Denys Shmyhal, Prime Minister of Ukraine
Ukraine has avoided deep economic crisis
21.08.2020 17:30

The summer that Ukraine spent in anxious quarantine expectation is coming to an end. What will happen next? After all, during the country's stay in a two-month lockdown and then in the mode of so-called adaptive quarantine entire industries stopped, established economic ties broke down, unemployment rose, and consumer demand fell. However, today we must admit that the worst-case scenario has been avoided. Despite the fact that the number of new daily COVID-19 cases is growing, and criticism of the government's actions does not stop, the first signs of stabilization in the economy can be seen. Ukrainian Prime Minister Denys Shmyhal spoke in an interview with Ukrinform about how that is achieved and what development scenarios can be considered optimistic.

PUBLIC FINANCES AND BUDGET

Question: Against the background of the pandemic, the Budget Code was amended to suspend medium-term budget planning in 2020 for the next three fiscal periods. The shock of the pandemic is over, so are we returning to the established modus operandi? Which draft budget will the government submit to the Verkhovna Rada on September 15 – the budget for 2021 or the budget for 2021-2023?

Answer: Due to the pandemic, budget planning had to be amended a bit - in May it was impossible to predict and plan for three years in advance. Despite this, the Ministry of Finance today plans the budget for 2021 and immediately sets the basic parameters for 2022-2023. Indicative amounts for each ministry's expenditures for the next three years will be presented, allowing agencies to plan medium-term programs and be confident in their funding.

Question: In what financial condition did the state enter the third quarter of 2020? Do you confirm experts' estimates that the budget "hole" is reaching UAH 300 billion? How can it be overcome?

Answer: This year the situation is complicated and related to the coronavirus and the economic crisis. But there is no "hole" in the budget. There is a planned budget deficit at 7.5% of GDP. This amount has been agreed with our international partners and creditors. It is relatively low compared to some European countries, where the budget deficit reaches even 10-14%. Our level of the budget deficit is really reaching 300 billion hryvnias, but the figure is moderate for Ukraine and absolutely bearable for the budget. There is no cash gap today. And we clearly understand the sources of covering such a deficit.

Question: How will the government overcome the deficit – through a painful but legal reduction of expenditures through the parliament or through manual management of the budget? Do you agree that the first way is fair and transparent, while the second poses serious corruption threats?

Answer: It is impossible to control this process manually. The budget was approved by the parliament, and all the necessary changes were made in the second quarter. Accordingly, the country lives according to the approved budget. We consistently comply with the budget schedule set by law.

Question: What are the sources of covering the budget deficit?

Answer: These are tax revenues, dividends of state-owned enterprises, and loans in the domestic and foreign financial markets. We do not have debt threats and arrears today. Ukraine fulfills all its obligations to creditors on time and according to schedule, despite the complexity of the economic situation in the world and in the country. Therefore, there will be no problems with finding funds.

Question: This year's plan to raise funds in the domestic market through domestic government bonds has already been 70% fulfilled. Will the Cabinet of Ministers have enough of the remaining volumes for the "maneuver"?

Answer: Of course. These are planned amounts entered in the budget together with other sources of deficit repayment, which have also been clearly calculated.

Question: Are you sure that the current discount rate, which has almost halved over the last year, will remain as interesting to investors in domestic government bonds as it was last year? Will they continue to buy domestic bonds with the same enthusiasm?

Answer: I think so. Today, Ukraine is of interest to both domestic and foreign portfolio investors. Recently, we have managed to sign an agreement on macro-financial assistance in Brussels in just one day and make a record placement of eurobonds worth about $2 billion at a rate of 7.25% per annum. This suggests that investors are still interested in investing in Ukraine.

Question: What dollar exchange rate and inflation rate do you consider acceptable for the current situation with budget replenishment?

Answer: We have respective macroeconomic indicators approved by the Ministry of Economy, and this is our balanced consensus forecast. Of course, we understand that the level of inflation in the macroeconomic forecast is higher than the one that will be recorded at the end of the year. It is also necessary to take into account the position and targets of the National Bank. Its indicator is known to be 5% (+/-1%). I believe that in our economic situation, an inflation rate of 6-7% would be acceptable to support Ukrainian exporters and "warm up" the economy.

