Marchenko: Do ​​we want to win the war or live in an imaginary world where the only problem is inflation?

An interview with Finance Minister Sergei Marchenko about the economy during the war, high inflation, salaries for the military, the priorities of the 2023 state budget, the dollar exchange rate, the IMF and faith in the hryvnia.

The new stage of the war with Russia, which began on February 24, changed the life of Ukrainians forever. On the same day, the government’s priorities changed dramatically. Officials began to spend many times more on the army, while receiving a catastrophic reduction in budget revenues.

Somewhat prematurely, in March, the authorities canceled some taxes and introduced a number of tax preferences, which gradually have to be withdrawn. It is easier to abolish taxes than to introduce them, Minister of Finance Sergei Marchenko sneers.

Now it is unlikely that the authorities will be able to do without unpopular steps, given that Western partners do not provide money for the war, leaving funding for the army to Ukraine. Why this is happening, how many loans and grants the Cabinet of Ministers plans to receive back in 2022, whether the authorities will freeze social standards and why inflation is far from the country’s biggest problem – Marchenko spoke about this and other things in an interview with RBC-Ukraine.

– Sergey, let’s start with where we are now. The economy has been destroyed by a third due to the war, many businesses have been stopped, taxes are collected much less. The country is currently experiencing high inflation, growing unemployment and rather serious migration processes. What does a country live on that has been in a state of full-scale war with Russia for six months now?

– Not everything is so unpromising and depressing. There is an understanding that business, compared to the initial stage of the war, is now more flexible and adaptable. Most of the business is trying to restore its production volumes, sales and work. I see more of this as a positive.

The level of consumption remained at a fairly high level. Despite the fact that many people have left, the level of consumption is still high. And it also drives the economy and economic processes. Yes, we lost from 5 to 9 million potential consumers, but this still did not stop the economic processes.

About inflation. Yes, inflation is quite high compared to the pre-war period. Compared to other countries – Europe, the USA, where inflation is approaching 10%, our inflation of 22.2% is not so critical. That is, this is not inflation, which could be in a country that is at war.

What am I leading to? External conditions are such that we would still be in high inflation. Breaks in supply chains, high fuel prices – these are all factors that have been formed from the outside. And we, like other countries, are forced to accept this normally.

How do we live? Mainly due to proceeds from foreign aid and through taxes and internal loans.

– How much does the Ministry of Finance lack monthly for expenses? What is this amount on average since the beginning of the war?

– Our estimates remain unchanged, 5 billion dollars a month is our objective need. That is, consider somewhere in current prices it is more than 150-160 billion hryvnia.

– What is the planning horizon of the Ministry of Finance? Month, quarter, six months?

We are already planning a budget for 2023. This year we understand how we are closing. Again, with the condition that we expect macro-financial assistance from the EU. And we hope that the IMF will give us a shoulder and we will have a new program.

– Until the end of the year?

We need a signal. And this is an important signal not only for us, but for other partners as well.

We’ll talk about next year’s budget. As for this year, of course, the key item is spending on security and defense. Tell me, are there any delays in the payment of wages to the military? Is the government up to this task?

– As of August 1, all the expenses that were provided, the government spent. We have no debts for any expenses, including the monetary support of military personnel, we have paid in full.

– Salaries of the military is now the main item of the state budget?

– Main.

– Western governments are against their loans and grants being used to finance the army.

– And there is. When certain support means are politically passed, it goes through the parliaments. And the level of political discussion in these countries is quite different. And, relatively speaking, in the US it is easier to convince Congress that it should be support, they separate the budgetary and military parts.

In other countries, they ( parliaments – ed. ) do not want to create the prerequisites for the continuation of the war, I will call it that. Despite the fact that we are the injured party here, there is an aggressor, but as a rule, funds are not given for war. And it is considered normal that their own army should be financed by their own economy, their own country.

– That is, we finance the army, the Armed Forces on our own?

