In a 2004 Report on the Observance of Standards and Codes, the International Monetary Fund (IMF) concluded that Ukraine's recent improvements in fiscal policy-making had the effect of increasing transparency. Improvements included the 2001 enactment of the Budget Code and the institution of a treasury system that has increased the timeliness, reliability, and coverage of fiscal reporting. Computerization of state procurement has resulted in a more modern and transparent process, as well. Ukraine subscribed to the IMF's Special Data Dissemination Standard (SDDS) and began posting metadata on the SDDS website in January 2003, at which time it complied with SDDS specifications. In 2006, the IMF's Article IV Consultation suggested that Ukraine authorities have begun to address remaining problems in the area of fiscal transparency, much more needs to be done.

General Overview

In a 2004 Report on the Observance of Standards and Codes (ROSC), the International Monetary Fund (IMF) noted that Ukraine had substantially progressed in fiscal transparency since its prior ROSC of 1999. In particular, the enactment a Ukraine's Budget Code created the legal underpinnings for sound budget management. In addition, improvements in timeliness, reliability, and coverage of fiscal reporting were enhanced by the creation of Ukraine's treasury system, including data from regional governments beginning in 2004. Improvements in the state's procurement policies include greater use internet resources, which has also enhanced transparency. In the words of the 2004 ROSC: "State procurement was modernized and transparency greatly improved through use of the internet. Though much remains to be done, progress was made in applying economic pricing and addressing the poor payment collection and enterprise tax arrears that have contributed to high quasi-fiscal costs" (p. 40)

To further Ukraine's progress in fiscal policy transparency, the 2004 ROSC suggested a program of greater consolidation of data from the various levels of government, as well as strengthening the budget process by instituting more a more consistent and integrated government policy framework, with an eye to eliminating interagency barriers, and by explicitly acknowledging the various risks ahead. The ROSC added that there needs to be greater accountability in Ukraine's medium-term budget process, stating that "the most important structural issue that needs sustained further effort is that of the relative lack of knowledge and control over the public enterprise sector. The many activities of a fiscal nature carried out by that sector continue to impede the establishment of sound long-term fiscal policies" (p. 40).

While praising Ukrainian authorities for their efforts in the area of fiscal policy transparency, the IMF's 2004 ROSC staff nonetheless cautioned that greater coordination at the managerial level must be achieved. This would improve the clarity of reports and enhance accountability, which is needed particularly in the area of quasi-fiscal activities (QFAs). Accounting and auditing procedures also need improvement if they are to be made consistent with international best practice. In early 2007, the IMF issued a "Selected Issues" report that raised further fiscal transparency issues, largely to do with the relationship between the government and State Owned Enterprises (SOEs). The report found that "the policy for SOE dividend transfers to the budget is insufficiently clear. Transfer requirements have been constantly modified by the Cabinet of Ministers, enforcement has been poor, and vagueness in the framework has led to disputes" (p. 26). The report went on to note that the enforcement of SOE tax collection remains weak, in part because the State Tax Administration is not empowered to seize key SOE assets.

Article 75 of Ukraine's Economic Code (Article 75) requires that SOEs file quarterly and annual financial plans with the governmental agencies or ministries charged with their oversight. Overall coordination of this process was officially conferred upon the Ministry of Finance in 2006. Unfortunately, the IMF's 2006 Selected Issues report found that this oversight has been significantly hampered by two factors: "data coverage and content requirements have been continuously modified, and there have been significant delays in the agreement of the plans" (p. 28). Exacerbating the difficulty is the very recent vintage of the requirement of SOEs to submit detailed asset/liability data to their oversight agencies.

The IMF's 2007 Selected Issues report did note that the SOE problem has been partially addressed by the 2006 amendment of the laws governing state audits. The central internal audit body, KRU, was empowered to audit SOEs in terms of both their financial data and their performance. Methodologies to fulfill this mandate are still under development. Other authorities with the power to audit SOEs include Ukraine's Accounting Chamber (SAI), which examines SOE use of budget funds, and certain independent audits agencies, which have focused on those SOES that participate in international capital markets. According to the Selected Issues report, however, these latter audits are not legislatively mandated.

Ukraine became a subscriber to the IMF's Special Data Dissemination Standard (SDDS) on January 10, 2003, at which time it posted its initial metadata on the website and met SDDS specifications. Its postings to the SDDS site include hyperlinks to data compiled and reported by the Ukrainian national statistical office

The Government of the Ukraine's website stipulates that the Ministry of Finance (MoF) operates in accordance with the Constitution of Ukraine, Ukrainian Laws, the Provision on Ministry of Finance of Ukraine, Orders of the President of Ukraine, Provisions of the Cabinet of Ministers of Ukraine and international acts. The site goes on to specify that the MoF's highest priority is the formulation of the budget and ensuring that budgetary funds are used effectively. In addition, the most important task of the MoF is budget formation and effective use of budgetary funds. Also, the MoF is mandated to make certain that the state's financial, budget, and tax policy is carried out appropriately. The website sets forth the legislation that establishes the MoF's mandates, which include the Decree of the President of Ukraine "On State Treasury of Ukraine" (1995), as amended according to the Decrees of the President Nos. 70/99 and 173/99. These laws created the State Treasury of Ukraine (STU) within the MoF, charging it with the task of managing the state's budget funds and to improve state financing efficiency.

