A Corruption Deadlock
A political scandal, in which Minister of Economy Aivaras Abromavicius blamed cronies of President Poroshenko for corruption, is seizing public attention. The scandal made public an issue already disturbing Western donors: the “undercover” reforms the friends of the president and prime minister have been making. This was tolerated while people like Natalie Jaresko and Abromavicius, who had been pushing forward real reforms, were in the Cabinet. But Abromavicius’ resignation effectively exploded this shaky balance, triggering a chain of reactions.The G-7 ambassadors and IMF Managing Director Christine Lagarde made it clear that there would be no support unless the corruption issues were resolved. Donors demanded technocrats be appointed to the Cabinet, but without early parliamentary elections.This has pushed Ukraine into a real political crisis.
The situation has been aggravated by the fact that managing the country is hardly possible without corruption. Most MPs entered Parliament to make money, not to improve the law. Now they are just voting for “informal remuneration,” no matter their political ideology.To deal with such a Parliament, one needs a hefty shadow budget.
Western donors are perfectly aware of how Ukraine’s political system is organized. However, it is seen as a reasonable price for some reforms, and those schemes had been expected to dissipate by now.Unfortunately, the political elites have become comfortable with such schemes, and show no sign of abandoning them soon.
So now there’s a real deadlock. Poroshenko and Arseniy Yatsenyuk are scared to pass the reins to the technocrats, since that would put their rent-seeking schemes at risk.Yet they can hardly go on as is. We don’t expect radical decisions by the political elites; rather, they will try to “muddle through” as long as they can.
The economic situation remains quite complicated. After the resignation of Abromavicius, the hryvnia depreciated further. Delayed IMF support and growing uncertainty made exporters preserve their foreign cash proceeds, and heated up demand for dollars. The hryvnia therefore lost another 5% in February, and dropped to nearly 27 to the $1 by early March, from 25.5 in early February.
Industry decline slowed down to -1.7% y/y in January (from -2.1% y/y in December), mainly benefitting from a low comparative base. Organized retail trade even inched up by 0.1% y/y, vs. a 12.9% y/y decline in December.CPI increased 0.9% m/m (0.7% m/m in December 2015) following stronger food price growth (+2.2% m/m).
The budget started 2016 in a positive mood, with general budget revenues growing 32.7% y/y in January and payroll tax collections performing 15.8% above the plan, despite the payroll tax cut, from 37% to 22%.By the end of January, the general budget was reported to have a UAH 9 billion (nearly 0.5% of GDP) surplus.
External accounts worsened, though, with the CAD widening to $379 million, vs. $288 million a year ago (the CAD came in at $279 million for 2015).The plunge of commodity exports (-32.1% y/y) on the back of sliding metals, minerals and foodstuffs, was the main culprit. A capital account surplus (of $500 million) covered the gap this month, and even allowedgross international reserves to rise to $13.4 billion, equivalent to 3.5 months of future import cover.
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