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DOI: https://doi.org/10.34069/AI/2023.68.08.12
How to Cite:
Tretiak, D., Sizov, A., Miedviedkova, N., Murovana, T., & Karpych, A. (2023). Fiscal risk management in Ukraine under new
challenges. Amazonia Investiga, 12(68), 126-140. https://doi.org/10.34069/AI/2023.68.08.12
Fiscal risk management in Ukraine under new challenges
Управління фіскальними ризиками в Україні в умовах нових викликів
Received: June 3, 2023 Accepted: August 27, 2023
Written by:
Diana Tretiak1
https://orcid.org/0000-0002-1610-6905
Alim Sizov2
https://orcid.org/0000-0002-6400-3951
Nataliia Miedviedkova3
https://orcid.org/0000-0001-6359-561X
Tetiana Murovana4
https://orcid.org/0000-0001-6285-7681
Anna Karpych5
https://orcid.org/0000-0001-5345-7299
Abstract
This article examines fiscal risks and their
management in Ukraine and abroad, drawing on
international best practices. The main aim is to
analyze global risks in the short and long term
and evaluate how public finances have been
managed in Ukraine and other countries during
economic crises, while suggesting areas for
improvement. The study utilized various
scientific methods, including the structural-
functional method to uncover risk management
mechanisms within public finance systems and
the comparative method to contrast key
indicators of Ukraine's public finance system
with those of other nations. Key findings include
the identification of primary tools used nationally
and internationally to mitigate the impact of
fiscal shocks during crises. Budgetary practices
from different countries were also examined,
emphasizing fiscal rules, social expenditure
allocation, and incentives for innovation and
investment. The research highlights how global
challenges and economic crises have led
countries to adopt different approaches based on
their economic development and risk
1
PhD, Associate Professor, Department of Insurance, Banking and Risk Management, Taras Shevchenko National University of Kyiv,
Ukraine. WoS Researcher ID: AAF-9251-2022
2
Ph.D., Associate Professor, Military Institute of Taras Shevchenko National University of Kyiv, Ukraine. WoS Researcher ID:
JDW-7089-2023
3
Ph.D., Associate Professor, Department of Finance, Taras Shevchenko National University of Kyiv, Ukraine. WoS Researcher
ID: T-4368-2017
4
Ph.D., Associate Professor, Department of International Economics, Taras Shevchenko National University of Kyiv, Ukraine. WoS
Researcher ID: V-3581-2017
5
Ph.D. student, Department of Finance, Taras Shevchenko National University of Kyiv, Ukraine. WoS Researcher ID:
AAU-8839-2021
Tretiak, D., Sizov, A., Miedviedkova, N., Murovana, T., Karpych, A. / Volume 12 - Issue 68: 126-140 / August, 2023
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management integration into fiscal processes.
Recommendations are provided to enhance fiscal
risk management measures in Ukraine,
particularly in the ongoing wartime context. In
conclusion, this article underscores the
importance of effective fiscal risk management
and offers specific suggestions to strengthen
fiscal risk management practices in Ukraine,
considering current circumstances and
unforeseen challenges.
Keywords: fiscal risks, risk management, public
finance, budget, war.
Introduction
The state of the state budget is one of the most
important factors of macroeconomic
stabilization. Its formation is significantly
affected by the risks associated with the
macroeconomic situation with accumulated
public debt, government guarantees, economic
entities' activities in the economy's public sector,
etc. In economic problems, financial risks are
associated with covering additional state losses,
particularly through military operations.
The introduction of martial law in February 2022
on the territory of the entire sovereign and
independent state of Ukraine in connection with
the military aggression of the Russian Federation
led to the activation of new challenges regarding
the proper functioning of not only the domestic
sphere of public finance but also for the domestic
economic system.
In the context of the above, it is obvious that
fiscal risk is a very dangerous factor in the further
development of the public finance system, which
requires careful monitoring, control, and the
search for optimal ways to minimize it.
Literature Review shows research by the
National Bank of Ukraine, OECD, IMF, and
other international organizations. We also
considered theoretical and practical issues of risk
management in the system of formation of the
state budget studied by domestic scientists.
In Methodology part we used the following
methods: structural-functional method to identify
the mechanism of the influence of public finance
risks on the main indicators of the public finance
system; method of comparison to describe
macroeconomic risks and compare countries
regarding the Open budget index, public
availability of budget documents in Ukraine in
accordance with the type of the document and
features of fiscal risk management in OECD
countries.
Results and Discussion part consists of a
developed classification of risks in the field of
public finance, namely, macroeconomic dangers,
risks associated with public debt and government
guarantees, risks associated with the activities of
public sector entities, risks associated with the
financial sector, risks associated with the social
sphere, risks associated with the sphere of
agriculture and food security of the state, risks of
poor budget transparency. An integrated
approach to identifying risks made it possible to
form a holistic picture of fiscal risks in Ukraine
and justify the corresponding recommendations.
The main recommendations for improving fiscal
risk management in Ukraine under new
challenges include the following: expansion of
government business support programs, the main
lending mechanism during the war; optimization
of budget spending; approximation of the terms
of placement of government bonds to the market
value of resources in UAH; application of fiscal
rules; settlement of lost housing and potentially
problematic mortgages; diversification of import
taxation.
