Week’s balance: Melting forex, taming inflation and fighting subsidies

Ukraine’s finance ministry presented the main budget parameters for the next year, the inflation in annual terms slowed to a two-year-old level, and the National Bank significantly eased forex restrictions - these are the main economic news of the past week.

One of the most significant events of the past week was the long-awaited significant softening by the National Bank of its foreign exchange restrictions imposed back in 2014 year in order to reduce devaluation pressure on the exchange rate. From June 9, the regulator doubled the limit of cash foreign currency purchase by individuals to the equivalent of UAH 12,000 per day, which is about $480.

The NBU also simplified the paperwork on forex transactions. When buying foreign currency, individuals will still be required to present an ID, but now the banks are only obliged to make its photocopy if a transaction is worth over UAH 150,000.

In addition, the regulator allowed banks from 15 June to change purchase and sale rates within one banking day. This will reduce short-term volatility risks that may arise for the banks, hence reduce the spread between the purchase and sale rates.

The central bank has also reviewed the limit on the amount of cash that can be withdrawn from the accounts. From now on, bank customers may withdraw twice as much cash in foreign currency – up to UAH 100,000 a day. At the same time, all limits on the withdrawal of cash in the national currency have been lifted.

The regulator also made life easier for the businesses. The norm of compulsory sale by exporters of foreign exchange earnings in the interbank market decreased from 75% to 65%.

Another easing is that foreign investors, finally, will be able to receive dividends for 2014-2015. However, the limit has been set of UAH 1 million per investor per month, 10% of the total amount of dividends to be paid, but no more than UAH 5 million.

According to the NBU, this decision will, on the one hand, satisfy the need of foreign investors for the repatriation of dividends, on the other – it will not impose excessive pressure on the interbank foreign exchange market.

The National Bank further intends to allow the repatriation of dividends for previous years - before 2014, as well as for 2016.

Experts and business appreciate such "generosity" of the central bank and consider it a significant step toward the liberalization of stringent administrative measures.

"The latest easing of foreign exchange restrictions by the NBU is finally strongly reminiscent of their total absence," said first deputy head of the Board of Privatbank Oleh Gorokhovskiy.

According to economists, the National Bank's actions should have a positive impact on expectations of businesses and the population, gradually returning confidence in the banking system and promoting the inflow of deposits.

However, experts warned that liberalization will lead to a slight increase in the volatility of the national currency. But by far, the hryvnia has not reacted to the NBU decision retaining its position at UAH 25 / USD.

Inflation comes back to normal

For the second consecutive month, there is a one-digit inflation in annual terms / www.zaimo.pl

The relative exchange rate stability helps slow down the rise in prices. Last week, the State Statistics pleased the experts announcing inflation indicators. For the second consecutive month, we have a one-digit inflation in annual terms. According to calculations, inflation in Ukraine in May compared with the previous month slowed to 0.1%, which in annual terms was down to 7.5%.

"Inflation has slowed dashingly, as we’ve been seeing one-digit inflation for the second consecutive month. In May, the rate has slowed to 7.5% in annual terms. This is a huge contrast with 61% in April 2015. Due to tight monetary policy and the effect of administrative restrictions, the rise in prices was slowed down," said Vitaliy Vavryshchuk, chief of the financial stability department at the National Bank of Ukraine.

But despite such a swift deceleration in price growth, the regulator has kept the inflation forecast for 2016 at 12%. The NBU said that the National Commission in charge of regulation in the energy sector and utilities nearly doubled the tariffs for thermal energy and central heating services for the households, which will affect the level of inflation. However, the central bank has pledged to continue lowering the discount rate given further decline in consumer inflation.

The regulator also has kept the country's economic growth forecast at 1.1%, stressing that the macroeconomic risks had decreased and that Ukraine had returned to a phase of macroeconomic growth.

The World Bank in its recent Global Economic Prospects report agrees with the NBU’s forecast.

Following steep price increases in 2014 and 2015 associated with the devaluation of the hryvnia and price reforms, inflation slowed as the currency stabilized, enabling a lowering of policy interest rates to 18% in May, as noted in the report. The western part of Ukraine is not directly hurt by conflict and restored, say the analysts.

