Finance Minister Serhiy Marchenko: Our main scenario is cooperation with the IMF

Serhiy Marchenko took the lead of the Ministry of Finance on March 30, 2020, at the onset of a challenging coronacrisis period. In an interview with UNIAN, the minister spoke about the progress in negotiations with the IMF, his vision of pension reform, the ministry's plans for the year, and features of the latest affordable mortgage program.

How would you assess the situation with public finances today? Are there any risks of non-fulfillment of the national budget?

The situation with public finances remains stable. In case no force majeure happens, we will meet the revenue target. Active negotiations with the IMF are underway. I hope that in the near future we will finalize talks and reach a common understanding of how we should move forward.

In terms of revenues, the budget is rather tight, but at the same time realistic. Our January results confirm this point. After all, the actual revenues to the general fund exceed the target by UAH 3.5 billion. The overfulfillment is due to the tax service (UAH 3.4 billion), while the main thing is domestic VAT. Revenue growth off this tax in 2020 stood at 132.4% on year. That is, we have significantly increased VAT inflows. This positive dynamic is our main result, which has been strengthening Ukraine's public finances since last year. The base for this is de-shadowing. I emphasize that, if no unexpected decisions are taken, I see the end of the year quite optimistic, because we started the year with a record high balance in treasury accounts compared to the corresponding periods in recent years (UAH 71 billion). We'll be seeing the peak of public debt payments in September this year. The situation is completely under control and does not cause concern.

The Cabinet recently approved the annual rise in pensions for all categories, starting 2022. This year, additional payments are provided for retirees over 75. The prime minister also announced higher salaries for medics and teachers. At the same time, the increase in utility tariffs provokes higher subsidies. Is the budget ready to cover such expenses?

Indexation of pensions is being discussed. It is desirable that this be within budget allocations, so as not to create additional risks. As for educators – expenditures have been laid down in the budget. As for medics, quarterly results will m clarify the situation. COVID-19 designates the current trend toward medical funding. Last year it was quite chaotic, but we boosted medical expenses by more than UAH 85 billion. And we support this pace.

As for the subsidies… Following this heating season, we will draw preliminary conclusions. We're seeing no critical issues for the time being.

Is it already possible to assess the impact of the January lockdown on Ukraine's economy?

We are inclined to partner estimates: the NBU estimates such impact at 0.1-0.2% of GDP. Most economic agents have adapted. Meanwhile, December payments yielded a positive effect on the situation. The main consumer demand was actually met prior to lockdown. The actors had the opportunity to prepare in advance, while the government offered a certain safety cushion.

Let's return to negotiations with the IMF. Is it possible to make any predictions about the next tranche? How do international partners assess progress in the implementation of structural beacons?

Negotiations are calm. New issues arise, including government regulation on the gas market. The parameters of how this should be agreed with the IMF are now being worked out. There are still some older issues – anti-corruption structure, NAPC [National Agency for Prevention of Corruption], NABU [National Anti-corruption Bureau], and judicial reform.

There are some structural beacons unresolved from last year regarding the law on banks and banking. Instead, the government ensured transition of tax and customs agencies to operations from single HQs from January 1. This beacon has been checked. The decision was made to liquidate tax police, so this point has been fulfilled as well, so to speak. We are in discussion with the IMF on 2022 budget parameters: how to consolidate the budget to get to 3.5% of the budget deficit.

Are there any deadlines for Ukraine to receive the IMF tranche, after which we could face problems? How will this affect this year's debt payments?

We were supposed to receive the tranche in August last year. We did everything possible to this end. For reasons beyond the control of the Finance Ministry, this never happened. Nevertheless, we have fully complied with our commitments, first and foremost to service and repay our debts. These are protected expenditures, and there is no reason to believe that this will affect the government's ability to service its debts.

But, of course, our main scenario is cooperation with the IMF. This course allows us to expect continued cooperation with the World Bank and the European Commission. It's a question both of receiving credit assistance and of a more loyal attitude to Ukraine in general. This will allow borrowing at lower yields, increasing the value of our bonds and, accordingly, reducing the country's debt risks. The Ministry of Finance is ready for any scenario, but we confidently hope to minimize any risks. The Stand-By Arrangement is designed for 18 months, due to complete in December this year. Therefore, by year-end, we plan to receive funds from the IMF under the current arrangement.

Photo from UNIAN, Viktor Kovalchuk

What other international partners are expected to help the country in case things work out with the IMF?

The second tranche of EU macro-financial assistance (EUR 600 million) is linked to our continued cooperation with the IMF.

Since last year, we have also been expecting two $350 million DPL tranches from the World Bank. The other day I talked to the World Bank chief representative in Ukraine. We discussed the terms of allocations. As for the first tranche, it is a staff level agreement with the IMF. And for the second tranche, it's the adoption of a package of agriculture-related laws, which, in principle, is realistic. The Verkhovna Rada will meet for a plenary session in a week. Therefore, there is a chance these bills will be considered so that we could get the two tranches worth $700 million from the World Bank.

