Ukraine's 2015 budget has been coming in for criticism from various quarters as too optimistic on revenue and unrealistic on spending or budget deficit. The consensus seems to be that the country is perilously close to a sovereign default. Yet military spending is set at a record-breaking 5 percent.
According to the budget, revenues in 2015 should amount to $30b which is 26 percent above the target for 2014. However, the figure is viewed with considerable scepticism: the IMF, EBRD and the country's own cabinet expect GDP for last year to plunge 7-9 percent and industrial production by over 10 percent.
The International Monetary Fund has for months been sending envoys to Kiev but is in no hurry to extend another tranche of the $17b aid package agreed last year insisting on rapid implementation of economic reforms. Another IMF delegation is expected in Kiev later this month.
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Ukraine's former finance minister Victor Pinzenik estimates that the budget deficit, penned by the cabinet at $4b, will in reality balloon to a staggering $12.7b. With its forex and gold reserves shrinking to an estimated $7.5b at the end of last year, in 2015 Ukraine is also to repay $9b of its foreign debt, including $3b to Russia.
Bloomberg warns that Ukraine's deepening recession and mounting debt burden have bondholders to Moody's Investors Service weighing prospects for a sovereign default. Russian economist Andrei Illarionov, former advisor to president Putin (and currently in fierce opposition to the Kremlin), believes Ukraine's default is ‘practically unavoidable'.
According to Illarionov, by the end of January Ukraine's reserves may shrink to just $5b. That is also when Kiev should make public its figures for the government debt to GDP ratio. If the ratio is over 60 percent it will trigger a provision in the agreement with Russia which will be able to demand an early repayment of the $3b debt. Should Ukraine refuse to pay up it will automatically mean sovereign default. FT's assessment is even more pessimistic: it forecasts that Kiev's debt-to-GDP ratio is likely to reach 90% this year — a level that the IMF may deem unsustainable. This uncertainty does not allow the IMF to make any further disbursements to Ukraine, and this is fraught with default.
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In the meantime Ukraine's budget for 2015 envisages, in the words of Head of the National Security Council Alexander Turchynov, a ‘colossal' increase in spending on defence and security. The spending is to jump to $5.5b which constitutes 5 percent of the country's GDP, one of the highest in the world and two and half times higher than NATO's agreed level of 2% of GDP, which quite a few NATO members are reluctant to deliver. Kiev is also looking to re-introduce compulsory conscription. Even in the view of some government officials in Kiev Ukraine is moving towards a militarised state.
Kiev justifies the increase in defence and security spending by the need to defeat insurrection in the self-proclaimed republics of Donetsk and Luhansk in the east. The military conflict there has been raging since April 2013 and claimed close to 5,000 lives.
