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09KYIV964, IMF AND WORLD BANK: UKRAINE STALLED ON BUDGET

June 4, 2009

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Reference ID Created Released Classification Origin
09KYIV964 2009-06-04 14:53 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO0662
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0964/01 1551453
ZNR UUUUU ZZH
P 041453Z JUN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7916
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 KYIV 000964 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF AND WORLD BANK: UKRAINE STALLED ON BUDGET 
 
REF: A. KYIV 954 
     B. KYIV 576 
 
Sensitive but Unclassified.  Not for Internet or Distribution 
Outside the USG. 
 
1.  (SBU) Summary. The IMF and World Bank have told us that 
they do not foresee any net revenues or fiscal savings in the 
pipeline for Ukraine's strapped budget.  Additionally, 
Ukraine has stalled on necessary reforms to qualify for a 
World Bank DPL loan.  Ukraine's parliament increased excise 
taxes on beer on June 3, a move that is expected to generate 
roughly UAH 300 million ($38 million) for the remainder of 
2009.  Nonetheless, Ukraine's authorities will likely end up 
with a revenue-neutral measure, as the Rada also passed a 
budget amendment that would increase outlays to four 
disparate programs.  Both the IMF and the World Bank 
separately acknowledged that such paltry sums being wrangled 
over in parliament, combined with a lack of credible 
structural measures, indicate how deadlocked the Rada will 
likely remain on fiscal issues over the weeks to come.  End 
summary. 
 
World Bank Loan Off-Track 
------------------------- 
 
2.  (SBU) World Bank Kyiv-based Senior Economist Ruslan 
Piontkivsky told us on June 4 that the $500 million 
Development Policy Loan (DPL), previously targeted for July 
disbursement, was significantly off-track.  The Bank had not 
come close to completing its appraisals or entered into 
sustained negotiations, due to the lack of GOU progress on 
structural measures.  Piontkivsky said a July timeframe for 
DPL disbursement was "impossible," and he stressed that the 
World Bank still considered GOU progress on the IMF's 
macroeconomic targets to be "essential."  Piontkivsky 
commented that the World Bank's $750 million loan for bank 
recapitalization could be disbursed sooner than the DPL.  In 
any case, he said, the two loans would "not be wrapped in the 
same package." 
 
3.  (SBU) There had been discussion "at the top" echelons of 
the World Bank about expanding 2009 lending to Ukraine, but 
even proponents of a loan expansion acknowledge that the 
Ukraine program is already beyond normal risk limits. 
Piontkivsky called the idea of reducing Ukraine's budget 
deficit through a World Bank bond issue "a long shot," given 
the logistical and time constraints of creating and 
implementing such a program. 
 
Money In, Then Out Again 
------------------------ 
 
4.  (SBU) A June 3 measure passed by the Rada will increase 
excise taxes on beer (from UAH 0.34 to 0.54 per liter) for 
the balance of 2009.  The IMF's Kyiv-based budget expert Igor 
Shpak anticipates that the taxes will only generate about UAH 
300 million ($38 million), hardly enough to make a dent in 
Ukraine's overall fiscal deficit of roughly 4 percent of GDP. 
 Moreover, the Rada also passed amendments to the budget that 
would allocate the new revenues to four separate programs. 
Spending will be increased for diabetes medicines and local 
budget subsidies in Crimea (UAH 160 million), water treatment 
facilities in Lviv (UAH 105 million), and restoration of the 
Shevchenko national reserve in Kaniv (UAH 22.5 million).  The 
IMF's Shpak estimated that the latter program is a sop to 
President Yushchenko, decreasing the likelihood of a 
presidential veto.  Taken in sum, the June 3 measure is 
revenue-neutral at the precise moment Ukrainian authorities 
are facing a large budget gap with no immediate financing 
prospects. 
 
5.  (SBU) The actual effect of the law may be to reduce tax 
revenues from the sale of beer.  Brewery output has already 
declined this year, falling 20 percent in the first quarter 
of 2009.  Rada deputy Yaroslav Dyodyk (Our Ukraine) noted 
during plenary debate that breweries with large dollar 
borrowings and imported inputs had faced a cash crunch, due 
to hryvnia depreciation and a drop in consumption.  However, 
the IMF's Shpak was more equivocal.  Although he acknowledged 
the possibility of elasticity, he pointed out that the beer 
market is concentrated in the hands of three or four major 
producers, each of which is likely to survive a downturn. 
Shpak predicted that because the excise tax increase would go 
into effect during the summer when beer consumption was 
highest, the new price levels would be fully accepted by the 
 
KYIV 00000964  002 OF 002 
 
 
public within weeks.  Shpak noted that the June 3 legislation 
constitutes another expansion of the excise tax regime for 
alcohol products.  Excise taxes were most recently amended on 
March 31, when the Rada passed two IMF-supported anti-crisis 
measures (ref B). 
 
6.  (SBU) The IMF does not anticipate any constructive 
p
rogress on fiscal policy in the coming weeks.  In fact, 
according to Shpak, the only budget-related measures in the 
Rada's legislative pipeline could result in a net decrease 
for the treasury.  A May 22 biofuels law grants generous tax 
incentives to both producers and consumers.  The IMF worries 
that any positive environmental and energy security outcomes 
from this law would be offset by losses in revenue, since the 
State Tax Administration would have difficulty distinguishing 
between types of fuel in its tax levies and collections. 
Additionally, a measure on VAT exemptions for agricultural 
producers had been passed that, in essence, could allow for 
broader indirect subsidies.  The IMF suggested that the 
President was being heavily lobbied to sign the VAT 
legislation, but Shpak could not estimate how much revenue 
might be lost if the law came into effect. 
 
7.  (SBU) Comment.  Ukraine's paltry efforts at raising 
revenue amidst a severe budget crisis, combined with the 
authorities' easy willingness to spend any gains, reveals 
that the Rada and the GOU are still not taking collective or 
unified responsibility for fiscal policy, perhaps thinking 
that the IMF and World Bank, along with other possible 
bilateral donors, eventually will come along with support. 
Given what we have heard from the IMF resident representative 
on June 2 (ref A) and the World Bank on June 4, however, it 
appears the international community likely will not be in 
Kyiv bearing gifts to offset Ukraine's budget deficit anytime 
soon. 
PETTIT

Wikileaks

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