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State budget performance: February 2020

In the second half of the year 2019, Ukraine's economy faced new macroeconomic realities, in particular the strengthening of the Hryvnia exchange rate and the fall in prices for imported gas and oil, which negatively impacted the state budget revenues. The same trends continued in the year 2020 and led to the underperformance of the state budget revenues in January 2020.

However, the set of measures elaborated by the Ministry of Finance, State Tax and State Customs Services in response to the new challenges made it possible to improve the performance of the general fund's revenues in February compared to January 2020. Thus, in February revenues of the State Tax Service exceeded the monthly plan by UAH 2.5 billion. An additional challenge at the end of February was the worsening situation on the global capital market, which negatively affected the demand for domestic government bonds. Despite all the challenges, the government has funded all necessary protected expenditures in line with open budget allocations.

Revenues

According to the State Treasury Service’s preliminary data, in February 2020 the revenues of the general fund of the state budget amounted to UAH 62.2 billion, which is 9.9% higher than in February 2019. In particular, higher average monthly wages contributed to higher personal income tax revenues. VAT revenues increased due to higher consumption against the backdrop of rising household incomes.

In general, according to State Treasury Service’s preliminary data, the revenues of the general fund of the state budget in February were performed by 93.7% of the monthly plan, and the total revenues of the state budget (both general and special funds) amounted to 95.3% of the monthly plan. The reasons that complicated the implementation of the monthly plan in January this year also had an impact in February, although the underperformance reduced. This refers to the difference between the actual macroeconomic indicators and those that were budgeted in the 2020 state budget. In particular, it refers to the strengthening of the hryvnia exchange rate, lower import volumes (US dollar equivalent), lower natural gas prices, slower average wage growth than budgeted for 2020.

Lower natural gas prices and lower domestic gas production had a negative impact on rental revenues. The slightly lower growth of nominal wages (including 16.3% yoy in January 2020, compared to the budgeted growth of 17.2%) led to an underperforamanth of the monthly plan of revenues from personal income tax and military tax in the amount of UAH 0.7 billion in February 2020.

At the same time, in February, the revenues under the responsibility of the State Tax Service were UAH 37.1 billion and were higher by 7.1% or UAH 2.5 billion than the monthly plan. In February, the main source of revenue overperformance was the VAT on goods produced in Ukraine, which amounted to UAH 21.6 billion. The VAT surplus in February amounted to UAH 10.8 billion, which is UAH 3.4 billion more than in February (UAH 10.8 billion of VAT was reimbursed in February). This was, in particular, the result of the introduction of a new model of the tax risk monitoring system for the registration of tax invoices. The corporate profit tax amounted to UAH 7.3 billion and was UAH 1.6 billion higher than the monthly plan.

Furthermore, in February 2020, the performance of the excise tax on tobacco products in the amount of UAH 3.3 billion was ensured due to the resumption of production by tobacco companies.

The revenues managed by the State Tax Service accounted to UAH 22.6 billion, or 78.3% of the monthly plan, due to a stronger exchange rate and a reduction in the volume of imports. Yes, the average exchange rate for February is UAH 24.6 / USD. The US remained substantially lower than the budgeted rate of USD 27 / USD. In February, according to the State Customs Service, the volumes of taxed imports decreased by 2.5 yoy, taking into account an 11.3% growth forecast. According to operational data of the LCA, in February 2020, customs duties overdue due to a decrease in imports of certain groups of commodities amounted to more than UAH 1.3 billion: in particular, imports of coal, fertilizers, petroleum products, coke, manganese ores decreased.

Expenditures

According to the State Treasury Service’s preliminary data, in January-February cash expenditures amounted to UAH 131.1 billion or 85.5% of the total monthly plan. All necessary protected expenditures were funded.

Wages and salaries expenditures increased by 17.8% yoy to UAH 28.2 billion as a result of the minimum wage growth. They accounted for 91.9% of the monthly plan.

Reduction of government bonds the yields and strengthening of the hryvnia exchange rate helped save UAH 3.4 billion in debt service. Therefore, debt service expenditures were 21.9% lower than planned.

Social security expenditures in the amount of UAH 49.5 billion were by UAH 6.7 billion lower than the planned figure due to several factors. Thus, the number of recipients of subsidies and consequently the expenditures on subsidies decreased, which was facilitated by warm weather and faster growth of household incomes than tariffs for housing and communal services.

The performance of the expenditures was influenced by tendering and procurement. As a result, expenditures under the code 5000 accounted to 60.5% of the monthly plan.

Borrowings

In February, the situation on the external capital markets deteriorated significantly and interest in investments in local currencies of emerging markets decreased. This has an impact on Ukraine as well.

Recent domestic government bonds auctions have shown that volatility in the global market has an impact: a decline in the demand for long-term securities from foreign investors. However, in February the Ministry of Finance was able to raise resources to finance the budget of UAH 14.1 billion on the domestic market. At the same time, effective public debt management allowed to keep the rate of return at the level of about 10% on all hryvnia instruments (1 pp lower than the NBU interest rate), after the record decrease of the interest rates of the government bonds issued by the Ministry of Finance. Due to the consistent implementation of the debt strategy, the cost of debt servicing was reduced by UAH 3.4 billion since the beginning of the year, and the need for additional borrowings to refinance the debt has decreased by UAH 7.3 billion.

In view of the situation on the global market, which is not related to Ukraine but affects the financing for Ukraine, the Ministry of Finance is working actively with official lenders, from which we are planning to receive concessional loan of EUR 500 million from the EU this year and additional significant funds from World Bank instruments and other official lenders. However, despite Ukraine's fulfillment of all commitments agreed under the EU's 4th MFA, no second tranche was received in February. Thus, the European side is waiting for the implementation of all prior actions agreed with the IMF for the new program.

At the same time, the IMF Board's approval of the new program will create the preconditions for starting a conversation with the EU on a new macro-financial assistance program, as well as finalizing negotiations on obtaining a DPL from the World Bank as soon as possible.

Further steps

As part of the preparation of the Budget Declaration for 2021-2023, on January 18th, the Ministry of Finance sent to all the main spending units of the state budget an instruction letter on the provision of information necessary for the formation of the document and today received their priorities from the main spending units for the next three years. In the coming weeks, we will discuss and model these priorities in order to come up with a sound strategic document that will help accelerate economic growth.

Also, on February 28, the Ministry of Finance received a new draft macroeconomic forecast from the Ministry of Economy, and in the near future, we will evaluate the impact of the updated macroeconomic forecast on the budget indicators for 2020.

Regardless of the impact of macro indicators, State Tax and Customs Services will continue the implementation of the measures to improve work efficiency and together with the tax police intensify the fight against shadow schemes. The relaunch of Tax Service and Customs Service is continuing. It is also planned to launch a common transit system, to introduce an institute of authorized economic operators and control over transfer pricing.

In February, reform of financial control and the creation of a modern and efficient office, based on State Audit Service of Ukraine, started, focusing on the inspection of state-owned companies and local budgets, monitoring of public procurement and audits in cooperation with law enforcement agencies.