Ukraine targets 2016 fiscal deficit at 3.7% of GDP

The Ukrainian government targets general budget deficit at 3.7% of Ukraine’s GDP in 2016, according to the updated IMF memorandum released on August 4.  For 2015, the Finance Ministry committed to meet 4.2% of deficit to GDP ratio.  At the same time, Naftogaz deficit was promised to shrink to 0.2% of GDP in 2016 compared to 3.1% of GDP in the current year.

Alexander Paraschiy: The Ukrainian government and the IMF forecast improvement of the economy with subsequent strengthening of fiscal parameters in 2016.  In fact, narrowing the overall budget deficit by a mere 0.5% of GDP is not a big deal in the case of Ukraine.  In fact, increased outlays on housing subsidies in 2016 on the backdrop of a projected decline in NBU profits wired to the budget (due to reduced revenues from the printing of hryvnia in 2015) are the key factors behind the modest changes in the fiscal deficit.

At the same time, it will be a huge achievement if the Cabinet of Ministers finally manages to narrow down the deficit of Naftogaz to a negligible 0.2% of GDP in 2016.  Recall that the target of the Naftogaz deficit is conditional on the hike in heating tariffs in 2016.  In light of growing tension in society in response to the sharp hike in heating tariffs, there is a high risk of further leveling of energy prices.  On this backdrop the targeted 3.9% fiscal gap of GDP (including Naftogaz) versus the 7.3% of GDP this year is quite an ambitious goal, we believe.