1. The Tymoshenko government is unable to curb inflation!

Facts

1. Inflationary processes keep on aggravating in Ukraine. According to the State Inspectorate on Price Control data, since the beginning of February of this year (as of 25.02.08) retail prices for the 1st sort flour bread grew by 4.4%, bread wheat-rye bread by 4.5%, sunflower-seed oil by 4.4%.

2. Inflationary expectations and anxiety in the society increased: more than 2/3 of Ukrainians deem that the primary task of the government is to tackle price growth. Results of the poll, conducted by the sociological service ‘Ukrainian barometer’, testify to this’ (31.01.2008).

The government’s anti-inflation program has not been promulgated by now! Meanwhile, draft statements of the Cabinet of Ministers of Ukraine directed on manual adjusting of prices on competitive markets do appear.
Comments

1. Fragmentary information about the anti-inflation program project in media testifies that its priority will be manual adjusting of prices on competitive food markets.

According to media information, Paragraph 38 of the anti-inflation program project stipulates ‘strengthening of state control over applying trade mark-ups and pricing mechanisms’. The government’s intentions become clearer after examination of draft statements of the Cabinet of Ministers of Ukraine concerning price regulation:

‘On making alterations to the statement of the CMU #1548 (of 25.12.1996)’. The document suggests including of sunflower-seed oil in the list of commodity items, which marginal rate of return and wholesale prices can be regulated by the local state administrations.

‘On approval of the pricing process of producers for food items subject to the government control’. A by-law suggests introducing rigid setting of norms for producers’ expenses to determine product prime cost. For example, draft statement does not let to add to operating expenses – when determining prime cost of a unit - expenses for conducting marketing arrangements or legal services. And it is contrary to the assessment of gross expenses of enterprises under the Law on corporate income taxation. Besides, the statement gives establishment of rates of return in charge of the authorized body on price control.

2. Tymoshenko’s initiatives, in case of their acceptance, shall considerably increase opportunities of the government to control prices of the producers manually:

A scope of applying marginal rates of return is broadening. At the moment marginal rates of return (setting of profit norms) are applied exceptionally to the producers of bread and child food (fixed by the local state administrations). In fact, Tymoshenko’s draft regulation stipulates to extend this list through broad range of ‘social’ goods under the resolution of the CMU #1548 (flour, meat, sausages, milk, sour cream, eggs and other), which make up the largest part of a food basket of an average Ukrainian.

Taking into account obsolete and inefficient law ‘On prices and pricing’ (#507-12 of 03.12.1990 with alterations) the government may get a possibility to regulate expenses and profitability of practically all groups of produced food stuffs that anyhow come within a notion ‘socially important’ through their resolutions.

3. The Cabinet of Ministers’ intentions contradict with the European countries’ experience, where prices on food products are generally not subject to direct regulation. Various schemes of indemnification (subsidies) for agricultural producers are carried out instead. The managed markets in the EU, foremost, involve pharmaceutics and markets of natural monopolies (power, gas distribution et cetera). Besides, Article 82 (a) of the Roman Agreement assumes interference of the state in the pricing on the non-competitive markets (in case of ascertainment of ungrounded purchase and/or sale prices which can bring harm to a consumer). However such conflicts shall be settled within the framework of the EU anti-monopoly law. The last one concerned fixing marginal price on the roaming services for mobile tele-operators.

4. Attempts of state to dictate prices, rates of costs and return on the competitive markets (including food) will slow down growth of food production, will lower products quality, and in a while will result in goods deficit. Existent practice of restrictions on profitability of bread producers is ‘kept afloat’ only due to subsiding bakers with cheap flour from the National Reserve. A question, who and how will reimburse private producers of milk, meat or eggs for a margin between market and ‘administrative’ price, is not addressed by the government. Meanwhile, Tymoshenko’s previous experiments in 2005 made the planned economy of Ukraine suffer the crises on sugar, meat, petrol markets. Malignancy of attempts to ‘freeze’ rise in internal prices on food becomes more evident at the background of increase in demand and prices on food products throughout the world. Constraining workers of processing agricultural raw products through state norms, the government curtails their resources for growth automatically, hindering satiation of the markets with goods.

