## 1ukrea2019003

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### Executive summary — Developing the Budget Declaration
- Pilot MTBF launched for the 2018 budget cycle as part of the Public Financial Management Reform Strategy (2017–21).
- 2018–20 draft Budget Declaration (submitted June 1) includes MTBF elements: medium-term macroeconomic and fiscal forecasts, expenditure ceilings for 2018–20.
- Included elements:
  - Macroeconomic outlook with forecasts for GDP (and some components, such as exports), prices and employment, and two alternative macroeconomic scenarios (optimistic and pessimistic).
  - Fiscal objectives and policy indicators with projections for 2018–20 for revenue, expenditure, and the budget balance; key policy parameters (minimum wage, minimum subsistence level, floor for capital investment).
  - Medium-term revenue projections broken down by main tax categories: personal income tax, corporate income tax, value-added tax, and excises, and non-tax revenue.
  - Summary fiscal risk section focusing on macroeconomic and public debt risks, and fiscal risks related to SOEs, guarantees and the financial sector.
  - Qualitative description of new policy proposals and strategic goals linked to the Sustainable Development Strategy “Ukraine-2020.”
  - Expenditure ceilings for key spending units (KSUs) allocating the overall general fund expenditure envelope by spending unit.
- Areas for enhancement:
  - More detailed explanation of medium-term macroeconomic and fiscal outlook; drivers of forecasts; updated budget forecasts for the current year.
  - Further disaggregation of revenue drivers and quantification of specific tax policy impacts over three years.
  - Reconcile differences between successive vintages of macro-fiscal forecasts and ceilings; separate baseline and target scenarios.
  - Present key fiscal aggregates for state budget (general and special fund), consolidated general government sector, and social security funds.
  - Explain characteristics of expenditure ceilings (fixed or indicative) and how KSU ceilings were defined.
  - Quantify budgetary impacts of new policies at the KSU level and identify each KSU’s contribution to strategic goals.
  - Expand the fiscal risk statement (FRS) to cover all material fiscal risks with deeper analysis.

### Executive summary — Implementing the MTBF
- Success condition: MoF must enforce compliance with expenditure ceilings during the annual budget process.
- Pilot implementation challenges:
  - Macroeconomic parameters and forecasts finalized too late, compressing time to set and negotiate ceilings with line ministries (LMs).
  - Policy costings estimated by LMs on a constant price basis; no bottom-up baseline expenditure estimates prepared to inform KSU fiscal space.
  - Limited bilateral discussion between MoF and LMs prior to cabinet submission.
- Procedural recommendations:
  - Prepare two macro-fiscal forecasting rounds timed to support the Budget Declaration and the annual budget.
  - Include standardized templates for LM submissions in the budget circular; require LMs to report progress against KPIs and provide stronger rationale for new proposals.
  - Adopt a revised budget calendar clarifying inputs and ensuring sufficient time for bilateral negotiations.
  - MoF to develop a robust briefing explaining ceilings for cabinet and legislature; empower MoF to execute the budget challenge function.
  - Explain any changes to expenditure ceilings during the annual budget in budget documentation.
- Legal/institutional action:
  - Amend Budget Code of Ukraine to facilitate full MTBF roll-out; authorities committed to amending it by end-2017. Amendments should include a finer budget calendar, core components for the Budget Declaration, and rules for adjusting ceilings.
- Credibility risks:
  - Entrenched practice of introducing new policies during annual budget formulation may undermine ceilings; mitigate via effective MoF budget challenge and CMU consensus requirement for policy changes.

### Executive summary — Improving fiscal risk disclosure
- Progress: inclusion of a summary fiscal risk statement in draft Budget Declaration.
- Data and systems gaps:
  - Validate existing SOE data to correct errors/inconsistencies.
  - Establish/improve systems to collect information on a wider set of fiscal risks (legal cases, PPP obligations), monitor fiscal support for individual SOEs, and quantify quasi-fiscal activities.
  - Create central process for SOE financial information and fiscal support to reduce duplication and improve reliability.
- Institutional arrangements:
  - Amend the Budget Code to assign responsibility for fiscal risk monitoring to the MoF and require publication of a comprehensive FRS with the Budget Declaration.
  - Expand mandate of the Fiscal Risk Management Division and specify responsibilities of departments/agencies via a cabinet resolution.

### Selected recommendations (with timing)
- Recommendation 1.1 — Build on 2018–20 Budget Declaration to enhance MTBF transparency and credibility:
  - For 2019–21 Budget Declaration (June 2018): provide discussion of macroeconomic and fiscal outlooks; clarify ceilings’ characteristics and justify KSU distribution; separately disclose baseline and target scenarios; quantify KSU-level impacts of new policies; broaden FRS; present general government fiscal forecasts; explain changes to prior forecasts and ceilings.
  - For 2020–22 and subsequent (June 2019): compare with independent forecasters; improve fiscal risk quantification; disclose KPIs (first outputs, then outcomes).
- Additional MTBF steps (from April FAD TA):
  - Define contingency margins for overall expenditure ceilings.
  - Integrate the Special Fund into MTBF and present medium-term general government aggregates.
  - Gradually move toward more fixed ceilings as system matures.
  - Expand strategic fiscal discussion with rules-based framework and enhanced information.
  - Develop technical amendments model for ceiling adjustments after macro changes.
  - Disseminate methodology for forward baseline estimates to inform MoF–KSU discussions.

### Box 1 — Exercising the Budget Challenge Function (standards and diagnostics)
- Standard analyses to inform budget challenge:
  - Calculate real growth in resource allocations; compare original budgets to actual spending; monitor sectoral spending changes and allocation shifts; compute unit cost of outputs; cost per beneficiary trends.
- Diagnostic questions for new spending requests include consistency with strategic plans, cost-effectiveness, precedent-setting risk, fiscal risk creation, macro interactions, distributional impacts, delivery capacity, and consistency with fiscal relations.
- Key pilot problems and guidance:
  - Ambiguity over ceiling nature; recommendation to explain revisions and include reconciliation annex to budget.
  - Macroeconomic forecasts: prepare and submit forecasts before budget declaration (ideally March), with independent external evaluation encouraged.
  - Baseline vs new policy delineation: baseline forecasts should include CMU-approved policies; potential benefits of reforms agreed in principle may be referenced in budget text.
  - Baseline expenditure preparation lacking during pilot; template proposed for KSU expenditure ceiling proposals (sample table entries preserved verbatim in source).
- Sequencing and negotiation:
  - Earlier macro forecasts, early CMU engagement, expanded bilateral negotiation on ceilings.
  - LMs to provide first draft KSU ceilings, separately disclose baseline changes and prioritize new policies for ownership.
  - MoF to lead negotiations and enforce ceilings; escalate unresolved issues to CMU.

### Box 1 — Performance information and Budget Code amendments
- Performance info observed: largely input/output indicators from budget passports; lacked assessment of whether programs met prior targets.
- Recommendation: MTBF submissions should include measurable performance indicators and assessment against targets; develop outcome-oriented indicators over medium term.
- Budget Code (BCU) constraints: pilot launched ahead of BCU revision; lessons to inform BCU amendments to enshrine MTBF fundamentals and specify Budget Declaration components.

### Chapter I — MTBF design, sequencing, and technical principles
- Define roles/responsibilities and required information at each MTBF stage; integrate gender budgeting reforms and phase implementation using transitional BCU provisions.
- Reserve highly technical delineations for secondary legislation and guidance manuals.
- Technical amendments triggered by exogenous factors (price, interest rate, exchange rate, demographic-driven beneficiary changes); policy decisions remain outside technical amendments.
- Absence of a budget margin (other than general reserve) increases need for prioritization.
- Recommendations 2.1–2.3 (timed):
  - 2.1 (June–Sept 2017): develop explanatory note supporting ceilings; build budget challenge capacity; disclose ceiling revisions.
  - 2.2 (June 2018): produce two macro-fiscal forecasts (baseline in March; updated including CMU-decided policies in May–June); include macro parameters in March circular; circulate common templates for LMs; require LMs to draft KSU ceilings and report KPIs.
  - 2.3 (April–May 2018): ensure sufficient bilateral negotiation time; give LMs mandate to manage portfolio finances within approved LM ceiling.

### Chapter I — Fiscal risk disclosure: capacity, gaps, and methodology improvements
- Government steps:
  - Established Fiscal Risk Management Division (FRMD) with SOE oversight mandate; developed SOE fiscal risk methodology; commenced disclosure in Budget Declaration; committed to further strengthening in PFM reform Strategy (2017–21).
- Strengths and inputs:
  - FRMD analyzing 48 SOEs posing most significant fiscal risk.
  - MEDT’s macro department includes alternative scenarios for CMU use.
  - Debt department maintains guarantee records and near-final debt management strategy.
- Information gaps:
  - FRMD data on 48 SOEs contain internal errors and inconsistencies; forward-looking SOE strategic-plan data not fully available or reliable.
  - SOE submissions limited in financial statement line items; aggregate guarantee/on-lending data need augmentation by creditor and SOE.
  - Quasi-fiscal activities largely unquantified.
  - Medium-term: need systems for legal cases, PPP obligations, local government liabilities by municipality, natural disasters.
- Institutional coordination:
  - Formal responsibilities across departments/agencies should be set by CMU resolution; amend BCU to assign fiscal risk monitoring to MoF and expand FRMD mandate.
  - FRMD needs a dedicated full-time team.
  - Short-term: create single central excel database for significant SOEs (financial info and state support) verified by specialist departments.
  - Medium-term: implement central electronic reporting platform accessible to stakeholders.
- Methodology improvements:
  - Widen ratio set for SOE ranking (e.g., current and interest cover); include selection principles in CMU resolution; compare actuals to projections; collect accruals, cash flow projections, capex, borrowing plans, contingent liabilities; use historical trends and conduct deep-dive meetings with SOEs and regulators.
  - Reduce reliance on SOE self-evaluation; solicit specific information (pledged assets, maturities, sensitivity analyses) via aggregation-capable templates.

