State Budget 2019 comments: PRELIMINARY data

Budget 2019 was full of challenges. In the H1 2019, there was political uncertainty due to parliamentary and presidential elections, changes in the prices on the international markets, and new macroeconomic trends in Ukraine, including the strengthening of the Hryvnia caused by several reasons. Unfortunately, the first Medium-Term budgetary declaration submitted by the Ministry of Finance was not considered by the previous Cabinet of Ministers and was not submitted to the Parliament and some expenditures were not completed in time. Despite this, many measures have been taken within the strategy of reforming public finances, including Medium-Term budgeting, liquidity management and transformation of the State Fiscal Service. During the year, the Ministry of Finance resolved issues related to the non-implementation of the revenue section of the budget.

The new government, appointed on August 29, 2019, rapidly responded to the challenges and promptly approved a new Macroeconomic Forecast prepared by the Ministry of Economy and submitted to the Parliament amendments to the State Budget for 2019, prepared by the Ministry of Finance, taking into account the updated forecast. The government has taken into account higher-than-projected revenue-related challenges and the state of use of funds under different budget programs. The decline in the revenue plan was offset by a decrease in the government debt service spending plan by UAH 21.6 billion. This was due not only to the stronger Hryvnia exchange rate against the US dollar and the Euro (which explains about UAH 6.3 billion from this decrease) but also the result of the prudent liquidity management by the Ministry of Finance.

The State Treasury Service of Ukraine released preliminary data on the 2019 State Budget execution. 

REVENUES 
In the year 2019, the revenues of the general fund of the State Budget increased by 5.5% year on year to UAH 879.8 billion. The general fund of the State Budget revenues from the personal income tax and income charge increased by 19.9% year on year to UAH 110 billion and exceeded the plan by 3.6% due to higher average salary growth than was taken into account in the budget. Better financial results of enterprises contributed to the growth of corporate profit tax revenues by 11.8% year on year to UAH 107.1 billion, which is 12.1% more than planned.
According to the results of the year, the revenues of the general fund of the State Budget amounted to 96.9% of the annual budget plan:
- VAT revenues from goods imported into Ukraine amounted to UAH 287.4 bn. The revenues were 89.6% of the annual plan due to stronger Hryvnia exchange rates, lower gas prices, slower growth in imports of goods than budgeted, VAT exemptions on solar and wind power plants imports starting from January 2019, reduced amount of imported natural gas.
- Excises amounted to UAH 61.7 billion - 79.8% of the annual plan mainly due to the decrease in tobacco production.
- Fee for the use of mineral resources amounted to UAH 46.3 bn (80.1% of the annual budget plan). Lower than planned revenues were due to lower gas production, the lower average customs value of imported natural gas, lower natural gas prices for retail consumers and heat producers, as well as stronger than budgeted for 2019 Hryvnia exchange rate.

State budget revenues (general fund) in the year 2019 (preliminary data)

According to preliminary data released by the state Treasure Service of Ukraine, non-tax revenues exceeded the plan by 119.4%. Thus, the NBU transferred UAH 64.9 billion to the state budget which is UAH 17.3 billion more than the planned figure. 

Dividends and net income were UAH 46.3 bn that exceeded annual budget plan by 103.9%.

EXPENDITURES

In the year 2019, the government has fully funded protected expenditure items and some other expenditures that contribute to the development of the economy and well-being of citizens. According to preliminary data, the following expenditures were financed from the state budget:

• UAH 213.3 bn were allocated to national security and defense, an increase of 11.3% year on year.
• UAH 47.5 bn were transferred to housing and utility subsidies. Social welfare payments amounted to UAH 55 bn, compared to UAH 51.8 bn in the year 2018.
• Transfers to the Pension Fund amounted to UAH 183.3 bn (which is by UAH 33.2 billion more than in the year 2018), including transfers from the general fund of the State Budget of UAH 173.9 bn. The Pension Fund’s one-time payments to the poorest pensioners (paid in March and April 2019) in the amount of UAH 7.9 billion were paid from concessional customs clearance of cars with foreign registration.
• About UAH 130 bn from the state budget, including transfers to the local budgets, were directed to education, an increase of 23% year over year.
• UAH 95.1 bn were allocated to healthcare, an increase of 13.7 % year over year.
• UAH 53.8 bn were transferred on the development of roads and road infrastructure, which is 19.5% more than in the year 2018.

Throughout the year, the government has repeatedly addressed the problem of lack of funds at coal mines. As a result, the miners were paid around UAH 3 bn in total. In general, next year, there are measures planned to restructure the coal industry, which will help the mines to break even.

At the same time, debt service expenditures were lower than expected due to stronger Hryvnia and lowering of the cost of borrowings. The total savings amounted to UAH 25.3 billion (UAH 21.6 bn before amendments to 2019 state budget and additional UAH 3.7 bn after amendments).

