Deficit virus: how Kiev is revising budget spending in a pandemic

A package of amendments to the budget of Ukraine was submitted on Thursday, April 16, for signature to the head of state, Vladimir Zelensky. Relevant data appeared on the website of the Verkhovna Rada.

Earlier, the draft of this document was approved by the deputies and signed by the Chairman of the Parliament Dmitry Razumkov. It is proposed to introduce changes to the state budget for 2020 in connection with the pandemic of the coronavirus COVID-19, which caused significant damage to the economies of several countries, including Ukraine.

According to the proposed changes, the revenues of the Ukrainian state budget will be cut by 11% to 975.8 billion hryvnias ($ 36 billion), expenses will increase by 7% to 1.266 trillion hryvnias ($ 46.5 billion). As a result, the state budget’s maximum budget deficit will amount to 298.4 billion hryvnias ($ 11 billion), it is planned to repay the debt using state loans, as well as funds received as a result of privatization of state assets — in total, the authorities expect to gain 0.5 billion hryvnias from the sale of state property this year ($ 18 million). At the same time, it was originally planned that privatization would bring 12 billion hryvnias to the treasury.

The most expensive item in the updated draft budget was the creation of the COVID-19 Fund - it is planned to spend 64.67 billion hryvnias ($ 2.37 billion) for these purposes. The fund will go to the needs of the healthcare system, including additional payments to doctors and families of medical staff who died from coronavirus. It is also envisaged to increase the Pension Fund by 29.7 billion hryvnias: additional expenses are associated with the promise of the authorities to pay 1 thousand hryvnias to senior citizens whose pensions are less than 5 thousand hryvnias.

At the same time, a number of benefits and allowances will be reduced. As noted in the document, “the payment of certain types of benefits, compensation, cash security and payment of services to certain categories of the population” will be reduced by a total of 1.3 billion hryvnia ($ 48 million). Subsidies and benefits to citizens for payment of housing and communal services and the purchase of heating oil and liquefied gas are also reduced by 8.2 billion hryvnias ($ 301 million).

The expenses of the Ministry of Veterans Affairs are also falling significantly, its budget is reduced by 816.4 million hryvnias ($ 30 million). The Ministry of Education will receive even less - 1.9 billion hryvnias ($ 70 million).

Power vector

At the same time, budget spending on the Ministry of Internal Affairs, by contrast, increased by 195 million hryvnia. The Ministry of Defense will not have to squeeze expenses either - the authorities do not plan to revise this article.

In addition, the measure limiting the wages and cash security of employees of budgetary institutions to ten minimum wages will not affect the military, carrying out "measures to ensure national security and defense, including in the operation of the Joint Forces (OOS)" (as the military is called in Kiev operation in the Donbass. - RT ). Recall that today the minimum wage in Ukraine is 4723 UAH.

• Military APU
• Reuters
• © Gleb Garanich

“The department of Arsen Avakov cannot be left without money, since the future of the country now depends on law enforcement agencies. Two months later, people will realize that they are left without money and work, and can go out to protests. In addition, crime is growing rapidly, people are being attacked in broad daylight. The police are careful that no one goes to the parks. In other words, the situation is becoming increasingly tense, ”the source of RT in the Fatherland party believes.

A similar point of view is shared by the director of the Kiev Institute for Analysis and Policy Management Ruslan Bortnik. As the expert explained in an interview with RT, authorities understand thatunder quarantine, the risks of socio-economic and political instability increase, therefore the budget of the power structures has remained virtually unchanged.

“Cutting the budget of the Ministry of Defense is already a political issue. It would lead to strong criticism from right-wing and radical groups. The government was incapable of this. It greatly reduced social spending and subsidies to local self-government, which financed medicine and education after the reform. In fact, the government refuses part of its social obligations, ”said Bortnik.

Analysts also believe that, keeping the defense budget unchanged, Zelensky thus “insures” the fulfillment of his promises to stop the conflict in the Donbass.

