Ukraine general budget deficit narrows to 1.6% of GDP in 2015

Ukraine’s general budget deficit amounted to UAH 30.9 bln (1.6% of GDP) in 2015 vs. UAH 72.0 bln (4.6% of GDP) in 2014, according to State Treasury report. Remarkably, central budget deficit reached UAH 45.2 bln (2.3% of GDP) while local budgets were in surplus (UAH 14.3 bln).

General budget revenues increased 43.0% yoy to UAH 652.0 bln in 2015, mainly due to devaluation-driven inflation. In particular, a 30.4% yoy increase in VAT and 39.9% yoy growth of excise duties was a direct consequence of prices’ jump (CPI was 48.7% in 2015, on average). Temporary collections like distribution of UAH 61.8 bln of NBU profits, UAH 25.2 bln of additional (interim) import duties and UAH 8.9 bln budget proceeds from 3G license sale were responsible for more than 1/3 of the growth in state collections in 2015.

General budget expenditures increased 29.9% yoy to UAH 679.8 bln. Social protection (+24.5% yoy), debt servicing (+23.4% yoy) and defense (+15.7% yoy) were responsible for 2/3 of budget spending increase in 2015.

Alexander Paraschiy: In 2015, Ukraine enjoyed outstanding budget revenues growth what translated into budget surplus. As a result, the general budget deficit appeared to be much less than it was widely expected. Recall, the IMF outlined 4.2% of GDP deficit limit for 2015.

In 2016, we do not anticipate booming state collections given that inflation eases, no economic growth is expected, and some temporary revenue sources won’t exist (except for expected UAH 38 bln of NBU profit). To make matters worse, taxation rules experienced significant changes in 2016 (like payroll tax cut down to 22% from 37%) bringing more uncertainty on prospects of state collections. On the other side, it looks like spending might appear somewhat higher – in particular, on servicing of foreign currency debt (the 2016 budget was based on UAH 24.1/USD expectations, while the current exchange rate is close to UAH 25/USD). All in all, we expect the year 2016 will be much more challenging for MinFin than the previous one. Whatever happens, we do not expect the Cabinet to breach the 3.7% of GDP deficit limit committed to the IMF, unless this limit is revised by the Fund.