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08KYIV2413, UKRAINE “NOT YET THERE” ON 2009 BALANCED BUDGET

December 9, 2008

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Reference ID Created Released Classification Origin
08KYIV2413 2008-12-09 16:49 2011-08-30 01:44 UNCLASSIFIED Embassy Kyiv

VZCZCXRO2071
OO RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #2413/01 3441649
ZNR UUUUU ZZH
O 091649Z DEC 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6882
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 02 KYIV 002413 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
TREASURY PASS TO TTORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE "NOT YET THERE" ON 2009 BALANCED BUDGET 
 
 1.  (SBU)  Summary.  The Ministry of Finance has granted a 
preview of the draft 2009 budget to the IMF and World Bank. 
The World Bank told us the GOU foresees a 2009 budget deficit 
equal to 0.3 percent of GDP.  After studying the draft, 
however, the World Bank puts the deficit at 0.8 percent of 
GDP.  In either case the draft does not foresee a balanced 
budget, a key conditionality of the IMF support program.  The 
draft budget contains strong reductions in real wages and 
pensions, but also a drop in investment spending.  In order 
to balance the budget, the World Bank has recommended further 
cuts in pensions, social privileges, and subsidies to coal 
producers and to entities in the energy sector, including 
Naftohaz.  At the same time, it recommends increasing certain 
budgetary items that will help the population and economy 
deal with the fallout of the economic crisis.  It is 
recommending that Ukraine heighten support payments for the 
country's most vulnerable citizens, and that it boost 
investment outlays as the best way to help the real economy. 
The USG, according to our interlocutor, can assist the IMF 
and World Bank by "raising the issue" of these 
recommendations with our Ukrainian counterparts.  End summary. 
 
GOU Budget Projections 
---------------------- 
 
2.  (SBU) On December 6, Minister of Finance Viktor Pynzenyk 
invited the IMF and World Bank to review the government's 
draft budget for 2009.  At his office on a Saturday 
afternoon, while his assistants compiled the budget's 
individual chapters, Pynzenyk explained that the government 
had made "hard decisions" on cuts in public sector wages, 
goods and services, capital spending, and pensions.  The 
Minister claimed to have closed the deficit to less than 0.3 
percent of GDP, with the ultimate goal of balancing the draft 
2009 budget in the coming days, which currently constitutes 
roughly 43-44 percent of GDP. 
 
3.  (SBU) Pablo Saavedra, the World Bank's Kyiv-based chief 
economist, told us on December 9 that the Bank does not share 
the GOU's forecast.  In the World Bank's view, the proposed 
budget still has a deficit of roughly 0.8 percent of GDP. 
 
4.  (SBU) Saavedra gave us an overview of the GOU draft.  The 
Ministry's current plan is to keep nominal public sector 
wages at current levels.  The action will cause real wages to 
drop significantly in real terms, saving 0.8 percent of GDP. 
The GOU is also planning significant reductions in public 
sector consumption.  Stemming the rapid growth in pensions 
will pose the most difficult challenge to the GOU, he said. 
Parallel to the budget process, the Ministry has prepared a 
separate draft law that will cap increases in pensions in 
nine different ways.  If passed, the caps would save another 
1.8 percent of GDP in next year's budget, even if pensions 
remain poorly targeted once the law passes. 
 
World Bank: More Cuts and Targeted Spending 
------------------------------------------- 
 
5.  (SBU) The World Bank and the Ukraine government are in 
line on 2009 revenue projections, with roughly $250 million 
separating their estimates.  According to Saavedra, both the 
GOU and World Bank's conservative forecasts foresee revenues 
falling by 2 percent of GDP in 2009, due to industrial 
production declines, lower payroll tax collections from wage 
contraction and unemployment, and drops in revenue from 
import duties. 
 
6.  (SBU)  Upon analyzing Pynzenyk's fiscal plan, the World 
Bank expressed to the Ministry that its spending cuts are 
admirable but "not there yet."  To remove the difference 
between the GOU's and World Bank's forecasts for the budget 
deficit, the World Bank suggested better targeting of all 
social expenditures.  It recommended chopping vestige 
Soviet-era privileges such as transportation fare reductions 
afforded to veterans, students, and the elderly.  According 
to the World Bank, the greatest budget decreases can be made 
through cuts in subsidies to coal producers (saving 0.5 
percent of GDP) and to the government energy monopoly 
Naftohaz and other entities in the energy sector, such as 
municipalities that are forced to sell heating below cost 
(saving 10 billion UAH or 1.8 percent of GDP). 
 
7.  (SBU) The World Bank said these cuts should be balanced 
by increases in targeted spending for Ukraine's poorest 
citizens.  The government's most efficient social spending 
currently reaches 70 percent of the poorest families in the 
 
KYIV 00002413  002 OF 002 
 
 
country, aiding, for example, vulnerable large families and 
single mothers.  Such under-funded programs should receive 
double or triple their current allotments, according to
 the 
World Bank, equivalent to roughly 0.4 percent of GDP. 
 
8.  (SBU) At the same time, the government should attempt to 
spur growth and employment by boosting the investment 
component of the budget, particularly by investing in 
crumbling infrastructure, Saavedra said.  Increasing 
investment would be the best way for the budget to support 
the real economy, he argued.  However, the GOU tends to think 
it can support the economy by giving special treatment to 
favored individual sectors, mostly through subsidies or tax 
breaks.  The GOU has spent, on average, about 2 percent of 
yearly GDP on investment over the past four years, far lower 
than the 6 percent mark normally seen in more progressive 
transformational economies.  Infrastructure development 
increases of 0.6 percent of GDP would improve transportation 
links and port capacity, simultaneously adding value and jobs 
to the overall economy, the World Bank believes. 
 
Bank to Provide $1.2 Billion in Budget Support in 2009 
--------------------------------------------- --------- 
 
9.  (SBU) The World Bank intends to release the third $500 
million tranche of its DPL3 loan to Ukraine by the end of 
December.  It also plans to loan Ukraine up to $1.2 billion 
in budget financing in 2009.  Of this, $750 million would be 
used for bank recapitalization and resolution, and only 
dispersed on a case by case basis as concrete needs arise. 
(Note: The IMF program considers outlays for bank 
reconstruction, bank resolution, and state-supported project 
finance programs to be exceptions to its overall balanced 
budget conditionality.) 
 
World Bank and USG Collaboration 
-------------------------------- 
 
10.  (SBU) Saavedra appealed for U.S. government support of 
the World Bank's budget proposals to the GOU.  He emphasized 
that a U.S. push for transparent infrastructure investment 
could counter worsening conditions in the real economy, as 
well as dash inefficient subsidies to favored or politically 
well-connected interests in the coal and energy sectors. 
Saavedra expressed enthusiasm for the Department of Treasury 
technical assistance team slated to visit Kyiv in 
mid-December, calling needs in the Ministry of Finance and 
the National Bank of Ukraine "critical." 
TAYLOR

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