Economic Crisis in Ukraine: What the Authorities Need to Do to Save the Country's Economy – Tetiana Bogdan’s comment
Tetiana Bogdan, Doctor of Economics and Head of Public Finance Department of the Growford Institute, stated in a comment to Comments.ua that in response to the ongoing crisis, the government has prepared a package of fiscal incentives of about 6% of GDP. The expert emphasizes that the easing of fiscal policy aims to curb the spread of the disease, as well as to protect employees and viable firms from economic collapse.
“At the same time, in many advanced countries and some emerging market economies, fiscal stimulus packages reach 10% of GDP or more. The total fiscal package is estimated by IMF at near USD 11 trillion globally. About 50 %, or USD 5.4 trillion in such packages are additional spending programs and tax relief for businesses and population,” – says Tetiana Bogdan.
The expert reminds that in Ukraine the changes to the 2020 budget approved by the Verkhovna Rada in April provide for an increase in the general government deficit (state budget, local budgets and social insurance funds) to 8.2% of GDP.
“At the same time, according to the IMF, the average overall fiscal deficit is expected to soar to 13.9% of GDP in 2020 .The deficit in developed countries will reach 16.6% of GDP. In Ukraine, the scale of fiscal incentives is twice smaller (in relative terms) than in developed countries. But it should be taken into account that this situation has mainly objective reasons: the narrow fiscal space of the state and limited non-inflationary sources of financing the budget deficit.”
Economic crisis in Ukraine: tax incentives
In Ukraine, the amount of social benefits for those categories of the population affected by quarantine restrictions is very modest. The same goes for financial support for the firms that have lost revenue.
“Tax relief for firms initiated by the state included the exemption from real estate tax and the single social contribution for a short period of time, the deferral of tax audits and deadlines for filing of annual tax declaration on property and income," reminds Tetiana Bogdan. At the same time, employees who lost their jobs due to quarantine could only apply for the minimum wage from the state. The amount of the minimum unemployment benefit increased from UAH 650 to UAH 1000 and from UAH 1630 to UAH 1800 per month, while the subsistence level declared by the Ministry of Social Policy of Ukraine exceeds UAH 4000 per month”.
Meanwhile, since the beginning of the coronavirus crisis in many countries, the fiscal incentives in the form of government guarantees, loans and equity injections have increased significantly.
“Globally, such incentives, also known as government liquidity support programs, are estimated by the IMF at USD 5.6 trillion. The liquidity support programs of governments and Ministries of Finance in many countries exceeded the amount of fiscal policy measures related to reducing revenues or increasing expenditures, – emphasizes Tetiana Bogdan. – In Poland, for example, the Ministry of Finance has approved a program of new credit guarantees and micro-loans to entrepreneurs with a budget of PLN 75 billion, or 3.3% of GDP. In addition, the Polish Development Fund has committed to financing a business support program worth PLN 100 billion, or 4.5% of GDP”.
In the major industrialized countries of France, Italy, Germany, Japan, the United Kingdom, and the United States, massive liquidity support packages have also been developed, including government guarantees and loans worth as much as 10% of GDP or more. Such packages were intended to help financial and non-financial enterprises during an emergency.
“In Ukraine, the only program of this type is the program “5-7-9”, which has not become an effective means of supporting small businesses, due to strict banking regulations and the lack of interest of banks to provide credit support to businesses (even with budget subsidies),” said the expert of the Growford Institute.
Economic crisis in Ukraine: the policy of central banks
To support the flow of credit resources into the real economy, the central banks of many countries have taken decisive action to ease monetary policy, repurchase a number of assets on the market, and provide liquidity to financial institutions.
The National Bank of Ukraine has also taken some steps in this area. They include:
- the key policy rate was reduced from 10% to 6% per annum;
- the implementation of stricter standards of banking regulation has been postponed;
- level of liquidity support of banks has been slightly increased and terms of short-term refinancing loans have been increased up to 90 days;
- tenders for long-term refinancing of banks for up to 5 years have been renewed.
“However, such measures are difficult to call monetary incentives in the context of continued rather tight monetary policy,” – said Doctor of Economics. “In addition, in many countries, the central banks have launched or expanded existing asset repurchase programs aimed at lowering long-term interest rates and prevent the growth of the cost of long-term financing for firms and households. In Ukraine, this has not been done and the NBU Board categorically rejects this possibility, despite the relevant decision of the NBU Council”.
The European Central Bank launched a "Pandemic Emergency Purchase Program" worth EUR 750 billion in April, which will run until the end of 2020 and cover the repurchase of public and private securities.
The US Federal Reserve (Fed) has begun repurchasing federal bonds, mortgages and corporate bonds with a funding limit of USD 300 billion.
The Bank of England has launched the Asset Purchase Facility with a funding limit of GBP 200 billion to increase the central bank’s assets in government bonds and in corporate bonds with an investment rating.
Among the emerging market economies, similar programs have been launched by the Central Bank of Hungary, Romania, Turkey, and South Africa.
The national securities market was also supported by the national banks of Croatia and Poland. For example, as of July 1, the National Bank of Poland repurchased treasury bonds on the secondary market in the amount of PLN 96 billion, or 4.3% of GDP.
“Today in Ukraine there is hope that the appointment of a new Governor of the National Bank and the renewal of the Board will be a driving factor of positive changes in monetary policy and banking regulation. They should become effective anticrisis tools in an unprecedented economic crisis,” summarizes Tetiana Bogdan.
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