Games of Statistics and the PryvatBank Dividends. What Helps Implement Budget 2020?

It has been over a month, yet things did not turn out as expected with the implementation of the “emergency budget”. The anti-virus fund, set up in the budget to tackle the consequences of coronavirus in a prompt manner, was not used in April. In May the country received revenue largely because of games with statistics and not due to the economic situation. What are the reasons for this? How did the budget survive the crisis months of April and May? What is the budget to expect in the coming months? Find out in this VoxCheck piece. 

Revenues. Indicator games in April-May

In January-April the general fund budget revenues fell short of 13.9% or 44.2 billion UAH (Fig. 1). 

There is nothing surprising about the trend itself – the budget has not been implemented since the beginning of the year and amid the crisis the “hole” in it has only been increasing with each month. The problem lies in the scale of underperformance specifically in April. 

On April 12, the Parliament voted for the revised budget. It would make sense if during the first month of new budgetary indicators implementation largely followed the plan. However, that was not the case – the general fund received 17 billion UAH or 15.7% less in revenues.

Why? 

In his video former Head of Tax Service Serhii Verlanov explained that the Ministry of Finances revised the law on budget but failed to do so with the revenue plan for April. 

He means the so-called indicators, set for the Tax Service by the Ministry of Finances, which the former is guided by in its activities.

“The plan was not updated. We had some calculations (with regard to updated indicators – editor’s note). According to the old law the revenue component made up almost 32 billion UAH, the revised plans (excluding rent tax and some other sources) foresaw 23-24 billion UAH.” According to Mr. Verlanov the State Tax Service collected 26.6 billion UAH in April. “Had the plan been adjusted, we would have fulfilled it”, he added. 

This may also mean that the grounds for these indicator games lie in the political realm. Underperformance of the State Tax Service coincided with the dismissal of Maksym Nefyodov, Head of State Customs Service, and Serhii Verlanov, as well as Ihor Buhrak, Head of Financial Control Office. Failure to fulfil the plan was proof of Verlanov’s alleged poor performance and a bad State Fiscal Service reform. Mr. Verlanov himself publicly stated that he was not informed of the grounds for dismissal.

In May, not long after that, Danylo Hetmantsev, Chairman of the Parliamentary Committee on Finances, Tax and Customs Policy, in his Telegram channel published an official letter from the State Tax Service on the adjusted State Tax Services indicators for the second quarter.

It contained the following indicators of tax income to the general fund of state budget: April – 31.8 billion UAH, May – 39.6 billion UAH, June – 21.3 billion UAH. 

In May the situation with fulfilling the revenue plan changed.

“In May the general fund of the state budget received 63.9 billion UAH, 100% of what has been planned”, contemporaneous data of the State Treasury as cited by the Ministry of Finances. 

According to the Ministry of Finances the main budgetary trends of May are as follows: income tax plan has been exceeded by 0.1 billion AUH, mineral resources rent tax has exceeded the plan by 0.3 billion UAH, which is 114.7% of what has been planned. VAT collection plans have been fulfilled almost completely in May (99.8%). Corporate tax plans were not 100% fulfilled (97.2%). 

According to the Ministry of Finances excise tax plans have been exceeded by 1.1 billion UAH or 21.4%, predominantly due to tobacco tax. 

Positive dynamics of tobacco excise income is something new. It used to be a weak link in the budget revenues. The Ministry of Finances reported regular underperformance due to decreased tobacco product output and stock formation by the owners at warehouses.

Why has the situation changed this time?

Since autumn of the previous year the government has in fact been having a confrontation with tobacco producers because of the so-called “Kholodov-Dubinskyi” amendment. 

In October 2019 the deputies passed Oleksandr Dubinskyi’s amendment No. 8 by to the draft law introducing a single account for paying taxes. The amendment set a fixed margin for wholesalers and retailers of cigarettes. The media were saying that the person benefiting from the amendment was Andrii Kholodov, who had connections to the tobacco business. Kholodov himself did not deny it.

Philip Morris Ukraine press service ensured VoxUkraine that the threat coming from “Kholodov amendment” was the main reason why tobacco production dropped in the late 2019-early 2020. Some companies had to return the excise labels they had already bought. The largest producers were even considering shutting down production in Ukraine entirely.

“In February the President vetoed, and then on April 16, 2020 signed the abovementioned law without the amendment No. 8. The situation on the tobacco market has stabilized, which allowed overperformance in tobacco excise tax collected to the state budget,” Philip Morris Ukraine claim. As far as the demand for tobacco product goes, the producer estimates it to have dropped by 5% during the quarantine.

High levels of income for other types of taxes can be explained by the fact that in May budgetary plans were already approximated to the economic reality. 

The new plans foresee “cut-downs” of expenditure from May until the end of the year for a sum total of 145.4 billion UAH. The largest cut down – for around 27 billion UAH – falls on May (Fig. 1)

Expenditure. Saving on development, focusing on “anti-virus” fund

During the crisis month of April, the state spent 88% of what was planned. (Fig. 2) 

Practically all governmental agencies have been underfunded to a larger or smaller degree. 