5. The administrative methods of prices regulation may have short-term results in the form of inflation reduction (for a few months), though will lead to more considerable price advance in the subsequent periods (after removing restrictions). In order to recover losses and reduce costs for introducing future sanctions, food producers will increase prices in reserve. Freezing of price growth on the competitive markets hits a consumer twice! The goods deficit is originated, and it stirs inflation in its turn.


6. The attempts of prices administrative regulation are continuation of the Tymoshenko government’s policy on reinforcing state interference in the economy. Earlier the CMU promulgated its initiatives on satiation food supply through instruments of non-tariff regulation. The matter concerns a draft resolution ‘On approving export quotas on sunflower-seed oil and sunflower seeds, subject to licensing until July 1, 2008 ’. The BYUT faction, in due time having criticized the Yanukovych government for export quota on grain, additionally limits foreign trade of sunflower-seed oil! Now – until a decree is passed – barriers for licensing consignments of sunflower-seed oil under export contracts are impeded. Meanwhile export quotas on grain are also prolonged. Advent of such anti-inflation measures indicates failure of the current government to reduce inflation through more effective market methods (by means of carrying out balanced budgetary and tax policy, implementing policy of energy-efficiency, creating conditions for upgrading agrarian production et cetera).

7. Tymoshenko’s anti-inflationary tools were lambasted by the President. The President’s Secretariat officials with a touch of irony pointed Tymoshenko out that ‘one of the effective approaches of tackling inflation would be to define all goods of food category as the subjects of governmental price regulation, though it would conflict with unambiguous position of the President - in the country which lives under conditions of a market economy, the appropriate market measures to be used’.

8. An analysis of first results of the Tymoshenko’s government performance give grounds to assert that there are serious risks of further acceleration of price growth. The government fails to include tasks of hampering inflation in its plans. Tymoshenko’s policy is unable to work for the long-term outlook. Her team (as well as in 2005) is focused on reaping short-term electoral benefits that have nothing in common with the actual growth of citizens’ well-being.


2. The government continues to twist business’ arms, turning to a mode of manual governing over tax policy, to obtain additional revenues...

Facts

The government keeps amplifying a burden of tax administration:

The Ministry of Finance reported that in February it will assign from the state budget for VAT indemnification only UAH 1.27 billion out of UAH 2.6 billion being stipulated. The State Tax Administration of Ukraine (STAU) officials attributed it to that indemnification sums inserted in declarations have not been confirmed with tax audit yet.

The head of the STAU S.Buryak introduces a draft ‘On using ordinary prices while holding tax control’. The draft may usher since April 1 new approaches for setting an ‘ordinary’ price as a method of charging extra taxes. The STAU believes that it should curtail possibilities of lowering tax obligations and increase the budget receipts by UAH 3 billion.

Comments

1. The VAT administering is worsening, and debts for the VAT reimbursement is used as a tool for the budget balancing. On February 20, 2008, the VAT outstanding debt amounted to UAH 3.2 billion and has increased from the beginning of the year by more than 10 (!) times (from UAH 0.3 billion at the end of 2007). The VAT largest past-due debt is accumulating in the agro-industrial complex ( UAH 0.9 billion). At this background reduction of funds for the VAT reimbursement seems to be utterly contradicting. Cutting down a plan of the VAT indemnification is indirect evidence of using the VAT to cover budget spending, related to populist promises, given that other sources of funds (privatization, loans) are limited.

The practice of the VAT reimbursement under the manual mode contradicts to the governmental program and coalition agreement, as well as earlier proclaimed intentions to cut debts for the VAT indemnification. Besides, the manual mode of refunding the VAT:

abets corruption, deteriorates tax order;

impairs business climate and entrepreneurship;

abolishes positive effects of Ukraine’s entry into the WTO;

2. The government is generating drafts that extend possibilities of manual administrating taxes.

The STAU suggests to enlarge a list of methods for calculating ‘ordinary’ prices and the scope of their usage from April 1, 2008. The STAU wishes to add the following approaches to the existent ones - ‘resale price’ and ‘expenses plus’:

‘Sale analogues’: an ordinary price is determined through the cost of similar goods in companies not connected with a seller;


‘Book value’: based on the accounting data of an enterprise.

