Ukraine’s COVID-hit budget will collapse without IMF loan

Closed cinema in almost empty shopping mall in Kyiv. Source: Kyiv map 

Politics

On 13 April 2020, Parliament adopted a revised Budget 2020, responding to the economic crisis caused by the COVID-19 pandemic. A special fund of UAH 65 billion ($US 2.4 bn) was created to tackle the novel coronavirus — it comprises 5.1% of the full annual budget.

However, President Zelenskyy’s Servant of the People was the only faction to vote for this budget and saw it adopted with its majority. Four other parties in Parliament voted against the budget, claiming that it is unrealistic to implement and imbalanced regarding culture.

The deficit of the amended budget is raised three times to UAH 0.3 trillion (US$ 11 billion). This enormous sum that Ukraine is lacking according to the budget is planned to be taken from the IMF. Yet, the new loan program can be unlocked only if Ukraine adopts a new banking law that was stuck in Parliament by the largest number of submitted amendments in Ukrainian history.

Also, a total of 38 projects vital for culture and infrastructure have either been canceled or vastly reduced in scope. At the same time, pension spending has been increased by UAH 30 billion ($US 1.1bn) to UAH 202 billion ($US 7.5bn). A half from these additional 30 billion hryvnia for pensions would have been enough to keep the most important cultural and infrastructural projects in place.

Some projections of economic decline and pending crisis taken into account in the budget

The initial projection at the beginning of the year was +3.7% GDP growth in 2020. However, after the economic crisis of the pandemic, the projection was revised to a negative growth of -3.9% GDP.

The projected revenue of the budget was lowered even more — by -11% to UAH 975 billion ($US 36.1bn). Expenditures, however, were increased by +6% to UAH 1,281bn (US$ 47.4bn), to tackle the coronavirus. The gap in revenue means that the budget deficit will increase three times to UAH 0.3 trillion ($US 11bn) or roughly 7% of the country’s entire GDP. The government plans to cover this enormous deficit through a loan from the IMF. The Cabinet has emphasized the necessity of cooperation with the IMF to keep the country solvent. However the cooperation is suspended until parliament adopts required banking law that is now stuck with amendments.

Some 226 MPs from the Servant of the People faction — that is exactly the number of parliamentary majority in Ukraine — voted for the revised budget. An additional 23 independent MPs voted for the law but none from the other four parties in Parliament.

Serhiy Rakhmanin, an MP and head of the parliamentary faction of the Voice (Holos) party, pointed out that the revised budget is based on the assumption that Ukraine will receive the new IMF loan. However, the new loan program is not guaranteed, since Ukraine must fulfill certain stringent conditions. One of the most controversial is new legislation restricting banking procedures — the so-called “Anti-Kolomoiskyi” law. In total, 16,397 amendments have been submitted for the law, which itself is 16,095 words. Such tedium ensures the law will be blocked for a long time, and puts the loan and the country at jeopardy.

Meanwhile. MPs from European Solidarity, as well as civil activists have argued that the new budget is not addressing the nation’s priorities. The budget has raised spending for pensions and law enforcement, while cutting infrastructure, education, and culture. Funds to cover a one-time payment to pensioners of UAH 1,000 (US$ 37) — dubbed the “Presidential Thousand” — are in question. The one-off has been promoted by the president — with one eye on his ratings — as helping pensioners during the coronavirus.

Opposition MPs have pointed out that a one-time payment is hardly enough to sustain the elderly over a longer period of time. Rather than siphoning funds from other ministries, the government needs to develop a more sustainable program to support seniors, without forgoing other important programs.

Social policy and healthcare get boosted; funds for education, culture, and regional development face cuts

The process of amending Budget 2020 has been complicated. During the last month, Parliament changed three finance ministers. On 4 March, Minister Oksana Markarova was passed over during the government shuffle. Three weeks later, her replacement Minister Ihor Umanskyi was also shuffled out and the current Minister of Finance Serhiy Marchenko was appointed. Each of these ministers had their own vision of a new budget for Ukraine until the current one was adopted by Parliament.

Changes to the budget compared to the original follow:

Ministry of Internal Affairs (police, National Guard) sees no cuts and even a slight increase from UAH 93 billion to UAH 93.2 billion (US$ 3.45 bn). This decision has been criticized by civil activists, in particular the Capitulation Resistance Movement. They view excessive funding of law enforcement, during a time of turmoil, as an attempt to control civil society and limit their right to freedom of movement and public assembly. Activists are especially outraged because Minister of Internal Affairs Arsen Avakov has retained his position for the seventh year, despite numerous government shuffles. Avakov is viewed as a shady public official, suspected of covering up corruption and crimes, as well as sabotaging police reform.

