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Week's balance: Foreign lenders upgrade Ukraine economy outlook, exports to EU rise, while Rada adopted the 2020 budget in the first reading

Ukraine's key foreign creditors, the IMF and the World Bank, have issued updated forecasts for a higher growth of Ukraine economy, the State Statistics Service noted rising exports of Ukrainian goods to the EU, while the Verkhovna Rada approved in 2020 the country's budget at the first reading – these are the main economic developments of the outgoing week.

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Last week, the International Monetary Fund and the World Bank announced improved forecasts for the Ukrainian economy growth rate. During the annual meeting of financial institutions in Washington, attended by Minister of Finance Oksana Markarova, Minister of Economic Development Tymofiy Mylovanov, and National Bank Governor Yakiv Smolii, the IMF said it had increased its estimate of this year's GDP growth to 3% from 2.7% projected previously.

As stated in the IMF outlook for global economy development, in 2020 the growth of real GDP in Ukraine is also expected by 3%.

It is worth noting that, according to the State Statistics Service, the real GDP growth of Ukraine in 2018 accelerated to 3.3% from 2.5% in 2017, reaching the highest over the past seven years.

The IMF also expects a decline in consumer prices in Ukraine to 2019 to 7%, and in 2020 to 5.6% from 9.8% in 2018.

As for the current account deficit of the balance of payments, the IMF estimates this year it will amount to 2.8% of GDP and 3.5% in 2020.

According to the methodology of the International Labor Organization, unemployment in Ukraine should drop to 8.7% this year and 8.2% next year. According to Ukrainian stats agency, the unemployment rate in 2018 fell to 8.8% from 9.9% in 2017.

The IMF also expects hryvnia to beef up against the dollar to UAH 26.75, which is 1.6% stronger than last year's UAH 27.20.

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The World Bank released a more optimistic forecast for the development of the Ukrainian economy, suggesting that in 2020 GDP will grow to 3.7% instead of 3% forecasted earlier.

The Bank also improved its outlook for real GDP growth in Ukraine in 2019 to 3.4% from the previous estimate of 2.7%, expecting GDP growth in 2021 by 4.2%.

The inflation index in Ukraine, the World Bank forecast says, this year should reach 6.8%, then 6% in 2020, and 5.4% in 2021.

Minister of Economic Development Tymofiy Mylovanov emphasized that Ukraine was one of the few countries in the world for which the forecast has been revised in a positive direction.

"Most other countries are slowing down, not accelerating," he said, adding that the implementation of the government’s reform program will further boost national economic growth. "We have [for 2020] a more optimistic 4.8% scenario provided that the government’s program is successfully implemented and the business climate in Ukraine changes for the better. This means creating conditions for protecting property rights, liberalizing markets, judicial reform, quality of law enforcement, and oligarchs and parties of interest staying aside from the government and politicians," the minister said.

Budget process

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The main economic event of the past week was the approval by the Verkhovna Rada at the first reading of the draft state budget for 2020 developed by the government, taking into account the proposals of the relevant committee.

Introducing the document, Deputy Finance Minister Yuri Dzyihir noted that following finalization of the bill, state budget revenues were increased by UAH 17.8 billion due to net profit and dividends of state enterprises, rent of state property, domestic and import VAT, as well as transfers from the National Bank worth UAH 3.5 billion, which requires coordination of the regulator.

He also said that the draft resolution of the Rada provides for a number of instructions to the government, including updating the forecast of macro indicators. "After the government makes a decision regarding the refinement of macro-indicators for 2020, it will be possible to calculate updated budget indicators for 2020, in particular, revenue indicators," the deputy minister said.

Initially, the state budget for 2020 was built on the current macro-forecast with a GDP growth of 3.3% and an exchange rate of UAH 28.2 per dollar. Expected revenues stood at UAH 1.079 trillion, expenditures – at UAH 1.170 trillion, deficit cap – at UAH 95 billion, or 2.09% of GDP, and state and state-guaranteed debt - at 54.1% of GDP.

During parliament consideration, head of the Accounts Chamber Valeriy Patskan emphasized the need for adequate forecasting of macro indicators: "Available resources must be planned. The annual increase in the number of decisions of the Cabinet of Ministers on the redistribution of budgetary funds indicates the shortcomings of planning: in 2017 there were 77 of them, in 2018 – already 99."

He also emphasized that the subsistence minimum proposed in the draft budget 2020 (at UAH 2,189) is 41.2% times lower than its actual size. "The basis of the state budget's social component is the size of the subsistence minimum. The Accounts Chamber has repeatedly noted the issues of determining this indicator," said Patskan.

Citing experts, he said the subsistence minimum is half the level of absolute poverty (a physiological minimum for a person’s life, determined according to UN international criteria, is $5 a day for countries in Central and Eastern Europe).

