Speech of the Minister of Finance at the meeting of the Parliament’s committee for Economic Affairs – Government’s report for 2016

2/10/16

February 10, 2016
Dear members of Parliament, dear colleagues, dear guests!


The previous year was a year of our first economic and financial achievements which resulted from our steps and from our joint efforts with you. Those efforts finally made it possible to stabilize the economic situation in the country, to protect it, to move Ukraine away from the brink and to gain some power reserve. This stabilization and power reserve are still fragile, and we have to work hard to make this positive trend continue, to transform it into real economic growth, into new employment possibilities and prosperity for our citizens.

I want to remind you where we started – in the beginning of 2015 Ukraine hardly could finance its social spending. We did not have enough money on our accounts to pay pensions and salaries. But we managed to remedy this and to create pre-conditions allowing us to expect a better future. The following figures prove it:
• the accounts of the State Treasury are full, and we have enough funds to effect all social welfare payments on time (in December 2015 we paid pensions for January 2016 in advance); • we restored the reserves of the National Bank which were sufficient to cover just one month of imports critical for the country (USD 5 bln) to the safe volume sufficient to finance three months of imports (USD 13 bln). The low assets of the National Bank extremely affected the country and all citizens and were the reason for the deep fall of our currency last year, since the reserves were that low and there was no certainty in our financial capacities; • inflation was stabilized, and now it is steadily decreasing – from the high of 14% in April 2015 to a 1.3% deflation in October last year; • the development trend of the real economy sector changed sharply from a fall (this trend actually started back in 2012) to growth – the quarterly index of GDP dynamic developed from a decrease by 5.3% in Q1 of 2015 to a growth by 0.7% in Q3, which was the first growth sign in two years. We expect an even better performance for Q4 of 2015. Now, having done our job and laid a solid basis, we are looking with optimism into 2016 and are expecting a positive economic development. All this proves what deep and comprehensive changes we needed to stop our economy for further plummeting. So what did we do in 2015 to stop the negative trend and to reach the above results – I want to report on our key steps:

First, this is our cooperation with international partners which helped our country sustain and conduct structural reforms. To stop the devaluation of the Hryvna and the double-digit inflation, we urgently needed financial support from our international partners. That was needed to cover the deficit of our balance of payments equal to USD 40bln within next four years (2015-2018). We managed to reach an agreement with the IMF – which is the main member of the mentioned international financial coalition – and received a loan program Ukraine amounting USD 17.5 bln for next four years. This is the biggest aid program for one country in the history of the IMF calculated per capita of the population of the receiving country. We also got a deal with our bi- and multilateral partners and received additional funding equal to USD 7.5bln. Additional USD 15bln we gained thanks to the successful restructuring of our foreign debts.

The condition for the release of each tranche under all international loan programs for Ukraine are continued reforms and compliance with the structural changes stipulated in the Government’s action plan. In 2015 we received two tranches from the IMF totaling USD 6.7bln as well as more than USD 3bln from our partners, including the USA, the EU, World Bank, Canada, Germany, Japan and Norway. We are now working on new agreements to receive support from the EBRD, EIB, Poland, Switzerland and Turkey. All of them participate in our international financial coalition.

Third, in the course of our foreign debt restructuring finalized in 2015 we managed to write off 20% of our foreign debt amount. This is equal to USD 18.7bln, including:
• USD 15bln in sovereign bonds;
• USD 2.7bln in Eurobonds of the Ukreximbank and Oshchadbank;
• USD 0.5bln in Eurobonds of Kyiv;
• USD 0.5bln in Eurobonds of the Ukrainian railway.
What we achieved in the debt restructuring deal:
• Debt write-off amounting USD 3bln;
• Postponement of a USD 12bln payment for after 2018;
• The rest amount (USD 3bln + 0.5bln) is subject to further restructuring negotiations now.

Thus, thanks to the already agreed restructuring deal we reduced the pressure on our balance of payments by USD 12bln for the period from 2015 till 2018. This radically reduced our need for hard currency in 2015 as well as in 2016 and in next two years. Accordingly, the pressure on the currency market went down reducing the inflation pace in Ukraine. Without this debt restructuring we would have had to default on our obligations which would have hindered our economic recovery for a long time.

