KYIV, Sept 14 – Ukraine’s 2022 budget deficit will probably exceed targets set by the International Monetary Fund due to skyrocketing natural gas prices and high inflation, Serhiy Verlanov, former head of the State Tax Service, said Tuesday.

The government, which is due to submit the 2022 budget bill to Parliament on Wednesday, has assured investors on Tuesday the budget gap will not exceed 3.5% of GDP, a level set by the IMF.

However, to do that the government has underestimated spending on natural gas subsidies and inflation-adjusted social security payments among other measures that may eventually widen budget gap to 5% of GDP.

“The budget bill is all smoke and mirrors,” Verlanov said. “This is going to be obvious to everybody by December.”

In early August, Verlanov has warned investors that the government’s rampant borrowing policy has been boosting inflation and causing interest rates to rise, slowing down the country’s economic growth.

Two weeks later, the government’s Q2 economic data showed the economy had fallen into recession, catching most Ukrainian banks by surprise, and forcing them to lower economic growth targets for 2021.

Dragon Capital, a major Ukrainian investment bank, has last week lowered its forecast for Ukraine’s economic growth to 3.5% on the year in 2021 from its earlier projection of 4.6%, reflecting massive deceleration in the second quarter.

The government’s bill sets budget deficit at UAH 188 billion, or 3.5% of GDP in 2022, while setting budget revenue target at UAH 1,277 billion and budget spending target at UAH 1,465 billion, Prime Minister Denys Shmyhal said.

The government plans to finance the budget gap mostly through borrowing on domestic market that will account for 70% of funding, with the remaining 30% to come from international borrowing.

“The government wants to gradually increase the share of domestic borrowing over foreign borrowing,” Shmyhal said.

However, the government has failed to reflect skyrocketing natural gas prices, which had increased 93% over the past two months to $830 per 1,000 cubic meters on Sept. 14 from $430 per 1,000 cu m in mid-July, according to Verlanov.

“At these high gas prices, subsidies will probably cost the government an extra UAH 20 billion in 2022,” Verlanov said, adding that an extra UAH 40 billion will be needed to adjust the Pension Fund, a social security fund, to inflation, which is expected at between 8% and 10%.

“Overall, we’re talking about UAH 100 billion in extra spending that has not been properly reflected in the budget bill,” Verlanov said, adding that the government has also abandoned ambitious privatization plans.

“Instead of promoting the market economy, the government is trying to build the state-dominated capitalism,” Verlanov said. “This has never worked.” (om/ez)