GOVERNMENT DEBT MANAGEMENT

GoalGoal

Government borrowing must be conducted:

in amounts required to smoothen economic cycles, implementation of structural

reforms, promptly meeting financial obligations.

in terms that provide the lowest possible cost (including risk) on principal and

interest repayment.

Government borrowing must be conducted:

in amounts required to smoothen economic cycles, implementation of structural

reforms, promptly meeting financial obligations.

in terms that provide the lowest possible cost (including risk) on principal and

interest repayment.

ChallengesChallenges large amount of debt refinancing costs for

the general government sector, % of GDP * large amount of debt refinancing costs for

the general government sector, % of GDP *

2013 2014

Maturing debt

Budget deficit

Total financing

need

Maturing debt

Budget deficit

Total financing

need

Egypt 26,1 11,3 37,4 25,1 8,7 33,8Pakistan 26,2 7,0 33,2 24,7 7,1 31,9Jordan 27,0 4,8 31,8 25,8 5,3 31,1Hungary 17,9 3,2 21,0 16,6 3,4 20,0Brazil 15,9 1,2 17,1 15,4 1,7 17,2Ukraine 12,2 4,5 16,6 9,6 5,4 15,0Morocco 10,2 5,5 15,7 11,0 4,2 15,1India 4,4 8,3 12,7 4,3 8,4 12,7South Africa 7,3 4,8 12,0 7,3 4,2 11,5Romania 9,5 2,1 11,6 9,2 1,7 10,9Poland 8,2 3,4 11,6 7,1 2,9 10,0Mexico 7,7 3,1 10,8 7,8 3,0 10,8Malaysia 6,2 4,0 10,2 6,1 3,7 9,8Turkey 7,2 2,2 9,4 8,7 2,3 11,0Argentina 6,0 2,7 8,7 6,5 2,4 9,0Lithuania 6,0 2,6 8,6 4,5 2,3 6,8Thailand 5,5 2,7 8,2 6,4 3,4 9,8Philippines 6,7 0,8 7,5 6,9 0,9 7,8China 4,1 2,1 6,2 3,3 1,8 5,1Bulgaria 2,5 1,4 3,9 1,2 0,6 1,8Colombia 2,8 1,0 3,8 3,3 0,9 4,1Indonesia 0,8 2,8 3,7 0,9 2,2 3,1Latvia 1,9 1,3 3,1 6,6 0,8 7,4Russian Federation 1,2 0,3 1,6 1,1 1,0 2,1Chile 1,0 -0,1 0,9 1,1 0,1 1,2Peru 2,2 -1,8 0,4 2,1 -1,6 0,5Kazakhstan 2,0 -4,9 -2,9 1,9 -4,5 -2,5Average 6,1 2,6 8,8 5,7 2,5 8,3

significant risk of depreciation of the currency, as evidenced by the balance of payments and

the real effective exchange rate (REER)

significant risk of depreciation of the currency, as evidenced by the balance of payments and

the real effective exchange rate (REER)

* Source: IMF: http://www.imf.org/external/pubs/ft/fm/2013/01/fmindex.htm* Source: IMF: http://www.imf.org/external/pubs/ft/fm/2013/01/fmindex.htm

Key tasks of debt policy in short-term periodKey tasks of debt policy in short-term period

Intensification of cooperation with the International Monetary Fund. Repayment of IMF loans is significant part of financial commitment in 2013. Its refinancing will reduce the risks associated with the debt and the cost of government borrowing. Additionally implementation of the IMF recommendations will speed up efforts to reduce the deficit of NAK "Naftogaz of Ukraine" and necessary amount of government borrowings.

Retention of the general government deficit (including NAK "Naftogaz Ukraine") and the State Budget within 5% and 3% of GDP respectively. With the increased government borrowings needed to refinance existing debt, deficits exceeding these limits will worsen the terms of borrowings and increase the government debt risks.

Achieving these deficit targets by reviewing the structure of costs and revenues. Preference shall be given to expenditure on economic development with a high multiplier effect (government agency’s mortgages, infrastructure projects). Attempts to find additional sources of revenue, in particular through the increase of mining taxes should be carried out.