Question: What are the prospects for the dollar to reach budget figures? The budget envisages the rate of UAH 29.5 per U.S. dollar, despite the fact that the average exchange rate in the first half of the year was UAH 26 per U.S. dollar. They say there are no preconditions for its significant increase by the end of the year, but the growth would be profitable for the Cabinet of Ministers, right? According to the Accounting Chamber, only due to the low exchange rate the budget received UAH 25.5 billion less in revenues.

Answer: I understand the concerns of investors and businesses about the expectations of the possible growth of the dollar in the next four months. But we understand that the budget was revised in April-May, when the impact of the global economic and financial crisis on Ukraine was expected to be much worse. Then we erred on the side of caution and set higher exchange and inflation rates. Today, as we see, the situation is developing according to a moderately stable scenario. In my subjective opinion, the exchange rate will fluctuate at around UAH 27-28 per U.S. dollar and is unlikely to exceed 29 hryvnias by the end of this year. Obviously, the macroeconomic forecast will be better for someone, maybe worse for someone. But in any case, the situation is normal. The exchange rate is regulated exclusively by the market, and the fact that the market today values it at 27 hryvnias per U.S. dollar is absolutely acceptable.

As for inflation, it is reviving the economy, and we really need it now. We must create jobs, promote exports, develop industry, etc., and 2% inflation during the crisis is very little. All countries are working to fill their economies with working capital and stimulate the movement of funds, rather than slow down the process.

Question: Today there are serious discussions about raising the minimum wage. Many experts say that if the increase to UAH 5,000 can still be considered, the announced increase to UAH 6,000-6,500 is a very risky step that could cause further "shadowing" of the economy.

Answer: We, together with experts, have carefully analyzed the consequences and benefits of a gradual increase in the minimum wage. It was estimated that this year's increase from UAH 4,723 to UAH 5,000 will be almost imperceptible for both people and the economy. But you need to understand why this is done. In Ukraine, inflation is low, consumer demand is slowing and the economy is "cooling down." These are harbingers of the economic crisis. Enterprises then have problems with salaries, the banking system has problems with working capital, and bankruptcies begin. Therefore, our task today is to warm up the economy and increase consumer demand. The first step in this direction is to help retirees. We indexed pensions and made appropriate surcharges. This is an important component of social support for the people from the state and an effective mechanism for gently stimulating consumer demand. Now we need to take the second step. What does an increase in the minimum wage mean? These are several indicators at once. It means bringing to the official level a larger amount of the salary fund in Ukraine as a whole. This is the support of people with low wages in the budget sphere. Given our lagging behind Europe in this regard, we have great potential to raise the minimum wage. And the steps we take are completely justified, and the decisions are justified and calculated. People will get the minimum wage of UAH 6,000 in late January or early February next year. We will thus partially stimulate the seasonal post-New Year decline in consumer demand during this period. Further increases are planned for July - this is the middle of the holiday season, when business life in the country freezes. In both cases, the economy will not receive excessive inflationary pressure.

Question: Are your calculations supported by the growth of labor productivity in Ukraine? It will be a shock for businesses that cannot afford to raise salaries administratively, but only on the basis of quality performance.

Answer: There will be no shocks at UAH 5,000 - businessmen won't notice additional loading. As for UAH 6,000, there are different opinions. We see that competition for labor has recently stimulated business in terms of efficiency and an increase in wages. There are about 80% of such enterprises. In any case, the level of the minimum wage is an important balance between the real sector of the economy and the social duty of the state.

INTERACTION BETWEEN BRANCHES OF POWER AND AMBITIONS

Question: Did you see in the new governor of the National Bank of Ukraine a like-minded person in terms of support (lending) to the real sector of the economy? If so, what steps by the new head do you consider the most successful?

Answer: Communication with the NBU is open and constructive. It gives its results. You can see how systematically and confidently the NBU discount rate was reduced. This was a joint work of the National Bank and specialists from the Ministry of Finance and the Ministry of Economy. We have ambitious goals, we are working together to introduce new economic, financial mechanisms and models to reduce the cost of credit and make such credit affordable for businesses and private consumers.