Overall, the World Bank has maintained its forecast for Ukraine's economic growth in 2016 at 1%. World Bank analysts insist the country will be able to see growth of 2% no earlier than in 2017.

Cabinet’s plans for 2017

The Government has drafted a budget resolution for 2017 / Photo from UNIAN

Ukraine’s finance ministry last week presented its preliminary macroeconomic outlook for the next year, which will be the base for the state budget.

When forming the budget resolution for 2017, the ministry laid the economic growth of Ukraine at 3% with an inflation rate of 8.1% and the exchange rate of hryvnia at UAH 27.2 per dollar.

"GDP growth - 103 [percent to the current year], inflation at 8.1%, the hryvnia exchange rate at 27.2 [UAH per dollar]," said Minister of Finance Oleksandr Danylyuk when presenting the resolution.

Meanwhile, the government did not approve the final version of the budget resolution. Although the finance minister the day before the cabinet meeting said that the draft was completed. But at the meeting, Danylyuk asked to withdraw the draft resolution from the agenda saying the paper should be further reviewed and approved by the MPs and members of the government committee.

"I think the resolution will be submitted to the Cabinet the next week, and in then to parliament," Danylyuk said, adding that the earlier developed resolution does not meet the principles of the three-year budget planning, which the finance ministry intends to implement. "I will further insist that the whole of the budget process be built in a new way," said Danylyuk.

By the way, the Cabinet of Ministers last week approved the establishment of a so-called "Black Hundred," an interagency group aimed to take control over the situation at the customs and stop the endless smuggling flow. The Black Hundred will include 20 mobile groups of four-five people each. They will inspect the borderline trails long-favored by smugglers and monitor compliance with legislation by customs officials. The head of the Black Hundred will earn UAH 50,000 a month, chiefs of the mobile teams will get UAH 40,000; while regular officers will boast a UAH 30,000 monthly salary. Presumably, the government believes that such wages will attract the best officers and negate corruption risks.

According to forecasts of the head of the fiscal service, Roman Nasirov, mobile teams can become fully operational as early as in two weeks after the adoption of the corresponding resolution. If their fight against corruption at the customs and smuggling is successful, the budget will see the additional UAH 50 million, according to the government’s calculations.

Energy efficiency in spotlight

Volume of subsidy payments increases due to inefficient consumption / Photo from UNIAN

A meeting of the National Council of Reform last week was dedicated to energy efficiency. The level of state budget expenditures on housing subsidies in the past two years has been growing rapidly. The finance ministry projects they may reach 3.8% of GDP by 2017. According to the estimates by Berlin Economics and McKinsey, the cost of paying housing and utility subsidies to the population in 2017 could rise from UAH 35 billion in 2016 to UAH 80 billion in 2017.

The main reason for the growth of payments is inefficient consumption, which is thrice as high as in the EU countries, as well as low incomes of the population.

"The current system of subsidies does not contain enough incentives for the people to take part in energy efficiency initiatives," the finance ministry says.

According to the government, energy efficiency measures must be taken in respect of 15 million households, or almost 90% of Ukrainians.

In view of this, the National Council of Reforms decided to establish the Energy Efficiency Fund, which should become operational before the end of the next heating season. Head of the Supervisory Board of the Fund will be the representative of a European bank. The Fund will be financed by the state, international partners and lending institutions.

Among the Fund’s objectives is the development of a technical framework, energy efficiency assessment of buildings, as well as the calculation of measures to ensure maximum savings for each individual household. In addition, partial monetization of subsidies is stipulated, so the people will be able to allocate the savings for upgrading energy efficiency.

According to President of Ukraine Petro Poroshenko, the programs of introduction of energy efficient technologies in Ukraine’s industry and household sector will make it possible in the medium term to reduce annual imports of natural gas to 1-1.5 billion cubic meters and reduce government spending on subsidy payments to the most vulnerable segments of the population by an average of UAH 3-5 billion a year.

The President pointed out that the introduction of energy efficiency technologies in Ukraine will not only save resources, but also create new jobs and increase tax revenues.

Ksenia Obukhovska (UNIAN)

UNIAN in Google News