2. Dynamics

The annual budget deficit to GDP ratio has been steadily declining (with the exception of 1997). It started in 1995 from the highly unbalanced point of 13,2% GDP and improved to less then 1,5% GDP in 1999. For the first 3 quarters of 2000 a budget surplus of 1% GDP was observed.

Figure 2. Consolidated Budget Deficit and Inflation Rate % Source: State Treasury, State Statistics Committee. Calculations: ICPS

Key determinants of the high level of budget deficit during 1993-1995 were extensive social security obligations, over-optimistic forecasts of both budget revenues and the macro environment.

Though all these features did not cease to exist, the period of hyperinflation and high macroeconomic instability, unrealistic social security spending level were partly terminated in 1995.

However, new possibilities for deficit financing, and unwillingness to cut public spending yielded a fallback to a 6,6% deficit in 1997.

The political attempt to introduce an “Economic Growth” program, featuring tax reform, failed in late 1996, consequently producing a return to distorted public outlays, including subsidies to inefficient producers and social security overspending⁹.

The average consolidated deficit level fall from 8,6% in the 1992-1995 to 3,8% of GDP in the stabilization episode of 1996-1998. The introduction of the new currency along with more tight monetary and foreign exchange policy lowered CPI inflation to 10,5% average in 1998.

The financial crisis of 1998 influenced heavily the macroeconomic performance, creating macroeconomic instability. Forced rescheduling of government securities caused a final drying up of borrowing possibilities on private markets, both domestic and foreign.

The suspension of external financing left the government no choice but to cut expenditures. The impounding of funds was used several times to meet current budget constraints. This "stabilizer" helped push the budget deficit towards 1,5 % GDP in 1999. More careful planning and pro-reform government seems to be taking the budget balance turn positive in the year 2000.

Figure 3. Quarterly Budget Deficit, Mln UAH Source: State Treasury, State Statistics Committee. Calculations: ICPS

Privatisation revenues make general government deficit (national definition) smaller, especially their influence is clear starting from the end of 1998.

Figure 4. Quarterly Budget Deficit, % GDP Source: State Treasury, UEPLAC. Calculations: ICPS

3. Financing

The structure of the budget deficit financing was determined by different mechanisms available to authorities: external borrowing, direct financing by NBU credits, financing through T-bills market by private borrowing and by NBU purchases, then via secondary T-Bills market.

1. Direct nbu financing

Unrealistic planning of budget revenues and significant government interference into the economy resulted in huge deficits of 1992-1995. The only source of financing was NBU credit to Ministry of Finance. For instance, external government borrowing in 1994 was covering less than 1% of the total.