Ukraine budget deficit reaches UAH 11.5 bln in 5M14

Ukraine’s state budget deficit was UAH 4.8 bln in May to reach UAH 11.5 bln for 5M14, the Finance Ministry reported on June 26. The monthly deficit was 1.7x higher yoy due to stronger spending growth (+8.5% yoy) compared to only a modest rise in state collections (+2.7% yoy). Still, the 5M14 deficit was 33% smaller yoy as budget revenue (+13.6%) grew faster than spending (+4.6%) in the previous four months, mainly due to direct transfers of NBU to the budget.

Alexander Paraschiy: The May fiscal statistics are disappointing. Though we anticipated the authorities would stop wiring NBU profits in advance, we see that this poor practice was the reason for the growth in May collections. The NBU fed the budget an extra UAH 2.2 bln during the month, boosting the 5M14 transfer to UAH 22.0 bln (which is 3.7x more yoy).

It is difficult to say what might be the IMF reaction to this behavior (it will not be happy to learn that one of their commitments was not fulfilled) but what is more disappointing is that we do not see any improvement with the state’s anti-evasion campaign that was announced by a new government this spring. In May, tax collection declined substantially in all key categories. In particular, VAT collections dropped 4.0% yoy in May vs. +16.2% yoy growth a month ago.

Against this backdrop, we see the chances evaporating for improved state revenue from closed tax evasion schemes. Thus, a UAH 30-40 bln revenue shortfall, compared to the government’s plan, becomes very realistic. Still we are keeping our forecast for the state budget deficit unchanged at UAH 63.8 bln, or 4.2% of GDP, since the Finance Ministry is unlikely to violate its budget deficit commitment to the IMF and will instead be accumulating arrears.