For the first time in the history of Ukraine's independence, the mortgage rate in the national currency has dropped to 10%. We have a dialogue with bankers and developers. They say this is a great signal to stimulate the development of an industry that has a high multiplier of job creation in related industries.

The same can be said about the Big Construction program and the program of lending to small, medium and micro businesses "Affordable Loans 5-7-9%." Under the latter program, for example, this week we have already reached UAH 5 billion as loans issued and refinanced. In total, there is more than UAH 30 billion worth of applications considered by banks under this program. These are also important indicators of our joint work with the National Bank of Ukraine.

Question: But skeptics say that loans under the "5-7-9" program are issued too slowly. It was planned to issue 50,000 loans by the end of this year, but only 2,000 have been issued so far.

Answer: It should be understood that it took six months to test all banking mechanisms and build confidence in this instrument of anti-crisis support. Today, the program has reached the peak of its demand. The growth rate now is probably tens or even hundreds of times higher than the growth rate of lending three months ago. By the end of the year, we still have time to reach the planned 50,000 loans, given how fast the situation develops and given a high level of interaction between banking institutions and businesses.

Question: Is the discount rate optimal or are there still reserves to reduce it? Is it necessary in this situation?

Answer: From the point of view of the Ministry of Economy and the Ministry of Finance, there is probably still room to reduce it, but here we have already reached a certain monetary balance. At the last meeting of the NBU board, it was decided not to change the discount rate. We think that for some time it will be fixed at the current level if there are no force majeure or shocks. The banking system must adapt to this level of the discount rate. Everyone is interested in cheaper credit. Of course, we would credit to continue its decline to a perfectly comfortable level for consumers at 5-7%. This is certainly not an easy task for Ukraine, especially in an era of global economic crisis and pandemic. But in any case, we have such ambitious goals.

Question: Here you will need close cooperation with the parliament that has recently worked not as fast as it did in the beginning.

Answer: This cooperation has never been easy, but it is definitely constructive today. We have reached a level of mutual understanding that allows us to work together so that bills are clearly written, worked out and so that they give maximum effect. A new political season will begin in September. It will be turbulent and difficult given the local elections. This should be seen as a natural process. But we maintain cooperation with the parliament, if we take its pragmatic side, and we will continue to do so.

Question: A number of important laws are already being discussed in society (on the gambling business, on the revival of the capital market, on amber, etc.). What economic effect do you expect from what has already been adopted and from what is to be adopted in the near future?

Answer: In fact, each of the laws passed by parliament has a very specific calculated economic impact on the budget and on economic development. For example, let's take the law on gambling. The issue concerns from 500 million to 5 billion hryvnias annually and up to 60,000 jobs, according to experts. Today, there are a number of such bills in parliament, including those initiated by the government. An extraordinary session is to take place in August, which will address very important issues - the ratification of macro-financial assistance, the law on raising the minimum wage, and so on. In fact, many reform bills are waiting to be passed, and they will definitely be passed because we are in the process of a whole number of reforms. The issue concerns our new ministry of strategic industries, large-scale privatization of state-owned enterprises, and their corporatization.

PUBLIC SECTOR REFORMS AND CORPORATIZATION

Question: What do you see in the role of leading strategic industries - IT, agriculture, space? Where is our greatest hope?

Answer: There is a respective presidential decree that defines the strategic sectors of the economy. What we see here is the creation, for example, of an aerospace institution, where we want to separate the aviation and space industries and take them under centralized management. Separately, we want to deal with the defense industry. This is also our export potential and huge international demand.

We have high hopes that the Deputy Prime Minister for Strategic Industries will help consolidate all enterprises, as well as all their intellectual and material resources, into a strong economic 'backbone.' In general, our strategic industries are high value-added industries that have a high job creation multiplier. This is the construction of railcars, locomotives, turbines, power equipment. For example, one job in aircraft automatically creates up to 50 jobs in related industries, which in turn create additional products for their businesses. And these are taxes, filling the budget, attracting foreign currency to Ukraine. This is where we are now focusing our attention.