– De facto, yes, through taxes and through borrowing. Therefore, the role of the National Bank at this stage is so important, despite the risks of issuing the hryvnia. The redemption of government bonds by the National Bank is a temporary phenomenon in the conditions of war.

– How much and from whom does the government plan to receive before the end of this year? What are your plans for external borrowing?

– We now ( plans, – ed. ) approximately up to 26 billion ( dollars , – ed. ), perhaps there will be more. It depends on the success of the negotiations, up to 30 billion maybe. This is from the beginning of the war in negotiations. We have already received 14, that is, before the end of the year we can get another 12 to 16 billion.

– Volodymyr Zelenskyy recently said that there is a certain delay in macro-financial assistance from the EU, we are talking about 8 billion euros. The president said it was either a crime or a mistake. What is the reason for the delay?

“We are at war. In Europe, the war is not felt and, relatively speaking, now is the period of holidays. Yes, there are many partners and many allies at the level of Brussels and at the level of other countries who are ready to help us.

But in general, the war is not happening on the next street. And therefore, given that even in Ukraine we have partially adapted to live in war conditions, in Europe, in European countries, this is not such an urgent critical focus now. This is possibly the reason.

But in general, we feel support. And I hope that these messages given by the president will be heard, and macro-financial support will be received by Ukraine in full.

– Is it correct to say that some of the countries or political forces of some of the countries are blocking the allocation of this assistance to Ukraine?

“It is politically impossible now. If any country publicly declares that it is blocking aid, the politicians of those countries effectively lose the opportunity to be re-elected. Therefore, if there is any blockage, it is more of a bureaucracy, there is no policy in this matter. I can’t say that someone deliberately blocks.

Moreover, I would not like to blame anyone. Because as the Minister of Finance, I believe that until you have a chance to convince partners and receive funds, it is better to do it smiling and patting the partner country on the back. Than trying to immediately blame something and create the preconditions for some kind of conflict situation. Therefore, if we want to receive funds, we need to be patient a little and, I think, everything will be in order.

– And when will we really get macrofin?

We hope that in September. There will be several trenches.

– In your opinion, is the Russian lobby in the West still strong enough to block, among other things, financial assistance to Ukraine?

– There is a lobby, but I would not say that this is a fairly significant influence. Here the situation is quite clear. And therefore it is very difficult to form a different point of view on the war in Ukraine. There is an injured side – Ukraine, there is an aggressor side. Under these conditions, it is very difficult to be somewhere in the middle, and even more so to take the point of view of Russia.

Therefore, it is possible that any such kind of lobbying exists, but more in terms of delays, more in terms of accusations against Ukraine, perhaps that we are doing something wrong. In this part, perhaps, there is a certain policy, including biased persons of the Russian Federation.

But I would like to say that Ukraine’s active policy can change this vector very quickly. We are open, we are absolutely transparent. And here it is very difficult to argue with arguments when you show how you really use these means, conditionally, if this is an example about means, or how you use weapons.

– Europe itself is going through far from the best of times – the energy crisis is on the verge, as well as rather high inflation. Are there any fears that if the crisis in the EU intensifies, then the desire to help Ukraine will be somewhat less?

It is very difficult to be constantly in focus. I repeat – there is war weariness in general. And despite the fact that the war has already been six months, Ukraine is actively trying to constantly draw attention to the problem, to maintain focus.

I do not see any risks that the situation will somehow change for the worse. Because this is one of the biggest wars in recent years, moreover, this is a full-fledged war of two fairly strong armies. The Ukrainian army is also strong, it can hold back one of the largest armies in the world. And this issue cannot be on the radar and not in the focus of European politics.

Moreover, many European politicians get political benefits from helping Ukraine or actively promoting the idea of ​​how to resolve these kinds of conflicts. Therefore, I think this question will be relevant.

Let’s go back to Ukraine. You mentioned that the National Bank is actively helping the state budget. The NBU has already printed more than 230 billion hryvnias. If we continue to act in the same way, don’t you think that this will not end well for the economy?

