Author: Vilen Veremko
Before the New Year, the Verkhovna Rada passed the Cabinet’s version of the 2011 State Budget on emergency basis. This document not only reflects the new Tax Code but also not-yet passed new norms in pension legislation, including a higher retirement age. Passing the State Budget quickly guarantees the Government US $1.5bn from the IMF to cover the deficit—and Premier Mykola Azarov was ready to dance with joy.
Revenues are expected to reach UAH 281.46bn in 2011, which is UAH 28.71bn more than in 2010, while expenditures are going to be UAH 321.93bn or UAH 16.24bn more. As in 2010, the Government has secured itself the right to borrow and disburse additional credits without planning or approval. Thus, the risk that Budget commitments will not be met is minimal. A typical feature of the 2011 State Budget is increased funding for all enforcement agencies: the Interior Ministry gets almost UAH 2bn more, or up to UAH 13.6bn, while the Prosecutor’s Office now gets UAH 2.2bn, not UAH 1.2bn as before.
Sets the limit of sovereign debt at UAH 375.643bn as of December 31, 2011.
The State continues to live in debt, which could grow an additional UAH 60bn in 2011. But even this can be considered nominal, since other provisions in the law allow the Government to draw on external and internal borrowings above this limit. The Cabinet of Ministers will also be able to increase or decrease the amount of loans at its discretion without the consent of the Verkhovna Rada.
Allows the Government to underwrite UAH 15bn in loans in 2011.
The Government is supposed to underwrite loans to the National Agency for Preparing and Holding Euro 2012, to the State Road Service, to Energoatom to build the 3rd and the 4th blocks of Khmelnytsk Atomic Energy Station (AES), to build a bridge across the Dnipro at Zaporizhzhia, and so on. Returning to the practice of providing state guarantees at the Cabinet level is likely to facilitate corruption.
Requires the Mandatory State Unemployment Insurance Fund to allocate at least UAH 360mn to create jobs for residents in coal mining regions.
This has been continued in the 2011 State Budget from the 2010 Budget largely unchanged. No statistics have been provided as to how effectively these funds are being used.
Allows the Cabinet to issue domestic government bonds that can then be exchanged for additional shares emitted by NAK Naftogaz Ukrainy.
Since NAK Naftogaz Ukrainy has no financial plan for 2011 yet, it is unclear what volume of bonds is going to be purchased for Budget funds. The fact that this item is in the Budget means that the Naftogaz is not ready to meet its liabilities without outside support.
Allows the Cabinet of Ministers to issue domestic government bonds worth UAH 5bn in order to lend to the Agricultural Fund.
Typically, these bonds have not taken included in the sovereign debt limit, although they in fact increase the deficit. Issuing bonds, their possible conversion into hryvnia, and lending to the Agricultural Fund all leave space for financial abuse.
Allows the State to purchase bank shares, provide financial assistance to banks and privatize them, based on a decision and procedure established by the Cabinet. The sources of funding include:
Government bonds or funds from other government borrowings.
This item sets up the conditions for the reorganization of the banking market expected once minimum statutory capital requirement is increased from UAH 75mn to UAH 500mn.
VII. CLOSING PROVISIONS
Requires the Cabinet to propose raising social standards, based on the State Budget performance review for Q1’11.
The Government’s talk of raising social standards will most likely remain just that. State revenues are unlikely to grow in Q1, whether due to tax, pension or administrative reforms.