Reports on Observance of Standards and Codes

Ukraine and the IMF

What do you think of Reports on the Observance of Standards and Codes?


September 1999

Prepared by an IMF staff team from the Fiscal Affairs Department in conjunction with European II and Policy Development Review Departments, on the basis of information provided by the Ukrainian authorities


  1. Experimental Module on Fiscal Transparency for Ukraine
    1. Description of Practice
    2. IMF Staff Commentary

I.  Experimental Module on Fiscal Transparency for Ukraine

1.  This draft report provides an assessment of fiscal transparency practices in Ukraine against the requirements of the IMF Code of Good Practices on Fiscal Transparency--Declaration on Principles. The authorities have completed the fiscal transparency questionnaire prepared by the IMF staff. The assessment has two parts. The first part is a description of practices, prepared by the IMF staff on the basis of the questionnaire response. The second part is an IMF staff commentary on fiscal transparency in Ukraine.

A.  Description of Practice

Clarity of Roles and Responsibilities

2.  The Government has taken a number of significant steps in recent years to redefine the roles of government, banking, and nonfinancial enterprise sectors in accordance with the needs of a market economy. The National Bank of Ukraine (NBU) has been established as a relatively independent central bank although amendments are required to clarify the role of the supervisory council; the Law on the NBU formally prohibits it from buying government debt on the primary market. NBU interest rates are, at times, well below market rates and thus involve an element of quasi-fiscal activity. The government role can be seen more clearly with the adoption of a budget classification in line with IMF Government Finance Statistics (GFS) standards. A major reorganization of government is underway, and this, together with the privatization program is helping to improve the demarcation between the government and private sector, particularly in the banking sector. Public debate on these issues is open.

3.  It is recognized, however, that much remains to be done and many complex issues remain unresolved; further clarification is required on many aspects to allow more constructive public participation. At a fundamental level, the relationship between the three branches of government with respect to fiscal management is not well defined in the legislation and is still evolving. The present budget management law is still based on budget concepts and practices of the former Soviet Union and does not clearly define responsibilities and authorities for budget management. A new more comprehensive framework aimed at clarifying budget management roles was drafted by the Ministry of Finance (MOF) and submitted to Parliament. A substantially different draft, prepared by the Budget Committee of Parliament, is now being considered by Parliament. Fiscal relationships among the national government and different levels of three-tier local government are also still evolving and do not have a well-structured legal framework. The government supports public and private enterprises in a variety of ways, through the budget (including state orders and tax expenditures), through guarantees, and by directed lending from the banking sector. Some significant forms of public support for enterprises are not included in the budget (for instance, toleration of tax arrears for Naftogas Ukrainy). More work is also required to clarify and simplify the enterprise regulatory framework and to give due regard to creating more equal competitive conditions for all forms of enterprise.

4.  Within the Government, considerable work has been done to define the role of the MOF more clearly. Macroeconomic policy coordination and technical capacity in establishing economic framework for the government budget are being improved. A Treasury has become operational and is improving budget and accounting controls for the State budget expenditures, as well as producing regular fiscal reports. Progress is being made in establishing a single treasury account in the NBU covering all funds of the central government, and extending budget controls to the many extrabudgetary accounts. It remains difficult to make a clear separation between the technical basis for fiscal policy and political factors that influence revenue and expenditure estimates. Laws on the enterprise profit tax and the value added tax (VAT), both enacted in 1997, provide a sound basic legal framework, but numerous exemptions and subsequent amendments reduce transparency and increase the difficulty of administration. Tax laws are published and made available to the public. Compliance with tax law is difficult to assess, but available evidence indicates that it is unsatisfactory. The civil service law includes regulations on ethical standards of behavior for public servants.

Public availability of information

5.  The budget document covers most of general government and is available to the public. The coverage of extrabudgetary funds and accounts is being progressively improved by establishing earmarked accounts in the budget--as an intermediate step. No statements are included in the budget or otherwise published giving the extent of tax expenditures or quasi-fiscal activities. The annual budget law contains provisions permitting the Government to issue guarantees within a certain limit. Comprehensive information on the extent and composition of central government public debt is included in the budget; local government debt information is less transparent, but the amount appears to be relatively small and monitoring is being improved. The annual budget does not include statements of financial assets, nor are complete data on financial assets at all levels of government recorded or consolidated on a consistent basis.

There is a constitutional requirement to publish data on budget execution and year-end financial reports are available to the public. The Government has not yet made a commitment to follow GDDS or SDDS in this regard. Formal advance release date calendars are not published.

Open budget preparation, execution, and reporting

6.  The budget process in Ukraine suffers from a number of continuing problems: it has proved difficult to establish realistic budget estimates or to overcome problems of poor fiscal discipline. Cash rationing, recourse to arrears, and netting-out operations remain prevalent. Government has, however, made progress in recent years in developing and improving transparency of the budget process although much remains to be done. The budget, as noted, is broadly classified according to GFS standards, the overall balance is used as the basis for defining the government's fiscal position, and the budget data are presented in comparison to the current year's budget. Macroeconomic forecasting is being progressively improved, the projections are discussed with representatives of nongovernment institutions, and some of this information is being made available to the public. Aggregate projections for the next three years are included in the budget estimates, but there is limited capacity in the MOF to develop a detailed framework of medium-term budget estimates. As yet, statements of fiscal risk, contingent liabilities, or assessment of long term fiscal sustainability have not been developed. Budget estimates data remain unreliable because of political factors and lack of clearly defined assumptions.