“We are well aware of the consequences. But again, we have different tasks and different understandings of how to solve them. That is, on the one hand – the loss of the economy and business pays less taxes, on the other hand – we have a war and about 30% of GDP goes to support the army. And more than half of the budget goes to support the army.

Yes, we can say that let’s stop the war because we have inflation. Let’s just stop and say: let’s wait until everything gets better with us and then we will fight again. Well, because there are risks that there may be economic problems. Because high inflation is an economic problem, the devaluation of the hryvnia is an economic problem. But we are a country that is at war!

And in recent years, there are practically no examples ( at war, – ed. ) of countries where the government works, where all spheres of the state’s life are fully functioning: the payment system, the banking system, the tax collection system, the settlement system, all social benefits are paid. In such conditions we now live!

We are at war and we are actually defending our territory. And we can’t pause. If it were possible to pause in the Ministry of Finance and say: let’s wait, we will not pay monetary allowances to the military … the consequences are obvious.

We need to decide whether we want to win this war – yes, there may be certain problems with the economy because of this, but they already exist – or we want to live in an imaginary world when everything is fine with us and the only problem that may interest us is it’s inflation.

Inflation is a problem that can be a big problem when people die and when you live in a country in which another government is imposed on you from the outside, or you simply lose the country. This is a bigger problem than the problem of inflation. I think so.

– At the same time, the National Bank plans to “fasten its machine”, limiting “printing” until the end of the year. What will the Ministry of Finance do in this case?

– We proceed from our capabilities. The National Bank is independent; it regulates its policy with the tools available to the National Bank. Yes, indeed, the policy of the National Bank, which was introduced, including the accounting one ( we are talking about raising the discount rate to 25% – ed. ), had a negative impact on our opportunities in the borrowing market.

We borrow very hard. Yes, we have to raise interest rates. And this is a very difficult decision in conditions when we understand that we have such volumes of income for servicing this debt and there is no such increase. Yes, there are other issues that we are trying to resolve in discussions with the National Bank of Ukraine. But we are finding a solution to ensure full payments to military personnel even in these conditions.

By the way, about debts. The creditors agreed to defer payments for Ukraine, and they agreed to your proposal. I have heard from many experts the question why only now the Ministry of Finance started these negotiations and why, in fact, there was no talk of writing off the debt, but only of postponing the payment period.

– Everything is very simple here. We have a deadline for paying debts, the body of the loan, the body on bonds and interest – the month of September. That is, we had enough time to prepare the right decision, to communicate with investors, to understand the mood of the market.

But it can’t be manipulative technology where you want to take advantage of a situation, and it can’t be cheating, shall we say, to win some kind of opportunity for yourself. This should be a responsible and honest decision, including before the holders of Ukrainian bonds. This decision was prepared for a long time, we approached it for a long time. Now at this moment, this is the most compromise solution that can be, and it is quite difficult.

– Some of the creditors were still against your proposal?

Yes, there is such a part. There is such a part of creditors who are called predators in this market, who specifically buy out the bonds of falling countries, so that later they can go bankrupt in the courts, arrange simply nightmare stories. For them, Ukraine with our problems is just a profit. But I am glad that there are more worthy investors.

– About Western support. The Prime Minister says that it is necessary to intensify negotiations on a new program with the IMF. You are actually talking about the same thing. Is there an understanding of what the amount of the program will be, or is everything still at the stage of negotiations? I won’t even ask. How much do we want?

– I do not want to voice the question of the amount, because it is incorrect. What we want is, of course, very good. But more important is what they can provide us. This is a matter of compromises, agreements and the existence of a program in general.

For us, an acceptable option would be if we would receive from the Fund an amount at least more than the one that we will return to them in the form of debts. This is my answer.

– Usually the Fund has conditions under the program, which even before the war, the Ukrainian authorities did not always fulfill promptly. Will this program be different? Will it be something out of the ordinary?

– There is no understanding yet what kind of program it will be, so it is difficult to say. It can be a program without conditions at all.

– But the main thing is that the IMF finances, lends to warring countries, right?