Literature Review
Since the management of fiscal risks is one of the
central elements in the formation of the fiscal
policy of modern states, this issue is given a lot
of research by the OECD, IMF and other
international organizations. In particular, the
OECD report "OECD Best Practices in Fiscal
Risk Management" systematizes the components
of the best risk management practices, according
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to OECD experts. In addition, to study global
risks, challenges, and trends, we analyzed in
detail the reports prepared annually for the World
Economic Forum (WEF) — "Global Risks 2022"
and "Global Risks 2023". They are analytical
reports containing a list of the most relevant
global risks humanity will face over the next two
and ten years, among them already familiar and
new threats.
Also analyzed is a survey conducted by the
National Bank of Ukraine in 2022 on the
systemic risks of the financial sector, in which
top managers of the largest banks and non-
banking financial institutions in Ukraine answer
questions about the risks threatening the financial
sector.
Fundamental studies of fiscal risks are presented
in the works of T. Persson & G. Tabellini (1996),
M. Cassardi & D. Folkerts-Landau (1997),
G. Mackenzie & P. Stella (1996). The IMF
specialists studied the sources of fiscal risks and
provided recommendations on disclosing and
managing these risks.
Theoretical and practical issues of risk
management in the system of formation of the
state budget were studied by domestic scientists
O. Bilousova (2013), K. Blishchuk (2018),
T. Bohdan (2022), O.Ivanytska (2019), I. Liutyi
& M. Kravchenko (2014), L.Kozoriz (2020),
I. Lunina (2012), O. Rozhko, N. Tkachenko &
Yu. Kovalenko (2021). Researchers in the field
of public finance A. Danylenko and I. Zimovets
(2015) considered the factors that create risks to
the stability of the public finances of Ukraine.
The mechanism for preventing threats to the
economic security of Ukraine was studied by
scientists O. Rozhko (2016) and Z. Varnalii
(2016), ways to increase the effectiveness of
control measures to prevent risks —
N. Miedviedkova (2016), I. Drozd &
M. Pysmenna (2021). The results of these studies
indicate that the risk management policy of the
state budget of Ukraine could have been more
effective. Paying tribute to the developments of
domestic economists, we note that some issues
need additional research, especially in the face of
the latest global challenges.
This study aims to analyze trends in global risks
in general and fiscal risks, in particular, to
summarize the global and domestic practice of
fiscal risk management, as well as the features of
managing fiscal risks of the state budget of
Ukraine in the face of new challenges. To
achieve these goals, the following tasks were set:
1) to explore global risks in world practice;
2) to study the approaches of foreign and
domestic scientists to the concept of "fiscal risks"
and the main tools for managing them;
3) determine the types of risks in the field of
public finance; 4) explore the challenges that
arise when implementing risk management
systems; 5) consider the prospects for the
introduction of tools for managing fiscal risks of
the state budget, taking into account new
challenges.
Methodology
Methods of theoretical generalizations apply to
studying and systematizing risks in the system of
public finances and the state concept of ensuring
economic security (Danylenko & Zymovets,
2015; Lunina, 2012; Liutyi & Kravchenko,
2014). Ivanytska O. & Koshchuk T. (2019)
defined the main approaches to managing fiscal
risks used in the domestic practice of financial
management and developed countries.
Researchers Riabushka L., Kubakh T., and
Pavlenko I. reviewed modern approaches to
managing fiscal risks: methodology and practice
(Riabushka et al., 2021). A systematic approach
was used to determine the types and elements of
state financial control into event risks in the
public finance system (Varnalii et al., 2016).
Some authors used conceptual approaches to the
essence of public finance risks (Danylenko &
Zymovets 2015; Hasanov, 2017; Lunina, 2012;
Liutyi & Kravchenko, 2014). System-structural
analysis was applied in prioritizing priorities to
ensure the national economy's economic security
(Varnalii et al., 2016). Grouping and the tabular
method were used for the properties of different
types of risks in the public money system
(Varnalii et al, 2016; Hasanov, 2017; Lunina,
2012).
To achieve the goals of this work, general
scientific and special methods were used, such
as:
− structural-functional method (to reveal the
risk management mechanism in the public
finance system). We used this method to
identify the mechanism of the influence of
public finance risks on the main indicators of
the public finance system;
− method of comparison (to compare the main
indicators of the public finance system of
Ukraine and other countries). This method
reviewed macroeconomic risks and
compared countries regarding the open
budget index.
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To understand the progress made by the
Ukrainian government in meeting public finance
targets, we examine the dynamics over recent
years, which made it possible to understand the
shortcomings and risks of the public finance
system. This, in turn, allows the development of
recommendations on measures in public
financial management.
Structural-functional method was used to
identify types of risks in the field of public
finance, namely, macroeconomic dangers, risks
associated with public debt and government
guarantees, risks associated with the activities of
public sector entities, risks associated with the
financial sector, risks associated with the social
sphere, risks associated with the sphere of
agriculture and food security of the state, risks of
poor budget transparency. An integrated
approach to identifying risks made it possible to
form a holistic picture of fiscal risks in Ukraine
and justify the corresponding recommendations.