### Chapter I — Fiscal risk disclosure recommendations (3.1–3.2)
- Recommendation 3.1 — Verify and enhance SOE data reliability:
  - Verify 2016 financial information for the 48 SOEs against financial statements and other sources (MEDT top-100 SOE database, debt department guarantees, budget subsidy data) (July-2017).
  - Establish a single excel database for financial and non-financial SOE information and state support (March-2018).
- Recommendation 3.2 — Approve and review updated fiscal risk methodology for SOEs:
  - Update and approve methodology in line with suggested improvements and March/April FAD TA mission (June 2017).
  - Review risk categorization against realized outcomes (first review end-2019).

### Annex I — Proposed Budget Calendar (key dates and roles)
- Timeline highlights:
  - Feb 1: Start forward baseline estimate (FBE) process; MoF issues circular and template; MEDT starts baseline macro forecast (no new policies).
  - Mar 1: Macroeconomic projections available; MEDT submits baseline forecast to CMU and circulates to MoF and LMs/KSUs; MoF revenue updates; LMs/KSUs update FBEs.
  - Mar 15: Baseline estimates available; MoF determines draft expenditure envelope.
  - Mar 31: Draft KSU ceilings determined and sent to CMU.
  - Apr 15: CMU approves expenditure envelope and KSU ceilings.
  - May 15: LMs submit KSU ceiling proposals and updated macro forecast (if needed); LM proposals include savings, reallocations, new policies, duly costed.
  - Apr 30–May 15: Bilateral negotiations between MoF and LMs on KSU ceilings.
  - May 31: MoF submits draft MT Budget Declaration and ceilings to CMU with explanatory note on pending disagreements.
  - Jun 15: CMU considers and approves MT Budget Declaration and KSU ceilings and sends to Verkhovna Rada.
  - Jun 30: Verkhovna Rada approves MT Budget Declaration and KSU ceilings; MoF sends KSU ceilings to LMs/KSUs.
  - Jul 31: LMs/KSUs send updated program information and KPIs to MoF.
  - Jun 30–Aug 1: MEDT updates macro forecast to include CMU-approved policy initiatives; new baseline by 1 Aug.
  - Jul 31–Aug 31: Bilateral negotiations on next year’s budget implementation (no new policy initiatives).
  - Sep 1: MoF submits draft budget bill and updated macro forecast to CMU.
  - Sep 15: CMU approves budget bill and macro forecast and submits to Verkhovna Rada and President.
- Roles and responsibilities summarized:
  - MoF: circulars, determine envelopes/ceilings, revenue forecasts, bilateral negotiations, submissions to CMU, send approved ceilings to LMs/KSUs.
  - MEDT: produce baseline macro forecasts and updates; circulate to MoF and LMs/KSUs.
  - CMU: approve envelopes/ceilings, consider and approve MT Budget Declaration and budget bill, submit to Verkhovna Rada and President.
  - LMs/KSUs: update FBEs, propose KSU ceilings by May 15, provide program expenditure and performance indicators by Jul 31, ensure total KSU expenditure does not exceed ceiling.
- New policy proposal template highlights (Annex II):
  - Financial implications table in (‘000, UAH) for 2018, 2019, 2020 with detailed revenue and expenditure rows; policy case narrative; impact and sensitivities; implementation issues.
  - Example numeric placeholders in template: all financial table entries shown as 0.0 for 2018, 2019, 2020.
- Program design (Annex III): start with objective; distinguish outcome indicators (stable, broad) from output indicators (activity-level); include examples from Queensland/Victoria and reference OECD and DFID guidance.

### Annex IV — Draft Fiscal Risk Statement (selected findings, scenarios, and key statistics)
- A. Macroeconomic risks:
  - Medium-term forecasts are uncertain; unanticipated macro changes will alter fiscal forecasts (e.g., slower-than-projected GDP growth reduces tax revenues).
  - Risks include weakening global conditions and terms of trade, increased geo-political tensions, and domestic shocks.
  - IMF DSA example: shock to growth lowering growth by one historical standard deviation in 2018 and 2019 (to -4.0 percent and -3.6 percent, respectively) would deteriorate the primary balance to deficits of 1.7 and 5.7 percent of GDP, respectively.
  - Proposed scenarios:
    - Scenario 1: weaker external conditions, lower agricultural commodity prices, reduced exports, lower exchange rate, lower nominal GDP.
    - Scenario 2: stronger domestic growth from successful reform implementation and more favorable trade conditions.
  - Suggested disclosure: compare baseline and two scenarios for GDP, prices, employment, net exports and show implications for total revenue, expenditure, budget balance, and debt.
- B. Public debt:
  - General government debt forecasts: [85] percent of GDP in 2018, falling to around [70] percent of GDP by 2020.
  - Debt portfolio vulnerabilities: around [70] percent denominated in foreign currency; around [65 percent] held by non-residents.
  - Example exchange-rate sensitivity: 2014–15 depreciation contributed to a 40 percent of GDP revaluation in the debt portfolio.
  - Refinancing risk: around 7 percent of the debt portfolio matures in less than one year; average duration around x years.
  - Interest rate risk: around x percent of domestic debt and around x percent of foreign-currency debt issued in variable-rate instruments.
  - Mitigant: shift toward official creditors with longer maturities and projected decline in foreign-currency debt share.
- C. Government guarantees:
  - Total guarantees at end-2016: UAH 279 billion or 11.7 percent of GDP.
    - IMF-related guarantee to NBU: around UAH 170 billion (7.1 percent of GDP).
    - Guarantees on SOE borrowing: around UAH 109 billion (4.6 percent of GDP).
    - Additional guarantee to a private company: UAH 273 million for defense contracts.
  - Majority of guarantees on external borrowing and exposed to FX risk.
  - Fiscal cost of servicing guaranteed debts: averaged 0.6 percent of GDP a year over 2010–17.
  - 2018 budget includes provision for anticipated costs of servicing outstanding guarantees.
  - Budget Code requires Cabinet approval for guarantees; limits on new guarantees set in annual budget law (limit for 2018 set at [UAH x billion or x percent of GDP]).
- D. State-Owned Enterprises (SOEs) — scope, performance, and risks:
  - SOE count/status: as at 31 December 2016, state owned approximately [3,350] SOEs; many non-operational, including approximately [1500] in protracted liquidation; government inventory underway.
  - Key reforms: supervisory boards with independent directors; new appointment/remuneration procedures for largest SOEs; corporatization to JSCs; IFRS financial statements and independent audits for largest SOEs within [a specified timeframe]; publication of financial statements.
  - Focused dataset: 48 SOEs selected for detailed analysis; as at [31 December 2016] these 48 accounted for almost [90] percent of total SOE assets and around [85] percent of total SOE revenues; operate in 9 sectors with Oil & Gas, Transportation and Electricity accounting for half the SOEs but more than 90 percent of assets and revenues.
  - Table (Top 48 SOEs, UAH million) — selected figures:
    - Oil & Gas: Number 4; Percentage 8%; Total Assets 1,197,700; Percentage Total Revenue 334,113.
    - Transportation: Number 10; Percentage 21%; Total Assets 449,506; Percentage Total Revenue 106,810.
    - Electricity: Number 10; Percentage 21%; Total Assets 291,199; Percentage Total Revenue 82,001.
    - Food & Agriculture: Number 4; Percentage 8%; Total Assets 47,793; Percentage Total Revenue 35,427.
    - Machine Building: Number 4; Percentage 8%; Total Assets 20,143; Percentage Total Revenue 8,481.
    - Real Estate: Number 4; Percentage 8%; Total Assets 8,745; Percentage Total Revenue 85.
    - Coal Mining: Number 5; Percentage 10%; Total Assets 6,936; Percentage Total Revenue 3,907.
    - Chemicals: Number 4; Percentage 8%; Total Assets 3,562; Percentage Total Revenue 2,655.
    - Other: Number 3; Percentage 6%; Total Assets 2,949; Percentage Total Revenue 4,700.
    - Total (48): Total Assets 2,028,532; Total Revenue 578,180.
  - Aggregate balance-sheet and income statement for Top 48 SOEs (UAH million):
    - Assets: 2014 878,231; 2015 1,123,795; 2016 1,957,141; 2017 2,025,583; y-o-y % change 3%.
    - Cash and cash equivalents: 2014 31,928; 2015 55,790; 2016 68,394; 2017 42,682; y-o-y % change -38%.
    - Liabilities: 2014 294,501; 2015 347,763; 2016 529,311; 2017 567,775; y-o-y % change 7%.
    - Equity: 2014 583,621; 2015 773,399; 2016 1,428,067; 2017 1,460,477; y-o-y % change 2%.
    - Revenue: 2014 212,103; 2015 295,775; 2016 454,233; 2017 573,479; y-o-y % change 26%.
    - EBITDA: 2014 46,123; 2015 124,000; 2016 125,074; 2017 (38,204); y-o-y % change -131%.
    - Net profit: 2014 (119,745); 2015 (44,489); 2016 41,197; 2017 51,223; y-o-y % change 24%.
  - Aggregate ratios for Top 48 SOEs:
    - Increase in Net Income (%) : 2015 39%; 2016 54%; 2017 26%.
    - EBITDA margin (%) : 2014 21.7%; 2015 41.9%; 2016 27.5%; 2017 (6.7%).
    - Net profit margin (%) : 2014 (56%); 2015 (15%); 2016 9%; 2017 9%.
    - Return on equity (%) : 2014 (21%); 2015 (6%); 2016 3%; 2017 4%.
    - Return on assets (%) : 2014 (14%); 2015 (4%); 2016 2%; 2017 3%.
    - Debt to Assets ratio : 2014 0.34; 2015 0.31; 2016 0.27; 2017 0.28.
    - Net Debt to EBITDA ratio : 2014 5.7; 2015 2.4; 2016 3.7; 2017 (13.7).
  - SOE fiscal risk drivers: poor financial performance, liquidity pressures, weaker financial positions could reduce dividends and taxes, increase subsidies or recapitalization needs, or trigger calls on guarantees.
  - Risk categorization (48 SOEs, 2017 outcomes):
    - Risk category 1: Number 12; Combined Net Debt (percent of GDP) 5.2.
    - Risk category 2: Number 20; Combined Net Debt 9.8.
    - Risk category 3: Number 1; Combined Net Debt 0.1.
    - Risk category 4: Number 6; Combined Net Debt 2.8.
    - Risk category 5: Number 9; Combined Net Debt 1.5.
    - Total 48; Combined Net Debt 19.4 (percent of GDP).
    - Observation: entities in categories 1–3 hold around three quarters of sector liabilities (~15 percent of GDP); two enterprises with largest debt in categories 1 and 2.
  - Financial transfers and privatization:
    - Dividends for 2016 totaled [UAH 5.8 billion or 0.2 percent of GDP]; 2017 expected to grow to [UAH 19.8 billion] largely due to [UAH 13.3 billion] anticipated from Naftogaz.
    - Privatization list approved for 18 large companies projected to raise UAH 17 billion in 2017; delays would reduce proceeds and increase government debt relative to projections.
  - Contingent liabilities and unguaranteed liabilities:
    - Explicit contingent liabilities from guarantees totaled UAH [109] billion or [4.6 percent] of GDP (almost all FX-exposed); Naftogaz UAH [28.5] billion; Ukrenergo UAH [13.6] billion.
    - Fiscal costs of servicing guaranteed SOE debt averaged around 0.7 percent of GDO over past five years.
    - Unguaranteed liabilities of major SOEs totaled around [20] percent of GDP; several SOEs have significant overdue accounts.
  - Quasi-fiscal activities: examples include below-cost passenger rail tariffs with estimated cost around UAH 8 billion and below-cost water/sewerage tariffs (impacts not yet quantified); government aims to replace quasi-fiscal activities with on-budget payments and pursue tariff reforms.
- E. Financial sector exposures:
  - Budget risks include obligations to back the Deposit Guarantee Fund (DGF), government guarantees for Oschadbank deposits, and potential bank recapitalization needs.
  - End-2015 non-equity liabilities of financial sector: about 50 percent of GDP; liabilities of four state-owned banks around 30 percent of GDP.
  - DGF: insured deposits up to UAH 200,000; around 80 insolvent banks transferred leading to DGF payouts of UAH 85 billion; total deposits guaranteed by scheme around UAH 300 billion (13 percent of GDP).
  - All deposits in Oschadbank (~UAH 145 billion or 6.4 percent of GDP) guaranteed by government.
  - Government support 2014–2017: provided 11 percent of GDP to compensate insured depositors and recapitalize banks.
  - Measures: governance improvements for state banks, restructuring plans, NBU diagnostics, managed nationalization of PrivatBank.
  - Financial soundness indicators (selected):
    - Regulatory capital to risk-weighted assets: 2015 12.3; 2016 13.9.
    - Share of Non-performing Loans to total loans: 2015 46.4; 2016 49.4.
    - Credit growth (yoy percent change): 2015 -19.4; 2016 -3.7.
    - Loans in foreign currency to total loans: 2015 54.1; 2016 49.3.
    - Deposits in foreign currency to total deposits: 2015 44.9; 2016 46.0.
    - Liquid assets to total assets: 2015 33.0; 2016 ...
    - Return on assets: 2015 -5.4; 2016 -1.2.
    - Return on equity: 2015 -70; 2016 ...
    - Number of banks not complying with regulations:
      - Not meeting capital adequacy for Tier I capital: 2015 11; 2016 10.
      - Not meeting prudential regulations: 2015 37; 2016 39.
      - Not meeting reserve requirements: 2015 6; 2016 7.