Ministry of Education funds are reduced from UAH 131.6 to UAH 126.6 billion ($US 4.7bn). Several important programs were canceled entirely; including, fund for the development of universities, president’s fund for the support of education, and all funding for renovation of universities. The last is especially damaging. Renovation projects are already underway, and by cancelling funding they will remain unfinished and can become a waste of public funds. Other programs also face reductions. The popular “New Ukrainian School” program arises from a key education reform. The innovative program emphasizes an environment for education that is both positive and constructive. The program is designed not only to impart knowledge, but to provide students with the ability to apply that knowledge in real life. The program had its budget reduced from UAH 1.4 to UAH 1.1 billion Moreover, a subsidy to local school budgets, funded under the program “Capable School for Better Results,” has been reduced from UAH 3.5 billion to UAH 2.5 billion. Costs for research were cut by at least 50%.

The renovation of the Palace of Besiadetskyh was started as a part of the reconstruction of Lviv University. Also, as part of the same state program, the restoration of the oldest building of Kyiv-Mohyla Academy was started in 2018. However, almost finished projects face budget cuts now, while so-called additional “Presidential Thousand” will be paid to pensioners at the time of coronavirus. Source: zaxid.net

Ministry of Culture faces major cuts. Some cuts are reasonable given the cancellation of group events during this time of COVID-19. However, other important projects have seen major reductions. The innovative Ukrainian Cultural Foundation faces a 43% reduction; the Ukrainian Book Institute faces a 33% reduction; state support for Ukrainian film production is reduced by 38%; and the Ukrainian Institute of National Remembrance down by 50%. Cuts to the remembrance institute are especially unfortunate, because they will detract from the Revolution of Dignity museum. The National Public Broadcasting Company will see a 12% reduction. These cuts — on top of chronic underfunding that has always hindered the company in producing unique, high-quality content — pose nothing less than a threat to its feasibility.

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Ministry of Health sees its budget expanded from UAH 115.9 billion to UAH 131.2 billion ($US 4.9 bn) in the battle against COVID-19. A separate fund of UAH 65 billion ($US 2.4bn) has been created for this purpose.

Ministry of Energy and Environmental Protection sees almost no cuts. However, the relatively inexpensive (UAH 0.45 billion, $US 17mn) allocation for the environmental action plan was entirely canceled.

Ministry of Social Policy funds were significantly increased. Funding for pensions was raised from UAH 172.6 billion to UAH 202.3 billion ($US 7.5bn). Additional costs have been allocated for the unemployed.

Ministry for the Development of Municipalities and Territories faces sharp cuts from UAH 17.4 billion to 10.6 billion ($US 0.4bn). The State Fund for Regional Development — key to local infrastructure — has been reduced from UAH 7.5 billion to 4.9 billion. Funding for energy efficiency of houses at UAH 1.6 billion has been canceled entirely. Subsidies for development of local municipalities at UAH 2.1 billion have also been canceled. The program supporting available housing encountered hardest hit, losing 84% of its funding.

10 schools reconstructed by The State Fund for Regional Development in Ukraine’s most underdeveloped Kropyvnytskyi Oblast in 2019. In total, the Fund supported 707 projects in 2019. Yet, this most important for regional development Fund faces reduction by 35% now. Source: Ministry of regional development.

Ministry of Infrastructure faces a reduction of 20% due to the cancellation of various state infrastructure projects. The funding for road improvement at UAH 22.3 billion ($US 0.8 billion) is the only infrastructure allocation that was not reduced.

Ministry of Defence sees no changes to its budget for the military.

The need for an additional fund to fight COVID-19 is obvious for everyone. The discussion in Parliament was about the spheres that had to lose money in favor of the fund. A month earlier, on 10 March, during the awarding of the Shevchenko Prize, President Zelenskyy had cited Prime Minister Winston Churchill’s legendary words, at the height of WWII. In responding to his parliament’s proposal to cut funding of culture at the time of war, Churchill said: “Then what are we fighting for?” A month after echoing Churchill with great reverence, the amended Ukrainian budget has set other priorities.

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Edited by: Sonia Maryn

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