Ukraine parliament approves promissory notes for state budget

Ukraine’s parliament approved on July 4 a law allowing the government to issue promissory notes to restructure state budget arrears as of Jan. 1, 2013, as well as restructure VAT compensation for those who agree to it. The promissory notes can be issued for up to five years, with a fixed interest rate of 5%.

The state budget’s payables amounted to UAH 4.3 bln as of Jan. 1, 2013. Yet the even bigger debt hole is the planned compensation of VAT from the state budget, which amounts to UAH 59.5 bln in 2013.

Alexander Paraschiy: While the payment of budget arrears via promissory notes is better than no payment, we see more risks for Ukrainian economy from this move than benefits. First, the notes only serve to postpone the budget deficit. Second, being forced to choose between VAT compensation in cash or promissory notes could encourage bribery of state officials to gain the former.

On top of that, it is not clear whether the notes will be liquid enough and whether companies will be able to use these notes to pay their taxes (e.g. VAT). If this is allowed, eventually the state and business will return to the barter-type economy of the 1990s, and the state budget will ultimately have no additional cash flow from the notes in just a couple of months after their release.