Ukraine’s Budget Schedules Growth in 2020
Reforming the labor market, opening the land market, developing exports and increasing international trade are the main priorities of the Ministry of Economic Development, Trade and Agriculture of Ukraine. This was stated by Minister Tymofii Mylovanov. Meanwhile, the draft law on Ukraine's state budget for 2020 has already been submitted to the Verkhovna Rada. Will the new budget of Ukraine comply with the country's economic priorities? To discuss this, we are joined by Dmytro Yablonovskyi, Deputy Director at the Center for Economic Strategy
Photo Center for Economic Strategy
First of all, what are your thoughts on this draft law?
I think that the draft law on state budget shows some figures, which, I would say, are related to a moderate increase of the budget revenues and expenditures. On the one hand, it isn’t an expansionary budget, on the other hand — it’s good because it will allow keeping macroeconomic stability, it will allow keeping low inflation and will reduce risks. Because, on the one hand, we can increase the budget to stimulate economic growth, but, on the other hand, whenever we increase the budget, it also raises the corruption risks. So, in my opinion, we should rather create opportunities for private investment growth, which will fuel the growth of GDP rather than trying to boost economic growth via increasing the budget. And in this case, moderate budget increase is good for the economy.
The Ministry of Finance expects GDP growth of 3.3%, but at the same time, Prime Minister Honcharuk was talking about 7%. Why, do think, the figures differ, were the ongoing reforms calculated in both forecasts?
Basically, there are approaches and goals of forecasting the GDP growth by the Ministry of Finance, for example, and by the Prime Minister or Minister of Economy. The Ministry of Finance should be more conservative, because it bases its forecast of tax revenues, for example, based on GDP growth. If it overestimates the GDP growth, and the actual growth will be lower than we have a risk of not enough taxes collected. So, in this case, for the purposes of budget planning, I would agree that a conservative estimate is ok. But, of course, for the purpose of economic planning, of government program planning we should set more ambitious goals, like 5% to 7%.
But what figure is more realistic, 3.3% or 5% to 7%?
I think that 3.3% is achievable by just doing nothing. The state doesn’t need to do anything specific, but we can achieve this goal. Why? Because we have the achieved macroeconomic stability, and we also have some new businesses coming, and we have some good signs in the economy for that. But again if you want to drastically increase the economic growth, we should think of some extraordinary measures, which, as I know, are being considered now by Ministry of Economy and Agriculture, as it is called now because they are really thinking in what ways they can boost the economic growth.
According to the 2020 draft budget, the deficit is estimated to be around 2% of GDP. How would you compare the deficit with the last year, I think it was around the same figure?
Yes, this is relatively the same. Besides, the Minister of Finance, Oksana Markarova, claimed that the overall or long term goal for the Ministry of Finance is to decrease the size of budget deficit relative to the budget size and relative to the GDP. So, basically, we don’t expect anything unusual, except for the fact that we hope that, finally, we will renew the cooperation with the International Monetary Fund, and we’ll get funds from this organization. Usually, these loans are cheaper than borrowing from private borrowers. And also, these loans usually open the door for other opportunities, like loans or grants from other international financial institutions, like EBRD, World Bank, etc. They are all watching the cooperation with the country and the status of cooperation of the country with the IMF, and if the cooperation continues, then we have higher chances and lower interest rates for other loans.
You said that the deficit is about the same as in the previous year, but at the same time, the draft budget allocates more money on healthcare. It’s about $400 million, more on defense, because this is the priority, of course, education, social policies that take 10% of the budget, pensions — $7 billion will be allocated, if adopted, for pension payments, and pensions might be increased by 8%, minimum wage might be also increased. So, we see that expenditures rise, the deficit stays the same. This forms the question: where is Ukraine planning to get this much income, or is Ukraine planning on increasing an international debt?
I think the main aspiration of the Ministry of Finance is as the economy grows, you will increase the tax revenues. Basically, how they can increase them there are two ways. For example, if the revenues of the certain company increase, then they will have higher taxes on these revenues. I mean, the tax rate is the same, because the revenues basically increase, then you have higher tax revenues from the companies. This is one scenario. But when actually the tax rates are not changed, but you to grow revenue, incomes, we will have higher tax revenues into the budget. The other scenario is also trying to decrease the shadow part of the economy. And in this respect Parliament is passing a new laws to avoiding these schemes, for example, using too much cash within the trade. So, basically there are plans to reform the retail trade to decrease the number of shadow operations. If there is a success, it will be also additional revenue from taxes.