*Source: 1ukrea2019003 (IMF Fiscal Affairs Department mission materials).*

### PREFACE _________________________________________________________________________________________ 5

### PREFACE

### Mission overview
- A capacity development mission from the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF) visited Kiev, Ukraine during May 23 to June 2, 2017.
- The mission was provided with financial support from the Government of Canada.

### Mission leadership and team composition
- Mission leader: Amanda Sayegh (FAD).
- Team members: Brian Olden, Miguel Alves (both FAD), Avril Halstead, and Mikko Spolander (both short-term experts).
- Participation note: Mr. Olden participated between May 23 to May 29, 2017.

### Principal meetings and counterparts
- Ministry of Finance:
  - Mr. Oleksandr Danyliuk, Minister of Finance
  - Ms. Oksana Markarova, First Deputy Minister of Finance
  - Mr. Vladimir Lozytsky, State Budget Director
  - Mr. Andrey Savenko, Head of the Fiscal Risk Management Division
  - Mr. Olexiy Zhak, Head of Budget and Macroeconomic Indicators Division
  - Ms. Polina Yarova and staff from the Debt Policy Department
  - Mr. Gladun Yevhen, Head of the Revenue Forecasting Department
- Ministry of Economic Development and Trade:
  - Mr. Maksym Nefyodov, First Deputy Minister
  - Ms. Olena Diachenko, Head of the Department of State Property Management
  - Ms. Natalia Gorshkova, Director of the Macroeconomic Forecasting Department and her staff
- Other meetings: senior officials from the Ministry of Health and Ministry of Education; representatives from the European Commission.

### Acknowledgements and support
- The mission thanks the authorities and other participants for their excellent collaboration during the mission.
- The mission expresses particular gratitude to IMF office staff for coordination support, naming Mr. Ihor Shpak.
- The mission is grateful to interpreters/translators: Mr. Viktor Verhun, Mr. Iouri Loutsenko, and Mr. Serhiy Kolesnyk for their interpretation and translation efforts over the course of the mission.

*Preface, IMF FAD capacity development mission to Kiev, May 23 to June 2, 2017.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Developing the Budget Declaration
- A pilot medium-term budget framework (MTBF) was launched for the 2018 budget cycle as part of the Public Financial Management Reform Strategy (2017–21).
- The 2018–20 draft Budget Declaration, submitted to the Cabinet of Ministers on June 1, is the first Budget Declaration to include important MTBF elements including detailed medium-term macroeconomic and fiscal forecasts and expenditure ceilings for 2018–20.
- Included elements in the 2018–20 Budget Declaration:
  - Some discussion of the macroeconomic outlook, including forecasts for GDP (and some components, such as exports), prices and employment, and two alternative macroeconomic scenarios (optimistic and pessimistic).
  - A statement of fiscal objectives and main policy indicators consistent with achieving them, with projections for 2018–20 for revenue, expenditure, and the budget balance, and key policy parameters (e.g., minimum wage, minimum subsistence level, floor for capital investment).
  - Medium-term projections for revenue broken down into main tax categories (personal income tax, corporate income tax, value-added tax, and excises) and non-tax revenue.
  - A description of the main fiscal risks, with an initial summary fiscal risk section focusing on macroeconomic and public debt risks, and fiscal risks related to state-owned enterprises (SOEs), guarantees and the financial sector.
  - A qualitative description of new policy proposals and strategic goals linked to the Sustainable Development Strategy “Ukraine-2020.”
  - Inclusion of expenditure ceilings for key spending units (KSUs) allocating the overall general fund expenditure envelope by spending unit.
- Areas for enhancement in future Budget Declarations:
  - Provide a more detailed explanation of the medium-term macroeconomic and fiscal outlook, including drivers of forecasts and updated budget forecasts for the current year serving as the basis for projections.
  - Disaggregate revenue drivers further and quantify the impact of specific tax policies over the three-year period.
  - Reconcile differences between successive vintages of macro-fiscal forecasts and ceilings, differentiating adjustments from macroeconomic/demographic developments and policy changes.
  - Present baseline (no policy change) and target (incorporating new policies) scenarios separately.
  - Present key fiscal aggregates for the state budget (general and special fund), the consolidated general government sector, and social security funds.
  - Explain the characteristics of expenditure ceilings (fixed or indicative) and how individual KSU ceilings were defined.
  - Quantify budgetary impacts of new policies at the KSU level and identify each KSU’s contribution to strategic goals.
  - Expand the fiscal risk statement (FRS) to cover all material fiscal risks with deeper analysis.

