Week's balance: Cabinet submits budget draft to Rada, Zelensky promises "human" salaries and pensions, while hryvnia keeps weakening
The Cabinet of Ministers submitted to parliament the draft state budget for 2021, which provides for a budget deficit of 6% of GDP, President Zelensky promised Ukrainians to raise salaries and pensions to the "human level", while the hryvnia continued to lose ground – these are the key economic developments of the outgoing week.
This week kicked off the process of passing the law on the state budget for 2021. It is obvious that the work on the budget in the year of the acute economic crisis will be very difficult.
On Monday, the Cabinet of Ministers approved the draft law "On the State Budget of Ukraine", while two ministers – of health and environmental protection – refused to support the document.
On Friday, Finance Minister Serhiy Marchenko presented the bill to the Verkhovna Rada, and parliamentarians accepted it for consideration, with some sharp criticism on the part of people's deputies.
The government proposes to set state budget revenues in 2021 at UAH 1.071 trillion, expenditures – at UAH 1.350 trillion, and the maximum deficit – at UAH 270 billion, or 6% of gross domestic product.
The draft state budget for 2021 is built on a very bold forecast of GDP growth at 4.6%, as well as a 7.3% inflation, an average annual hryvnia rate of UAH 29.1 to the dollar and an average monthly salary of UAH 13,600.
In the meantime, in the first half of 2020, the Ukrainian economy fell by 6.5% due to the coronavirus crisis, and the government expected a 6% drop in GDP by the end of 2020. Now, taking into account the indicators of September 2020, who can give guarantees that next year the country's economy will be able to reach a growth level of 4.6% , especially since the "storm" in the global economy is only gaining momentum, and many countries have begun to return again to a tough quarantine option?
"Realistic and balanced"
Presenting to the deputies the draft 2021 Budget, Finance Minister Serhiy Marchenko called it "realistic and balanced." According to the minister, the main priorities are raising the minimum wage to UAH 6,500, ensuring high-quality education, affordable healthcare, and allocating funds to fight the coronavirus, including for vaccinations.
The document also provides for financing the government's priority program "Big Construction". The security and defense budget will amount to UAH 267.2 billion, or 5.93% of GDP against the current 5.45%. The bill also proposes to allocate UAH 4.2 billion to support Ukrainian farmers. To fight the main challenge of today – the COVID-19 pandemic – the government laid down UAH 19.4 billion, of which UAH 2.6 billion will go for vaccine purchases.
In addition, the draft state budget for 2021 provides for expenditures of UAH 2 billion for one of the president's main programs, "Affordable loans 5-7-9."
It also provides for the allocation of UAH 10 billion for portfolio guarantees, according to which the state will cover part of the loans that are issued to small and medium-sized businesses.
A significant part of budget expenditures, UAH599 billion, will go to repay and service the state debt, of which UAH 439 billion will be used to pay off the debt, and UAH 160.5 billion – to service it.
Criticism by businesses and experts
Experts and a number of politicians did not share the government's optimism. The main complaint is the huge budget deficit, which will have to be covered by new expensive loans.
According to the deputy director of the Center for Economic Strategy, Maria Repko, in the current situation of the global economic crisis, it would be more logical to have a budget deficit within 3%.
"Financing such a deficit would mean building up public debt, and that debt would be expensive. After all, there will not be enough cheap funds from institutional creditors to cover it, while we still need to pay off debts of past years. With such debts, the total need for financing will amount to more than UAH 555 billion, or approximately $20 billion," the expert noted.
Yaroslav Zheleznyak, first deputy head of the parliamentary committee for finance, tax and customs policy, sees the submitted project as a "wastefulness or survival" budget. Also, he compared the government to "an alcoholic who keeps borrowing as long as people give them money."
"Our state will spend UAH 270 billion more than it earns next year. This means that we are going into debt again. This means that our children and we will have to pay back in the coming years by having taxes and different tariffs raised, our salaries and spending on teachers lowered. This means that we live in debt," MP stressed.
Svitlana Mikhailovska, Deputy Director of the European Business Association, noted that business regrets to see some of the norms laid in the budget. Also, businesses are interested in the sources the government plans to use to fill the budget. After all, there are warnings that taxes will increase on businesses, which seems completely illogical in the times of crisis, when entrepreneurs are already struggling to stay afloat.
"Human" salaries and pensions
Last week, President Volodymyr Zelensky promised that in a few years Ukraine will reach an adequate, "human" level of wages and pensions, "even if it will be very difficult, hard for us."
During his trip to Lviv region, Zelensky noted that the 2021 budget set a task to increase salaries for scientists, teachers, medics, and, as far as possible, pensioners.
Also, in the outgoing week, the government approved March 1 as the date of the annual indexation of pensions. "We envisage that pensions will be indexed for more than 9 million pensioners but approximately 8 million pensioners will receive an increase," said Minister of Social Policy Maryna Lazebnaya.
Opening data and dealing with useless documents
Last week, Deputy Prime Minister, Minister of Digital Transformation Mykhailo Fedorov promised to put Ukraine into TOP3 of the world leaders in terms of data openness, just in three years. According to him, the Ministry of Digital Industry is now working on creating a relevant portal.
"I really want it to be in English as well. So that investors can see and analyze information," he said.
In addition, the Ministry of Digital Development plans to launch a national project on the elimination of useless paperwork for citizens to get public services, and in October – to present an updated version of the Diia mobile application for e-documents. The application will feature over 10 new electronic and mobile services.
In particular, the Ministry of Finance plans to introduce the possibility of online registration of a new place of residence and automatic notification of military enlistment offices if a potential draftee moves to another place of residence. Moreover, by the end of the year or early next year, it is planned to introduce an automatic service of registration of an individual entrepreneur in the Diia application.
"So that after citizens apply, the system automatically makes a decision on the registration of an individual entrepreneur, making changes to his entrepreneurship status or canceling it," said Deputy Minister of Digital Transformation Oleksiy Vyskub.
In the outgoing week, the hryvnia continued its weakening. As a result, on Monday, September 21, the National Bank set the official hryvnia exchange rate at UAH 28.17 per dollar, down by another 6 kopiykas.
Head of the NBU Council, Bohdan Danylyshyn, considers the situation on the national currency market predictable, being closely monitored by NBU experts. He says that in the last days of summer on the interbank market, the demand for non-cash foreign currency on the part of bank clients has increased, which may indicate higher devaluation expectations among businesses amid the uncertainty with the COVID-19 spread and the possibility of new bans being set in Ukraine.
In the medium term, the head of the NBU Council believes, the depreciation of the hryvnia will have a positive effect on leveling the balance of trade in goods. According to Danylyshyn, the National Bank has so far refrained from interventions to sell foreign currency on the interbank forex market. However, if necessary, it will provide a sufficient supply of foreign currency to balance supply and demand.
Next week, President Zelensky will continue his working trips around the country, while the State Statistics Service will report on the results of the industrial performance in August.