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Speech of minister of finance of Ukraine Natalie Jaresko at her press conference on October 16, 2015
16.10.2015 | 19:15 | printer friendly

Dear colleagues,

Two days ago I returned from my important trip to the Annual meeting of the IMF and the World Bank which this time took place in Lima, Peru. Since the participation in this event was very important for a number of issues and decisions, I would like to report to you on them and report on our progress in issues which the Ministry of Finance is responsible for.

Lima and communication with international partners

During my visit to Lima I met the management of absolutely all international financial institutions including managing director of the IMF Ms. Christine Lagarde, management of the World Bank group, the EBRD, THE European Investment Bank and others. I also had approximately 20 meetings with our bilateral partners representing other countries including those of G7. I also had three meetings with the management of biggest investment companies.

Most of them I last met in March last year during my last visit to the USA. That is why I had a lot to tell to our partners about the current situation in Ukraine.

I told our partners the following:

1) Ukraine has managed to stabilize its economy and financial system. Today we can already see a few signs of this important achievement:

a.     Stable exchange rate of our national currency

b.     Citizens brings their savings back to the banks

c.      The slowing pace of the economic downturn

d.     The slowing pace of the industrial production downturn

e.      Decreasing inflation and increase of the National Bank reserves from the critically low level under USD 5bn to approximately USD 13bn today. This means that Ukraine seems to have passed the bottom of the crisis.

2) Now we are set to return to growth, and all efforts of our government shall be aimed to reach real economic growth as fast as possible to secure

- real increase of domestic and foreign investments in our economy;

- real increase in employment;

- real rise of salaries and pensions.

To help Ukraine make it, we asked our international partners to double their aid and financial support from the already approved USD 7.5bn (biggest part of this amount has already been received in the course of 2015) to at least USD 15bn.

Today, 7 months after the launch of the Extended Funding Facility by the IMF, we are convinced that we do have reasons to expect a significant increase of the support for Ukraine.

I can give four reasons for this.

1) Half a year ago we had active military actions in the eastern part of our country. Nobody knew how long these hostilities were going to last, how they would impact the Ukrainian economy and what the costs for the state budget would be. Today we finally have the agreement of Minsk, have the long expected truce and hence can be more secure in our forecasts.

2) Some 7-8 months ago, when we started the dialogue with our international partners, our government had just came to power and could not enjoy much trust from our partners. Today the trust is in place, we could convince them that we are serious about the implementation of our reforms and are implementing them as fast as we can. The government, the President and our coalition in the Parliament proved more than once that we have a political will to implement these reforms.

3) The above helped us remedy the third point missing positive experience in implementing reforms in Ukraine. In the beginning of this year nobody believed that any incumbent government in Ukraine has the capacity to consistently introduce reforms and to deliver to its commitments. Today we already have this experience, and it means that our international partners can increase their support and be more active in it.

4) Last, but not least in the beginning of this year we had a huge gap in our balance of payments equal to USD 40bn. We were insolvent. Nobody wanted to grant Ukraine new loans, until we managed to remedy that. But we completed the debt restructuring successfully saving USD 15bn for our balance of payments for the next four years.

But to continue to receive financial support from our international partners, first and foremost from the IMF whose loan program is an anchor for all other funds, we must carry on with our reforms. The key point here, and this is really the most important thing I want to turn your attention to today, is that our reforms must secure and enhance the macroeconomic stability which took us so much effort to achieve.

Importance of international financial support for maintaining stability

Dear citizens and journalists, since the beginning of this year Ukraine has received financial support from its international partners amounting USD 9.7bn. Why is international support so important, why is this amount important for our country?

First, these funds help us restore the reserves of the National Bank, which is in turn increasing the stability of our national currency and building up trust to our banking system. This is directly impacting the quality of life of every one of us. Secondly, these funds are partially used to finance the expenses of the state budget of Ukraine.

By the end of this year Ukraine will have a possibility to received additional financial support amounting approximately USD 4bn. USD 1.7bn of them shall come as a tranche from the IMF, further USD 2.3bn are the support from other international partners linked to our compliance with the IMF program.