– The main thing for us is that they go to the program with us, because it’s not just about money. It is also about a signal to the market in general, to other donor countries, that Ukraine is a reliable partner.

Is it about trust?

– It’s about trust as well. The IMF is a risk analysis, an assessment of our capabilities, a fairly thorough financial analysis, an analysis of the balance of payments, settlements, and analysis of debts. An institution like the IMF can do it well and they are trusted. In this case, countries that are ready to support us will be more inclined to do so in the presence of this kind of analysis.

– There was an idea that a special account would be created on the basis of the IMF, through which countries would be able to help Ukraine. So far, not many countries have joined it.

– The account has been created. Canada transferred funds to us through this account, as well as Germany. There was an idea of ​​transferring quotas of special drawing rights to us, which were distributed ( last year, the IMF distributed funds among countries to combat the economic consequences of the pandemic – ed. ).

– 10% of $600 billion.

– It was our idea. Unfortunately, there are some technical difficulties. For European countries, this should be a common decision, finance ministers do not decide this, it is decided by the heads of central banks. And since the European Central Bank is there, there must be some kind of general structure. Let’s just say there was a desire, but in terms of implementation, we don’t see real steps yet.

– The issue of Naftogaz’s debts has not yet been resolved. The company’s management has not yet agreed the terms of the restructuring with its creditors. Maybe you have some information, is there any progress in the negotiations?

– I can’t say anything new. I hope that investors will listen to the second variant of the “consent” that was proposed, because it goes completely under the conditions that the government has offered ( to its creditors, – ed. ). I hope investors will support the proposal of NJSC Naftogaz.

– At the beginning of the conversation, you mentioned the state budget for the 23rd year. It is clear that the priority is the military. What will happen to medicine and education? Will costs increase?

– There will be no expenses that will not be reviewed. In all areas, there will definitely be a review of all costs, optimization. On the one hand, our budget turns out to be very difficult, because it is a difficult year, complex macro indicators that are difficult to objectively assess, and there are many unknowns.

On the other hand, it’s quite simple. Because we must finance pensions for pensioners, salaries for doctors, teachers, social protection of citizens, payments to internally displaced persons and funds for the military campaign, for the army. Everything.

The budget will be extremely tight. This is the budget of opportunities in a war. But at the same time, there is hope that we will be able to finance it. The key task is to find funds, including with the help of our partner countries, to finance the budget deficit.

– By the way, about the indicators that are included in the budget. For example, the hryvnia exchange rate is a rather unstable story now. The National Bank raised the fixed rate by 25%. Are you holding back from him?

– There is a forecast rate, which is agreed by the Ministry of Economy, the National Bank. We are not the subject of forecasting here. We focus on the numbers that are provided to us.

– Is the course public yet?

– Not yet. I don’t want to create expectations. But the numbers are not catastrophic. It is hoped that more or less all balances will be maintained.

– The National Bank predicts inflation of 30% this year, 20% next. In this regard, the question is: is it planned to index social standards, taking into account such price dynamics?

– Complex issue. And I suggest that it be determined closer to when we have final budget figures. I understand that this is a socially sensitive issue, but the price is very high. Therefore, it is necessary to decide more closely, when we will already understand the final version of the budget.

– Indexation of pensions, for example, is fixed by law – March.

Yes, this is an automatic decision.

– If I understand you correctly, this issue will be agreed later.

– There is something to talk about, I would say so. If there had been no war, this issue would not even be discussed. But since we have a rather difficult budget, a difficult situation… I hope that we will find a wise solution.

– About the salaries of officials. Are you planning to cut the state apparatus? The government was engaged in the project of this reform. Is this expected in the 23rd year?

– Maybe. In this case, we are simply corny reducing the budgets of ministries by 10%. Already this year they have reduced by 10%. Just a smaller fund, and then there are different ideas about optimization.

The ministries are now undergoing various stress tests and assessing their own policies. This is a complex process. I think certain optimization processes will be introduced. The only thing I want to say is that you should not expect big savings here.