7.  A comprehensive accounting system is being established as part of the Government's treasury system project. An interim treasury system is now operational; it covers all State budget payments and its coverage will be extended to all extra-budgetary operations of the central government and gradually to local budget operations. Internal government fiscal reports on the state budget and extra-budgetary operations of the central government spending units are prepared each month (including separate reports on payments arrears) within one month after month-end--though it is recognized that the quality of these reports needs to be improved Key fiscal indicators are being published monthly. Final accounts on the state budget include all central government earmarked funds, but not the Pension Fund and Social Insurance Fund, which are reported separately. These reports are presented to the Chamber of Accounts (external auditor) by around four months after year-end and reports are available to the public. In general, reconciliation with budget appropriation and bank accounts is effective and timely. The present accounting system is on a modified cash basis and cash based revenue and expenditure data are accompanied with data on arrears accrued but some moves are being made toward a modified accrual system; work is underway to develop balance sheets including all financial assets and liabilities. No statement of accounting policies is made with the budget or final account reports.

Independent assurances of integrity

8.  The Chamber of Accounts, established in 1996, carries out external audit of government accounts. It reports directly to Parliament and its findings are widely circulated in the government and discussed publicly. Many areas of audit practice need strengthening and the need to improve the technical capacity of the audit chamber is recognized. Its mandate is at present limited to audit of expenditures of budget spending units (with respect to regulatory and appropriation compliance) and public enterprise accounts. Its mandate for audit of revenue collection is unclear.

9.  As noted, macroeconomic forecasts are being improved and the assumptions are increasingly being reviewed by independent analysts and being made more widely available to the public. Statistical and data dissemination standards do not yet conform to international standards (such as the GDDS or SDDS).

B.  IMF Staff Commentary

10.  The staff generally concurs with the authorities' assessment, which highlights the progress that has been made but also identifies some of the critical issues that need to be addressed to improve transparency and effectiveness of the fiscal management system. If further progress is to be made, a major effort is required to improve other critical aspects of fiscal transparency. Some important improvements, which should yield substantial benefits in terms of reinforcing the recent gains, can be achieved by substantial technical strengthening of existing policies. Other transparency issues are deep-seated and more intractable, however, and will require a strong and sustained political commitment if they are to be addressed successfully.

11.  The following suggested actions fall into the former category:

  • All operations of extra-budgetary funds and accounts, including the Pension Fund and the Social Insurance Fund, should be incorporated in the State budget documentation for FY 2000 and should be reported in the monthly, quarterly, and annual presentation of government fiscal accounts. Legal requirement for fiscal reporting to the Treasury about operations of all government entities, including the Pension Fund and the Social Insurance Fund in accordance with the GFS requirements should be established.

  • Significant external support for budget entities or enterprises, including aid-in-kind, should be disclosed in the budget and annual accounts.

  • Quasi-fiscal activities of the NBU, by way of lending at below market rates, should be clearly reported by the NBU and in the budget documents; the Law on the NBU should be strengthened to reinforce its independence and require reporting on activities of a fiscal nature

  • Clear legal authority and enforcement arrangements over revenue collection and spending authority and accountability should be established in the proposed budget system legislation for FY 2000. The law should clearly require that all public funds, including government non-commercial unit collected revenues be paid into treasury accounts and these funds should be committed and spent only by law.

  • The tax laws need to be thoroughly reviewed to reduce exemptions and scope for discretionary interpretation of the laws and to clarify the rights and responsibilities of taxpayers. The large number of exemptions and the recourse to tax deferrals to subsidize enterprises has seriously compromised fiscal transparency in Ukraine.

  • Statements of tax expenditures and outstanding contingent liabilities should be included with the FY 2000 budget. It may not be possible to produce comprehensive, quantitative statements in the first year, but these can be developed in future years.

  • A statement of current accounting policies should be produced as part of the FY 2000 budget document--again, while the initial statement may be less than fully developed, this can be improved in future years. As a matter of course, statements of accounting policies should be revised as accounting policies are developed.

  • As part of the development of macroeconomic forecasting, assessments of fiscal risk and fiscal sustainability should be undertaken. The FY 2000 presentation might contain a review of just the major risks, but comprehensive public statements on these aspects of fiscal policy should be produced for the FY 2001 budget.

  • A program for improving the comprehensiveness and quality of fiscal accounts should be established. Specific targets covering the next two years should be set for improving reports on all government funds--and establishing a comprehensive summary report.

  • Fiscal data dissemination should be improved and brought closer to internationally recognized standards such as the GDDS.

12.  Issues of a more fundamental nature that need to be addressed at a high political level to establish a sound and transparent system of fiscal management are:

  • Budget estimates should be realistic in terms of assessment of actual costs of government obligations and availability of revenue to cover these costs. Establishing realistic estimates and a disciplined budget process are key requirements for elimination of netting out operations which have seriously compromised fiscal transparency in recent years. The improvements in treasury management and macroeconomic forecasting described above will help, but it will also be necessary to ensure that estimates are established substantially on a technical basis without political intervention. Opening the basis of the estimates to independent scrutiny is the best way of achieving this goal.

  • Lack of clarity over the relative role of government vis--vis the rest of the economy is undoubtedly the major reason for lack of transparency and accountability in Ukraine. Quasi-fiscal activities of government need to be identified comprehensively and either reported as part of government activity or eliminated through privatization or explicit budget subsidies.