But access to this funding directly depends on the progress of Ukraine in its reforms and, more importantly, on the quality of these reforms, their ability to develop the economy instead of smothering it depending on whose proposals will be taken into account in our reforms.

To receive the USD 4bn which I am talking about, we must:

- agree tax amendments necessary to keep the state budget deficit within 3.7%. Hence, we must adopt the budget for 2016 not exceeding this deficit;

- further crackdown on corruption;

- implement a number of reforms whose list is open for public and is included in the Memorandum of understanding with the IMF which is by the way translated into Ukrainian and published on the website of the Ministry of Finance.

The most important job for the Ministry of Finance is, of course, the state budget.

The goal of our cooperation with the IMF is to heal the public finance and to secure a healthy and sustainable basis for economic growth. One of the key indicators for the health of the financial system is the state budget deficit. The higher this deficit, the more loans we must take, which means a higher debt burden for us and for our next generations. Another risk of the higher budget deficit is the hazard of an emission meant to cover this deficit, which means printing money and triggering new waves of devaluation and inflation which is something we do not want to have.

Hence, the target of both the Ukrainian government and the IMF is to reduce the state deficit and thus to reduce the increase of the state debt, inflation etc. The lower the inflation, the sooner the National Bank would be able to reduce its interest rates and to facilitate loans to businesses thus starting the motor of the economy the banking system.

In this year we have already achieved a significant progress in this direction we have reduced the state budget deficit to 4.1% of the GDP. Our goal for next year, I want to emphasize it again, is to further reduce it to 3.7%.

We must do this simultaneously with the decreasing budget revenues already agreed with all relevant parties and set in the draft of the state budget which we submitted to the Parliament on September 15. For example, for next year we have abolished the special import charge, cut transfers from the National Bank and reduced rent revenues. Also, we have obliged ourselves to abolish the special taxation mode for agriculture starting from January 1, 2016, as well as to restore the 1% index for the single social tax.

All these steps pose a basic set of steps already incorporated into the draft of the state budget for 2016.

At the same time, we are striving for more much more. We think that Ukraine really needs a tax reform this is necessary to return to economic growth, to reload the tax relationship between the government, business and citizens, to boost employment etc.

Our government is actually already working to improve the tax revenue management without any tax reform. Not all depends on tax rates alone. If we look into various opinion polls, businessmen in Ukraine often rank not tax revenue management, but tax revenue management and corruption as the most critical points. Businessmen are well aware that tax revenue management is in many cases even more important for them than tax rates. That is why we are taking new steps to improve the tax revenue management and are going to announce our new steps in this direction soon.

Returning to the tax rates, we are convinced that the tax reform must secure return to stability and growth instead of undermining them to help the Ukrainian business and to secure investments into economy. Hence, we must not increase the budget deficit when implementing the tax reform. The state budget deficit amounting 3.7% of the GDP is our main KPI for next year. You must take it literally: state budget deficit is one of the key indicators for the health of economy like body temperature for humans.

Tax reform

There are different opinions on the tax reform which are now publicly discussed. I will not be describing our draft of the tax reform I think all present here have already got the idea of it.

According to updated estimates, our model of the tax reform would result in the reduction of tax revenues by additional UAH 60bn. Why is this sum higher than the previously calculated one? The reason is that every parameter in the calculations had to be agreed with IMF, and sometimes we had different views on the impact of this or that tax rate on the state revenues, since the calculations are based on a number of assumptions. And UAH 60bn is the approximate amount which we and the IMF have calculated as a difference in state revenues resulting from the tax reform.

Thus, we have to cut our public spending by the same amount of approximately UAH 60bn. The law requires that, in order to save economic stability. Neither legislation nor simple logic allows us to propose a cut in revenues without simultaneously cutting spending.

The Minister of Finance is ready to cut public spending. But what expenses must be cut and what must be kept needs a serious public discussion and difficult political decisions. Currently, everyone is talking about the tax rates and nobody takes the courage to start a discussion on concrete changes in spending.

I am asking you for help. Please, start this discussion between yourselves, among journalists. How can we reduce public spending now and what would be the correct way to do this today?

