I guess it was always going to be ambitious to imagine the current International Monetary Fund compliant version of the tax code and budget were going to be passed in a couple of days through the Verkhovna Rada.
More likely we assumed things would drag on to the edge/last minute and knife edge. This is Ukraine, after all where its political elites seem to exist on a different planet/even constellation to other mere mortals.
The IMF have made it pretty clear that they are not going to be soft – they did their bit by changing policy over lending into official arrears, now it is the turn of the Verkhovna Rada to do its share of the heavy lifting and pass a reasonably coherent and consistent budget and tax code, reining the deficit in to 3.7 percent of gross domestic product.
In the end “he who pays the piper, gets to play the tune,” and the IMF calls the shots, unless that is if Ukraine’s oligarchic elites want to start to put their own hands in the own pocket and bring their business into the formal sector and pay taxes, which is a key problem – I saw one comment that 70 percent of the economy is now “informal.”
I think the IMF and the official community might have been more amenable to give some flex on the tax and spend side if more (any) progress had been made on the rule of law side, but glacial progress is being made there again as oligarchic business interests continue to resist – and the only solution in my mind still is a truth and reconciliation process and amnesty (but that’s probably just too simple for politicians in Ukraine to figure out).
The (Interior Minister Arsen) Avakov – (Odesa Oblast Governor Mikheil) Saakashvili spat this week goes kind of to the heart of the problem – more needs to be done to root out corruption and graft. And not enough is being done.
There are lots of pressures and vested interests playing against this budget and tax code getting passed.
First there are the populist impulses from member of parliament Yulia Tymoshenko and member of parliament Oleh Lyashko, who likely see this as an opportunity to extract political capital and perhaps bring Prime Minister Arseniy Yatsenyuk administration down, to force early elections.
Tymoshenko has spoken out against the budget cuts to fund the tax reforms – and this appeals to her constituency.
There is then a business lobby that wants a more ambitious tax-cutting agenda – but some are not clear how to pay for this, the other around Saakashvili want more ambition from tax cuts and spending cuts, and think the revenue side will sort itself out as above plan inflation and growth help with the heavy lifting.
I have some degree of sympathy for this latter view (lots of budget spending slack/graft to cut and better target spending on the needy) – albeit not with the line that Ukraine can exist now without the IMF which would be taking a huge risk.
It seems now likely that no budget/tax code will be passed before very late towards year end, or through to the first quarter of 2016.
The government had already signaled no Extended Facility Funds are likely before year end so this might all drag on through to beyond the Orthodox New Year and there might be the need for a new IMF mission to get this over the line.
I think some in the President Petro Poroshenko administration think they have time and political capital to negotiate with the IMF – I don’t.
This will leave the economy and financial system on the edge.
Ukraine’s recent hard-fought macro-stabilization (one of the big achievements in the past six months alongside banking sector reform) would be under threat.
I do not think it would take much then in terms a re-accentuation of the conflict in the east to destroy this macro-stability again, weakening the hryvnia, destroying sentiment and pushing the economy into recession again next year – widening the budget deficit and creating budget and external financing holes again in the IMF program.
I am not sure Western governments will want to throw yet more money at the problem if the administration does not deliver progress on rule of law issues, and fails to agree a reasonably coherent budget.
It just needn’t be like this if there was more leadership and focus at the top.
