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Aug 16, 2012

Aggressive tax collection, global slowdown erode state revenues

Kyiv Post

State revenues dropped 20 percent in July compared to last year, raising concerns that aggressive tax collection by Ukraine’s authorities has pumped the country dry. While experts say this is a factor, they also highlight deteriorating macroeconomic conditions that are steadily getting worse.

According to calculations by Kyiv-based investment bank ICU, state budget revenues fell 20.2 percent in July compared to June, and 20 percent compared to last year. At Hr 23.5 billion ($2.9 billion) July’s income was the second lowest this year, behind a traditionally lean January. It was also the first time monthly revenues dropped compared to last year, when authorities began to step up revenue collection.

The lower revenues can partially be attributed to a weaker external environment and seasonal corporate tax payments, which typically peak in May, August and November, said Alexander Valchyshen, head of research at investment bank ICU. But excessive tax collection, which has depleted businesses resources also played a role, he added.

The situation has two sides, confirmed Oleksandr Zholud, senior economist at Kyiv-based think tank International Center for Policy Studies. Tax collectors have indeed been overzealous, he said, but a general slowdown of the economy is also making itself felt. The original government forecasts for 2012 saw consumer prices rise 7.9 percent, Zholud explained, but now we even have deflation, so the collection of nominal taxes is much lower.

“On top of that, aggressive tax collection like advance payments has limited the funds available to businesses,” Zholud summed it up.

The European Business Association, which gathers companies throughout Ukraine, has long been critical of the authorities’ attempts to boost state revenues. These include pressuring companies to buy state bonds, demanding taxes in advance and conducting an ungrounded amount of inspections looking for reasons to issue fines.

Nonetheless, Valchyshen believes the shortfall in revenue means the practice is unlikely to stop, with even more pressure on businesses to pay in advance, more fines and more inspections to find cases of tax avoidance.

“Going forward the government would like to correct this,” he said.

Meanwhile, beyond Ukraine’s borders, the storm clouds are once again gathering. Italy and Spain are looking closer and closer to Greek-bailout territory, while manufacturing, considered a top indicator of where the economy is going by experts, is taking a plunge. Germany and France saw their purchasing manager’s indexes fall to their lowest level since mid-2009; eurozone unemployment is at its highest in the single currency’s history.

September is looming large as analysts forecast a brutal return from the summer holidays for Europe’s leaders. According to a recent study by the International Monetary Fund, a quarter of banking crises since 1970 erupted precisely in that month. It was in Sept. 2008 that a 40 percent devaluation of the hryvnia began - a crack in the dam which exploded into a crisis that cost the country 15 percent in gross domestic product.

The hryvnia is once again coming under pressure. The national bank’s foreign reserves rose slightly in July to $30.1 billion, albeit largely due to a $2 billion eurobond placement at a rate of 9.25 percent, the highest in 12 years. A $450 million loan from the World Bank, that ministry of finance officials say is in the works, will no doubt help.

Nonetheless, interventions to stabilize the hyrvnia doubled in comparison to June, a research note by investment bank Dragon Capital noted, straining the reserves which stood at the $38.2 billion in Aug. 2011. The National Bank of Ukraine’s decision to tighten reserve requirements for banks has also been viewed by experts as part of the government strategy to keep the exchange rate stable, notably by creating hyrvnia shortages on the local market.

“Our base case view also assumes that NBU reserves will decline to $25 billion [covering 3 months of imports] by end-2012 on foreign currency market intervention and repayments to the IMF, and drop further to $23 billion (2.6 months) in 2013,” the investment bank wrote.

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