The Rada approves new taxes on alcohol, cigarettes and diesel, but stops short of doing more to meet the IMF requirements for a new money tranche.
As challenges mount for a nation sliding deeper into recession, Ukraine’s politicians have yet to rise to the occasion.
Despite demands from the International Monetary Fund for Ukraine to get its fiscal house in order, the Verkhovna Rada adjourned on April 1 without adopting a budget that would balance its pension fund or comply with other IMF requirements.
The prospects don’t look good anytime soon to get the outside aid flowing in.
The Regions Party, the largest faction in parliament with 175 out of 450 members, announced it will block action on April 2-3. The party is led by former Prime Minister Victor Yanukovych, a likely candidate for president again in the coming months. Regions’ members – seen as obstructionist by rivals – want the government to table its anti-crisis program. They promise more mass protests in Kyiv.
A solvent pension fund is one of the requirements for unfreezing a $2 billion installment of an IMF loan designed to stabilize the hryvnia, which has lost 40 percent of its value against the U.S. dollar in the last year.
The IMF suspended lending after granting a $4.5 billion initial installment last fall. Resumption of credit could mean another $12 billion altogether from the IMF alone. No less important, billions of dollars in other possible Western aid – from the European Bank of Reconstruction and Development, among others – hinges on IMF decisions.
Parliament on March 31 passed some anti-crisis laws, but these measures only partially satisfied IMF terms.
Lawmakers approved up to Hr 6 billion in tax hikes by raising excise rates on cigarettes, alcohol and diesel fuel. But that still leaves a deficit projected to be much larger than the 3 percent reportedly sought by the IMF. After the excise tax hikes are factored in, national revenues may reach Hr 245 billion (roughly $30 billion) with spending at roughly Hr 270 billion, for a projected deficit of Hr 24 billion.
The tax hikes “will help to address the fiscal situation. It is now important that measures are taken to prevent the projected deficit of the pension fund,” Ceyla Pazarbasioglu, the IMF mission chief to Ukraine, said in a statement reported by the Wall Street Journal on April 1.
The need for an international financial lifeline became even clearer after President Victor Yushchenko warned of dire consequences because gross domestic product fell by “25-30 percent” in the first two months of 2009, compared with January and February of last year. In his annual address to parliament on March 31, Yushchenko urged lawmakers to swiftly adopt legislation needed to renew IMF assistance and get the nation out of crisis.
And, in a surprise move, Yushchenko also called for a new constitution that would strengthen presidential powers. Lawmakers, however, balked at those initiatives.
A handful of Yushchenko’s allies in parliament on March 31 refused to support other IMF-related laws submitted by Prime Minister Yulia Tymoshenko’s government.
The next day, on April 1, a majority of lawmakers retaliated by moving presidential elections from January 2010 to Oct. 25 of this year. The move, if it survives an expected court challenge from the president, would cut short Yushchenko’s term and prevent him from dissolving parliament because of rules that forbid snap parliamentary elections being held too close to a presidential contest.
Fredrik Erixon, director of the German-based European Centre for International Political Economy, said Ukrainian lawmakers were playing with fire by delaying legislation required to meet IMF conditions.
“Ukraine must understand that it is flying into a wall at the speed of 150 kilometers per hour,” he said in an interview with Deutsche Welle radio.
Besides a balanced pension fund, the IMF also wants the nation to bring the budget of state-owned Naftogaz Ukraine into line, which could require a Hr 7.7 billion transfer from the general fund.
“The IMF appeared [to be] in [an] understanding mode, issuing a press release that welcomed the hikes in excises, but signaled that it looked forward to seeing progress,” said Timothy Ash, an analyst at the Royal Bank of Scotland. “The message was clearly that the IMF would not be returning to Kyiv to sign off on the second credit tranche disbursement of $1.84 billion until parliament” met the rest of the requirements.
The first $4.5 billion IMF tranche last fall helped to stabilize Ukraine’s wobbly banking system and currency. In the last month or so, the hryvnia has stabilized at a rate of about Hr 8 to the dollar.
Yushchenko and Tymoshenko, who came together in Brussels to win European Union backing for upgrading Ukraine’s natural gas pipelines, continued to fight this week over who is mishandling the crisis.
Yushchenko wants spending cuts to meet the 3 percent budget deficit target, but Tymoshenko refuses.
Meanwhile, economic pain is growing for more Ukrainians.
Official unemployment has doubled since last fall, reaching 1 million people. Small protests have taken place in different cities, but citizens have generally remained calm. However, polls suggest that could change as patience wears thin.
About a third of household deposits have been withdrawn from Ukraine’s banking system in the past six months, prompting fears that Kyiv’s financial woes could spill over into Western and Central Europe. Foreign banks control more than 20 percent of Ukraine’s banking system via subsidiaries.
It remains uncertain how many of Ukraine’s 180 banks the cash-strapped government can save. Bloomberg news service, quoting the IMF, estimated the cost of recapitalizing banks at 4.5 percent of the nation’s GDP – about $8 billion from last year’s amount.
Tymoshenko is also traveling the world, hitting up potential creditors such as Russia and Japan for a $5 billion loan. She’s had no luck so far. Printing money is seen as a last resort that will spark hyper-inflation, in a nation that already withered under a Europe-high inflation rate of 22 percent officially.
“If the government does not have anywhere else to get the money, they will try to print it, and this causes inflation,” said economist Kostiantyn Kuznetsov.
How much more will consumers pay?
Cigarettes
New tax hikes will more than double excise tax for non-filtered cigarettes, from Hr 15.6 to Hr 35 per 1,000 non-filtered cigarettes, adding 70 kopecks per pack. The hikes will nearly double taxes on filtered cigarettes, from Hr 37 to Hr 60 per 1,000 filtered cigarettes, or around Hr 1.2 per pack.
Alcohol
With excise taxes for hard alcohol increasing by 26 percent, taxes on a half-liter bottle of vodka will increase, on average, by Hr 4.
Diesel fuel
With excise taxes on diesel fuel increasing by 50 percent, 25-30 kopecks will be added on per liter.