### Implementing the MTBF
- The Ministry of Finance (MoF) must be able to enforce compliance with expenditure ceilings during the annual budget process for the MTBF to succeed.
- Key implementation challenges identified in the pilot:
  - Macroeconomic parameters and forecasts were finalized too late, compressing time to set and negotiate expenditure ceilings with line ministries (LMs).
  - Policy costings were estimated by LMs on a constant price basis; no bottom-up baseline expenditure estimates were prepared to inform fiscal space at the KSU level.
  - Limited bilateral discussion between the MoF and LMs to resolve differences prior to cabinet submission.
- Recommended procedural improvements to address these challenges:
  - Preparation of two macro-fiscal forecasting rounds timed to support the Budget Declaration and the annual budget.
  - Inclusion of standardized templates for line ministry submissions in the budget circular to request greater detail on cost drivers for existing programs; require LMs to report on progress against key performance indicators for existing programs; and provide a stronger rationale for new policy proposals.
  - Adoption of a revised budget calendar clarifying inputs required by departments and agencies and ensuring sufficient time for bilateral negotiations between the MoF and LMs.
  - MoF to develop a robust briefing explaining ceilings for cabinet discussion and presentation to the legislature; MoF must be empowered to execute the budget challenge function by scrutinizing spending proposals for consistency with policy and fiscal objectives.
  - Any changes to expenditure ceilings during the annual budget process should be explained in the budget documentation.
- Legal and institutional actions:
  - The Budget Code of Ukraine will need amendment to facilitate a full MTBF roll-out; the authorities committed to amending it by the end of 2017. The April FAD technical assistance mission provided guidance on these amendments.
  - Amendments should include a more finely tuned budget calendar, core components required for the Budget Declaration, and clear rules for adjusting ceilings in response to macroeconomic developments.
- Risks to credibility:
  - Entrenched practice of introducing new policies during annual budget formulation may undermine ceilings; mitigating this requires effective MoF budget challenge function and making policy changes dependent on CMU consensus rather than bilateral MoF–LM agreements.

### Improving Fiscal Risk Disclosure
- Progress to date:
  - Inclusion of a summary fiscal risk statement in the draft Budget Declaration represents significant progress.
- Data and systems gaps to address:
  - Validate existing SOE data to correct errors and inconsistencies.
  - Establish or improve systems to collect information on a wider set of fiscal risks (e.g., legal cases, obligations under public–private partnerships), monitor fiscal support for individual SOEs, and identify and quantify quasi-fiscal activities.
  - Establish a central process for compilation of SOE financial information and fiscal support to reduce duplication and enhance consistency and reliability.
- Institutional arrangements needed:
  - Amend the Budget Code to formally assign responsibility for fiscal risk monitoring and assessment to the MoF and require publication of a comprehensive fiscal risk statement with the Budget Declaration.
  - Expand the mandate of the Fiscal Risk Management Division and specify responsibilities of departments and agencies involved in preparing the fiscal risk statement via a cabinet resolution.

### Recommendations (selected, with timing)
- Recommendation 1.1. Build on the 2018–20 Budget Declaration to enhance MTBF transparency and credibility:
  - For the 2019–21 Budget Declaration: provide discussion of macroeconomic and fiscal outlooks in qualitative and quantitative terms; clarify ceilings’ characteristics and justify KSU distribution; separately disclose baseline and target scenarios; quantify budgetary impact of new policies at the KSU level; broaden the FRS to cover all material fiscal risks and strengthen analysis; present fiscal forecasts for the general government; and explain changes to the previous vintage of macro-fiscal forecasts and ceilings (June 2018).
  - For the 2020–22 Budget Declaration, and subsequent versions: introduce comparison with forecasts of independent forecasters; improve quantification of fiscal risks; disclose key performance indicators (first for outputs and later also for outcomes) for government policies (June 2019).
- Additional MTBF implementation steps (from April FAD TA recommendations):
  - Define contingency margins for overall expenditure ceilings.
  - Integrate the Special Fund into the MTBF and present medium-term fiscal aggregates for general government.
  - Gradually move toward more fixed ceilings for overall and KSU expenditure as the system matures.
  - Expand strategic fiscal policy discussion aided by a rules-based fiscal framework and enhanced information.
  - Develop technical amendments model specifying clear rules for adjustment of ceilings following macroeconomic changes.
  - Develop and disseminate a methodology for forward baseline estimates to inform MTBF discussions between the MoF and KSUs.

*Source: EXECUTIVE SUMMARY (1ukrea2019003)*

### Box 1. Exercising the Budget Challenge Function

### Box 1. Exercising the Budget Challenge Function

### Standard analysis to inform the budget challenge function
- Calculating real growth levels in resource allocations to assess whether it is in line with the cost of providing services.
- Comparing original budgets to actual spending (for example, are some areas or types of spending consistently under- or over-budgeted?).
- Monitoring changes in spending in different sectors and calculating how additional resources have been allocated to shift (or maintain) overall spending shares.
- Calculating the unit cost of outputs and how this changes over time.
- Calculating the cost of providing services per beneficiary, how this changes over time and how it is affected going forward.

### Diagnostic questions for new spending requests
- Is the policy consistent with government strategic plans and to what degree is it a priority? Are the level of resources proposed commensurate with these priorities?
- What is the overall policy objective, and are there more cost-effective ways of delivering the same objective—have all options been fully considered?
- Does spending set a new precedent or introduce a financial commitment that will be hard to reverse (for political, technical, legal reasons)?
- Does the policy create any significant fiscal risks?
- Does the policy directly affect other aspects of the macroeconomic or policy environment (e.g., tax base, inflation, growth, employment)?
- Who will lose/benefit from the policy, and by how much?
- Does the agency have the capacity to deliver the policy change?
- Is the policy or proposed expenditure consistent with the government’s systems of central and local government fiscal relations?

*Source: Extracted from Hadley S., and Welham, B. 2016, “The Ministry of Finance ‘Budget Challenge Function’, A Public Financial Management Introductory Guide”, Overseas Development Institute, London. (originally sourced from CABRI. 2006, “Bridging the gap from policies to budget,” Collaborative Africa Budget Reform Initiative. Pretoria.)*

### Key problems observed in the MTBF pilot and guidance to address them
- Ambiguity over the nature of expenditure ceilings under the pilot may result in pressure to revise ceilings for the annual budget; no clear rules disclosed about addressing developments that change macroeconomic and demographic assumptions underpinning macro-fiscal forecasts.
- Recommendation: Any revisions to ceilings between the approved Budget Declaration and annual budget should be explained; the annual budget should include a summary reconciliation detailing the main components of any changes to ceilings (using the template provided in Table 1.1. of the March/April 2017 TA Mission report). The MoF should disclose in an annex to the 2018 Budget Proposal explanatory notes on the detailed adjustment of each ceiling.

### Preparation of the macroeconomic forecasts
- Problem: Final update of the macroeconomic forecast was not available until quite late; Budget Code and CMU resolution (No. 621 of 2003) require submission to CMU for approval on June 1 (same time as the Budget Declaration); indicative forecasts required in March but scope for revision and late approval complicates formation of expenditure ceilings.
- Guidance:
  - Macroeconomic forecasts should be prepared and submitted to the CMU before the budget declaration, ideally in March, and updated if necessary.
  - Forecasts should facilitate preparation of revenue forecasts and inform the overall expenditure envelope (derived from the top-down process) and enable KSUs to prepare bottom-up baseline estimates.
  - Macroeconomic forecasts should be submitted to the CMU for information and their formalization only.
  - Government commitment to establishing a process for independent external evaluation of the forecasts will help strengthen credibility.

- Problem: Inconsistencies between fiscal forecasts and macroeconomic forecasts; baseline macroeconomic forecasts are based on existing policies but incorporate some new policy proposals; budget macro forecasts do not always fully reflect final policy decisions decided late.
- Guidance:
  - Baseline macroeconomic forecasts should include the impact of those policies that have been approved by the CMU, and provide an update for any significant policy changes decided by the CMU or the Verkhovna Rada later in the process.
  - Potential benefits from reforms agreed in principle but not finalized can be referenced in the text of the budget documentation.

- Coordination note:
  - MEDT should consult the MoF and relevant LMs on critical inputs and details of new policy proposals, but lengthy consultations introduce delays; forecasts to the CMU should represent the expert and professional view of the MEDT.
  - MEDT, as producer of the macroeconomic forecasts, should contribute to drafting the macroeconomic outlook of the budget declaration.

### Preparation of baseline expenditures and ‘new policy’ scenarios
- Problem: During the pilot, expenditure ceilings were determined without recourse to baseline expenditure estimates. LMs prepared costings on a constant price basis (holding 2017 prices constant in the out-years); MoF updated costings for revised parameters.
- Problem: Lack of delineation between baseline expenses and new policy scenarios makes it difficult to formulate fiscal policies and assess fiscal space; absence of updated baselines obscures true costs of maintaining existing policies and complicates decisions on financing new initiatives or reprioritization.
- Risk: New spending may be approved without full knowledge of current cost pressures, resulting in over-execution of budget plans or future funding reductions for existing programs.

### Sequencing of tasks and negotiation with Line Ministries (LMs)
- Pilot highlighted need for clearer sequencing:
  - (i) Earlier preparation of macroeconomic forecasts.
  - (ii) Early engagement of the CMU to provide input on strategic priorities or the size of any fiscal adjustments.
  - (iii) Expanded bilateral negotiation on expenditure ceilings—critical for MTBF implementation.
- Recommendation: Budget timetable should allow sufficient time for bilateral negotiations between the MoF and LMs; minimize open issues for the CMU so CMU can focus on strategic new initiatives.
- Role adjustments:
  - LMs should provide the first draft of their KSU ceilings, separately disclosing changes in funding required to deliver existing policies (due to parameter and volume changes) and prioritizing new policies consistent with meeting ceilings to enhance ownership.
  - LMs could prioritize spending of lower level spending units within portfolio expenditure ceilings.
  - MoF should maintain leadership: engage proactively with LMs during negotiation and enforce compliance with ceilings through effective execution of the budget challenge function; where bilateral negotiations fail, MoF should provide guidance and information to facilitate CMU decisions.