Plus, as far as we heard from the media, from different experts, privatization reform and land reform could also benefit and provide lots of revenues to the state budget. And if I am not mistaken, according to the World Bank, the opening of the land market would benefit into $15 billion dollars annually. What do you think of that figure? And what do you think about the opening of the land market? Because as far as we see, Zelenskyi is a big supporter of this idea and he even ordered his government to prepare the legislation and submitted to the Verkhovna Rada, but there has been a lot of discussion on this reform, there has been a lot of controversy whether it should be restricted somehow or nor, because the main idea is that foreigners and wealthy people might get a total control over Ukrainian agricultural land and buy all — even though considered impossible — all the 43 thousand hectares of Ukrainian land. What are your thoughts on this reform and whether they should be restricted or not anyhow?
The idea of this reform is not about, at least, at current framework, not about increasing immediately budget revenues, because there is not plan to immediately sale all the ten million hectares that belong to state, because they would be rather transferred to local authorities. Ten million hectares belong to state now and about 28 million hectares belong to private people, who are not also able to sale this land. Basically, moratorium it covers both state-owned land and privately owned agricultural land. So, when the market starts, it covers both state-owned land and privately-held land. And for the state-owned land, at least, currently politicians say that there is no plan to sale it massively. Of course, some of the state-owned lands should be sold which is not used by the state, but the overall idea is that it would be transferred to local authorities. This is a part of the decentralization reform when local authorities would be given additional resources. But land reform would stimulate investments. Why it would stimulate investment? Because currently most of those farmers or companies who process the land usually lease the land, but now own the land. The idea is that, at least, at some cases when the state or private owners are ready to sell the land, they can sell the land to those companies and farmers. And when the farmer becomes an owner of the land, his business planning horizon increases substantially. For example, if you want to grow a garden, you need ten-fifteen years for that, but if you just lease the land you are not sure if you can lease this land in 5 or 10 years. If you can buy the land, then you are sure that you are the owner of this land in ten years, and then you can invest. So, the main idea behind the opening of the land reform, on the one hand, it allows those people who own the land to sale it, if you want. On the other hand, it allows the farmers of the agricultural producers to become owners, buying this land and then increase the business planning horizon, which will increase the probability for the investment. And these investments will have a further impact on economic growth or GDP growth.
Another interesting aspect to discuss. Andrii Radchenko, the chairman of the state-owned Agrarian Fund, told to Radio Free Liberty that Russia was using scare tactics to convince Ukrainians that rich foreigners would gobble up all their farmland that is what I’ve mentioned in the previous question. This is probably the main argument and the main fear spread by Zelenskyi’s opponents. Do you think this fear has enough ground to somehow impact and subsequently forecast some bad outcomes from the land reform?
I would start probably from setting the scenario. Of course, we really think about some limitations but rather we should think not about limitations but why we want these limitations. The reasons are that we want level playing field or equal opportunities for both smaller farmers and big agro holdings to buy the land. And in this case, the correct solution would be not to limit someone but to provide opportunities. For example, if we believe that smaller farmers do not have money to buy the land after the market opening is launched, then we should offer them some loans and indeed this program is already being discussed. What the Prime Minister has already mentioned and also other politicians that they will be at least 4.4 bln hryvnias in the budget for the next year which can be distributed as loans for the farmers, for small farmers to buy the land. And the interest rate can be, for example, 5 percent per annum in hryvnia which I would say quite low and affordable. So, in this case, we should rather not limit somebody but create equal opportunities and loans with the aim to create equal opportunities for small farmers. Another limitation is being considered as a limitation on concentration. So, basically, we don’t want anyone to buy all the Ukrainian land. Despite the fact that it is impossible it’s really a huge amount of money which none of the oligarchs has and even foreigners cannot afford to do so. But, in any case, if we think that concentration is not good for the economy, we should set some limits and it is now being discussed, for example, to set a limit of 0.5 percent for the total land in Ukraine. But also to set some certain limits of ownership in one hands in for example oblast (regional) level or even raion (district) level. In this case, I think these limitations are possible and they can be justified. So, basically, returning to your question, on the one hand, we should not rather limit but create equal opportunities, on the other hand, for the concentration, yes, we can have limits and they are being discussed. And as for the foreigners, basically, at least now, we told that physical persons, foreigners would not be allowed to purchase Ukrainian land according to the new draft law. But again we should wait for this law to be published. Hopefully, it will be published in October and we can discuss it in more detail.
Every government has been launching this privatization reform and Ukraine was trying to sell some big state-owned enterprises and get some output from there but every government has been failing so far. Why do you think this year the new government can actually succeed?
At least I see a new Minister of Economy who doesn’t have any vested interest in State-Owned Enterprises, to my best knowledge, and then there is a proposal for Putin and new top-manager for State Property Fund which also seems to be an independent candidate. If we don’t have vested interest among politicians, then I think the privatization process can speed up because this opposition can be blocked and finally we can start not only small-scale but large-scale privatization as well.
Let’s see what will be the finalized version of the budget-2020 after November, 2 expectedly.