Ukraine 2018 state budget approved with 2.5% of GDP deficit

Ukraine’s parliament approved the second reading of
the 2018 state budget on Dec. 7 with revenues rising by UAH 36.6 bln from the
first reading to UAH 913.6 bln. Spending increased by UAH 40.5 bln compared to
the first draft to UAH 988.6 bln. The deficit grew to UAH 81.8 bln (2.5% of
GDP) from UAH 77.9 bln (2.4% of GDP) in the first reading.

The budget’s forecasted macro-parameters were also revised
in the second reading. Inflation was revised upwards to 9% from 7% initially in
what translated into higher nominal GDP, or UAH 3,332 bln vs. the UAH 3,248 bln
projected previously. However, the real GDP forecast remains unchanged at 3.0%
yoy growth.

Budget revenue was revised higher on the back of
stronger state owned enterprise profits (UAH 13.9 bln higher), enterprise
profit tax (UAH 9.5 bln higher), a 4G license sale (UAH 6.3 bln higher), and
revenue from confiscations (UAH 4.7 bln higher).

The main part of the spending increase was allocated
on interbudget transfers (UAH 29.4 bln higher than in the first reading) and on
housing subsidies (UAH 13.2 bln higher). The privatization target (UAH 22.5
bln) remains unchanged.

Alexander Paraschiy: Despite the
revisions, the approved budget is very close to what was initially approved in
the first reading. The increased revenues are more administrative-based (state
enterprise profit, 4G license sale), meaning that for those collections
everything is in hands of the Cabinet. The deficit grew but still remains
within the limit that the IMF outlined, or 2.5% of GDP. Spending on housing
subsidies were revised higher in light of higher-than-expected housing subsidy
outlays this year. 

More funds on the local level is a good move
reflecting the ongoing decentralization process, which involved efforts like
responsibility for vocational schools being shifted to local budgets. However,
the budget’s privatization target of UAH 22.5 bln remains a big question mark.
For 10M17 for example, the budget raised only UAH 3.4 bln from privatization
(the full-year pkan was over UAH 17 bln) and we don’t expect any more revenue
until after the 2019 elections.

The approved spending plan looks close to what the IMF
would like to see. The budget deficit is modest, without any big stains that
might irritate the Fund (like quasi-fiscal spending). Instead, what might
disturb IMF officers is the relatively ambitious revenue target of 18.5% yoy
growth. However, this also should not be an issue with the inflation trend that
we are currently observing.