Ukraine 2016 budget assumes 2% GDP growth, 12% inflation

Ukraine’s Finance Ministry registered on Sept. 14 the 2016 draft budget with parliament, which plans for 2% GDP growth, 12% inflation and nominal GDP at UAH 2,262 bln. The Finance Ministry emphasized that the draft budget was developed based on the current tax rules, which it expects to be changed in line with the currently discussed tax reform. Also the draft does not reflect the debt restructuring deal, which still has not been formalized. Against this backdrop, the Finance Ministry withdrew the draft budget from parliament the same day it was submitted, thus only formally fulfilling the deadline requirement set by the budget code.

Alexander Paraschiy: This formal submission and withdrawal of the draft budget was widely expected. The Finance Ministry stated openly that the spending plan won’t be ready by Sept. 15. Tax reform and debt restructuring are not the key reasons though. The main problem is that in 2016, the budget will lose up to 10% of its current revenues, we estimate. Specifically, the 2015 budget will have benefitted from UAH 60.5 bln of NBU profits that were generated in 2014 on the back of hryvnia printing. Those “profits” will be at least twice as less in 2016. What’s more, in 2016 the interim additional import duty will be abolished after revenue from this temporary measure will have exceeded UAH 20 bln in 2015. Moreover, a large chunk of the 2015 revenue stemmed from a 3G license sale (UAH 9.0 bln), a one-shot deal. 

Against this backdrop, the Finance Ministry faces a tough dilemma on how to meet the IMF requirement to reduce the state budget deficit to 3.7% of GDP (from 4.2% of GDP expected this year) while losing revenue. The intention to pass tax reform has only complicated the task. In this context, we do not expect any real spending plan released before the local elections (Oct. 25) and very likely the parliament will be voting to approve the final 2016 budget on New Year’s Eve, just as it had last year.