Ukraine deficit surges to UAH 2.3 bln in February

Ukraine’s state budget deficit reached UAH 2.3 bln in February, in contrast to a UAH 4.7 bln surplus a year ago. State budget revenue increased only 5.2% yoy while spending surged 20.9% yoy. Social outlays (+44.6% yoy) were among the key reasons for the spending binge kicking off the year.

Alexander Paraschiy: It’s not typical to see a large budget deficit in the first months of a new year. Traditionally, the Cabinet prefers to run surpluses at the year’s start to test how strong state revenues are. Yet owing to a high level of recurrent spending, the deficit started swelling already in January-February.

The structure of state revenue growth is particularly disturbing. Against the backdrop of a 14.4% yoy VAT collections slump (net of VAT reimbursement), increased advance enterprise profit tax collections (+23.1% yoy) and administrative mobilization of non-tax revenues (own revenues of budget organizations doubled for the first two months) were the key supports for budget revenue. The reported growth, therefore, does not look sustainable.

In other words, we see feeble revenue growth (underpinned by administrative levers) on the one hand, amidst accelerating spending growth, particularly on social programs. If Ukraine’s economic performance does not improve, this mixture might result in a much higher deficit than government targets (3.0% of GDP). We still assume the state deficit won’t exceed 3.0% of GDP since the NBU is very likely to keep supporting the budget with direct cash injections.