These decisions must after all be implemented by branch ministries, because the only real resource for spending cuts in Ukraine is saving on healthcare, education, social welfare, security and defense. These are the areas the tax revenues are spent for.

Have a look at this slide: here is the structure of the state budget expenses.

One of the key areas is spending on security and defense. Can we really afford spending cuts here not knowing how long we can keep this unstable truce in the East? I am sure this would not be very smart.

Another significant spending area is the re-payment of our state debt. I think, Ukraine has never had a government which did more than our government to reduce the debt burden.

Further areas are social welfare, healthcare and education. Hence, we need extremely challenging decisions to cut public spending by, say, UAH 60bn, and these decisions must be a joint product of the branch ministries, the Ministry of Finance, public and the Parliament.

This is challenging, very challenging. But the Ministry of Finance thinks that this is possible.

Now I want to touch upon the so-called radical tax reform which is also being publicly discussed now. What would it mean for the state budget and for all of us?

I am not talking about some concrete option of the tax reform there are several models of radical reforms. But all these proposals result in the decrease of tax revenues by UAH 150-200bn. This means that we would have to cut spending accordingly, just like in tax reform proposed by the Ministry of Finance. The reason is that irrespective of the tax reform we have the same target budget deficit not exceeding 3.7% in 2016.

No doubt, cutting budget revenues by 25% can be easily done by cutting the tax rates. But try to cut spending by the same 25%. Would it be easy to cut public spending by a quarter within a year?

International experience gives a clear answer: NO.

According to IMF studies, there have been only 10 cases in last 25 years when countries could reduce their spending by more than 5% a year. The average annual spending cut for these countries was 9.3%. The so-called radical reform proposals demand to cut spending by up to 25% a year.

Is the Ukrainian society ready to reduce social welfare for the citizens to this extent? Is it ready to reduce the number of schools and hospitals? Is it ready to cut the number of public employees? Are we ready to radically cut spending for our army? Are we ready to leave in the rain those who need support from the state? Both attractiveness for investments and social justice are important for us. And we must find a balance between them.

As a minister of finance, I am sure that such significant spending cut is unacceptable for us today. And reducing tax revenues by 25% as proposed in the radical tax reform without cutting public spending accordingly would be a suicide for our country. That would mean the end to our cooperation with the IMF and the need to print money to cover the huge state deficit. All of us remember the terrible devaluation in February 2015, and the older generations also remember the hyper-inflation in the beginning of the 1990s caused by such an approach.

That is why I am deeply convinced: Ukraine has no right to put everything at stake now just restored stability, signs of economic recovery to make reckless experiments with itself.

I am also convinced that the reduction of the tax rates alone wont help us provide an impulse to attract investors tax rates are just one of the incentives for investors and it is, with the exception of the tax burden on salaries, is not decisive for business. Crackdown on corruption is not less important than tax rates. Equally important is the reform of the judicial system. Inflation rate and bank interest rates are not less important than tax rates either.

We are ready to cooperate with journalists, experts, citizens, parliament members and ministers to find and propose ways to balance the budget which could really reduce the tax burden on salaries and on diligent tax payers, simplify the tax revenue management without putting at risk the financial health of our country.

We are ready to search for resources to cut public spending and to pursue a well-balanced and responsible reduction of taxes and public spending jointly with the government, the President, the Parliament and the Ukrainian society. We are striving to do this with the effective support from our international partners, first of all with the support of the IMF.

I am deeply convinced: Ukraine has had enough of negative experience trying to implement so-called home-made reforms. Ukrainian politicians have for 23 years been blind to international experience and have been searching for their unique way of economic management. Every time they denied reforms which other countries implemented with the support of the IMF and which helped these countries get far ahead of Ukraine in terms of development and GDP per capita. All of us could see where we ended up due to this unique way: after the fall of Yanukovichs regime the state reserves amounted ridiculous UAH 117 thousand.

I think the time has finally come to deliver up to our commitments which we acknowledged and which represent our reform program and to execute the IMF program in full and in one go. This is what helped all our Western neighbors build up a sustainable and strong economy. Let us altogether give our country a chance for a real European life.

Thank you for attention!

 

Presentation - 16.10.2015.pdf
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