Ukraine’s budget deficit greatly underestimated – ex-minister

Former Ukrainian Finance Minister, Viktor Pinzenik, assesses that the real deficit of the country’s budget is around 14% of GDP. The figure that the government used when preparing the budget is 3%.

In an interview with Ukrainian newspaper “Levyi Bereg” published on Friday, the ex-official said the current budget overestimates the state’s incomes.

“Each month the budget was to receive 98% of planned incomes. Over the first five months it received 72%. Speaking in real figures, the budget will lack 25 to 30 billion hryvnas (US$3.2 to 3.9 billion),” he said.

He added that the budget also ignores the money spent by the Ukrainian gas company Naftogaz on the natural gas bought from Russia. It lacks reserves of its own due to mounting consumer debt, and the government had to spend de facto budget money to pay for May deliveries. Then there is the pension fund, which also has a deficit, because its investments have left it with no incomes lately.

According to Pinzenik, the real deficit of the Ukrainian budget is $17 billion, or 14% of the country’s gross domestic product.

Back in January, while still in the cabinet, Pinzenik voiced concerns to Prime Minister Timoshenko over what he called an ‘unrealistic budget’. The analytical document was leaked to the media and made much public uproar.

Weeks later the minister resigned, saying his warnings had fallen on deaf ears, and that he couldn’t do his job and prevent the upcoming downfall. Timoshenko said the former member of her team was not capable of working in the extreme conditions of the economical crisis.

Now, Pinzenik says, with no external sources of money, the government has only one option – to print more money. According to him, that’s what is being done already, and since the beginning of the year, Ukraine has pressed about 16 billion hryvnas, or more than $2 billion at the current exchange rate.

This position is shared by President Yushchenko, a rival of the prime minister. In an interview with UNIAN news agency he said: “The unrevised budget is pushing the country towards serious trouble. We can’t fail to review spending policy, can’t live without reforms. We can’t focus on output via printing press.”

Yulia Timoshenko is showing more optimism over the prospects of the economy. Speaking at a cabinet meeting on Wednesday, she said there was “a small and gradual growth of industrial production month after month,” adding that it indicates that “the crisis has at least stopped,” UNIAN cites her as saying.

The prime minister is also seeking loans from the International Monetary Fund, the European Union, and probably even Russia, to cover the budget deficit.

An IMF mission is to arrive in Ukraine later this month. The fund is to provide a total of $16.43 billion and has already transferred two tranches of $4.5 and $2.625 billion respectively. The second one arrived two months late. But according to Kommersant-Ukraine business newspaper, the third tranche is under question.

“The IMF has worsened its forecast on Ukraine’s economy slowdown to 12% (from 8%) and demanded that Kiev declassify the statistics on GDP reviewed its budget, make an examination of Naftogaz and avoid any sharp decrease in interest rates. If the demands are not met, the visit of the IMF mission to Ukraine will be delayed, and the third tranche will only be sent in September, which will make bank payments on foreign debts more difficult,” said the newspaper.

The EU may lend Ukraine money to pay for Russian gas, although European officials so far have voiced reluctance to do so. Moscow is calling on the EU to share the burden of subsidizing the Ukrainian economy, arguing it was in their common interests to ensure gas transit from Russia to Europe.

Now, specific schemes of how EU can help out Ukraine are being discussed. For example, European gas companies may buy gas from Russia and store it in Ukrainian underground reservoirs. This is needed to maintain the transit during next winter, when gas consumption in Ukraine rises and, due to the technical specifications of the pipeline system, this must be done soon.

Russia has been among the parties Ukraine sees as a possible source of credit for some time. In late May, the Russian Finance Ministry said a request for $5 billion sent by Kiev last February was denied, but added the decision was not final.