– For obvious reasons, this is a popular story for society when officials and deputies have their salaries cut. There is even a petition, it quickly gained the necessary number of votes to take the allowances from people’s deputies. Do you think this is a good idea?

– This is populism. I am against it, because it does not lead to anything good. This is the creation of an illusion. There is no purpose, no understanding of this, this is pure populism.

– Do you believe in the hryvnia as the Minister of Finance?

– I believe.

– Is it realistic for people in the current conditions, if not to increase, then at least to keep their savings? What can they invest in?

“First of all, these are war bonds.

But they don’t cover inflation.

Why aren’t they covered? Even if we assume that the inflation rate is 22.2%, the average annual. But we consider this for a certain period of time. Now we offer an instrument slightly longer than one year – 16% ( the government bonds rate, – ed.), This is quite a significant compensation. I’m not sure there is a business that will offer more earnings. Deposit accounts are also a tool for maintaining at least a partial coverage of inflation.

– But state-owned banks now offer fairly low rates (on deposits – ed.), even compared with private ones. Perhaps a correction of their policy is planned here? Will the rates go up?

– Again, it depends on the availability and the need for banks to raise rates. Because it is commonplace to raise rates without understanding how to give it back later, this is a certain risk for banks. Banks cannot increase their passive base indefinitely without real tools where and how to invest this resource.

– And what about the assets of banks? Will lending grow? And in general it is real during the war?

– Lending during the war is only at the expense of the 5-7-9 program. Because all other lending has actually died. And after the increase in the discount rate by the National Bank, it is generally worth forgetting about lending. The only thing that can lend is the 5-7-9 program, under which the government partially offsets interest rates. Everything.

But is it a small amount?

– Why small? Since the beginning of the war, about 43 billion hryvnias have been directed. Up to 70% is agriculture.

– Since the beginning of the war, the government has made a number of tax preferences for business. But over time, they had to be canceled, in particular, as was the case with import taxation. Will it be the same with fuel? Will there be a return of taxes ( for fuel, – ed. ) to the pre-war level?

– I hope it will. But, again, this is a question for legislators. I believe that the temporary decisions that were made in March should be corrected.

– When can this happen?

– It’s hard for me to say. Hopefully soon. ( On August 14, three days after the recording of the interview, the Cabinet of Ministers submitted a draft law to the Rada, proposing to return the excise tax on fuel in the amount of 100 euros / 1000 liters, – ed. ).

– But the government will not come up with a corresponding initiative?

“It could be a government initiative. We must understand the sensitivity of the market, which was two months ago, when we had a lack of fuel. Such decisions must be balanced both from the point of view of the market and from the point of view of our needs and capabilities.

– What about 2% turnover tax for a large number of businesses? Will this rule be revised?

– It would also be desirable to reconsider. As practice has shown, it is very easy to reduce taxes and remove them altogether, and it is very difficult to return them back.

– And what about the idea of ​​introducing a tax on the purchase of foreign currency for imports? What is the final rate? And will it be introduced?

– A very difficult decision, quite controversial. And I cannot say that it is on the surface and ready for implementation. There is a model that we are now discussing, but for now I want to actually assess the risks, including for the country’s economy. And then think about whether it is worth introducing it at all.

– Is it likely that the new budget will be prepared on a new tax base?

– I am against the new tax base. I’m all for making the payment of taxes as fair as possible. If there are initiatives from the Ministry of Finance, then this is about justice.

Do we need a new tax system after the war? What should she be?

“After the war, there should be a fair system. This is when you understand the origin of your income and you understand that you have paid taxes on that income. And you understand that your neighbor did the same. And that there are no ways to avoid, there are no unrecorded products in the markets.

Then it is about justice and that we can then really build a state where law exists and where the state can protect the needs of an ordinary citizen.

And when we think that by some miracle someone will finance the budget for us, and we will be able to minimize taxes, then this is not so, this will not happen. Because this is just populism and these decisions will simply lead to a worsening of the situation, that’s all



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