OREANDA-NEWS. January 14, 2008. The State Budget for 2008 passed by the Verkhovna Rada looks realistic and doesn’t envisage the significant fiscal expansion that was expected given populistic pre-election promises made by politicians, Dimitry Sologoub, Raiffeisen Bank Analyst, believes.

Specifically, the document envisages only partial reimbursement of lost savings as cash payments will constitute less than 1% of GDP. Nevertheless, as the budget deficit of general government will be around 3% of GDP and more social spending is expected in the amended budget, it might have a negative effect on inflation, which is already very high. Therefore, in opinion of Dimitry Sologoub, the amendments to the budget should not envisage further fiscal expansion and widening of budget deficit.

This year the government is planning to reimburse up to UAH 20 bln. According to the budget law, UAH 6 bln will be paid in cash, while debt of UAH 2 bln will be offset through mutual settlement of lost savings, households’ overdue payments for utility bills and outstanding tax arrears of energy enterprises. This scheme was tested in 2005 when UAH 1.8 bln of lost savings has been written-off in a similar manner. The document also contains a provision that in case of extra revenues from privatization UAH 12 bln will be used for compensation of lost savings in non-cash form, for example for purchases of durables including housing.

The revenues of the state budget for 2008 are set at the level of UAH 217 bln (24.4% of GDP) and planned expenditures are UAH 235 bln (26.5% of GDP). That implies a state budget deficit of 2.1% of GDP. Based on these figures the deficit of general government (including local budgets and all state-managed funds) will constitute at least 3% of GDP in 2008. The deficit is planned to be covered by foreign and domestic borrowings and privatization revenues.

Specifically, the government is going to put more focus on the domestic debt market, as the targets for internal and external borrowings are almost identical, while before the authorities predominantly borrowed abroad.

The target for privatization revenues is UAH 8.6 bln, which looks rather ambitious given the poor record of privatization in the last two years. However, if several lucrative state assets (namely Ukrtelecom, Odessa seaport plant and a few others) will be put on sale this year, the target might be easily achieved.