### Information to support the process
- Limitations observed:
  - March budget circular requested costings of new policy initiatives (on a constant price basis), additional funding required for existing programs from legislative or regulatory changes, and suggested savings, but not all templates were provided—submissions differed across LMs (example: Ministries of Health and Education showed substantial differences).
- Recommendation: Revise information template to include comparison of estimated actual LM expenditure ceiling with the ceiling decided in the previous medium-term Budget Declaration to reduce unrealistic budget bids and low-priority initiatives.
- Table 1 illustration (Proposed Template for KSU Expenditure Ceiling Proposal) — example entries preserved exactly as in source:
  - Header: Ministry [...]
  - Columns: 2016 actual | 2017 budget | 2018 ceiling | 2019 ceiling | 2020 ceiling
  - Rows and sample values:
    - Actual/Budgeted 1000 1050
    - Ceiling acc. to Previous MT Budget Declaration 1000 1000 1000
    - New commitments, of which 100 100 100
      - by VR 50 50 50
      - by Government 50 50 50
    - Structural adjustments within the Budget
    - Automatic adjustments, of which 20 35 50
      - volume factors 10 20 30
      - cost factors 10 15 20
    - Estimated baseline 1120 1135 1150
    - New policy initiatives, of which 70 100 30
      - Initiative I 70 70
      - Initiative II 30 30
    - Overall impact of baseline and policy changes 1190 1235 1180

- Notes on the template (verbatim):
  - "The template is set at LM level. LMs collect the required information from the KSUs."
  - "The starting point is the existing ceiling decided in the previous medium term Budget Declaration."
  - "To reach the baseline estimate, the existing ceiling is updated to take into account of i) new commitments that the Verkhovna Rada or the Government has made, ii) technical adjustments within the budget and between the budget appropriations resulting from e.g. the changes in the structure of the budget line items iii) changes in volumes and costs that result from changes in the respective updated macroeconomic indicators. The changes in volumes concern e.g. the changes in the number of citizens entitled to benefits or allowances according to the existing social legislation. The changes in costs result e.g. from the indexation of social benefits to prices or wages."
  - "New policy initiatives are added line by line on top of the baseline to reach the proposal for the actual expenditure ceiling. More detailed calculations, further arguments or explanations and any other relevant information to support the assessment of the fiscal and broader economic impact of the proposed new initiatives should be presented in a separate annex."

### Performance information and outcomes
- Observation: Performance-related information submitted by KSUs was largely drawn from current budget passports and primarily consisted of input and output indicators; submissions did not analyze whether programs were on track to achieve performance targets set in previous years.
- Recommendation:
  - MTBF submissions should include (i) measurable performance indicators and (ii) assessment of performance against targets set in previous years.
  - As MTBF becomes more established, consider developing more outcome-oriented indicators over the medium term (Annex 3 links program objectives, outcomes, and outputs and provides example program indicators based on outcomes).
  - Reporting progress against performance indicators will contribute to more effective allocation of resources and enhance accountability in the use of public funds.

### Amendments to the Budget Code
- Observation: Provisions of the current Budget Code of Ukraine (BCU) constrained the scope of MTBF features included in the pilot; the BCU determined substantially the structure and content of the budget declaration.
- Approach: The pilot was launched ahead of revising the BCU to inform legislative changes planned before end-December 2017.
- Recommendation: Lessons from the pilot should inform revisions to the BCU alongside broad recommendations from the April TA mission to enshrine fundamental features of the MTBF in Ukraine’s legislation.
- The pilot highlighted the need for the following amendments:
  - Specifying the key components to be included in the Budget Declaration (as outlined in the source). 

*Source: Extracted from Hadley S., and Welham, B. 2016, “The Ministry of Finance ‘Budget Challenge Function’, A Public Financial Management Introductory Guide”, Overseas Development Institute, London. (originally sourced from CABRI. 2006, “Bridging the gap from policies to budget,” Collaborative Africa Budget Reform Initiative. Pretoria.)*

### Chapter I);

### Chapter I)

### Medium-Term Budget Framework (MTBF) design and sequencing
- Define roles, responsibilities, and inputs of key actors in the MTBF process, and information required at each stage as detailed in the sub-sections on “sequencing of tasks” and “information to support the process”.
- Leverage prior gender-based budgeting reform initiated by the MoF in 2014 and the "Gender Budgeting in Ukraine" (2014-18) project funded by the Swedish International Development Cooperation to integrate gender budgeting into the annual budget preparation process over time.
- Use the “transitional period” chapters of the BCU and other relevant legislation to phase implementation: specify elements to take immediate force and those to become applicable later.
- Reserve highly technical delineations (for example, between baseline and “new policy” scenarios) for secondary legislation and guidance manuals rather than embedding them in the BCU.

Technical amendments — principles and scope
- Technical amendments should be triggered by factors outside government control, for example:
  - changes in prices (CPI, PPI), interest rates, and exchange rate;
  - changes in the number of benefit and allowance recipients resulting from demographic or macroeconomic developments.
- Policy decisions (e.g., expanding public programs or initiating new ones) should remain outside the technical amendment procedure.
- Where technical amendments increase expenditures and risk breaching fiscal objectives, further prioritization is required either within affected KSUs’ allocation or across KSUs to compensate the adverse budget balance effect.
- Ukraine has not established a budget margin as part of its MTBF other than the general budget reserve; absence of buffers increases the need for prioritization and reduces capacity to absorb uncertainties and forecast errors.
- Changes to entitlement parameters induced by policy (example given: extending months of unemployment benefits) are policy changes and not technical adjustments; whereas increases in recipients due to economic slowdown are parameter changes that could be subject to technical adjustment.

### Recommendations for MTBF strengthening (Recommendations 2.1–2.3)
Recommendation 2.1 — Reinforce MTBF credibility by strengthening pilot controlling mechanisms
- Develop a robust explanatory note supporting the ceilings proposed in the Budget Declaration (June 2017).
- Build budget challenge capacity of Budget Officers and empower them to enforce that capacity during the 2018 Budget formulation (July 2017).
- Transparently disclose ceiling revisions and their main drivers in an annex to the 2018 Budget Proposal (September 2017).

Recommendation 2.2 — Improve and expand MTBF inputs (June 2018)
- Produce two macro-fiscal forecasts to inform planning:
  - the baseline scenario (existing policies) at the beginning of the process (March); and
  - an updated scenario including new policy initiatives decided by the CMU (May-June).
- Include macroeconomic parameters in the March budget circular and request LMs to submit information on their implications for existing policies.
- Design and circulate common templates for LMs to explain deviations and submit information on factors driving the costs of existing programs and to support rationale and costings for new programs.
- Require LMs to produce the first draft for the KSU ceilings under their branch to support bilateral negotiations with the MoF.
- Require LMs to report progress against key performance indicators in their budget submissions and end-year reports to strengthen the information base for policy prioritization.

Recommendation 2.3 — Clarify stakeholder roles and interactions in the MTBF process
- Ensure sufficient time is dedicated to bilateral negotiations between the MoF and LMs on KSU expenditure ceilings (April 2018).
- Give LMs a stronger mandate to plan and manage portfolio finances within the approved LM ceiling by requiring them to prioritize requests of lower level spending units and negotiate with the MoF on their behalf (May 2018).

### Improving fiscal risk disclosure — background and capacity
- Government steps taken:
  - Established a Fiscal Risk Management Division (FRMD) in the MoF with a mandate to oversee SOE risks.
  - Established a methodology for assessing SOE-related fiscal risks.
  - Commenced disclosure of fiscal risks in the Budget Declaration.
  - Committed to further strengthening disclosure and capacity in the PFM reform Strategy (2017–21).
- The April FAD TA mission recommended the 2018 FRS focus primarily on SOE-related fiscal risks and include macroeconomic risks, public debt exposures, and guarantees.
- The Budget Declaration largely fulfilled those recommendations but did not incorporate all SOE disclosure elements envisaged by the TA mission.
- Authorities intend to expand SOE-related risk disclosure and present it as a separate statement in the 2018 budget documentation.
- A draft FRS (Annex 4 of the mission materials) was prepared and shared with the authorities; not all components may be possible to incorporate for 2018 but provide a basis for future reporting.

### Expanding fiscal risk disclosure — current strengths and information gaps
Strengths and available inputs
- FRMD has developed a methodology and collected/started analyzing data on 48 SOEs that pose the most significant fiscal risk.
- MEDT’s macroeconomic forecasting department includes alternative macroeconomic scenarios in its report to the CMU that could be used for alternative macro-fiscal projections.
- The debt department maintains records on government guarantees and has almost finalized its debt management strategy, including discussion of key risk exposures.

Information gaps and limitations
- The FRMD’s data on the 48 SOEs contain internal errors and inconsistencies with other data sets (e.g., guarantees and budget subsidies); forward-looking information based on SOE strategic plans (2018–20) is not available for all 48 SOEs and is not fully reliable for forward-looking assessment.
- SOE submissions contained only a limited number of financial statement line items (for example, total assets, debt and equity) and pre-calculated financial ratios, limiting analytical depth.
- Aggregate data on guarantees and on-lending exist, but FRMD needs regular access to outstanding amounts, execution of guarantees, and loan performance for individual SOEs; debt department records should be augmented by creditor to include guarantee performance by individual SOE.
- Information on quasi-fiscal activities of SOEs remains limited and unquantified.
- Medium-term requirement: systems to collect information on a wider range of fiscal risks — legal cases; public-private partnerships (direct obligations over their life cycle and contingent liabilities); local government liabilities by municipality and their contingent liabilities; and natural disasters.