Question: What is your vision of the future transformation of the Ukroboronprom state company?

Answer: The idea is to transform it on a sectoral basis and bring order to the management of its enterprises. Where else are strategic innovative enterprises left without orders, income and salaries, serving some private corrupt interests?

Businesses need to be cleared of debt, given the right management and brought to the world level. The task is not technically difficult but requires strong political will. The defense industry is always a level of government cooperation and governance, a model that is accepted around the world. The state has not recently had a full understanding of what is happening with the company, there was no control. And we want to bring our defense companies to the level of world standards. There is a demand for our products in the world. The question is that we could satisfy that demand qualitatively and in time. In addition, domestic production and defense orders must also change qualitatively.

Question: Will the government reform Ukrzaliznytsia? After all, it seems that only at the government level can this issue be really resolved. Ukrzaliznytsia will not separate freight transportation from passenger transportation and will not make other painful steps. What is needed to carry out such a reform?

Answer: If there is a commercial enterprise that is in turbulence, whether it is a monopolist or not, it must solve its problems on its own. Ukrzaliznytsia is no exception. It must carry out internal reforms like a normal business.

Its corporatization is carried out for this purpose. In general, the reform of corporatization of state-owned enterprises taking place in Ukraine is designed to protect these enterprises from any political influence in order to prevent political corruption against them, to manage them as a business. Ukrzaliznytsia has set up such governing bodies, and there will soon be a new manager who has won a serious personnel competition. The person is currently undergoing a special inspection and, I think, will be appointed by a government decision next week.

The Ukrzaliznytsia head will face the task of internal reform, because the crisis related to the coronavirus has hit the company hard. Passenger traffic has practically stopped. When they were unprofitable, they covered most of the fixed costs of the enterprise. However, Ukrzaliznytsia cannot continue to exist in such a complex business model with passenger and freight transportation as it is now. We need to identify areas and bring order there, attracting investors and foreign experience.

ART OF COMPROMISES

Question: What do you think about the restriction of salaries in the public sector during lockdown? How do you see the way and the time frame for its solution, moreover, in the light of Ukraine's commitments to the IMF? According to this commitment, the restriction should have been lifted by June 30, but now it is August... Many people say that because of this restriction, effective honest managers are forced to go because they are not satisfied with the level of payment.

Answer: A very important question. We really have a number of precedents today, when as a result of MPs' decision to limit salaries at state-owned enterprises to ten minimum wages, high-quality top managers from government agencies, banks and industrial enterprises resigned and went to the private sector.

When the issue was submitted to parliament, the idea was to introduce a temporary restriction. The terms were called - two months after lockdown. But then, in April, no one knew how the situation would develop and how long the lockdown would last. Today we understand that lockdown will remain in place. In the absence of vaccines and drugs, this is the only effective tool for monitoring the incidence. Unfortunately, we continue to lose high-quality managers and today there is a question of the adoption of changes to the deputy law. We cannot change it by a government decision. Moreover, there is a motion to the Constitutional Court, which delays the deadlines. So, for our part, we will have a dialogue with the parliament and look for a compromise.

Question: How do you see the way for a final solution to the conflict between nuclear and renewable energy?

Answer: The way is very simple - it is the energy balance of the country. It has been approved, and it must be adhered to. This is not about a conflict between types of energy, but about a systemic crisis in Ukraine's energy system. Unfortunately, we got into this crisis simultaneously with the epidemic and the economic crisis. First, there was a decrease in overall demand, and secondly, in the energy system, there was an imbalance due to the overproduction of solar energy. With the arrival of the spring-summer season in Ukraine this year, twice as many solar energy facilities were put into operation than planned. Moreover, we are forced to pay for this energy, because this is how agreements are made: whether you consume or not, you have to pay. I unequivocally qualify this situation as the irresponsibility of the former leaders of Ukrenergo, who thoughtlessly issued permits for the construction of solar power plants. It is possible that there was a corruption component here, let the law enforcement agencies deal with it. Strategically, we want Ukraine to become a country where most of the energy is "clean", but not at a price as it is now - with a tariff of 5 to 15 hryvnias per kilowatt. This is probably the most expensive "green" energy in Europe. Ukraine has all the prerequisites for this energy to cost UAH 1.2-1.3 per kilowatt.