The STAU wants to apply ‘ordinary’ prices for four kinds of transactions: external economic, barter, with concerned parties and payers subject to another rules and tax rates. Disparity with an ‘ordinary’ price empowers the STAU to charge on the occasion extra tax amounts on a taxpayer. A purpose of the proposal is to increase the budget windfall from income tax by UAH 1 billion, from the VAT – by UAH 2 billion

3. Extended usage of ‘ordinary’ prices within tax control is a tool for escalating pressure on business by the tax authorities

Application of ‘ordinary’ prices should not beget automatic charge of extra taxes. It is an instrument for identifying doubtful transactions by means of indirect tax audit. In evasion cases, decisions on taxpayers audit should be made rather than outright charge of extra taxes.

Unless ‘ordinary’ prices usage within tax control enjoys sufficient regulation, the STAU will be able to apply them arbitrarily at its discretion. In practice it will mean selective application of the law towards taxpayers (depends on their familiarity with the power) and exacerbate corruption in the tax sphere.

4. Pursuing short-term objectives of increasing the budget receipts, the government undermines the long-term outlook of the country’s growth.

Manual management of tax policy might provide additional revenues in short-term period. However in a longer outlook it causes decline in tax receipts against a background of investment climate deterioration, scaling down of business activity and growth of shadow economy.

5. The government should give up attempts of the budget unbalancing and focus its efforts on tax administration reform and development of the internal borrowings market, that would provide flexible access to the resources.


3. ...But even these measures are not enough for fulfilling promises about reimbursement of Oschadbank (Savings Bank) deposits.

Facts

According to the Presidential Secretariat’s data, the Oschadbank (Savings Bank) board has reached a decision to halt registration of new depositors for obtaining partial reimbursement for lost savings in the former Savings Bank of the UkrSSR.

Comments

1. Although the Oschadbank board on the same day made a speech with refuting the Presidential Secretariat’s information, every day it becomes more obvious: Tymoshenko’s blitzkrieg on reimbursements has suffered a defeat.

2. The government in its calculations underestimated the amount of potential depositors and allocated much lesser sums for pecuniary compensations :
In the 2008 budget pecuniary compensations (UAH 1.000 for each), promised for all depositors, are appointed only for 6 million people;

On 22.02.2008 4.678 depositors were listed on the register of depositors, among which about 2.7 million people received payments.

Approximately 1 million depositors are waiting for their registration at the moment (considering them the amount of pecuniary compensations in the budget will be almost exhausted).

According to the Presidential Secretariat calculations, a total would-be amount of registered depositors may come to 20 million people.

3. The Oschadbank hardly manages to restrain flow of registering depositors:

During the last weeks information about difficulties in registration comes from all regions of Ukraine. In particular, on February 22, 2008 Odessa Regional Administration of the State Oschadnuy Bank halted registration of depositors. A formal reason is to prepare January account statements. Date of proceeding registration is unknown.

Earlier the Oschadbank confined registration days to Friday and Saturday, many Oshadbank branches not working on Saturdays.

Lag between registration of a depositor and money receipt increased on average from few days at the beginning of January to one month at the end of February (under the governmental resolution, payments shall be made on a 3rd day after registration of a depositor).

4. The government lacks money for reimbursements:

The budget stipulates only UAH 6 billion for pecuniary compensations (out of potentially necessary UAH 20 billion)

Privatization windfall (including additional), on which the Tymoshenko government expects, remain under a question (privatization is blocked by the President)

The government tries to shift a decision of the problem on business, amplifying manual administration of taxes and customs payments.

5. Complete indemnification of savings in 2 years has become one of the BYUT’s basic and exclusive election pledges at the last extraordinary elections to the Parliament. Citizens entrusted their voices to the BYUT politicians for solution of their specific problems. Unfortunately, the government has failed to put in practice its political obligations, to refund savings, not only in full volume but even partially. The Tymoshenko government is not able to work efficiently and gain the result. Political responsibility of the power for its citizens, permanently mentioned by the present prime minister, still remains to be a myth.

6. As for reimbursements, the Party of Regions position remains the same:

The legislative approval of the procedure for reimbursing depreciated savings economies is required (that would make the authorities stick to a schedule of declared payments). The power should be honest with its citizens and execute in full undertaken obligations.


The reimbursement mechanism should not undermine basis of macroeconomic stability and result in stagnation of reforms in the crucial sectors.