Ukraine working with IMF to cut 2021 budget deficit, PM says

Ukraine is currently convening negotiations with the
IMF to “somehow decrease” the planned 2021 budget deficit, the cabinet website
said on Sept. 25, citing PM Denys Shmyhal. The current plan is for a UAH 270
bln deficit in 2021 (6.0% of GDP) after a planned UAH 298 bln deficit in 2020
(7.5% of GDP). The latest memorandum with the IMF, signed in June, stipulates
that Ukraine’s budget deficit will be 5.3% of GDP in 2021, which is UAH 239
bln, based on the government’s latest GDP forecast.

Alexander Paraschiy: The
initiative to cut the planned budget deficit definitely comes from the IMF, not
Ukraine’s government. This means the IMF is not willing to tolerate that high
Ukraine’s budget gap for the next year, which in fact could become even higher
than the actual deficit for 2020. This confirms our expectation that the IMF is
unlikely to conduct the first review of its program with Ukraine and provide
the second tranche under the program until Ukraine shows and adopts an
affordable budget for the next year. That’s even though the budget’s adoption
is not an explicit precondition for the tranche.

Recall, the IMF was planning to provide the second
tranche under its SBA program with Ukraine in September (about USD 700 mln).
Also, the E.U. is awaiting a positive signal from the IMF to provide its
macro-financial assistance tranches for Ukraine in the amount of EUR 1,200 mln.

Interestingly, on the weekend, some MPs registered a
draft law to increase the 2020 budget deficit by UAH 19.6 bln to UAH 318 bln
(8.0% of GDP) in order to finance the capability of the state-controlled
electricity market operator to pay its bills to renewable electricity
producers. While such bill have a low chance to be approved, it illustrates the
general mood of Ukraine’s lawmakers, who are more interested in increasing
rather than reducing the budget deficit.

Moreover, it illustrates a risk of the re-emergence
of quasi-fiscal deficits in Ukraine caused by inefficiencies on regulated
markets, a phenomenon not seen since 2017, after the reform of Naftogaz took
effect.