Zelensky initiates minimum wage hike

Ukrainian President Zelenskiy is preparing to submit
to parliament a bill to implement a planned hike of the monthly minimum wage to
UAH 5,000 starting on Sept. 1, President’s Office deputy head Yulia Kovaliv
told a press briefing on Aug. 6. Parliament might approve the bill at a special
session in August, she noted.

Budget amendments proposed earlier this year plan for
outlays related to minimum wage hike to be financed mostly by the “savings”
gained from reduced outlays on debt servicing.

The recently approved government macroeconomic
forecast assumes two more minimum wage hikes in 2021, to UAH 6,000 and UAH
6,500, Kovaliv said.

Evgeniya Akhtyrko: The monthly
minimum wage hike to UAH 5,000 from the current UAH 4,723 starting Sept. 1 will
not do much for improving the well-being of the population. Instead, it will
definitely involve additional budget outlays, as the wage scale of state
workers, budget-financed entities and some state-owned enterprises is closely
tied to the minimum wage.

Such budget amendments of doubtful usefulness from a
fiscal viewpoint – during a year of economic recession
and already ballooned budget deficit –
are hardly justified, especially for a country that is heavily dependent on IFI
financing . At the same time, they might generate some votes for The People’s
Servant party in the October local elections.

Therefore, this rushing initiative is purely
populistic move of the Zelenskiy administration in the attempt to improve its falling popularity prior to the
local elections scheduled for the late October.

The announced government plans of two-stage minimal
wage increase in 2021 are even more malicious. Firstly, the increase of the
minimal wage by 20-30% will result in significant increase of budget
expenditures. And we do not see any ways the government to afford this
increment but to keep the budget deficit high (perhaps, far beyond the IMF
guidance of around 3% of GDP). 

Secondly, the intensified increase of nominal wages
will intensify private consumption with subsequent surge of inflation. The
increased consumption is also likely to increase the demand for imported
consumer goods which subsequently result in the deterioration of the trade
balance. Thirdly, as a result of the imposed increase wages the producers will
have to increase their labor and tax costs, and this will leave them with less
money for investments.