Comparison method was used in the case of
analyzing features of fiscal risk management in
OECD countries. For instance, the identification
of fiscal risks based on the possibility of their
occurrence and possible impact on public finance
is a component of the fiscal risk management
systems in Australia and Great Britain. The so-
called internal fiscal risks connected to the
execution of governmental programs are defined
in Finland. New Zealand estimates the probable
costs involved with disaster-related
infrastructure reconstruction. The UK is now
grappling with fiscal risks that have catastrophic
effects on the world's economy and public
finances with a high degree of uncertainty
regarding time, the size of the expenses, and the
forecasting process: public debt, the coronavirus
outbreak, and climate change.
We analyzed Public availability of budget
documents in Ukraine in the context of such
documents as Pre-Budget Statement, Executive’s
Budget Proposal, Enacted Budget, Citizens
Budget, In-Year Reports, Mid-Year Review,
Year-End Report and Audit Report during 2010-
2021. A positive trend is that the Citizens Budget
has been available since 2017. The analysis
helped us to conclude that, in general, the public
gets all the necessary information.
We also used another statement — the Open
Budget Survey (OBS) which evaluates the
public's ability to determine how the central
government raises and spends public resources.
Besides Ukraine, we considered Bulgaria,
Moldova, Slovakia, Romania, Armenia, Poland,
Czech Republic and Hungary. We concluded that
since 2015, there has been a positive trend:
Ukraine has increased its rating from 46 to 65.
Results and Discussion
On January 11, 2022, the World Economic
Forum (WEF, 2023) published its 18th annual
Global Risks 2023 report. Estimates are based on
a survey of over 1200 experts from 121 countries
from academia, business, and international
organizations. The study showed that the most
serious risks in the next 2 years are the following:
1. The cost-of-living crisis.
2. Natural disasters and extreme weather
events.
3. Geo-economic confrontation.
4. Failure to mitigate the effects of climate
change.
5. Destruction of social cohesion and
polarization.
6. Incidents with large-scale environmental
damage.
7. Failure to adapt to climate change.
8. Cybercrime and lack of cybersecurity.
9. Crisis of natural resources.
10. Large-scale forced migration.
Among the most serious risks in the next 10
years, experts identify the following:
1. Failure to mitigate climate change.
2. Failure to adapt to climate change.
3. Natural disasters and extreme weather
events.
4. Loss of biodiversity and collapse of the
ecosystem.
5. Large-scale forced migration.
6. Crisis of natural resources.
7. Destruction of social cohesion and social
polarization.
8. Cybercrime and cybersecurity.
9. Geo-economic confrontation.
10. Incidents with large-scale environmental
damage.
The World Economic Forum's annual report on
global risks showed that the threat of a recession,
a cost-of-living crisis, and a growing debt crisis
will dominate forecasts for the next two years.
The study noted that the most immediate risk is
the cost-of-living crisis, while the biggest long-
term threats remain climate-related.
According to The Global Risks Report 2022, the
following main short-term risks (0-2 years) were
identified in 2022: extreme weather (31.1%),
livelihood crisis (30.4%), failure to take climate
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action (27.5%); erosion of social cohesion
(27.5%); infectious diseases (26.4%);
deterioration in mental health (26.1%);
cybersecurity (19.5%); debt crisis (19.3%);
digital divide (18.2%); deflating asset bubbles
(14.2%) (WEF, 2022).
According to a survey conducted by the National
Bank of Ukraine in November 2022, involving
the heads of 22 banks, 11 insurance companies,
and 3 investment companies, the war with Russia
creates very high risks. The risks of economic
activity, fraud, and cyber threats have
significantly increased — they are among the top
five threats. Top managers of financial
institutions in Ukraine have slightly improved
their estimates of the current state of the financial
sector. The proportion of those rated his
condition as bad or very bad is 17%. At the same
time, three-quarters of respondents perceived the
current state of the financial sector as
satisfactory. Most respondents noted the
financial sector's deterioration over the past six
months.
At the same time, expectations of further
development of the financial market have
improved. The proportion of respondents who
expect the financial sector to deteriorate in the
next six months has almost halved to half of the
respondents, and about 43% do not expect
changes.
Global economic growth is projected to slow to
1.7 percent in 2023, one of the slowest in nearly
30 years, second only to the global recessions of
2009 and 2020. This slowdown is partly due to
tightening monetary policy to combat high
inflation. Negative shocks such as rising
inflation, tightening monetary policy, or financial
turmoil can send the global economy into
recession. Urgent action is needed to reduce
global recession and debt crisis risks. In addition,
governments need to ensure support for
vulnerable populations, keeping inflation
expectations stable and financial systems
resilient (Table 1).
Table 1.
World Economic Outlook
Indicators
Real GDP (%)
2020
2021
2022e
2023f
2024f
2022e
2023f
2024f
World
-3.2
5.9
2.9
1.7
2.7
0.0
-1.3
-0.3
Advanced Economies
-4.3
5.3
2.5
0.5
1.6
-0.1
-1.7
-0.3
Emerging markets and
developing countries
-1.5
6.7
3.4
3.4
4.1
0.0
-0.8
-0.3
East Asia and the Pacific
1.2
7.2
3.2
4.3
4.9
-1.2
-0.9
-0.2
Europe and Central Asia
-1.7
6.7
0.2
0.1
2.8
3.2
-1.4
-0.5
Latin America and the
Caribbean
-6.2
6.8
3.6
1.3
2.4
1.1
-0.6
0.0
Middle East and North Africa
-3.6
3.7
5.7
3.5
2.7
0.4
-0.1
-0.5
South Asia
-4.5
7.9
6.1
5.5
5.8
-0.7
-0.3
-0.3
Africa south of the Sahara
-2.0
4.3
3.4
3.6
3.9
-0.3
-0.2
-0.7
Source: World Bank (n.d.)