You have previously announced plans to cease borrowing from the International Monetary Fund in the coming years. Is it really possible? At whose expense?

It's about lending to the budget. This is a realistic situation, as the option of the IMF lending to the budget is not typical for the Fund. It is more understandable and acceptable to move to the situation where IMF funds replenish NBU reserves, being mostly aimed at maintaining the balance of payments. We have calculations at hand to consider the possibility of abandoning in 2023 loans directly to the budget. We will do everything necessary to this end throughout 2021 and 2022.

What is the situation in customs and tax agencies? Are there any success stories in the fight against smuggling and VAT evasion, which were high on the agenda last year?

We are satisfied with the performance of tax authorities over the last year – target indicators were exceeded by almost UAH 50 billion despite decline in economic dynamics. Due to de-shadowing and the fight against fraud, the agency managed to cope with their task.

The situation with customs is more complicated. Personnel reshuffles took place. We weren't happy with their leaders' work due to the fact that the requirements for the implementation and even overfulfillment of budget indicators were not fully met. And at the same time there are also requirements to reform the agency, which is highly sensitive to corruption. In particular, it's about eradicating smuggling. I'm not going to cover up these negative things and say that everything's fine there.

There is a fairly objective indicator to assess customs performance – the ratio of incoming turnover and revenues to the budget. There were times when such indicators were just fine. But they were unstable. This proved that changes were needed there. And we pursued, despite the fact that it was politically difficult. But facts are out there and we only need to look at the result – whether it's egood or bad.

Indeed, this is our zone of ​​responsibility, in particular with regard to staff rotations. Now a new leader has come in, a team has been formed, and there is hope that they will succeed.

Are you now satisfied with the new customs chief?

It is too early to assess his work. In January, the targets were met in full. Let's see how things will go in February and March. Everything is in their hands.

Recently, President Zelensky stressed the need to accelerate customs reform. How is this reform going on right now, what has been done, and what are further plans?

The customs reform plan has been agreed with international partners. This is actually a strategic document drawn the Ministry of Finance – our roadmap for the transformation of customs authorities. First of all, it is about launching the format of a single legal entity from January 1. We've already done that. An experimental project on testing qualifications and integrity of customs officers has been launched. A mechanism for unifying import duty rates on light industry goods has been developed. The program of the authorized economic operator (AEO) has been launched – the first application for granting AEO authorization has already been accepted from one of the enterprises.

A pilot test of the national electronic transit system has been underway since November 16. From November 7, the possibility of submitting a general declaration of arrival by carriers has been introduced, as provided by the Customs Code of Ukraine and the EU Customs Code. A pilot project on automatic clearance has been in place since May, which allows for the automated release of goods under the appropriate customs regime without physical participation of a customs official.

We are experimenting, implementing various innovations, but I'll say this again – this is just the beginning. The requirements for customs are quite serious. They are not only on the part of the government – the president has taken the issue of customs under personal control.

Photo from UNIAN, Viktor Kovalchuk

The government is set to introduce next year the second level of pensions. Many experts criticize the decision due to the lack of tools for effective investment of long-term savings, as well as people's distrust of private pension funds. On the other hand, there's the perpetual deficit of the Pension Fund and the growing number of retirees. How do you assess the chances of this reform? Will it work in Ukraine?

All bills currently registered in the Rada fail to solve the key task. Pension reform cannot be fragmentary where some offer a third tier of the savings system and some talk about the second. That's besides the fact that we have an unresolved issue of what to do with the solidarity system, with pension supplements, with various current formats of pension accrual. Therefore, I'm skeptical of the existing innovations and proposals.

The team of the Ministry of Finance, together with the World Bank, is working out a systemic solution. We need to understand how to get an effective cumulative element in 2030-2040, when to implement it, and what needs to be done with existing systems. In addition, we have to index pensions and ensure decent payments to current retirees.

Besides, we have a deficit of the Pension Fund at UAH 195.6 billion, and constantly growing as some are willing to raise pensions at the expense of the national budget. So this is a comprehensive solution that we will discuss with the public and experts. We have to offer an option for which we will find compensators, for example, of the second tier. It is possible, for example, through government bonds financing instruments. We are not considering other options yet.

It should be understood that the savings system is not for current retirees. We have to protect them and provide them with decent pay. But to say that current retirees or those who have to retire in the next 10 years may be interested in the cumulative element would be self-deception. Such a mechanism should be of interest to today's most active economic category. But a significant part of it, unfortunately, is not ready to pay a single social contribution, they don't understand why it is necessary, and in general, they don't see themselves as future retirees.

