Ukraine: Courts IMF funds, passes 2017 budget
January 9, 2017
In an effort to earn fresh funds from the International Monetary Fund (IMF), the Ukrainian government passed the delayed 2017 budget on 21 December after rescuing its largest bank, Privatbank, days earlier. The budget targets a fiscal deficit of 3.0% of GDP, meeting the IMF’s requirements, and along with efforts to clean up the country’s banking sector, should pave the way for a stalled USD 1.3 billion in aid from the organization. Ukraine’s government is reliant on outside support for financing, however, patchy reform momentum has threatened aid and delayed payments. Continued cooperation with the IMF is crucial for Ukraine’s outlook, to ensure that the economy remains on a recovery path.
The 2017 budget is designed to lower the country’s fiscal burden from an estimated 3.7% of GDP in 2016 to 3.0% of GDP. A rise in the minimum wage and pension increases are to be balanced out by greater revenues from income taxes, value-added tax and dividends from the Central Bank. In addition, the government is expected to cash in on planned privatizations and asset sales. However, the budget assumes GDP growth of 3.0% this year, which is a more optimistic projection than the 2.4% forecast by FocusEconomics analysts, and if the recovery fails to hit this speed some of the revenue targets could fall short. Moreover, a number of late additions to the bill complicate the spending estimates and the numbers could see revisions going forward.
The government’s efforts to clean up the banking sector and meet IMF spending commitments bode well for the country’s outlook going forward, however, exorbitant challenges remain. A number of tough and politically unpopular IMF-demanded reforms still have not been completed by the government, including pension and land reforms as well as stepping up efforts to tackle corruption, such as jailing corrupt officials. These reforms are critical to ensure continued support from the Fund as well as to fuel sustainable growth, yet the government’s history of slow reform momentum bodes poorly for quick implementation. In addition, there is a risk of fiscal slippage if growth or revenues fail to meet the government’s targets. Our panel sees a slightly largest fiscal deficit than planned this year of 3.2% of GDP.