Against the backdrop of high inflation and
rapidly decelerating global economic growth,
emerging market regions and developing
economies face a variety of adverse factors.
Growth forecasts across all regions for the next
two years have worsened from those made in
June. Tighter monetary policy and credit
conditions will constrain economic growth,
especially in Latin America, the Caribbean,
South Asia, and sub-Saharan Africa. The
slowdown in advanced economies is projected to
have a particularly strong impact on East Asia,
the Pacific, Europe, and Central Asia due to the
spillover effect from the contraction in foreign
trade. Persistently high energy prices cloud the
outlook for energy-importing countries
worldwide. All regions are dominated by risk
factors that threaten to strengthen economic
growth. Among them are potential financial
shocks, new shocks in commodity markets,
deepening conflicts, and natural disasters (World
Bank, n.d.).
The IMF specialists consider macroeconomic
and specific risks caused by contingent liabilities
of the state to be the main fiscal risks, it is
expedient to assess and disclose them. The latter
include fiscal risks, the sources of which are the
provision of state guarantees, public-private
partnership projects, government support for the
financial sector, the use of exhaustive natural
resources, overcoming environmental problems,
and the activities of local governments and
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business entities of the public sector of the
economy.
The main fiscal risks in Ukraine, the assessment
of which is provided for by the Methodology for
assessing fiscal risks, approved by the Resolution
of the Cabinet of Ministers of Ukraine dated
April 24, 2019 No. 351 (Methodology, 2019),
include risks arising from, firstly, changes in the
macroeconomic environment; secondly,
contingent liabilities — potential liabilities of the
state budget, confirmed only after the occurrence
or non-occurrence of certain events; thirdly, non-
fulfillment of the plan for proceeds from the
privatization of state property; fourthly, the
deviation from the planned indicators in the field
of pension provision. Contingent liabilities cover
the following areas: the provision of state
guarantees for loans, unprofitable activities of
economic entities in the public sector of the
economy, inefficient functioning of the financial
sector, unplanned results of the implementation
of public-private partnership projects, and the
elimination of the consequences of man-made,
natural and other emergencies (Methodology,
2019).
The OECD report “Best Practices in Fiscal Risk
Management” (Managing Fiscal Risks, 2020)
presents the experience of Australia, Finland,
New Zealand, the Netherlands, and the United
Kingdom. The systematization of the
components of the best risk management
practices, according to OECD experts, is
presented in Table 2.
Table. 2.
Features of fiscal risk management in OECD countries
Components
Characteristic
Country
Identification
The subjects of the Commonwealth determine the fiscal risks in their area of
responsibility and are obliged to provide information to the Ministry of Finance and
the Treasury
Australia
Each central government entity is responsible for risk identification, description,
and monitoring.
Finland
Competence lies with authorized entities responsible for identifying and monitoring
risks
Netherlands
Risk identification stages are carried out, such as monitoring and reviewing
previous periods.
New
Zealand
The Treasury coordinates its work with other bodies competent for fiscal risks
Great
Britain
Measurement
Commonwealth entities identify and assess risks when preparing their financial
statements, risks are consolidated
Australia
The measurement of fiscal risks is carried out in the form of financing of state
guarantees at face value
Finland
Macroeconomic and financial risks are measured by analyzing alternative scenarios
(stress tests)
Netherlands
Each agency measures its specific fiscal risks under the guidance and monitoring of
the Treasury.
New
Zealand
The likelihood of risk and its potential impact on both reserve performance and
public finance flows are assessed
Great
Britain
Information
disclosure
Risk Statement included in the Budget Strategy
Australia
The annual nationwide fiscal plan includes a summary of the overall risks
associated with the fiscal outlook
Finland
Information provided with medium-term forecasts and annual budget
Netherlands
Biennial and pre-election economic and budget updates reveal general, specific,
and balance sheet risks.
New
Zealand
Risks for medium-term forecasts are mentioned in economic and fiscal forecasts,
and sensitivity analysis relative to long-term forecasts is presented in the Fiscal
Sustainability Report
Great
Britain
Mitigation
Departments and other business entities prevent and mitigate business risks,
contingent liabilities, and assets
Australia
Each government agency is expected to prevent or reduce its risks
Finland
Contingency risk management policy includes restrictions and prevention of
government incurring new contingent liabilities
Netherlands
Each department prevents and mitigates specific risks by re-setting priority targets.