Patskan noted that the deputies 18 adopted a decree on holding on December of parliamentary hearings on the formation of the subsistence minimum.

Photo from UNIAN

Summing up the "budget" discussion, Prime Minister Oleksiy Honcharuk called on deputies to support the bill. "These are proposals to us, the government. We will take them into account. Moreover, we heard all the proposals – on energy saving, infrastructure projects… All this will be taken into account. We will honestly see how much money we have, and together with you we will decide how to spend it efficiently," the head of government said.

Earlier, Honcharuk promised by the end of October to present an updated macro forecast, which will become the basis for adjusting the draft state budget for the next year. An officially updated forecast has not yet been made public, however, economy minister Mylovanov has already stated that the forecast for GDP growth next year is raised to 3.7%, while finance minister Markarova announced a higher rate of the hryvnia.

Legislative innovations

Last week, deputies also adopted a number of important economic laws. In particular, the law on verification and monitoring of state payments, which will optimize budget expenditures through verifying information that affects the determination of the right to and the size of state payments.

Head of the Committee on Social Policy and Protection of Veterans' Rights, Halyna Tretiakova, said that as part of the bill's revision following its first reading, a number of proposals put forward by MPs had been taken into account.

"The bill regulates payments, which include pensions, allowances, benefits, subsidies, scholarships, with the exception of academic ones; other payments made at the expense of state and local budgets, and funds of compulsory state social and pension insurance. That is, there is an absolutely European norm, a mechanism worked out by the central executive bodies," she explained.

The Verkhovna Rada also amended the Customs Code to strengthen the protection of intellectual property rights as regards goods moved across the country's customs border.

This law is designed to enhance efforts to counter smuggling, which will help cleanse the domestic market of counterfeit products, which often fail to meet the established safety requirements.

Photo from UNIAN

The parliament also approved a law that harmonizes the legislation of Ukraine in the field of radioactive waste management in accordance with international requirements and introduces a new classification system for radioactive waste during its disposal.

Another important decision concerns road construction. The parliament passed a law introducing a mandatory safety audit of roads of international and national importance, which will increase the cost of highway design from 5 to 13%. MP Oleksandr Skichko noted that, when the bill was being developed, the provision of the European Union Directive on the management of road infrastructure safety was taken as a basis.

"The adoption of the bill will make mandatory an audit of safety on roads of both international and national importance. On all other roads, audit will be voluntary," he said.

Incentives for entrepreneurship

An important event of the past week, which will have a long-lasting impact on the development of entrepreneurship in Ukraine was President Zelensky's decree instructing the government and the Rada to ensure the introduction of a moratorium on inspections of individuals-entrepreneurs.

The government shalll prepare a bill introducing a two-year moratorium on such inspections (except those targeting individuals-entrepreneurs carrying out highly profitable operations with significant risks of tax evasion) regarding compliance with the procedure for applying PoS machinese and mitigating liability of these persons for violation of the established procedure for reporting to regulatory authorities, associated with the use of PoS machines.

Photo from UNIAN

In addition, necessary measures must be taken to ensure transparent and easy procedures for registering settlement transactions when selling goods and services online and the procedure for applying such procedures is explained.

Starting January 1, 2020, taxpayers are expected to be able to test a free software solution for such payers using PoS.

The document also obliges the Cabinet of Ministers to create a Coordinating Council for the development of small and medium-sized enterprises involving representatives of NGOs.

In a two-week period, bills shall be developed and submitted to parliament for liberalization of the conditions and criteria for classifying individuals-entrepreneurs as the first group in the simplified system of taxation, accounting and reporting.

Rise of Ukrainian exports to EU

The State Statistics Service this week reported on Ukraine's foreign trade for the eight months of 2019. Over the reporting period, exports of goods increased by 6.9% year-on-year, to $33.0 billion, while imports increased by 8.2%, to $38.8 billion.

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An important trend was the increase in exports of Ukrainian goods to the EU market. In January-August 2019, it grew by 7.5% to $13.984 billion. Imports from the EU during the same period grew by 8.8% to $16.152 billion. Thus, the EU remains Ukraine's largest trading partner. The total volume of exports of goods from Ukraine to the EU amounted to 42.3%.

In terms of individual countries, the largest recipients of goods from Ukraine are China (7.1%), Poland (6.8%), and Russia (6.6%).

The State Statistics Service also said that the export of goods from Ukraine to Russia over the eight months of 2019 dropped by 11.2%, amounting to $2.175 billion, while imports from Russia decreased by 3%, to $4.939 billion.

The fourth week of October promises warm weather across Ukraine, which means a postponement of the heating season start to November. The State Statistics Service next week will report on industrial output indicators over the nine months of 2019.

Dmytro Buniak

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