Institutional coordination and capacity issues
- Formal allocation of responsibilities across departments and agencies (suggested by April FAD TA mission) is recommended to be formalized in a CMU resolution; amending the BCU to assign fiscal risk monitoring and assessment to the MoF and expanding FRMD’s mandate is recommended.
- FRMD needs a dedicated team accountable full-time for fiscal risk monitoring, assessment, reporting and mitigation to avoid tasks being crowded out by other responsibilities.
- Duplication exists in SOE data collection across MoF, MEDT, and LMs; harmonization toward a single data collection process is advised.
- Short-term step: develop a single central excel database for the most significant SOEs containing financial information and state support, verified by specialist departments and SOE governing authorities.
- Medium-term step: implement a central electronic reporting platform capturing financial and non-financial information available to all stakeholders to reduce reporting burdens and improve data reliability.

Methodology improvement opportunities
- Current CMU-resolution-based methodology selects SOEs for detailed analysis and ranks them into risk categories; scope exists to enhance the methodology over time:
  - Widen the set of ratios used to rank SOEs to better pinpoint liquidity and solvency challenges (for example, current and interest cover ratios).
  - Include principles in the CMU resolution informing selection of SOEs for in-depth assessment (for example, macro-critical entities; liabilities above a threshold; those ranked among highest risk categories) and provide MoF discretion to require in-depth assessment of other entities where potential risks are identified.
  - Compare actual outcomes to forward-looking projections to detect persistent biases in SOE projections.
  - Collect supplementary data: all accrued arrears (beyond wages and taxes), cash flow projections, capital expenditures, borrowing plans, and contingent liability exposures.
  - Use historical information to identify trends signaling deterioration in SOE financial performance over time.
  - Conduct meetings with SOEs, supervisory authorities and regulators for deep dives into potential fiscal risk drivers.
- Review the methodology’s categorization against realized outcomes to ensure predictive validity and consider graduated thresholds for ratios grouping entities into risk categories.
- Reduce reliance on SOE self-evaluation; instead solicit specific information enabling FRMD assessments (for example, pledged assets, upcoming maturities, sensitivity analyses of cash flows/balance sheets to exchange rate and commodity price changes) and provide aggregation-capable templates for SOEs.

### Recommendations on fiscal risk disclosure (Recommendations 3.1–3.2)
Recommendation 3.1 — Verify and enhance SOE data reliability
- Verify the 2016 financial information for the 48 SOEs against their financial statements and check consistency with other data sources including:
  - the MEDT database for the top-100 SOEs;
  - debt department data on guarantees; and
  - budget data on subsidies (July-2017).
- Streamline SOE financial information collection by establishing a single database (excel-based initially) for financial information, non-financial indicators and state support for SOEs to be made available use by all stakeholders (March-2018).

Recommendation 3.2 — Approve and review an updated fiscal risk methodology for SOEs
- Update and approve fiscal risk methodology in line with improvements suggested in this report and by the March/April FAD TA mission (June 2017).
- Review the risk categorization against realized outcomes (first review end-2019).

*Chapter I) — 1ukrea2019003*

### Annex I. Proposal for Budget Calendar

### Annex I. Proposal for Budget Calendar

### Timeline and Key Deadlines
- Feb 1: Start forward baseline estimate process
  - MoF issues circular requesting the preparation of the FBEs, providing an excel template, pre-filled with final outturn of previous years.
  - MEDT starts producing the baseline macroeconomic forecast including no new policies.
  - Consultation with the MoF Revenue Department regarding tax revenue forecast.
  - Consultation with MoF (Budget and other relevant departments) regarding budget policy assumptions for t+2.
- Mar 1: Macroeconomic projections available
  - MEDT submits the baseline macroeconomic forecast and key assumptions to the CMU and at the same time circulates these to the MoF and the LMs/KSUs.
  - MOF revenue department updates revenue forecast.
  - LMs/KSUs update FBEs.
- Mar 15: Baseline estimates available
  - MoF determines the draft expenditure envelope.
  - The expenditure envelope is updated to take into account the updated macroeconomic baseline forecast. Technical amendments according to the predetermined amendments model.
- Mar 31: Fiscal space and draft KSU ceilings determined
  - May result in consolidation needs or stronger fiscal balance.
  - MoF determines the draft KSU ceilings and sends the draft ceilings to the CMU.
- Apr 15: CMU discussion and approval
  - CMU approves expenditure envelope and KSU ceilings according to fiscal framework and consolidation requirements/use of fiscal space.
  - MoF sends the draft KSU ceilings to the LMs/KSUs.
- May 15: LMs proposal for KSU ceilings and updated macroeconomic forecast available
  - LMs send to the MoF their proposals for new policies.
  - The proposals should include savings on existing policies, reallocation between existing policies and brand new policies. The proposals should be duly costed.
  - Macroeconomic forecast update if there is new information available pointing that the March forecast is clearly outdated.
- Apr 30 – May 15: Bilateral negotiations between the MoF and LMs regarding the KSU ceilings
  - Updated macroeconomic forecast is integrated in the KSU expenditure.
  - Technical amendments in the ceilings possible according to the predetermined amendments model.
  - New policy initiatives are discussed and disagreements requiring decision at the CMU level are detected.
- May 31: MoF submits the draft MT Budget Declaration and KSU ceilings to the CMU, with an explanatory note on pending disagreements
- Jun 15: CMU considers and approves the MT Budget Declaration and the KSU ceilings and sends them to Verkhovna Rada
  - All disagreements detected during the bilateral negotiations between the MoF and the LMs are settled.
  - Macroeconomic forecasts are updated if necessary in the Budget Declaration to reflect any major policy decisions taken by the CMU that differ from the draft Declaration.
- Jun 30: Verkhovna Rada approves the MT Budget Declaration and the KSU ceilings
  - MoF sends the KSU ceilings to the LMs/KSUs.
- Jul 31: LMs/KSUs send updated program information (expenditure and performance indicators) to the MoF
  - Total KSU expenditure including all programs cannot exceed KSU ceiling.
  - KSUs should include information on measures to comply with their ceiling.
  - KPIs are updated.
- Jun 30 – Aug 1: MEDT updates the macroeconomic forecast to include new economic information, policy initiatives approved by the CMU and specified in detail by the KSUs at program level
  - Consultation with the stakeholders takes place.
  - New baseline macroeconomic forecast available by 1 Aug.
- Jul 31 – Aug 31: Bilateral negotiations between the MoF and LMs regarding the budget for the next year
  - No new policy initiatives on the agenda, negotiations only on how to implement the agreed initiatives in the budget bill.
  - New baseline macroeconomic forecast is integrated in the KSU expenditure.
  - Technical amendments in the ceilings possible according to the predetermined amendments model.
- Sep 1: MoF submits the draft budget bill and the updated macroeconomic forecast to the CMU
- Sep 15: CMU considers and approves the budget bill and macroeconomic forecast and submits the budget bill to Verkhovna Rada and the President of Ukraine

### Roles and Responsibilities
- MoF (Ministry of Finance)
  - Issues circular and excel template for FBEs on Feb 1.
  - Determines draft expenditure envelope and draft KSU ceilings.
  - Updates revenue forecast (MOF revenue department).
  - Conducts bilateral negotiations with LMs.
  - Submits draft MT Budget Declaration, KSU ceilings, and draft budget bill to CMU at specified dates.
  - Sends approved KSU ceilings to LMs/KSUs after Verkhovna Rada approval.
- MEDT
  - Produces baseline macroeconomic forecast including no new policies starting Feb 1.
  - Submits baseline forecast and key assumptions to CMU and circulates to MoF and LMs/KSUs by Mar 1.
  - Updates macroeconomic forecast to include new information and policy initiatives; new baseline available by 1 Aug.
- CMU
  - Receives and approves expenditure envelope and KSU ceilings (Apr 15).
  - Considers and approves MT Budget Declaration and KSU ceilings (Jun 15).
  - Considers and approves budget bill and macroeconomic forecast (Sep 15) and submits to Verkhovna Rada and President of Ukraine.
- LMs/KSUs
  - Update FBEs following MOF and MEDT inputs.
  - Propose new policies and KSU ceiling proposals by May 15.
  - Send updated program information (expenditure and performance indicators) by Jul 31.
  - Ensure total KSU expenditure does not exceed KSU ceiling and include measures to comply.

### Budget Negotiation and Approval Process
- Sequence:
  - Prepare FBEs and baseline macro forecast (Feb–Mar).
  - Determine expenditure envelope and KSU ceilings (Mar 15–Mar 31).
  - CMU approval of envelopes/ceilings (Apr 15).
  - LMs submit proposals and bilateral negotiations (May 15; Apr 30–May 15).
  - CMU resolves disagreements and approves MT Budget Declaration (May 31–Jun 15).
  - Verkhovna Rada approval of MT Budget Declaration and KSU ceilings (Jun 30).
  - LMs/KSUs finalize program details and negotiate budget implementation (Jul–Aug).
  - CMU approves final budget bill and submits to Verkhovna Rada and President (Sep 1–Sep 15).
- Negotiation features:
  - Technical amendments allowed according to the predetermined amendments model at multiple stages.
  - Macroeconomic forecast updates are integrated into expenditure and ceilings when new information arises.
  - New policy initiatives are discussed during negotiations; unresolved disagreements escalated to CMU.

### Macroeconomic Forecasting and Updates
- MEDT responsibilities:
  - Produce baseline macroeconomic forecast including no new policies (Feb 1).
  - Submit baseline macroeconomic forecast and key assumptions to CMU and circulate widely (Mar 1).
  - Update the macroeconomic forecast if March forecast is outdated (May 15 conditional).
  - Update macroeconomic forecast to include policy initiatives approved by the CMU and program-level details; new baseline by 1 Aug (Jun 30 – Aug 1).
  - Integrate updated forecasts into KSU expenditure at negotiation stages (Apr 30 – May 15; Jul 31 – Aug 31).
- Integration points:
  - March baseline feeds into expenditure envelope (Mar 15).
  - Updated macro forecasts can trigger revisions to ceilings and budget declaration if major policy decisions differ from drafts.