New
Zealand
The government's strategy consists of five steps: identifying the source, scope, and
risk; risk disclosure; risk reduction; risk assurance and calculation of risk residuals
Great
Britain
Source: Riabushka et al, 2021; OECD, 2020
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For example, the system of fiscal risk
management in Great Britain and Australia
includes the identification of fiscal risks by the
likelihood of their occurrence and potential
impact on public finances. Finland defines the
so-called internal fiscal risks associated with
implementing government programs. New
Zealand measures the potential costs associated
with rebuilding infrastructure in a disaster. The
UK is now dealing with fiscal risks that have a
significant degree of uncertainty in terms of
timing, the scale of the costs, is characterized by
a non-linear nature of forecasting, catastrophic
consequences for the world's economies and
public finances of countries: the coronavirus
pandemic, climate change, public debt
(Riabushka et al, 2021).
A paper published by the World Bank defines
fiscal risk as a source of financial stress that the
government may face in the future
(Hrechanichenko, 2018). At the same time, fiscal
risks are particularly associated with
contingencies arising mainly from political
decisions and fiscal opportunism to avoid
difficult adjustments and unpopular structural
reforms.
Another interpretation of fiscal risks, contained
in a study by International Monetary Fund
specialists, concerns the potential difference
between actual and expected fiscal results, for
example, in terms of the budget, the balance
sheet, or the amount of public debt (Everaert et
al, 2009) or possible deviations of fiscal variables
at the level that was expected at the time adoption
of the budget or its forecast. Researcher Hasanov
(2017) believes that fiscal risks can be divided
into two large groups: 1) internal risks of the
fiscal system; 2) risks of external origin,
including those outside the country.
Risks in the sphere of public money are
understood as the possibility of a difference in
the size of government revenues, expenditures,
and borrowings from their expected sizes during
certain budget periods by one, three, or more
years.
There are many views on the definition of risk-
based management, although they all have
similar components. Public finances in Ukraine
are sensitive to several significant fiscal risks,
including risks associated with state-owned
enterprises and state property management;
public debt and government guarantees; the
financial sector; configuration of the
macroeconomic situation These risks are also
called fiscal risks and are factors that can lead to
a deviation of revenues, expenditures,
government budget deficits, and public debt from
planned indicators (Fig. 1).
Fig. 1. Types of risks in the field of public finance.
Source: developed by the authors based on Fiscal risks (2008), Information on fiscal risks (2023), Ministry
of Finance of Ukraine (2021)
The soundness of fiscal policy negatively affects
the lack of a comprehensive management system
for these risks, which has negative consequences
for the sustainability of public debt and the
efficient allocation of public resources in line
with public policy priorities.
PUBLIC
FINANCE
RISKS
Macroeconomic risks
Financial Sector Risks
Risks associated with the
activities of public sector
entities
Risks associated with public
debt and government
guarantees
Risks Associated with
Insufficient Budget
Transparency
Risks Associated with
Inadequate Cost Control
Risks of fraud and tax
evasion
Risks associated with imperfect
approaches to the analysis of the
effectiveness and efficiency of
the program budget
Risks associated with the
social sphere
Risks related to
agriculture and food
security
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1. Macroeconomic dangers. The
macroeconomic forecast of the Cabinet of
Ministers of Ukraine (CMU), based on
which the calculation of the 2023 budget
indicators is more pessimistic than the
National Bank of Ukraine (NBU) forecast. If
in 2022 the NBU expected a deeper decline
in the economy, than in 2023 — a more
powerful recovery (Table 3).
Table 3.
Comparison of government and NBU macro forecasts
Indicators
2023
CMU
NBU
Real GDP growth, %
+4,6
+5,5
GDP deflator, %
+30,7
+25,0
Nominal GDP, billion UAH
6399
5990
CPI, December to December, %
+30,0
+20,7
Average monthly salary, %, r/s (nominal)
+32,0
+36,3
(real)
+1,0
+6,7
Unemployment rate, %
28,2
+27,0
Export of goods and services, % Y/Y
+9,1
+20,8
Import of goods and services, % Y/Y
+1,0
+9,5
Source: Danylyshyn, 2022
As a result of the negative impact of the war, the
budget deficit is planned at 20% of GDP. The
government plans to raise most funding needs
from external loans and grants, and the rest from
internal loans, privatization, and other sources
(Table 4).
Table 4.
Characteristics of the public money system for 2023
Indicators
UAH billion
In % of GDP
Income
1278.8
20.0
Tax revenues
1156.0
18.1
VAT
596.3
9.3
Income tax
132.0
2.1
Part of the profits of the GP
7.3
0.1
Expenses
2513.9
39.3
Defense
870.0
13.6
Social sphere
647.3
10.1
Investments
95.0
1.5
Debt service
330.7
5.2
Shortage (+grants)
-1280.1
-20.0
External loans and grants
1497.4
23.4
Domestic loans
-225.3
-3.5
Other sources
8.0
0.1
National GDP
6399.0
100
Source: Danylyshyn, 2022
Since 2014, the Ukrainian economy has
operated in a hybrid war waged by the Russian
Federation against Ukraine. However, the
massive military actions of the aggressor state
on the territory of Ukraine have created new
extraordinary challenges, namely:
− non-receipt of financial assistance from
international financial organizations and
donor countries can lead to additional
money emissions, and a reduction of budget
expenditures, which will negatively affect
the volume of economic demand and
production and further affect price
dynamics;
− uncertainty about the duration and intensity
of the military conflict between Ukraine
and the Russian Federation, which could
lead to further involuntary resettlement of
the population, the continued destruction of
vital infrastructure, and increased loss of
economic and productive potential;
− loss of crops as a result of the destruction
by the Russian Federation of fields and crop
storage sites, which will lead to a reduction
in food crops and agricultural production,
which, firstly, will lead to a decrease in
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exports and foreign exchange earnings
from exports, and, secondly, also food
shortages in the domestic market and rising
consumer food prices.