Today we have managed to balance the market. We have negotiated with investors in green energy, kept the price for the population at UAH 1.68/kW, which, and I have always emphasized, we will not change. Today, Energoatom is operating normally, all scheduled repairs are being carried out, and the demand for electricity is growing. The question of financial balancing of the market remains because we have debts to producers of alternative energy. It will take more time to resolve this question because we are talking about billions in debt. But we hope that with the launch of auctions for the construction of new stations, where the winner will be determined by the proposal of the lowest tariff, the problem will eventually disappear.

COMPLEX BUT MUCH-NEEDED DECISIONS

Question: The heating season is approaching. World gas prices remain at record lows. However, we still have legislative problems that do not allow transferring these low gas prices to heat tariffs. This is Bill No. 2458, which the parliament sent for a second reading. Will we have time to enter the heating season with revised downward tariffs for thermal energy?

Answer: As far as I remember, we are submitting this bill to the August special session. The government has done everything it should have done in terms of introducing the gas market and the energy market. For the transition period, we have introduced a mechanism for assigning special responsibilities to natural gas sellers. After the abolition of the mechanism, for the smooth launch of the market, a supplier of "last hope" was selected at the auction. For the next three years, it will be the state-owned Naftogaz. This company, if a consumer does not choose a supplier or something happens to his supplier, is obliged to sell gas to the public for 60 days with a zero markup, until the household finds a new supplier.

With regard to utilities, the tariff is regulated by the National Electricity Regulatory Commission (NERC). The commission must now exercise all its powers to review utility tariffs in order to bring them to market prices. That is, it should check and take into account the market price of natural gas in the component cost. But this is a question to local self-government bodies and to the NERC, it is beyond the powers of the government.

Question: What is the most important information that should be conveyed to people now?

Answer: The COVID-19 Fund and roads. The issue of financing road construction at the expense of the coronavirus fund is constantly causing debate in society. I want to emphasize the correctness of this decision. At the beginning of the lockdown, people were most afraid of getting sick, then later only a quarter of the citizens were afraid of the epidemic itself, and others were afraid of the economic consequences caused by the coronavirus crisis. This led to the redistribution of funds. We understood that salaries for doctors, the purchase of medicines, protective equipment, the arrangement of hospitals and so on are, of course, extremely important things. But it was even more important to support the people and reduce the pressure on the economy as a whole. And one of the best ways is to invest in construction. Large-scale road construction is exactly what provides a large multiplier for job creation and a warm-up of the economy.

Question: To what extent did your calculations turn out to be correct?

Answer: The effect was manifested in all areas - in the medium, small, and micro-business. Due to this, the global crisis and lockdown restrictions did not have a very negative impact on the economy. We have introduced credit and investment programs, compensated for losses for saved jobs, simplified registration and accrual of unemployment benefits. All this contributed to the fight against the effects of COVID-19. If anyone still has doubts about the correctness of the redistribution of the COVID-19 Fund money for the Big Construction program, I am ready to dispel them with numbers in hand. Since the beginning of lockdown, the number of registered unemployed has increased significantly in our country - from 320,000 to more than 500,000. To date, we have officially employed about 240,000 people. At the peak of registration, there were days when 6,000-7,000 people registered at employment centers at the same time, but today this figure has declined. This is just a dynamic indicator that shows a certain improvement in the economic situation. And what is most important for me is the stabilization of the employment situation.

We will continue the Big Construction program, in particular, the construction of roads, and we will also start projects for the construction of bridges. These are more complex engineering structures, so they will give impetus to the development of the industry with high added value. The logic of the government and the president of Ukraine is that economic stimulus measures should be widely applied in the country. The crisis cannot be overcome without this.

Oleksandr Kharchenko, Oksana Polishchuk, Kyiv

Photo credit: Hennadiy Minchenko

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