Rada passes 2019 budget to unlock IMF aid, boosts spending on defense, health, roads

The Ukrainian parliament early on Nov. 23 approved next year’s state budget bill in a move that could unlock $3.9 billion in aid from the International Monetary Fund.

The budget was passed five weeks before the deadline of New Year’s Eve – a record for the country. The hasty approval was driven by the growing financing needs of the country, with hefty public debt repayments coming due in 2019, as well as the politically turbulent upcoming presidential and parliamentary elections.

Ukraine now hopes to receive the first tranche of a new 14-month, $3.9-billion agreement with the IMF in December, having met the lender’s key conditions, such as raising household gas tariffs by 23.5 percent and keeping the budget deficit at around 2.4 percent of GDP – below the IMF’s limit of 2.5 percent.

“We need stability at the end of this year and next year,” Prime Minister Volodymyr Groysman said in parliament ahead of the voting in the early hours of Nov. 23.

“2019 will be challenging economically and politically. But we have a balanced and realistic budget.”

Parliament then approved the budget with a vote of 240 for, and 28 against. There were 22 abstentions, and 19 lawmakers didn’t vote. A total of 309 lawmakers out of 423 elected members were present for voting.

The plan proposed by the Groysman’s cabinet was harshly criticized by the opposition. None of the lawmakers of the 25-member Samopomich faction, 20-member Batkivshchyna faction, and 38-member Opposition Bloc voted for the bill.

Main numbers

The final version of the 2019 budget plan is yet to be made public, but preliminary numbers were set out in the draft bill submitted for second reading at parliament.

Finance Minister Oksana Markarova said on Nov. 23 that the changes between the drafts at first and second readings by parliament were insignificant.

The 2019 budget boosts spending on defense and security, healthcare, and infrastructure.

Forecast:

Total Spending: Hr 1.11 trillion ($39.6 billion)
Deficit: Hr 89.9 billion ($3.2 billion)

Defense and security: Hr 211.9 billion ($7.6 billion)
Pensions: Hr 167.5 billion ($5.9 billion)
Healthcare: Hr 95.7 billion ($3.4 billion)
Education: Hr 126.9 billion ($4.5 billion)
Road repairs and construction: Hr 55 billion ($1.96 billion)

The Finance Ministry forecasts real economic growth at 3 percent next year, which is in line with the World Bank’s forecast of 3.5 percent.

The minimum salary will be increased from the current rate of Hr 3,723 to Hr 4,173 (from $133 to $149) and will remain unchanged throughout the year.

The budget forecasts an exchange rate of Hr 29.4 to the dollar by the end of the year, and annual inflation at 7.4 percent. GDP is seen at just under $133 billion.

The bill appropriates Hr 145.45 billion ($5.2 billion) for repayment of the public debt on IMF loans and government bonds.

“Without support from the international institutions, it will be significantly harder to refinance over $6.1 billion of public debt with a due date in 2019,” the explanatory note to the budget bill read.

Besides the IMF tranche, Ukraine expects a 500 million euro tranche of 1 billion euros of aid from the European Union by the end of this year.

Privatization of state enterprises and increased tariffs on natural gas for households – the two key requirements of the IMF – are expected to bring to the budget Hr 17 billion ($607 million) and Hr 9 billion ($321 billion) respectively. To assuage public discontent over the gas tariff hike, the government promised subsidies for low-income citizens.

The budget bill foresees revenues of Hr 1 billion ($35 million) from the new customs duties on used cars imported from the EU, which the parliament passed on Nov. 8. This money will go to the Pensions Fund.

President’s foundations

The budget plan generously funds the Presidential Foundation for educational and scientific programs for youth, which President Petro Poroshenko, who is also running for re-election next year, established in November. The foundation will receive Hr 1 billion ($35 million) for “connecting village schools to the internet, purchasing school buses, constructing swimming pools, and for partially compensating for extra expenses from the increase in gas tariffs.”

Poroshenko’s wife became the head of the Ukrainian Cultural Foundation in January, and the organization’s budget has increased by almost three times: Next year it will get Hr 780 million ($27.8 million) of taxpayers’ money to award grants for art projects and patriotic films.

A journalistic investigation by Schemes project of the Radio Free Europe/ Radio Liberty found that the first lady was appointed without competition and that she works pro bono without an official employment contract, which is against the law since she is a public official who manages public funds.

Other expenses

The Central Election Commission will receive Hr 2.3 billion ($82 million) and Hr 1.9 billion ($68 million) to finance the presidential and parliamentary elections respectively.

The Defense Ministry will get an additional Hr 1 billion ($35 million) to improve fire safety at its ammunition depots. There were devastating ammunition explosions at depots in the village of Kalynivka in Vinnitsya Oblast in September 2017, in a town of Balakliya in Kharkiv Oblast in May 2018, and in a town of Ichnya in Chernihiv Oblast in October 2018. The estimated damage from the explosions exceeded $1.2 billion.

The bill allocates nearly Hr 7 billion ($250 million) for subsidies and loans to agricultural producers.

The government plans to spend Hr 29.3 million ($1.04 billion) on creating a state registry of cases of domestic violence and gender-based violence. Additionally, it wants to spend Hr 20 million ($714,000) on setting up call centers for victims of domestic violence and human trafficking. At present, a non-governmental organization La-Strada operates two 24/7 national hotlines offering free counseling and legal consulting to adult and child victims of domestic violence, discrimination, and human trafficking.

An additional Hr 200 million ($7.1 million) will be spent on the construction of an airport near the village of Solone on the border of Dnipropetrovsk and Zaporizhzhya oblasts. The only airport in Dnipropetrovsk region, Dnipro airport, is privately owned by Dniproavia, an airline affiliated with oligarch Ihor Kolomoisky, which went bankrupt in 2017.