2. Risks associated with public debt and
government guarantees. Due to the
deterioration in the work of enterprises in the
state and municipal sectors of the economy
as a result of the war, in 2023 for these
enterprises, there is a risk that such entities
will not fulfill their obligations to creditors
for loans attracted under state guarantees, to
the Ministry of Finance of Ukraine as a
creditor, for loans attracted by the state from
international financial organizations.
A significant deficit and its predominantly loan
financing led to a rapid accumulation of public
debt. The limit value of the state direct debt for
2023 is provided in the amount of UAH 6.4
trillion (100.1% of GDP), and exceeding the
value of more than 60% is a threatening level of
public debt.
So, among the possible risks in the next year, it
is advisable to highlight the following.
Firstly, in 2023 there is a significant likelihood
of warranty cases for the obligations of PJSC
State Food and Grain Corporation of Ukraine
and the risk of Ukravtodor fulfilling its debt
obligations.
Secondly, the increase in the NBU discount rate
is also an additional burden for economic entities
of the public sector and municipalities, whose
portfolio contains loans linked to the NBU
discount rate, in particular, guaranteed by the
state. In the future, this may lead to defaults and
additional unpredictable state budget
expenditures. Moreover, an increase in the NBU
discount and inflation rates will lead to additional
state budget expenditures for servicing the public
debt in 2023.
Thirdly, it should be noted that the reduction in
the volume of tax payments to the budget and the
urgent need to cover the country's significant
current expenses in war conditions create
significant fiscal risks for the state budget - they
lead to an increase in the state budget deficit and
public debt.
3. Risks associated with the activities of public
sector entities. State-owned enterprises
acutely felt all the negative consequences of
the war in the country, which led to the
deterioration of their financial and economic
condition. The emergence of new challenges
in the activities of state-owned companies
has led to the following negative
consequences: loss of assets and labor
resources, insufficiency of working capital
and, thus, an increase in the need to attract
additional resources; a significant reduction
in production and sales volumes; a
significant increase in prices for energy
carriers, raw materials, and materials;
problems with logistics and its price rise;
loss of markets.
State-owned companies suffered significant
losses due to the negative effects of the war,
including the destruction of production assets
and the threat to workers' lives. It is also
advisable to add to this list the deterioration of
solvency and the growth of debt, the
deterioration and rise in the cost of logistics,
which, as a result, leads to a restriction of
activities.
4. Risks associated with the financial sector.
Although the banking system of Ukraine
successfully resists new challenges, which
confirms the high volume of free liquidity of
the banking system, at the same time, the
growth of net business loans in the national
currency since the beginning of the war was
provided primarily by support programs.
That is why mass lending to businesses now
seems possible only with the expansion of
state support programs.
Credit risk remains one of the key risks, and its
realization is the biggest threat to the sector,
according to the NBU, banks will lose at least
20% of their loan portfolio due to the war and, as
a result, the financial and economic crisis. Under
the greatest risk are secured loans issued in the
temporarily occupied territories and territories
where active hostilities are taking place. Due to
the destruction of collateral in the form of
housing and vehicles, as well as the deterioration
of the solvency of the population, a significant
proportion of the loan portfolio of banks may
need to improve (RBC, n.d.)
5. Risks associated with the social sphere.
Priority financing of expenditures this year
is aimed at military purposes, increasing the
country's defense capability and making the
most necessary social expenditures
supporting the population affected by the
war.
Firstly, in 2022 there were fiscal risks associated
with the failure to meet the planned indicators of
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the Pension Fund's revenues due to a decrease in
the number of employees and failure to achieve
the planned growth rates of the payroll fund: an
increase in arrears in paying unified social
contributions and reimbursement of preferential
pensions; decrease in the level of solvency of
enterprises, institutions, organizations in terms of
paying mandatory insurance premiums due to a
decrease in income, termination of activities as a
result of the military aggression of the Russian
Federation, hostilities and the introduction of
martial law on the territory of Ukraine. The
upward trend in the Pension Fund's debt on loans
granted from a single treasury account to cover
temporary cash gaps continues.
Secondly, according to the Ministry of Social
Policy, there is a high risk of growth in debt on
the payment of material security for insurance
due to temporary disability because of a decrease
in revenues from the single contribution for
compulsory state social insurance. Thus, losses
in the revenue part of the budget of the Social
Insurance Fund of Ukraine as a result of a
shortfall in funds from the single contribution
amount by the end of 2022 may amount to UAH
4.2 billion (Information on fiscal risks, 2023).
6. Risks associated with the sphere of
agriculture and food security of the state.
Before the start of the war, Ukraine was one
of the largest suppliers of food and
agricultural products to the world market, so
over the past five years, agri-food products
provided about half of the state's total
exports. The full-scale invasion of the
Russian Federation into Ukraine has created
new challenges in the state’s agriculture and
food security.