There were savings in several social programs (with all needs for these categories funded by 100%):

• UAH 6.9 billion in the subsidies for families with children, low-income families, etc. due to lower birth rates than budgeted figures, fewer families entitled for social assistance, low use of the municipal nanny program.
• UAH 2 bn in housing and utility subsidies and UAH 1.1 bn gas subsidies due to faster growth of household incomes than tariffs, as well as warm weather in November and December.

In total, according to the State Treasury's preliminary data, the expenditures of the general fund of the state budget amounted to UAH 950.7 billion, which is 3.2% below the plan.  

DEFICIT

According to the State Treasury's preliminary data, the total deficit was less than planned and amounted to UAH 81.2billion (which is estimated at 2% of GDP). In particular, the deficit of the general fund of the State Budget was within the target of UAH 69 billion.

The state budget deficit was financed by borrowings, as privatization proceeds amounted to only UAH 0.5 bn.

Financing of the general fund of the state budget in the year 2019 (preliminary data)

Considering favorable domestic market conditions in December, the Ministry of Finance prefinanced state budget 2020 in the amount of UAH 4.7 bn.

State debt

For the first time in 5 years, the Ministry of Finance fully implemented state borrowings plan.

In total, in the year 2019, state debt interest payments amounted to UAH 119.2 bn, while state debt principal payments were UAH 345.2 bn.  During this period, domestic borrowings amounted to UAH 341.2 bn (of which UAH 222.6 bn accounted for UAH –denominated bonds), and external borrowings totaled UAH 63.8 bn in Hryvnia equivalent. Macroeconomic stability, prudent fiscal and monetary policies, and Ukraine’s expected economic growth contributed to the growth of demand for domestic government bonds. The demand was supported by non-residents, who in May gained easier access to Ukrainian market via Clearstream link. At the end of December, the share of non-residents’ portfolio in domestic government bonds reached 14.1%.

According to preliminary data, state debt amounts to UAH 1 764.2 billion (USD 74.5 billion in USD equivalent) as of the end of 2019. State debt to GDP ratio declined to 45% at the end of 2019. The government-guaranteed debt was estimated at 6.6% of GDP at the year-end. Within the implementation of the Medium-term Strategy for the State Debt Management for 2019-2022, the share of state debt denominated in national currency was increased from 33% to 41%. The average weighted maturity of domestic government bonds was raised from 9 months in 2018 to about 2 years in 2019. Yields on government bonds declined substantially: by 722 bp in UAH to 11.78% for 3-month government bonds and 708 bp to 11.42% on 1Y government bonds. Yields on recent domestic market borrowings in the US dollar were at a record low of 3.86%, and in Euro at a record low of 2.22%, the lowest in the history of modern Ukraine.

2020 PLANS

2020 fiscal year started with the timely approval of a monthly budget plan for 2020. There was defined a list of 114 budget programs that are required to prepare or amend budgeting procedures for timely and effective management of budget programs. The budgetary units are to approve passports of budget programs with quality indicators of efficiency and effectiveness by February 15.

In the year 2020, it is planned to complete the expenditures started in 2019 and conduct a review of expenditures, as well as to strengthen the fiscal risk controls of state-owned enterprises and state-owned banks in cooperation with the EU, IMF and the World Bank. The Ministry of Finance plans to finalize the creation of the new Customs and Tax Services, to create a Financial Control Office, a Financial Investigation Bureau and Debt Management Office. Together with colleagues from the Government, the Presidential Office, the NBU and the Parliament, MoF plans to complete preparations for the IMF Management Board's consideration of the new three-year Program and continue negotiations with official partners to obtain new concessional financing instruments from the World Bank, the European Union and other official lenders.

According to the latest updates from the Ministry of Economy, a government-mandated macroeconomic forecasting authority, there are clear grounds for revising the macroeconomic forecast for 2020 which is the basis for budgetary indicators. The Ministry of Finance will respond to the revised macroeconomic forecast in accordance with the legislation.

At the same time, under the supervision of the Ministry of Finance, State Customs and Tax Services will continue to improve their work efficiency and narrow the possibilities for tax and customs abuses. These include improving the efficiency of transfer pricing controls, reducing the possibility of tax evasion from the excise goods group, further prevention of smuggling attempts and intensifying the fight against counterfeit goods. Such measures will improve the business environment, reduce gray businesses and, accordingly, facilitate budget revenues. It is also planned to expand the functionality of the taxpayer's electronic office, increase the number of electronic services, and introduce the Authorized Economic Operator Institute. Further implementation of a risk-oriented approach in controlling tax payments will help to reduce the number of business examinations by the Tax Service.

An important task for the Ministry of Finance in the year 2020 is to prepare a high-quality Budget Declaration for 2021-2023, its timely adoption by the Government and submission to Parliament.