It is also important to understand that only this year the debt restructuring will help us save almost UAH 64bln for our state budget (interest rates and debt re-payment). This saving effect was calculated into the state budget balance for 2016 which enabled us to balance the budget and to reach the planned budget deficit equal to 3.7% of the GDP.

Fourth, this is our budget discipline which made it possible to reduce the budget deficit. We all know: the higher budget deficit we have, the higher inflation and devaluation risks we are exposed to, the more debts we have to make again and the higher probability of new economic crises is. Two years ago, in 2014, the total consolidated budget deficit, including the debts of NAK Naftogaz accrued in previous years was equal to 10.1% of the GDP. This means that we had to cover that deficit by making new debts. New debts increase the pressure on next generations, since the interest rates on the public debt increase every day. In 2006 our debts cost us 0.5% of the GDP; in 2015 we already had to pay almost 5% of the GDP to serve our debts, and that amount was pretty close to all our security and defense spending. We started an extremely important process aimed to reduce our budget deficit. This year the budget deficit should go down to 3.7% of the GDP, whereas the deficit of Naftogaz - which is traditionally covered by new public bonds and cost us UAH 110bln in 2014 – should go down to zero. We also launched an extremely important process of cutting public spending which amounted approx. 53% of the GDP in 2014. The systemic efforts of the Ministry of Finance are expected to result in the reduction of public spending to 44% of the GDP in 2016. This will pose a significant fiscal consolidation by almost 10% of the GDP in two years. I also want to emphasize that we managed to reduce public spending while keeping sufficient funding for all public needs. This means that:
• we finance all public expenditure on time and do not have pending pension or salary payments;
• we adopted the highest defense budget in the history of Ukraine amounting 5% of the GDP (UAH 114.5bln);
• we enhanced social support for our citizens (we are set to increase social welfare payments in two steps starting from April 1 and December 1 by 12.5% in total) (social welfare costs amount UAH 245 bln, including a transfer from the state budget to the State Pension Fund; thus, they are equal to 29% of consolidated budget spending in 2016). One more extremely important achievement for us is that we delegated more public decision-making to the local communities. To make it happen, we successfully conducted a fiscal decentralization transferring a part of powers and financial resources to the municipal self-government. The real volume of financial resources at the municipal level (total budget fund) in 2015 increased by 42% or by UAH 30bln. In 2016 we expect the financial resources of the local communities to rise by further 40%. This means almost doubled revenues for the local level of public administration within two years only. One of the tools we used to do this was to expand the tax base at the local level. Here I would like to mention two points:
• Implementation of the property tax;
• Implementation of an excise tax (5% of the sales volume) on the retail sale of beer, alcoholic beverages, tobacco products and fuel.
We also significantly increased resources for capital investments at the local level coming from:
• the State Regional Development Fund (UAH 3bln vs. UAH 2.9bln in 2015);
• funds for the infrastructure build-up in 159 united communities – UAH 1bln (vs. UAH 0 in 2015);
• subventions for the social and economic development of selected territories (UAH 1.9bln vs. UAH 780m in 2015). Subventions will be shared between the local budgets by the Cabinet of Ministers and with the approval of the Parliament’s budget committee.
However, all above said is only a part of our strategy. Jointly with the National Bank we are working to strengthen our banking system. To recover the national banking system, we supported the adoption of the Law on the liability of affiliated parties. To strengthen the State Deposit Fund, we supported the adoption of legislation on the better protection of the rights of bank customer. Other steps which we did in this area include:
• in 2015 we provided a loan to the State Deposit Fund by issuing domestic bonds equal to UAH 41.5bln.
We are also supporting state-owned banks:
• the assets and liabilities of the troubled bank “Kyiv” were transferred to Ukrgazbank;
• the CEO of Ukrgazbank was selected in an open contest (a strategy is being developed to sell the state share in the bank’s capital);
• the troubled «Ukrainian Bank for Reconstruction and Development» is scheduled to be suspended from the market in 2016;
• the capital of Ukreximbank and Oshchadbank was increased by UAH 9bln and UAH 5bln respectively.