The destruction and significant damage to the
agricultural, storage, and transport infrastructure
and the energy and processing industries led to a
significant decrease in Ukraine's export
opportunities and a shortage of products in world
markets.
The war radically changed the achievements of
Ukraine's export potential and affected world
markets. The failure of stable supplies of
agricultural products from Ukraine has already
led to a rapid increase in world grain prices, so it
is important to increase the possibilities of its
export to receive foreign exchange earnings in
the Ukrainian economy (Information on fiscal
risks, 2023).
7. Risks of poor budget transparency. The
transparency of the budget and the budgeting
process is an essential or critical requirement
for a democratic society to function. The
openness of the budget allows the public,
particularly its socially engaged element,
which represents the interests of many
sectors of the population, to understand the
complexities and alternatives of budget
choices and influence the authorities while
actively preserving their civil rights.
The Open Budget Survey (OBS) is the world's
only independent, comparative, and fact-based
research instrument that uses internationally
accepted criteria to assess public access to central
government budget information; formal
opportunities for the public to participate in the
national budget process; and the role of budget
oversight institutions, such as legislatures and
national audit offices, in the budget process
(Open Budget Survey, 2021).
It evaluates the public's ability to determine how
the central government raises and spends public
resources. Ukraine ranks 65th. A score of 61 or
above indicates that a country is likely to publish
enough information to allow for informed public
debate on the budget (Fig.2).
Fig. 2. Transparency in Ukraine compared to others
Source: Open Budget Survey, 2021
45
71 65 65 65 61 60 60 60
44
0
10
20
30
40
50
60
70
80
Global
Average Bulgaria Moldova Ukraine Slovakia Romania Armenia Poland Czech
Republic Hungary
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Since 2015, there has been a positive trend: Ukraine has increased its rating from 46 to 65 (Fig.3).
Fig. 3. How has the transparency score for Ukraine changed over time?
Source: Open Budget Survey, 2021
In general, the public gets all the necessary
information. A positive trend is that the Citizens Budget has been available since 2017 (Table 5).
Table 5.
Public availability of budget documents in Ukraine
Document
2010
2012
2015
2017
2019
2021
Pre-Budget Statement
+
+
+
+
+
-
Executive’s Budget Proposal
+
+
+
+
+
+
Enacted Budget
+
+
+
+
+
+
Citizens Budget
-
-
-
+
+
+
In-Year Reports
+
+
+
+
+
+
Mid-Year Review
+/-
+/-
-
-
-
-
Year-End Report
+
+
+
+
+
+
Audit Report
+
+
+
+
+
+
«+” - Available to the Public
“+/— “- Published Late, or Not Published Online, or Produced for Internal Use Only
“— “- Not Produced
8. Risks connected with insufficient
expenditure controls include public-sector
fraud and corruption. The practice of
withholding information about the use of
taxpayers' funds has become the basis for
increased corruption in Ukraine. Following
the first stage of the Dignity Revolution in
2014, Ukraine was given a window of
opportunity to enact swift, effective changes
in numerous public government sectors. One
of the priority areas was public procurement
reform, where a successful example is
Prozorro.
ProZorro is a completely online public
procurement platform and cooperation
environment in Ukraine that enables open access
to public procurement (tenders). It was fully
implemented in 2016 as a hybrid (both
centralized public and decentralized private
marketplaces) system, and it has since been
recognized globally as one of the most innovative
public procurement systems for delivering
government services in a stakeholder-focused,
transparent, effective, fair, and low-cost manner.
Another platform for reporting data in the field of
public finance is E-data which was implemented
in the order of the Cabinet of Ministers of
Ukraine dated February 11, 2016, No. 92-r, "On
approval of the Concept for the creation of an
integrated information and analytical system"
Transparent Budget" (Order No. 92-r, 2016). It is
the official state information portal, which
publishes information on the use of public funds
and implements the idea of a "Transparent
Budget", that is why it is an accessible tool for
public control over the planning and use of public
funds.
9. Risks connected with flawed ways of
assessing the efficacy and efficiency of
program budgets. The country's difficult
political and economic situation causes an
urgent solution to the issue of increasing the
efficiency of the formation and distribution
of public finances. The problem of
digitalizing public finances is especially
aggravated during the war when it is
necessary to quickly respond to external
challenges and change the distribution of
62 54 46 54 63 65
0
10
20
30
40
50
60
70
2010 2012 2015 2017 2019 2021
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planned financial resources after the
approved budget.
The effectiveness of budget programs is
evaluated at all stages of the budget process. It
provides measures to monitor and analyze the use
of funds and control their targeted and effective
use.
Also, performance evaluation contributes to the
revision of activities, tasks, and indicators of the
budget program, both in the course of its
implementation and planning in the next budget
period and the medium term. Another benefit of
performance evaluation is the early warning of
possible program performance problems and the
development of cost-effectiveness measures.
To date, there is yet to be a single methodology
for assessing the effectiveness of budget
programs of local budgets. But the most used
method is the method of comparative analysis,
which makes it possible to compare the
effectiveness of the use of budgetary funds and
the results achieved by different administrators in
implementing similar programs (Clarification for
the communities, n.d.).