### New Policy Proposals (Annex II: Template highlights)
- Submission fields required:
  - LINE MINISTRY, Implementing Spending Unit, Program Name (New or Existing with program code), Reform Title and description.
  - Financial Implications table in (‘000, UAH) for 2018, 2019, 2020 with rows for:
    - Change in Revenue; Change in Tax Revenue; Change in Administrative Fees; Change in Other Non-Tax Revenue
    - Change in Expenditure; Change in payroll expenditure; Change in expenditure on G&S; Change in other current expenditure; Change in capital expenditure
    - Total Impact on State Budget
    - Change in staffing levels (‘000)
  - Policy case narrative requirements (program description, rationale, objectives/outputs).
  - Impact and sensitivities (affected populations, financial impact, social/economic consequences, implications for other programs, stakeholder reactions).
  - Implementation issues (time required, one-off costs, legislative change, negotiations, alternatives considered, further consultation).
- Example numeric placeholders in template:
  - All financial table entries shown as 0.0 for 2018, 2019, 2020 in the template.

### Program Design: Objectives, Outcomes, and Output Indicators (Annex III)
- Program design principles:
  - Begin with a clearly defined objective linked to the problem and intended result.
  - Distinguish outcome indicators (broad public policy outcomes; relatively stable) from output indicators (specific activities; more frequently revised).
- Schools example and comparative indicators:
  - Ukraine indicators focus on inputs/outputs; quality and timeliness indicators are not yet developed.
  - Queensland/Victoria examples include outcome-oriented indicators such as:
    - Number of students
    - Number of teacher certification centers
    - Number of competency standards issued
    - Number of people willing to participate in external assessments of learning outcomes obtained in full general education
    - School attendance
    - Literacy and numeracy achievement from standardized tests
    - Retention through years
    - Transitions to further education, training and employment
    - Outcomes for vulnerable or high priority groups
    - Students with acceptable levels of school attendance
    - Students meeting the expected standard in national and international literacy and numeracy assessments
    - Course completion rates
    - Enrolment in specialized or high priority courses
  - Queensland program outcome example: students are engaged in learning, achieving, and successfully transitioning to further education, training and work.
  - Victoria program framing: broad programs related to achievement (Raising standards of learning and development) and engagement (increasing participation in education and development).
- References for indicator development cited (as guidance within the text):
  - OECD’s Education at a Glance and Health at a Glance publications.
  - DFID’s “Indicators of Inputs, Activities, Outputs, Outcomes, and Impacts in Security and Justice Programming”.

*Source: Annex I. Proposal for Budget Calendar (with Annex II and Annex III templates and guidance).*

### Annex IV. Draft Fiscal Risk Statement

### Annex IV. Draft Fiscal Risk Statement

### A. Macroeconomic Risks
- The Budget's economic and fiscal forecasts incorporate assumptions and judgments based on information available at the time of preparation; medium-term forecasts are subject to uncertainty around future economic conditions and implementation of government policies.  
- Unanticipated changes in macroeconomic conditions will cause fiscal forecasts to differ from those presented in the budget; e.g., slower-than-projected GDP growth would result in tax revenue collection underperforming against the forecasts.  
- Risks to the macroeconomic outlook include: weakening in global economic conditions and terms of trade (impacting export volumes, earnings, and the exchange rate); increased geo-political tensions; and shocks in domestic conditions.  
- IMF Debt Sustainability Analysis example: a shock to economic growth entailing lower growth by one historical standard deviation in 2018 and 2019 (to -4.0 percent and -3.6 percent, respectively) would lead to a deterioration in the primary balance to deficits of 1.7 and 5.7 percent of GDP, respectively.  
- Forecasts assume implementation of structural reforms to facilitate growth; delays in implementing reforms may translate into lower-than-forecast economic growth and weaken the fiscal position. Successful implementation could result in higher-than-forecast growth.  
- Proposed scenarios (to be presented in subsequent statements or replaced by government scenario analysis):  
  - Scenario 1: weaker external conditions, lower agricultural commodity prices, reduced exports, a lower exchange rate, and lower nominal GDP.  
  - Scenario 2: stronger than anticipated domestic growth from more successful reform implementation and more favorable trade conditions with major trading partners.  
- Suggested disclosure approach: summarize alternative scenarios with a comparison table of key macroeconomic aggregates – GDP, prices, employment, net exports – under the baseline and two scenarios, showing implications for total revenue, expenditure, budget balance, and debt.

### B. Public Debt
- General government debt forecasts: [85] percent of GDP in 2018, falling to around [70] percent of GDP by 2020.  
- Debt portfolio vulnerabilities: around [70] percent of the debt portfolio denominated in foreign currency; around [65 percent] of public debt held by non-residents.  
- Majority of foreign currency debt is denominated in [set out currency composition, i.e., share in USD, EUR for major currencies]; the portfolio is highly sensitive to exchange rate fluctuations. Example: depreciation in the exchange rate in 2014–15 contributed to a 40 percent of GDP revaluation in the debt portfolio.  
- Refinancing risk: around 7 percent of the debt portfolio has a maturity of less than one year; average duration of the portfolio is around x years.  
- Interest rate risk: around x percent of domestic denominated debt and around x percent of foreign currency debt issued in variable interest rate instruments.  
- Mitigants: shift in composition of debt from private to official creditors with longer maturity and projected decline in share of foreign currency debt in coming years.

### C. Government Guarantees
- Total guarantees provided by government: UAH 279 billion or 11.7 percent of GDP at end-2016.  
  - Of this, around UAH 170 billion (7.1 percent of GDP) relates to a guarantee provided on IMF loans to the National Bank of Ukraine (NBU).  
  - Remainder largely guarantees on SOE borrowing: around UAH 109 billion (4.6 percent of GDP).  
  - Additional guarantee to a private company [specify]: UAH 273 million to ensure fulfillment of defense contracts.  
- Majority of state guarantees provided on external borrowing and are exposed to foreign currency risks.  
- Fiscal cost of servicing guaranteed debts: averaged 0.6 percent of GDP a year over 2010–17.  
- 2018 budget includes provision for anticipated future costs associated with servicing outstanding guarantees.  
- Budget Code requirements: all guarantees must be approved by the Cabinet of Ministers of Ukraine; limits on annual issuance of new guarantees are set in the annual budget law, with the limit on new issuance for 2018 set at [UAH x billion or x percent of GDP].

