VZCZCXRO3247
RR RUEHDBU RUEHSL
DE RUEHKV #1943/01 3131245
ZNY CCCCC ZZH
R 091245Z NOV 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8765
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001943 
 
SIPDIS 
 
STATE FOR EUR/UMB AND EEB/OMA 
 
E.O. 12958: DECL: 11/08/2029 
TAGS: EFIN EREL ECON PREL UP
SUBJECT: UKRAINE MINFIN ECONOMIST WANTS REFORM 
 
REF: KYIV 1920 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1. (C) Summary.  The new social spending law, which increases 
wages and pensions, would be disastrous for Ukraine's 
economic recovery, according to Volodymyr Parnyyuk, a leading 
Ministry of Finance economist.  Even without the social 
spending increases, the GOU is facing a $3.75 billion or 
larger deficit that would require it to halt expenditures to 
all but "protected" items in the budget.  Nonetheless, 
Parnyuk agreed with recent National Bank of Ukraine (NBU) 
resistance to monetizing the deficit.  He also argued that it 
would be best if the bloated 2010 budget stalled in the 
parliament until after the presidential elections in January. 
 End Summary. 
 
Social Spending Law Disastrous For Economic Recovery 
--------------------------------------------- -------- 
 
¶2. (C)  The recently signed social spending law (reftel) 
would result in wage and pension increases for a broad 
percentage of the population, according to Ministry of 
Finance Director for Macroeconomic Forecasting Department, 
Volodymyr Parnyuk.  During a meeting with Econoff on November 
5, Parnyuk noted that the wage increases would be disastrous 
for Ukraine's economic recovery, not to mention that the 
government had no money to implement the increases.  Parnyuk 
repeatedly emphasized that the law had systemic economic 
consequences beyond its simple budgetary impact. 
 
¶3. (C)  Although President Yushchenko had argued that only 
minimum-level pensions and assistance payments would be 
increased by the social spending law, Parnyuk argued that all 
social payments would need to be adjusted upward.  Without 
changes to other laws and regulations that link such payments 
to formulas based on the statutory subsistence minimum, the 
government would legally be required to implement a broad 
indexing of wage and pension hikes.  Parnyuk said he 
understood the President's desire to guarantee a minimum 
standard of living for the people of Ukraine, but argued that 
wages had already increased significantly over the past few 
years. 
 
Wages Growing Since 2003 
------------------------ 
 
¶4. (U) Ukraine has made progress since 2003 to reduce the 
number of Ukrainians earning less than minimum wage and to 
bring Ukraine's minimum wage up to its minimum subsistence 
level.  In 2003, 18.5% of employees earned less than the UAH 
180 monthly minimum wage; 61.4% earned less than the 
subsistence level of UAH 342. By September 2008, only 4.8% of 
wage earners received less than minimum wage, which had 
increased to UAH 522 per month; and 13% were receiving less 
than UAH 607, the subsistence level.  These changes conform 
to a 2005 law that required elimination of the gap between 
the minimum wage and the subsistence level.  The new social 
spending law, passed in October, provides for an initial rise 
in the monthly minimum wage to UAH 744 on November 1, with 
subsequent quarterly augmentations in 2010.  The increases 
would continue until the minimum wage reached UAH 922 
(roughly $112). 
 
¶5. (C) Parnyuk argued that continuation of the policy of 
increasing minimum wages made little sense given the onset of 
the global economic crisis and Ukraine's GDP contraction of 
roughly 15% in 2009.  The share of wages and pensions had 
already grown from 27.3% of GDP in 2004 to 30.1% in 2008. 
Parnyuk noted that wages as percentage of GDP were on track 
to jump significantly in 2009, even without increases 
required by the social spending law. 
 
Harmful Effects of the Social Spending Law 
------------------------------------------ 
 
¶6. (C) Businesses would need to increase wages to keep 
workers at the expense of investment that might bring 
economic growth, Parnyuk said.  Parnyuk thought that in 2009 
the social spending bill would require UAH 8 billion (nearly 
$1 billion) to implement, much more than estimates from the 
Presidential Secretariat, which put the increase at roughly 
UAH 1 billion.  Parnyuk argued that increased expenditures on 
wages and pensions would cause the shadow economy to grow, 
unemployment to increase, and stimulate those without work to 
continue to seek work abroad.  He also argued that Ukraine 
would need to borrow more to finance the government deficit, 
 
KYIV 00001943  002 OF 002 
 
 
leading to inflation. 
 
GOU To Fund "Protected" Budgetary Items Only 
-------------------------------------------- 
 
¶7. (C) Parnyuk confirmed that the GOU needed at least $3.75 
billion (UAH 30 billion) to cover budgetary obligations for 
the rest of the year, without the increased wages and 
pensions required by the social spending law.  He speculated 
that the government would be reduced to funding only 
"protected" items in the budget (like wages to teachers, 
doctors, and law enforcement) but would not fund other items. 
 Although Parnyuk thought the Prime Minister would try to 
avoid pension arrears, he said that some missed payments 
might be unavoidable.  Parnyuk noted that arrears for goods 
and services were already accruing to the government. 
 
National Bank Should Hold The Line 
---------------------------------- 
 
¶8. (C) The National Bank of Ukraine (NBU) should continue to 
stand firm against monetizing the budget deficit, Parnyuk 
stated, as  NBU emissions would lead to "growth-destroying" 
inflation.  Parnyuk also worried that monetization would send 
the wrong signals to the country's leadership.  In his view, 
the government should be forced to reform, something that 
would not happen if the NBU or the IMF bailed the GOU out 
time and again.  Parnyuk commented that IMF funding for 
budgetary support scares off international investors.  He 
noted that this tendency stood in contrast to the policy 
advocated by former Minister of Finance Viktor Pynzenyk, who 
had welcomed the discipline of an IMF program because he was 
convinced it would bring reform to Ukraine and send positive 
signals to international investors. 
 
2010 Budget 
----------- 
 
¶9. (C) Parnyuk commented that it might be best for the 2010 
budget, which PM Tymoshenko had submitted for parliamentary 
consideration, to stall in the Rada (Ukraine's parliament). 
Pressures were too great to inflate spending in advance of 
the presidential election.  If no budget were passed, the 
government would continue to operate at 2009 levels, and 
continue to make social payments at 2009 levels. 
Technically, the Rada Budget Committee had until October 20 
to forward the budget for its first reading by the full Rada 
membership.  Only after the first reading should the bill be 
sent back to the CabMin for approval or changes.  The second 
reading of the budget should be completed by November 20; and 
the third and final reading by December 1, according to 
normal procedures. 
 
Comment 
------- 
 
¶10. (C) While Parnyuk's views may differ from those 
publically espoused by his superiors at the Ministry of 
Finance, they reflect the thinking of a careful economist 
with the best interests of the economy in mind.  Parnyuk's 
concern that the government had not yet been forced to reform 
and was delaying the pain of real economic adjustment by 
borrowing or monetizing is well placed.  At this point, real 
economic reform has no chance in Ukraine before the January 
election.  Similarly, with the IMF program already off track, 
it appears likely the GOU will continue to stall on cutting 
2010 budget expenditures.  However, as the treasury is 
depleted and gas payments mount, future Ukrainian authorities 
will have few options in early 2010 other than to implement 
some of the needed reforms and entice the IMF back to 
Ukraine.  End Comment. 
 
PETTIT