We are working to have banks resume loan supply for the real economy sector. For this, we are searching for solutions to the bad loans problem:
• we elaborated the draft law «On financial restructuring» to solve the bad loans issues and presented that to the Parliament;
• we elaborated the draft law «On the restructuring of the debts of citizens of Ukraine who took loans in hard currency for the purchase of their single residential property (mortgage loans)» and presented that to the Parliament (the law benefits 37000 families owning a single residential property + groups of citizens with receiving social benefits (disabled persons of category 1, ATO participants and their heirs, veterans of war and families with many children have mortgage debts amouting UAH 20bln which accounts for 40% of the total hard currency mortgage loans taken by citizens of Ukraine).

Taxation: our target in the taxation area is to create a simple, fair and transparent tax system. For this, we have to reduce the tax burden, lower the administrative pressure on business and eradicate corruption.

Last we significantly reduced the tax burden on the economy. We reduced the payroll tax from the average rate of 41% to 22% and replaced more than 80 rates of this tax with one flat rate and two minor exceptions. We also halved the rent fee for oil and gas production from 55/28 to 29/14 which is expected to provide a strong impulse to boost domestic production.

The second area of our work is a reduction of the administrative burden on business related to tax payments. Here we did the following:

- Business registration within 24 hours is now in place;

- Electronic service is now in place, enabling tax payers to check their tax payments without applying to the State Fiscal Service;
- Electronic excise bills for fuel sales must be launched on April 1;
- Online service is now in place (pilot project), making it possible to trace sale points for licensed alcoholic beverages and tobacco products;
- Tax declarations were simplified;
- To simplify licensing procedures for excise goods sale, relevant data from the United License Register are now published on the website of the State Fiscal Service;
- A system of values was put in place for a more precise and steady risk assessment during customs clearance.

Another important task for us is to tackle corruption related to taxation. Our key step here is the maximum simplification of interaction between tax payers and tax authorities.

We did the following here:
- Electronic VAT management;
- Jointly with the Parliament we adopted a decision to open registers with the data on VAT reimbursement;
- Jointly with the Parliament we adopted legislation on the electronic management of fuel excise tax.
Of course, fight against corruption related to taxation and customs is impossible without the institutional reform of the State Fiscal Service (DFS). We started this reform in June 2015 by adopting and presenting a clear two-year reform action plan. Under this reform we already have the following results:

- The functional structure of the SFS has been re-organized;
- The Office for big tax payers is being reformed in line with Western patterns;
- 345 high-ranking officials have been dismissed in line with the Law «On the purification of state administration»;
- The external test of the first 877 customs officers has been conducted;
- The number of launched criminal proceedings based on internal investigations at the SFS has been increased by 50% from 348 to 537;
- An anti-corruption hotline is now in place at the SFS. Out of 298 calls reporting on suspected corruption at the SFS 46 calls resulted in criminal proceedings;
- 9 thousand SFS employees have been fired. However, this cut is not yet sufficient to reach the set number of SFS employees, hence we expect 9 thousand more tax and customs employees to be dismissed by the end of February.

The tax police are being demilitarized. A part of their firearms has been transferred to the National Guard.

- Agreements have been reached with the tax and customs authorities of the USA, Great Britain, Canada, Lithuania, Poland and other countries on technical aid for the reform process at the SFS.

Also, important area within the reform of the SFS is a reform of customs.
• The experiment has been started in 4 regions, and it has brought 50% more in tax revenues which will be used for local roads construction. Within the experiment, Lviv region has got additional UAH 312mln, Lutsk region – UAH 104mln, Chernivtsi region – UAH 129mln.
• Within the EU cross-border cooperation program we have started to build 7 crossing points on the borders with the EU (3 checkpoints on the border with Poland, 2 - on the border with Romania, 1 - with Slovakia 1 – with Hungary).
• An agreement has been signed with Poland for EUR 100mln to finance the construction of joint modern checkpoints for overland transport on our western border.

Dear members of Parliament, summarizing I want to say that we did an enormous job last year to stabilize the economic situation in Ukraine, to cope with major challenges in the economy and to tackle deep structural problems in Ukraine’s economy. All this, along with the powerful support from our international partners and with your support, enables us to look into the future with much more certainty. However, this re-gained stability is not yet so strong, and risk returning to the calamity of an uncontrolled economic crisis, if we do not carry on our difficult and unpopular but strongly needed structural reforms and do not stick to the rigid budget policy. That is why I am asking you for your help on our difficult but crucial way, in order to cement our stability and to lay a solid ground for a rapid and sustainable economic growth.

Thank you for your attention!


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