How do you plan to implement the new "Affordable Mortgage" program? Who will have access to it?

It was decided to introduce a mortgage at 7% in parallel lines with the current business "5-7-9" lending program at the expense of the Entrepreneurship Development Fund. We are currently discussing the issue, because, unfortunately, we don't have a mortgage market yet, only creating its certain segments.

It is important to create some economic dynamics, to introduce incentives – the development of new housing construction as a key project idea. We understand that we have to give a certain impetus and resource to the current mortgage system, too. The configuration can still be changed, various options are on the table. But the key markers include the 7% rate, mortgage cap at UAH 2 million, the term of up to 20 years, and down payment of 15% of the value. There is a regulatory area given the number of family members. We consider the primary and secondary housing markets. We are ready to discuss the issue with the banking community, so that the first soft loans could be issued in the near future.

We strive to create conditions to have part of the risks transferred from banks to government. This is a realistic project, we have enough resources, so we're moving in this direction.

Will this mortgage be available to any family or are there any criteria?

The criteria are provided by the current resolution. First of all, we are talking about internally displaced persons, teachers, doctors, public sector workers, young families in need of better living conditions, residents of dormitories and houses in emergency condition. But in the future we strive to abandon categorization and provide an opportunity for all citizens to take advantage of affordable mortgage.

In general, we see global challenges in the development of affordable mortgage. This, in particular, is about the introduction of new financial instruments, stimulating competition among financial service providers, which will affect further reduction of interest rates.

The Verkhovna Rada passed a law establishing the Bureau of Economic Security. What will it bring Ukraine?

The idea is to minimize pressure on businesses. This body will be coordinated by the Cabinet of Ministers. By the way, establishing a financial investigation body is part of Ukraine's international obligations, including before the IMF. It is envisaged to optimize the structure of law enforcement agencies, their material and technical base, to introduce new analytical approaches to combating financial crimes in order to prevent them, not to allow budget losses, as well as to minimize unfair competition.

But the main thing is not to create another monster that would investigate crimes in the economic sphere, while maintaining the influence of other existing law enforcement agencies. This is the biggest risk we must avoid. I expressed my opinion publicly prior to the adoption of the new law – we supported the creation of an analytical department in the system of the Ministry of Finance. But this is no longer relevant, because the law has been passed. Now we have to eliminate tax police.

How do you assess the situation on the foreign exchange market? Now the hryvnia is strengthening, but for how long will the trend prevail?

This is a typical seasonal strengthening of the hryvnia. Before the sowing campaign, we usually exchange currency to buy fuel, fertilizers, and seeds. Remember, two weeks ago there was another trend.

I recommend that people not pay attention to small fluctuations. There is every reason for the rate to be stable. It was just as stable last year, despite crisis. There was a speculative attack in March, before the introduction of quarantine, but it was a temporary phenomenon. National Bank reserves are sufficient to maintain the exchange rate. I see no reason for the deterioration of exchange rate dynamics.

Photo from UNIAN, Viktor Kovalchuk

What are the main plans for the Ministry of Finance for 2021?

We are currently updating the ministry's Strategy we've developed last year. Many tasks have already been completed, but now we're facing new challenges. Among this year's main tasks is to search for a conceptual vision of pension reform with budgetary compensators, recalibration between local and state budgets, and finding a formula of when, how, and for whom we're doing it.

An important element is the creation of the National Debt Agency. I'm proud to acknowledge that we have the best debt market specialists in Eastern Europe. Almost every public transaction with which Ukraine enters international capital markets receives the highest recognition from reputable international outlets. The National Debt Agency will be able to apply public debt management tools more comprehensively and effectively and, as a separate central executive body, won't be dependent on political factors, which is important for increasing investor confidence and predictability of public debt management processes in the long run.

We will also continue to implement our medium-term budget planning – we are already working to draft the Budget Declaration for 2022-2024 as a strategic paper that will become the basis of the national budget for 2022. Besides, we're creating a basis for developing medium-term local budget forecasts.

In the first half of the year, we will come up with a package of initiatives to amend the Tax Code. First of all, they will be aimed at addressing legislation gaps that still allow tax evasion. But rest assured that we plan no innovations that would be too drastic.

We harbor plans to boost budget funds efficiency: we will change approaches to funding higher education and social support. Our task is to protect budget funds from risks of misuse. To this end, we have a mechanism for preventive verification of government payments, aimed at ensuring that the ultimate recipients are precisely those who really need help. The State Audit Office will also check the use of COVID Fund disbursements.

In addition, we plan to create at the Tax University a modern scientific and educational hub based on the best world models. We want this university to become one of the flagships of changes in the educational environment. This is a quality field for successful transformation. We must create conditions for graduates to form the core of human resources for the finance ministry, tax, customs, and other government agencies.

Kateryna Zhyriy

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