I never promised you a rose garden
On March 14 Ukraine’s media reported that the Cabinet of Ministers had asked the U.S. lobbying company APCO to assist it in talks with the International Monetary Fund that had hit a dead end due to the unwillingness of the Ukrainian side to increase the rates of gas for households. The reason the government is desperate for the new loan from the IMF is clear. Last week President Viktor Yanukovych promised to increase social payouts in preparation for the upcoming presidential elections.
The resonating announcement of President Viktor Yanukovych at the government meeting held on March 7 of his attention of fulfilling the promises he made prior to the presidential elections in 2010 immediately elicited a sceptical response from Ukrainian political commentators. The president also promised to increase the subsistence level, pensions and other social payouts, introduce a luxury tax and lower the rates of mortgage loans.
The President’s promise to raise payouts to depositors in accounts of Oschadbank, which ex-premier Yulia Tymoshenko did in 2008, also came as a surprise. At the time, her opponents in the Party of Regions harshly criticized this initiative that resulted in hyper-inflation. Today, they decided to use the experience of their predecessor without any explanation for the radical change in their course. Furthermore, the promises made by the President were aimed not at improving the existing system of social welfare, rather gaining more votes of the people leading up to the elections.
First of all, by ignoring the social component of the election campaign over the first two years of his presidency Viktor Yanukovych clearly expressed his intention of buying the votes of the electorate in favour of the Party of Regions.
Secondly, the radically different assessments of the execution of the president’s plans showed that nobody was seriously involved in financing them.
First Deputy Chief-of-staff of the Presidential Administration Iryna Akimova said UAH 8 million are needed to finance the president’s promises, while the sum named by Minister of Labour and Social Policy Serhiy Tihipko was two times larger.
Thirdly, the sources of receiving the necessary funds were not convincing. Neither Akimova nor Tihipko could name the sources of financing only alluding to an increase in revenues of he tax and customs authorities. Meanwhile, NBU Governor Serhiy Arbuzov could not explain where the state will find money to cover the social initiatives of President Yanukovych.
Furthermore, the demonstrative optimism of the president and to government contradicts their previous rhetoric and the trends of the social progress of the country over the past several months. In particular, in November 2011 Tihipko said there is no money in the Pension Fund to pay privileges to certain categories of the population that they were supposed to receive according to court rulings.
In December the government got a positive ruling of the Constitutional Court, which allowed it to set the volumes of social payouts dictated by the financial wherewithal of the budget. In January of this year the CCU allowed the government to cut social payouts to the people. For this reason it is not clear how over such a short period of time the lack of budget funds to cover the social security of citizens could have turned into a surplus in the billions.
All for the voters
Clearly, the amounts of money noted above are not sufficient to fulfill the president’s promises. Accordingly, the ruling team will be forced to look for this money. Given the tight deadline of the next parliamentary elections scheduled for October of this year, two strategies of the country’s leadership can be outlined.
The first strategy typical for the current government is to apply administrative and tax pressure on businesses. The probability that state bodies were given the assignment to increase budget revenues to the maximum is quite high. Be that as it may, hoping that the government will increase the standards of living of Ukrainian citizens is an exercise in futility.
The second strategy may be oriented towards receiving financial aid from international lending institutions. The patching of budget holes with loans granted by the IMF has long been a practice of governments of Ukraine and now Premier Mykola Azarov can exploit this factor in the next election campaign.
On the one hand, this will eliminate the requirements of the IMF to increase the tariffs for household gas, which will deal a serious blow to the chances of victory of the ruling Party of Regions in the presidential elections. On the other hand, this will allow for directing money towards fulfilling the promises that President Yanukovych made to voters.
Deferring of losses
By placing such high bets on victor in the elections the ruling power can easily become a victim of its lack of vision. Such social initiatives would be welcomed if they were systemic and financed by the national budget. In conditions of pre-election campaigns and the lack of required financing, they may have serious social and economic repercussions.
On the one hand, there are no doubts that the president’s promises of social payouts will not be fulfilled immediately following the parliamentary elections. As a result, while the elections may not result in a tangible rise in the standard of living Ukrainians, but they will always expect that politicians will fulfill their promises.
On the other hand, if President Viktor Yanukovych fulfills his promises this may have serious repercussions on the socio-economic development of Ukraine. If the government of Ukraine is granted the next tranches of loans from the IMF and uses the money to fulfill its promises in the social sphere it will not only become go deeper into debt but may also lose its trust with the IMF and other foreign investors.
If the plan of loans by the IMF falls through, there is a huge risk that the president’s promises will be financed by additional emissions of money by the National Bank of Ukraine. This, in turn, will lead to a rise in inflation and all the socio-economic repercussions associate with it may incite the indignation of the people meaning that the current leadership may face an upset in the next elections.
As such, the attempts of Premier Mykola Azarov to receive the next tranche of loans from the IMF is clearly dictated by the urgent need to find money to fulfil the promises of social payouts that President Viktor Yanukovych gave to the people.
There are major doubts as to the success of such an initiative. Even if the head of state and the government manage to convince Ukrainian voters before the elections, they will be forced to eat socio-economic fruits of their populist promises
Democratic Institutions Foundation, Focus on Ukraine