Speech of the Minister of Finance of Ukraine Nataliе Yaresko at the meeting of the Government attended by the President of Ukraine, September 8, 2015
Dear Mr. President, Mr. Prime-Minister, Mr. Head of the Verkhovna Rada,
dear colleagues and journalists,
support for our citizens in this difficult time is the duty of our Government. This is why we have been actively searching for possibilities to speed up the upgrade of the social welfare standards. Finally we found necessary resources for this.
Based on the results of the state budget in 2015, the Government proposed the Verkhovna Rada to increase the social welfare funding starting from September 1 this year instead of December 1.
This step will help to improve the social protection of citizens who most suffered from the devaluation and inflation in the previous and current year. By upgrading the social standards we will enhance social protection for approximately 12 million citizens. This step will also deliver a positive impulse for the domestic consumption and thus for the recovery of the Ukrainian economy.
The difficult economic situation still persists in Ukraine. But the efforts of our Government have stabilized the economy and the financial sector without resorting to money emission for the current economic improvement.
The latest data prove the following:
- the pace of the economy fall has slowed down;
- the exchange rate of the Ukrainian currency has been stable for half a year already;
- the currency reserves of the National Bank have been increased;
- the revenue dynamics of the state budget and local budgets is better than originally planned. All planned expenses are covered completely and on time for the first time in several years.
In the last 8 months of this year we have done a lot to stabilize the situation and to generate positive trends.
For example, as Mr. President pointed out, we have agreed a cooperation programme with the IMF and are successfully implementing it, which means that our country can rely on financial support amounting USD 17,5 bn – USD 6,7 bn out of this sum we have already received. This programme paved the way to further bi- and multilateral financial support, including aid from the US, the EU, Germany, Japan, EBRD and World Bank.
We have also been sticking to the correct fiscal policy, the Government has been very prudent in all its expenses and has been fighting manipulations in tax collection. As Mr. Prime-Minister told, the implementation of the electronic system for VAT management in July alone enabled us to reduce the number of manipulations and to increase state budget revenues by UAH 2 bn.
Finally, we made one more very important step which gave us more certainty in regard to the positive trends. After really complicated negotiations with our private creditors – some of them manage assets which are the tenfold of the Ukrainian economy – we managed to agree the write-off and restructuring of the state and publicly warranted debts.
For us it means that we will save up to USD 4 bn, which is approximately UAH 80 bn, within several next years. This is money which we won’t have to repay. This will substantially improve the solvency of our country and its balance of payments as well as reduce the burden on our economy which is under recovery now. I want to stress that without this debt deal we would have to pay not only the sum given above, but also approximately USD 5,2 bn in additional loan charges within next years.
The maturity for the remaining debt will be postponed from 2015-2023 till 2019-2027. Thus, Ukraine won’t be repaying the major part of the debt till 2019. These are additional 4 years we have to recover and to develop our economy. The average interest rate on our debt shall be 7,75% p.a.
The most important point is that we succeeded to negotiate these terms without imposing the embargo on the repayment of foreign debts. With the high volatility currently observed on the international markets, it would have substantial risks for the macroeconomic and financial stabilization which we have just achieved. Only less than a third of affected countries have managed to agree on debt restructuring without defaulting on their obligations.
That is why we can consider our restructuring agreement as a true success.
Thanks to the concessions we negotiated with our creditors, our country received an important financial relief and can bring its economy back on track faster. In return, Ukraine will issue state derivatives, i.e. new securities whose profitability is linked to the dynamics of the Ukrainian GDP.
Ukraine won’t be making any payments on the state derivatives until 2021 and if the real GDP growth is under 3%. After that, we will only be paying, if the GDP of Ukraine becomes more than USD 125 bn which is 50% higher compared to the current GDP.
Thus, our economy has 10 years to achieve the new quality of its GDP to continue the sustainable growth.
These securities pose a mechanism meant to make investors interested in the recovery of Ukraine and an additional tool to attract foreign investments for our economy.
Another very important detail:
· the write-off of the debt has no conditions and is effected immediately;
· the possibility for creditors to receive compensating payments is theoretical and will be probably equal to zero.
The basic IMF forecast for the Ukrainian economy is growth at 4% per year. The modern economic history of Ukraine says that the GDP growth was higher than 3% only in 9 out of 24 years.
We must understand that under this scenario the GDDP of Ukraine would grow from the current USD 84 bn to USD 600 bn in 2040, which is equal to the prosperity of a country like Switzerland.
Also, if we accept the basic IMF forecast for the real growth of our GDP by 4% per year until 2040, our payments will be lower than the cost of the debt write-off (including possible interest rates).
Thus, the deal is a win-win case both for our country and for our creditors. Thanks to this agreement Ukraine has a substantial financial relief and can return its economy back to normal faster. If it helps our economy grow by 4-5% per year or even more in five years, our payments on the mentioned derivatives will not have a substantial impact on the economy.
More than that, under these terms the creditors will be interested in our success and will be investing more in our economy, just like the Special Creditors’ Board declared after the deal.
Our agreement has been publicly welcomed by the IMF, EBRD as well as by the governments of the USA, the EU, Germany, Great Britain and other countries.
But we still have to make two important steps to make the debt write-off happen and to receive opportunities for economic growth:
the restructuring terms have to be approved by the holders of each bonds emission included in the restructuring process in the course of a special legal procedure.
Before that, the Verkhovna Rada has to adopt the following legislation:
1. Amendments to the Budget Code shall:
¨ settle the emission and repayment on the state derivatives;
¨ define the priority of restructured debts over the debts which were not settled in the proposed restructuring deal.
2. Amendments to the Law of Ukraine “On Securities and Stock Market” introduce a new security – “state derivative”.
3. Amendments to the Tax Code define rules for the taxation of the income of payers who receive foreign loans under a state warranty.
The above legislation was agreed with the Special Creditors’ Board.
That is why I ask to approve process and submit this legislation to the Verkhovna Rada, since this is the integral element of our collective efforts in debt restructuring and recovering the economy of Ukraine.
I want to point out that debt restructuring and our financial policy helped us put the puzzle together in the end of August which shows that the situation in the Ukrainian economy is stable and positive trends including budget revenues are not a coincidence.
That is why we have analyzed the priorities of our country and decided that the additional resources which the Government has generated by its policy in this year shall be spent to upgrade the social welfare. We have found the balance between the solid public financial system and the support for socially affected citizens which is proven by our economic data. The explicit task of the state is to protect and support those who need it most.