10. Risks of fraud and tax evasion.
Multinational companies have long
exploited gaps and inconsistencies in tax
rules. World trends in combating the erosion
of the tax base and the withdrawal of taxable
profits (Base Erosion and Profit Shifting -
BEPS) have not gone through Ukraine
either.
In 2013, the Council of the OECD developed the
BEPS project, which provides measures to
combat abuses associated with using special tax
regimes and double taxation conventions.
More than 100 countries worldwide have joined
the program, and since January 1, 2017, Ukraine
has also joined. In 2020, Ukrainian legislation
was amended to ensure the implementation of 8
steps out of 15 activities of the BEPS plan.
Implementing the BEPS Action Plan contributes
to harmonizing international tax rules with more
than 70 countries and creates a more transparent
tax environment. In the EU Member States, the
PERS plan and global threats to tax security have
brought the fiscal function of taxation to the fore
(Finap Software Solutions, 2022).
Therefore, to reduce the risks of public finances,
consistent steps are needed to provide the budget
with reliable sources of revenue, reform its
expenditure side, and improve the budget process
to create conditions for improving the quality and
efficiency of budget decisions. The risk
management of the state budget is carried out to
increase security. The main recommendations
are as follows:
1. Expansion of government business support
programs, the main lending engines in times
of war. Considering these programs’
success, increasing their volume and
covering a wider range of borrowers is
advisable. In addition, the planned expenses
for this program in 2023 should be revised,
considering the prospects for growth in the
loan portfolio and an increase in market
interest rates.
2. Optimization of budget spending. To
stabilize the state of the national economy of
Ukraine in the long term, it is necessary to
ensure an increase in the level and efficiency
of the use of budgetary funds by increasing
the part of expenditures aimed at developing
and modernizing the economy, by reducing
the costs of maintaining the bureaucracy,
reducing tax pressure on business entities by
improving the administration system taxes,
which will help increase the number of own
funds of enterprises that can be used for
investment purposes.
The main areas of recovery, requiring a
significant part of the budget, are as follows:
− reconstruction and modernization of
transport and energy infrastructure;
− social rehabilitation and renewal of social
institutions affected by the war;
− repair and reconstruction of the housing
stock;
− the restoration of damaged agricultural
facilities;
− expansion of production capacities of the
military-industrial complex;
− reconstruction of the network of educational
and healthcare institutions optimized for
new needs, a continuation of reforms in
these areas;
− restoration and modernization of industrial
facilities, creation of jobs, and support for
small and medium-sized businesses
(Committee, n.d.).
3. Approximation of the terms of placement of
government bonds to the market value of
resources in UAH. The Ministry of Finance
should increase the size of market
borrowings to cover the budget deficit and
minimize direct financing of the National
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Bank. Banks, traditionally the main creditors
of the state, have sufficient liquidity reserves
to invest in government bonds. Low yields
on current war bonds are holding them back.
An increase in government bond rates will
help increase demand for them. At the same
time, this will reduce the amount of funding
for the issue in the NBU budget, thereby
reducing price and financial stability risks.
4. Application of fiscal rules. The hostilities
and the economic downturn led to the
violation of the system of quantitative fiscal
rules in Ukraine. That is, fiscal rules are
legislative or regulatory restrictions on the
long-term nature of fiscal policy in the form
of quantitative limits on major fiscal
aggregates (International Monetary Fund,
2017). Such limits are reflected in national
legislation or international treaties and are
binding on public authorities (Iefymenko et
al., 2014; Bohdan, 2023).
5. Settlement of lost housing and potentially
problematic mortgages. Current legislation
allows borrowers to suspend loan service
until they receive compensation for
damaged or lost property. The procedure for
further resolution of credit relations will
depend on the degree of damage caused to
the borrower and his property. At the same
time, the principle of distribution of losses is
implemented: the state and the bank share
the losses arising from the repayment of
credit debt. For the effective operation of the
mechanism, it is necessary to determine the
procedure for compensating borrowers and
initiating payments.
6. Diversification of import taxation. It should
be noted that the reduction in import duties
in the first months of the war made it
possible to meet Ukraine's demand for
scarce goods, which was necessary for an
effective rebuff against the invaders. The
import duty is now back. The government
should also impose additional import duties
on non-critical categories of goods and
services. This will increase budget revenues
and reduce imbalances in the foreign
exchange market.
Conclusions
Theoretical and practical aspects of the
application of recommended measures in
Ukraine require further research, which will
contribute to the activation of investment
processes, innovative and technological
modernization of production, the formation of an
innovative investment model of economic
development, and most importantly, will ensure
the implementation of priority tasks for
economic recovery and modernization of the
public finance system.
Increasing the efficiency of public finances,
which is crucial for the economic development of
Ukraine and improving the welfare of citizens,
can be achieved, in particular, by systematically
improving the mechanism of public
administration by central and local executive
authorities.
Introducing a risk-based public administration
mechanism in the system of public internal
financial control is an important guarantee of an
effective public administration reform, which
will reduce the number of problematic issues in
the activities of public executive authorities and,
accordingly, increase the country's
competitiveness.
Therefore, to reduce the risks of public finances,
consistent steps are needed to provide the budget
with reliable sources of revenue, reform its
expenditure side, and improve the budget process
to create conditions for improving the quality and
efficiency of budget decisions.
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