Page 29 - RusRPTAug24

bne August 2024 Cover Story I 29
Ukraine’s budget is short of UAH500bn ($12bn) this year to finance its planned expenditures and it is not clear how the shortfall will be covered, other than by raising taxes and printing money.
Tax revenues in general have increased as the economy stabilises, according
to the head of the Budget Committee, Roksolana Pidlas; the 2024 state budget lacks about UAH400-500bn ($10bn-$12bn), UBN reports.
The 2024 budget calls for $43bn of spending, but international donors have only committed to $38bn, and in the first half have already sent Kyiv $16bn in assistance, of which an increasing share is loans, not grants.
The government has been working hard to improve its finances. An IMF team arrived in Kyiv on July 16 for the fourth review of the Extended Fund Facility, after which it will release the next $2.2bn tranche. But it increasingly looks like the government will be forced to hike taxes – something the government has been loath to do until now.
“Ukraine has now reached the limit of its ability to finance its defence forces. All domestic resources are being allocated to the war effort – including taxes, dividends from state-owned companies, and proceeds from domestic borrowing. But it still isn’t enough,” Ukrayinska Pravda reports.
The banking sector had a record year in 2023 and the government levied a special one-off 50% on profits to bring in extra cash; however, this year that rate will fall back to 25%. According to the Tax Service, companies in financial and insurance activities increased the payment of taxes, fees and payments to Ukraine's consolidated budget by UAH73bn in January-June, which is 170% more than in the same period last year.
The wholesale and retail trade and repair of cars and motorcycles segments raised their tax contributions by 23.4% (UAH24.7bn) and the processing industry by 18.4% (UAH20bn). The
largest tax payments came from wholesale and retail trade enterprises – 15.3% of all revenues.
The growing pressure on the budget means the government focus has switched from supporting the economy to raising money to pay for the military operation at all costs.
In March 2022, Ukraine’s parliament, the Verkhovna Rada, passed a substantial package of tax breaks to support businesses and ensure the availability of essential goods during the initial shock of the full-scale invasion. However, two years later priorities have shifted, Ukrayinska Pravda reports.
The Cabinet of Ministers has delayed this unpopular decision, but with only a few weeks left to implement the necessary changes before the summer break, the defence forces risk losing funding during the war's active phase.
is now knocking on to affect the
tax take, which is expected to fall further as major companies have lost production capacity and exports have also plummeted. Additionally, most international financial aid cannot be used for military expenditures.
Ukraine’s government must raise
an additional $12bn to meet defence needs. The local bond market (OVDP) is another source of money, but it has largely been tapped out.
In June, the Ministry of Finance attracted more funds from OVDP auctions than
it paid out to investors. In June, the Ministry of Finance raised UAH38.41bn ($025mn) and $407.33mn from the issuance of new domestic government bonds, of which UAH35.3bn of the total volume of OVDP issued in June were military bonds. However, much of the issue for the short maturity bonds has
to be ploughed back into the market to refinance earlier issues.
“The growing pressure on the budget means the government focus has switched from supporting the economy to raising money to pay for the military operation at all costs”
Ukraine is spending some 20% of GDP on defence, against Russia’s 8%. Officials from Ukraine’s financial and economic departments describe the defence forces’ requirements as “urgent and substantial.” Despite upping defence spending for three consecutive years, the allocated funds barely cover a fraction of the military's needs. For the 2024 budget, the General Staff requested UAH17 trillion ($420bn), but only UAH1.69 trillion ($41.5bn) was approved.
The economy, battered by war, has contracted by nearly a third and growth slowed to 1.1% in June, and to 4.1% over six months, partly due to the impact of the destruction of half the country’s generating capacity by Russian missile attacks. The slowdown
And this is an expensive form of funding: the weighted average yield of OVDP bonds denominated in hryvnia was 15.58% in June, and 4.63% for those denominated in dollars. As of July 1, commercial banks (43.4%) and the NBU (41.3%) own the largest share of OVDP bonds, reports UBN. They are followed by legal entities (9.7%), and individuals (3.6%). Non-residents make up only 2% of the total.
Banks have been the biggest player on the OVDP market, but they are tapped out and do not have much capacity to increasing their bondholding, due to their own prudential limits, according to Ekonomichna Pravda. To boost bond sales, the National Bank of Ukraine (NBU) may loosen the rules.
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