Intensification of cooperation with the International Monetary Fund. Repayment of IMF loans is significant part of financial commitment in 2013. Its refinancing will reduce the risks associated with the debt and the cost of government borrowing. Additionally implementation of the IMF recommendations will speed up efforts to reduce the deficit of NAK "Naftogaz of Ukraine" and necessary amount of government borrowings.

Retention of the general government deficit (including NAK "Naftogaz Ukraine") and the State Budget within 5% and 3% of GDP respectively. With the increased government borrowings needed to refinance existing debt, deficits exceeding these limits will worsen the terms of borrowings and increase the government debt risks.

Achieving these deficit targets by reviewing the structure of costs and revenues. Preference shall be given to expenditure on economic development with a high multiplier effect (government agency’s mortgages, infrastructure projects). Attempts to find additional sources of revenue, in particular through the increase of mining taxes should be carried out.

Long term strategyLong term strategy

Strengthening of budget transparency. Although the availability of information and public control of budget balance and debt is a prerequisite of balanced fiscal policies and the insurance of the sustainability of public finances, it is necessary to:

- implement accrual accounting of public sector transactions;

- consider the quality of the acquisition of financial assets made by the government in the process of budget balance accounting

- conduct budget deficit and debt accounting on the general government sector level

- implement primary cyclically-adjusted budget balance;

Optimization of the size and structure of public debt. The threshold of public and government guaranteed debt at 60% of GDP set in the Budget Code does not match Ukrainian conditions, therefore does not improve budgetary discipline. It is necessary to increase the restriction to 40% of GDP. Although it is required to revise the structure of the government debt. The share of government debt in foreign currency (or linked to foreign currency) shall not exceed 50% of the total stock.

Improving the effectiveness of government debt by increasing their counter-cyclical orientation. The Budget Code should include limiting the amount of funding the state budget according to the cycle of economic development.

Creation of the stabilization fund. Given the vulnerability of the economy to external factors of national economy, it should be considered to establish a stabilization fund that would provide an additional financial resources during recession and to transact active debt management.

Strengthening of budget transparency. Although the availability of information and public control of budget balance and debt is a prerequisite of balanced fiscal policies and the insurance of the sustainability of public finances, it is necessary to:

- implement accrual accounting of public sector transactions;

- consider the quality of the acquisition of financial assets made by the government in the process of budget balance accounting

- conduct budget deficit and debt accounting on the general government sector level

- implement primary cyclically-adjusted budget balance;

Optimization of the size and structure of public debt. The threshold of public and government guaranteed debt at 60% of GDP set in the Budget Code does not match Ukrainian conditions, therefore does not improve budgetary discipline. It is necessary to increase the restriction to 40% of GDP. Although it is required to revise the structure of the government debt. The share of government debt in foreign currency (or linked to foreign currency) shall not exceed 50% of the total stock.

Improving the effectiveness of government debt by increasing their counter-cyclical orientation. The Budget Code should include limiting the amount of funding the state budget according to the cycle of economic development.

Creation of the stabilization fund. Given the vulnerability of the economy to external factors of national economy, it should be considered to establish a stabilization fund that would provide an additional financial resources during recession and to transact active debt management.

Measures for the reduction of quasi-fiscal operations

Measures for the reduction of quasi-fiscal operations

Approving the method of accounting of quasi-fiscal operations made by public sector and publication of the data on the volume of such transactions

Legally establishing the right to perform the loans which will be repaid by the state budget funds only for the Cabinet of Ministers of Ukraine

Setting prices for goods and services produced or provided by public corporation at economically adequate levels and (or) compensation of public enterprises losses connected with carrying out of quasi-fiscal operations

Strengthening the terms of state guarantees, providing up to 80% of failed payments

Limiting maximal amount of issued guarantees to 1% of GDP, except guarantees on loans received from the international financial institutions

Approving the method of accounting of quasi-fiscal operations made by public sector and publication of the data on the volume of such transactions

Legally establishing the right to perform the loans which will be repaid by the state budget funds only for the Cabinet of Ministers of Ukraine

Setting prices for goods and services produced or provided by public corporation at economically adequate levels and (or) compensation of public enterprises losses connected with carrying out of quasi-fiscal operations

Strengthening the terms of state guarantees, providing up to 80% of failed payments

Limiting maximal amount of issued guarantees to 1% of GDP, except guarantees on loans received from the international financial institutions