Funding for Regional Development Fund has been put on pause along with a number of other smaller programmes, e.g. support of agricultural producers, reimbursement of damages caused by airplane disaster in Iran (which happened in January 2020), launch of partial credit guarantee fund and others. This approach fits into the course approved by the April anti-crisis changes to the budget. Back then the government and deputies refused to continue budgetary funding of a number of development and state support programmes. 

The state is quite disciplined about social expenditure – pensions and different types of social benefits get 100% funding. In January-April the Cabinet of Ministers spent 2 billion UAH less on subsidies for utility services because of warm weather.

Expenditure on infrastructure development, in particularly construction of roads, deserve a separate mention. Building of infrastructure, including roads, is accelerated by the President Volodymyr Zelenskyi as part of a joint programme with the government called Great Construction. Nevertheless, in April the funding of State Road Agency was quite low – 37%. This index may increase in May and throughout the summer. Road repairs are traditionally financed according to seasonality. 

Under quarantine circumstances, healthcare expenditure was of particular importance. Here, the situation was quite ambiguous. Thus, the medical subvention and the subvention for the support of separate medical institutions got 100% funding. Yet, the selection under the programme of state public health guarantees made up 69% of the plan. 

This has to do with the schedule of money transfers.

National Health Service of Ukraine (NHSU) received additional funds to pay for the services of healthcare institutions which cater to patients with suspected or confirmed COVID-19 diagnosis. “The money was allocated for April as well, but the legislative acts which allowed the NHSU to contract institutions for provision of such services came out only in May. Consequently, the money was transferred to the institutions in May,” the NHSU press service told VoxCheck.

Financial reports on regular specialized care services provided in April were compiled and settled in May. 

According to the NHSU, they have not yet spent 400 million UAH of the funds allocated for the reimbursement programme Affordable Medicines. That is because an electronic prescription can be created for medicines needed for 90 days of treatment. And most patients already used the programme in December 2019, so they received the medicines from pharmacies and the NHSU reimbursed the money to pharmacies. Consequently, in the next three months those patients did not apply for medicines. This helped save money in the period specified. 

Major expenses on combating the pandemics were to be funded from a separate 65 billion UAH anti-virus fund. It was supposed to be like that but according to the State Treasury statistics there was no funding in April. The government started distributing money from the fund in late April only, having allocated 6 billion UAH to the State Unemployment Social Insurance Fund. See more on how and when the country was planning on spending the billions from anti-virus fund in Figure 3. 

The state is currently allocating almost all “anti-virus” funds on a non-refundable basis. As of May 20, out of the 65 billion UAH of the fund 28.5 billion UAH has been distributed, with only 1.3 billion being allocated on a refundable basis.

What’s next?

Three main factors influencing budget implementation.

The first factor is the duration of quarantine measures which have a direct impact on the level of state revenue. There are two scenarios here. The optimistic scenario – easing of the quarantine restrictions will allow the businesses to come back to work, budgetary revenue will start evening up gradually. The pessimistic scenario means that the coronavirus curve will go up after easing of the quarantine and the government will introduce a second wave of restrictions. Under this scenario it is highly likely that the budget will require another revision by the end of the year. For now, the experts seem to be more optimistic.

“I doubt we will be seeing any serious budget revision at the end of the year. For the time being, the Cabinet of Ministers will be juggling expenses aimed at supporting the economy within the specially created fund for pandemic combating”, Taras Kotovych, Senior Financial Analyst of ICU group, told VoxUkraine. 

If we do not have enough money to cover the expenses, the Ministry of Finances will be using loans. “Most probably, at the end of the year we will have underfunding of some items of the budget. Those that might get affected first are capital expenses and expenses on education,” the expert summarizes.

The second factor – the IMF cooperation programme. It will affect both revenue and expenditure. The agreement on continued cooperation opened access to external funding for Ukraine. The programme’s impact on expenditure lies in the realm of control. For the first time since 2015, the IMF resources will go not to the NBU reserves but to the budget. In this context, it is important for the IMF for its funds to be used for their intended purpose. 

“As a rule, we set very strict rules for monitoring the expenses in our cooperation programmes, especially for emergency programmes like this one caused by COVID-19. In almost all countries we are insisting on measures that ensure strict mechanisms of control and audit, and Ukraine is not an exception,” IMF Resident Representative in Ukraine Mr. Goesta Ljungman told VoxUkraine.

Additional concerns are brought about by the procedure of tenders for the procurement made within the framework of anti-virus fund in circumvention of the Prozorro system. This procedure allows for the customer to enter the procurement agreement after negotiating the price and other essential terms of the agreement. The Prozorro system requires for the reports on such procurement to be published. The creditor will demand additional control mechanisms over budgetary expenses. 

The third factor – the dividend factor. The dividends and the share of net income from the public sector transferred at the right moment are a rescue rope for the budget. In late 2019 Naftogaz paid dividends in advance, in April it was the National Bank that filled up the budget with 42.7 billion UAH. We are expecting the 24.5 billion UAH in dividends from the PryvatBank. The bank is supposed to transfer them by July 1. This marks the end of large-scale dividends. The crisis has also affected public companies and we do not know if they will make profit again by the end of 2020.