### D. State-Owned Enterprises (SOEs)
- SOE definition: entities with state interest over 50 percent or with state ability to exercise ultimate influence; common legal forms include state unitary enterprise and joint stock companies (JSEs).  
- Count and status: as at 31 December 2016, the state owned approximately [3,350] SOEs; many not operational, including approximately [1500] SOEs in protracted liquidation; government undertaking an inventory of all SOEs.  
- Governance framework: Constitution, Commercial Code, State Property Law, resolutions, regulations, procedures and rules; ultimate supervision by the Cabinet of Ministers (CMU), supported by the Ministry of Economy and the State Property Fund and line ministries.  
- Key SOE reforms being implemented:  
  - Requiring supervisory boards with independent directors for unitary state enterprises.  
  - Introducing new procedures for appointing and remunerating heads of the largest SOEs.  
  - Corporatization of unitary state enterprises to JSCs for commercial entities.  
  - Requirement that financial statements of the largest SOEs be prepared in accordance with international reporting standards and independently audited by internationally reputable auditors within [a specified timeframe] after the end of the financial year.  
  - Requirement for SOEs to publish financial statements on corporate or supervisory authority websites.  
  - [Any other relevant reforms, particularly where relevant for fiscal risk].  
- Financial performance dataset: 48 SOEs selected for detailed financial information (state support recipients, large assets/revenue, weak performance, large arrears). As at [31 December 2016]: these 48 accounted for almost [90] percent of total SOE assets and around [85] percent of total SOE revenues; operate in 9 sectors with Oil & Gas, Transportation and Electricity accounting for half the SOEs but more than 90 percent of assets and revenues.  
- Table 1.2 key figures (Top 48 SOEs, UAH million):  
  - Oil & Gas: Number of SOEs 4; Percentage 8%; Total Assets 1,197,700; Percentage Total Revenue 334,113.  
  - Transportation: Number 10; Percentage 21%; Total Assets 449,506; Percentage Total Revenue 106,810.  
  - Electricity: Number 10; Percentage 21%; Total Assets 291,199; Percentage Total Revenue 82,001.  
  - Food & Agriculture: Number 4; Percentage 8%; Total Assets 47,793; Percentage Total Revenue 35,427.  
  - Machine Building: Number 4; Percentage 8%; Total Assets 20,143; Percentage Total Revenue 8,481.  
  - Real Estate: Number 4; Percentage 8%; Total Assets 8,745; Percentage Total Revenue 85.  
  - Coal Mining: Number 5; Percentage 10%; Total Assets 6,936; Percentage Total Revenue 3,907.  
  - Chemicals: Number 4; Percentage 8%; Total Assets 3,562; Percentage Total Revenue 2,655.  
  - Other: Number 3; Percentage 6%; Total Assets 2,949; Percentage Total Revenue 4,700.  
  - Total (48): Total Assets 2,028,532; Total Revenue 578,180.  
- Aggregate balance-sheet and income statement for Top 48 SOEs (UAH million):  
  - Assets: 2014 878,231; 2015 1,123,795; 2016 1,957,141; 2017 2,025,583; y-o-y % change 3%.  
  - Cash and cash equivalents: 2014 31,928; 2015 55,790; 2016 68,394; 2017 42,682; y-o-y % change -38%.  
  - Liabilities: 2014 294,501; 2015 347,763; 2016 529,311; 2017 567,775; y-o-y % change 7%.  
  - Equity: 2014 583,621; 2015 773,399; 2016 1,428,067; 2017 1,460,477; y-o-y % change 2%.  
  - Revenue: 2014 212,103; 2015 295,775; 2016 454,233; 2017 573,479; y-o-y % change 26%.  
  - EBITDA: 2014 46,123; 2015 124,000; 2016 125,074; 2017 (38,204); y-o-y % change -131%.  
  - Net profit: 2014 (119,745); 2015 (44,489); 2016 41,197; 2017 51,223; y-o-y % change 24%.  
- Aggregate ratios for Top 48 SOEs:  
  - Increase in Net Income (%) : 2015 39%; 2016 54%; 2017 26%.  
  - EBITDA margin (%) : 2014 21.7%; 2015 41.9%; 2016 27.5%; 2017 (6.7%).  
  - Net profit margin (%) : 2014 (56%); 2015 (15%); 2016 9%; 2017 9%.  
  - Return on equity (%) : 2014 (21%); 2015 (6%); 2016 3%; 2017 4%.  
  - Return on assets (%) : 2014 (14%); 2015 (4%); 2016 2%; 2017 3%.  
  - Debt to Assets ratio : 2014 0.34; 2015 0.31; 2016 0.27; 2017 0.28.  
  - Net Debt to EBITDA ratio : 2014 5.7; 2015 2.4; 2016 3.7; 2017 (13.7).  
- Fiscal risk drivers from SOEs: poorer-than-anticipated financial performance, liquidity pressures, or weakening financial positions could lead to lower dividends and taxes; increased need for subsidies or recapitalization; or calls on government guarantees.  
- SOE risk categorization methodology (48 SOEs):  
  - Risk category 1: unprofitable (operating or net) with high debt burden (Net debt to EBITDA exceeds 4).  
  - Risk category 2: high debt burden.  
  - Risk category 3: unprofitable or negative ROE.  
  - Risk category 4: low profitability and ROE below 1 percent.  
  - Risk category 5: remaining SOEs.  
- Risk categorization outcomes (2017):  
  - Risk category 1: Number of entities 12; Combined Net Debt (percent of GDP) 5.2.  
  - Risk category 2: Number 20; Combined Net Debt 9.8.  
  - Risk category 3: Number 1; Combined Net Debt 0.1.  
  - Risk category 4: Number 6; Combined Net Debt 2.8.  
  - Risk category 5: Number 9; Combined Net Debt 1.5.  
  - Total 48; Combined Net Debt 19.4 (percent of GDP).  
- Observations: enterprises in risk categories 1–3 hold around three quarters of total sector liabilities, amounting to around 15 percent of GDP; two enterprises with largest debt exposures rated in risk categories 1 and 2.  
- Financial relations and transfers:  
  - Direct financial support (grants and subsidies) totaling [UAH X [billion] provided to SOEs during [2016]; provision made in the budget to continue over medium term; support mainly to transport, coal, chemicals and machine building sectors.  
  - Regular share capital increases [totaling UAH xx million] via issuance of domestic government bonds to SOEs to cover losses; primary recipient Naftogaz (total UAH [xx] million); due to Naftogaz performance improvement, further transfers not anticipated beyond [2017].  
  - Law of Ukraine on State Aid to Business Entities adopted in 2014, in effect August 2017, to systematize state aid allocation and improve SOE fund management.  
- Receipts from SOEs: dividends for [2016] totaled [UAH 5.8 billion or 0.2 percent of GDP] representing a dividend payout ratio of 14 percent; 2017 expected to grow to [UAH 19.8 billion] due to a [UAH 13.3 billion] dividend anticipated from Naftogaz.  
- Dividend payout regulation: 2016 rules required unitary SOEs that are natural monopolies with budgeted net profits over UAH 50 million to pay 75 percent of profits as dividends; other unitary SOEs paid 15 percent; JSCs 75 percent; exceptions for Ukrhidroenergo, [Ukrzaliznytsia], Energoatom, Ukrenergo, Centrenergo, and [the Defense Company]. For energy sector SOEs, net profit basis reduced by allocations for investment projects and loan repayments subject to CMU authorization. In 2017 payout ratios for JSCs and unitary state companies adjusted to [xx] percent and [xx] percent, respectively.  
- Taxes from SOEs: amounted to [UAH X billion or X percent of GDP]; majority of SOEs up-to-date in tax payments except for some coal sector companies.  
- Privatization: Cabinet approved list to privatize 18 large companies projected to raise UAH 17 billion in 2017; sectors include coal, electricity, transport and others. Delays would reduce proceeds and increase government debt relative to projections; historical receipts disappointing.  
- On-lending: central government no longer lends from its own resources but on-lends IFI borrowings to SOEs; such on-lent borrowing recorded as central government gross debt. Total loan portfolio around [UAH xxx billion or X percent of GDP]; historical accumulated arrears on government loans to SOEs amount to [UAH 49 million, of which UAH X is denominated in foreign currency].  
- Contingent liabilities and unguaranteed liabilities: as at [end-2016], explicit contingent liabilities from SOE-related government guarantees totaled UAH [109] billion or [4.6 percent] of GDP (almost all exposed to FX risk); most significant exposures Naftogaz UAH [28.5] billion; Ukrenergo UAH [13.6] billion. Fiscal costs of debt-servicing guaranteed SOE debt averaged around 0.7 percent of GDO over past five years. Budget includes provision to meet anticipated calls on guarantees for loans to State Air Enterprise, Lisichanskugol and Energoatom.  
- Unguaranteed liabilities of major SOEs totaled around [20] percent of GDP; of these, [around x percent are denominated in foreign currency, and around [x per cent] fall due within one year. Several SOEs (Ukrzaliznytsia, Regional Electricity Network, State Food and Grain Corporation, Sumykhimprom, Dnieper HPP, Kryvorizka heating plant) have significant overdue accounts. The state is not obligated to service unguaranteed debts. No limits on SOE borrowing, but [Ministry of Finance/oversight authority] controls level and cost of borrowing and pledging of state assets as collateral.  
- Other SOE fiscal risks: exposures from deposits held in troubled banks (as at [December 31, 2016], deposits total about [7 percent] of total SOE cash holdings); notable SOE exposures include Research-Industrial Complex Pavlograd Chemical Plant, Agrarian Fund, Kharkivoblenergo, Regional Electricity Network, Urktransgaz, Antonov and Kyiv Boryspil International Airport.  
- Quasi-fiscal activities: non-commercial activities undertaken by SOEs to fulfill public policy objectives can erode profitability if not properly compensated; identified examples include below-cost passenger rail tariffs cross-subsidized from freight at estimated cost around UAH 8 billion; below-cost water and sewerage tariffs (impacts not yet quantified). Government steps: replace quasi-fiscal activities with on-budget payments; collect information on such activities; tariff reforms in 2015–2017 to increase electricity tariffs to cost-reflective levels and phase out gas sector subsidies to import parity prices, reducing indirect subsidies to Naftogaz over the medium term.

### E. Financial Sector Exposures
- Financial sector risks to the budget include obligations to back up the Deposit Guarantee Fund (DGF), government guarantees for Oschadbank deposits, and potential recapitalization of troubled banks not anticipated in the budget.  
- End-2015 non-equity liabilities of the financial sector: about 50 percent of GDP; liabilities of four state-owned banks (Oschadbank, PrivatBank, Ukreximbank and Ukrgasbank) around 30 percent of GDP.  
- DGF and deposit guarantees: DGF insures deposits up to UAH 200,000 per account holder; around 80 insolvent banks transferred to the DGF which paid out UAH 85 billion to depositors; total volume of deposits guaranteed by the scheme around UAH 300 billion (13 percent of GDP). Total assets in the fund amount to UAH X billion (X percent of GDP). All deposits in Oschadbank (around UAH 145 billion or 6.4 percent of GDP) guaranteed by the government.  
- Government support to banking sector: over 2014–2017 government provided 11 percent of GDP to finance compensation of insured deposits in failed banks and recapitalize other banks. Measures taken: improve governance of state-owned banks (independent supervisory boards), require restructuring plans and capital adequacy for banks with negative operating profitability, NBU diagnostic studies and recapitalization schedules for top-60 banks, and managed nationalization process for PrivatBank.  
- Systemic risk trends: systemic risks diminishing with recovery in banks’ funding base, asset quality recognition, and compliance with recapitalization programs; however deterioration in the banking sector could give rise to additional fiscal costs.  
- Financial soundness indicators (selected):  
  - Regulatory capital to risk-weighted assets: 2015 12.3; 2016 13.9.  
  - Share of Non-performing Loans to total loans: 2015 46.4; 2016 49.4.  
  - Credit growth (year over year percent change): 2015 -19.4; 2016 -3.7.  
  - Loans in foreign currency to total loans: 2015 54.1; 2016 49.3.  
  - Deposits in foreign currency to total deposits: 2015 44.9; 2016 46.0.  
  - Liquid assets to total assets: 2015 33.0; 2016 ...  
  - Return on assets: 2015 -5.4; 2016 -1.2.  
  - Return on equity: 2015 -70; 2016 ...  
  - Number of banks not complying with banking regulations:  
    - Not meeting capital adequacy requirements for Tier I capital: 2015 11; 2016 10.  
    - Not meeting prudential regulations: 2015 37; 2016 39.  
    - Not meeting reserve requirements: 2015 6; 2016 7.

*Annex IV. Draft Fiscal Risk Statement*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ukrea2019003.pdf_