“The government is appealing to the fact that the situation in Donbass is currently turbulent, and therefore spending on the army cannot be reduced. However, Zelensky does not talk about ending the confrontation, but demands to transfer the border between Donbass and Russia under the control of the Armed Forces of Ukraine. In this, he is not very different from the previous government, ”political analyst Alexander Dudchak noted in an interview with RT.

Moreover, it was the military budget that became the most ambitious expense item for the Ukrainian treasury. In 2020, UAH 245.8 billion will be spent on defense and national security needs, which is 5.45% of GDP. As Ukrainian Defense Minister Andrii Zagorodniuk previously said, this is the largest defense budget in the history of the country.

“Compared to 2019 (UAH 212.0 billion), the current budget is 16% higher (UAH 33.8 billion). At the same time, 136.5 billion goes for defense, 109.3 billion UAH billion UAH for security. The Ministry of Defense alone receives UAH 125.1 billion, ”the head of the defense department emphasized.

Debt accumulation

However, the main creditor of Ukraine, the International Monetary Fund, did not have questions for Kiev in connection with the upcoming revision of budget spending.

As the director of the IMF's European department, Paul Thomsen, said the fund endorses the decisions of the authorities.

“Ukraine is seriously suffering from the coronavirus pandemic. The country's authorities are taking measures that will lead to a significant increase in the budget deficit. We fully support this, ”said a representative of the organization.

He also added that the fund is ready to increase the amount of financial support for Ukraine in connection with the quarantine and the economic crisis caused by it, however, for this, the Ukrainian authorities must comply with the IMF requirements.

Recall, the fund previously identified two conditions for new credit tranches to Kiev. Firstly, in Ukraine, the moratorium on agricultural land purchase and sale transactions should be lifted, and secondly, the authorities should pass a law blocking the possibility of returning nationalized banks to their former owners. The law on the sale of land was previously adopted, despite the indignation of the opposition, and the "anti-Colomian" law (as the Ukrainian media call banking reform. - RT ) The Rada has yet to consider in final reading.

Moreover, even before the coronavirus pandemic, the economic situation in Ukraine was not developing in the best way. By the end of last year, the volume of public debt and guaranteed by the government of Ukraine reached $ 84.4 billion. At the same time, the maximum payments on external debt in 2020 will fall on I and III quarters ($ 5.415 billion and $ 5.237 billion, respectively). In total for the current year, Kiev should transfer $ 17.059 billion to creditors. The coronavirus pandemic significantly aggravated an already difficult situation.

• IMF Europe Director Paul Thomsen
• Reuters
• © Mike Theiler

“The situation in the Ukrainian economy is extremely difficult - the budget does not receive money from business, since all work has almost stopped. For a month now the country has been living in strict quarantine, after which the financial crisis awaits us, ”a RT source in the Ministry of Finance of Ukraine noted.

According to him, the budget adopted by the Verkhovna Rada is based on the belief that the IMF and other donors will allocate money to Ukraine.

“But if the quarantine is delayed or the Parliament does not vote for the anti-Colomian law, everything will be much worse. It may come to the point that state employees will simply have nothing to pay pensions and wages. Then you’ll have to cut all expenses, ”the interlocutor of RT believes.

As an RT source in the Golos party said, now some deputies are even thinking about calling for additional money emission, not realizing that this will not be a way out, but will only aggravate the situation.

According to Ruslan Bortnik, the government will now be able to execute the budget it will take no longer than 3-5 months.

“The revenue side is generally disastrous, it is proposed to fill almost half of the budget with new borrowings,” Bortnik said.

In his opinion, the pandemic is not the only reason that prompted the Ukrainian authorities to budget sequestration. We are also talking about changing priorities after Denis Shmygal became prime minister - the new government is now rewriting the budget to fit its ideas.

“Of course, no one has canceled the need to respond to crisis in a pandemic. The authorities had a choice. One could look for funds inside, or it was possible with external lenders. The government has taken the path of debt accumulation and cooperation with the IMF, which has long become an instrument of external influence on Ukraine. In fact, the chosen path is a passive-reaction model of crisis response, ”the expert summed up.