios as soon as possible and proposals for economic policy measures and structural reforms on which such a program must be based," the NBU said.

The NBU again financed Ukraine's state budget last week with the purchase of "military bonds" totaling UAH35 billion, increasing their portfolio to UAH225 billion, including by UAH105 billion in June alone.

The Finance Ministry expected external financing to increase to $4.8 billion in June from $1.5 billion in May, but it has only totaled about $1.5 billion so far this month.

Ukraine's Verkhovna Rada passed Tax Code changes at the end of March that reduced the excise on gasoline and liquefied natural gas to zero and lowered the value-added tax on motor fuel imports to 7%.

A bill was later submitted to the parliament that proposed to eliminate these tax breaks, but these provisions were removed from it even before it was considered by lawmakers over fears that this would further increase fuel prices. As a result, tax breaks for imports of most goods will be scrapped effective July 1, but remain in place for motor fuel.

The NBU also proposed to the government and Rada that they introduce a 10% additional import duty similar to one that existing in 2014-2015 in order to ease pressure on the hryvnia and boost budget revenue, but the government and the relevant parliamentary committee have so far refused to adopt this measure.

Ukraine wants to reach an agreement with the IMF on a new cooperation program, but the Fund believes it makes sense to launch a new program when the country begins the phase of reconstruction after the end of the conflict and that for now it should focus on short-term aid. Ukraine, nonetheless, sees the issue of a new program as fundamental.

The FSC brings together representatives of the NBU, National Securities and Stock Market Commission, Finance Ministry and Deposit Guarantee Fund so they can coordinate their actions.

The hryvnia's official exchange rate on June 27 was UAH29.25/$1.