The Accounting Chamber of the Ukraine was created by Article 98 of the Constitution of Ukraine and the Law of Ukraine About the Accounting Chamber. The Government of Ukraine website reports that the Accounting Chamber (established in 1997) is "the permanent acting body of financial and economical control of application of funds of the State Budget of Ukraine." Within its portfolio of operations is the application of Ukraine's state budget funds, state debt service and repayment, the financing of state-sponsored development programs, and the oversight of budget funds used by local governmental authorities in the conduct of delegated tasks and projects.

The Principles

Clarity of roles and responsibilities.

CP

The IMF's 2004 ROSC reported that Ukraine defines general government in terms generally compatible with those employed by the Government Finance Statistics (GFS) principles. Legislation exists that clearly sets forth the various fiscal policy roles held by the executive, legislative, and judicial branches of the government. The Budget Code distinguishes the different levels of government and defines the interrelationships across the various agencies, as they impact upon budgetary policy. However, the ROSC strongly encouraged Ukraine to confer on the MoF coordinating authority over all governmental agencies involved in fiscal planning and policy-making, including the State Tax Administration and the State Treasury. In the opinion of the 2004 IMF ROSC staff, "mechanisms for the coordination and management of budgetary and extra-budgetary activities are improving, but a number of issues remain" (p. 41).

The 2004 ROSC noted that there were ongoing efforts to clarify the relationships among government and non-financial public enterprises and public financial institutions. It specifically cautioned that clarity in the area of dividend policy and practice needed to be improved. The ROSC went on to note that "public financial institutions no longer assume any explicit fiscal functions, but they remain a significant source of fiscal risk due to poor lending practices" and concluded that "the purpose, scope, and management of the public enterprise sector needs to be clearly defined" (p. 41). Because the list of fully state-owned corporate and equity assets remain extensive, the IMF further recommended that the management of these properties needed to be more adequately consolidated. The legal framework governing the disclosure of the terms of privatization of state-owned properties was deemed to be inadequately developed.

The 1999 Law on the National Bank of Ukraine (NBU) establishes the NBU's operational independence from state interference. The 2004 IMF ROSC reported that, at that time, the state owned three separate financial institutions. These were the Savings Bank, the Export-Import Bank, and a joint-stock insurance company. The ROSC approved of recent improvements in the relationship between these banks and the government, which had been achieved through the clarification of policy and new, enabling legislation, but cautioned that "this activity had been limited and was expected to be cancelled in early 2004" (p. 10). The ROSC also noted the consolidation and clarification of tax laws and administrative procedures since 1999. The Law on the Taxation System, buttressed by other legislation, establishes state and local taxes and customs tariffs. According to the ROSC, however, "the transparency of tax policy is compromised by problems in the interpretation of tax law, frequent changes in tax structure, and a range of tax preferences. Several tax laws continue to leave scope for interpretation, due to gaps, ambiguities, and deficiencies in accounting rules" (p. 15).

Open budget processes

EN

The IMF's 2004 ROSC deemed Ukraine's annual budget process to be open and assessed it to be broadly compliant with international standards (p. 22). The Budget Code clearly sets forth the procedures to be used in budget preparation, approval, and execution by all levels of government. In the words of the ROSC: "Fiscal policy goals are set around the balance of the central government, excluding extra budgetary funds (EBF), although information is provided on general government balances in the budget document. The policy focus of the state budget law is on the deficit of the state budget, excluding EBFs" (p. 22). The presentation of underlying assumptions and forecasts were deemed to be clear, but the ROSC found fault with the level of coordination and consistency represented in the forecasts.

The MoE consults with other line ministries to develop the macroeconomic forecasts used in the formulation of the annual budget. Input is invited from the MoF, but does not have authority to interfere in the MoE's forecasting. The budget also includes a statement of medium-term objectives, but the 2004 IMF ROSC staff found that this is of limited utility in the formulation of fiscal policy going forward. The budget also presents a 3-year forward projection of a quantified fiscal framework, essentially setting forth upcoming policy regarding the reform of revenues and expenditures, but, in the words of the ROSC, "the framework does not yet represent a fully accountable statement of government policies for the medium term and does not constrain future budgets" (p. 24)

While the Budget Code is clear in its definition of many fiscal rules, it does not yet fully institute the procedures required to produce medium-term, program-oriented budgeting within the budget documents. The 2004 IMF ROSC identified specific deficiencies, including the fact that "estimates of new initiatives and ongoing costs of government policies are not clearly distinguished in the budget documents" and "the objectives and expected results from government activities are defined only in general terms" (p. 24). The ROSC found that the focus of Ukraine's budget reporting is on financial compliance, and excludes a systematic consideration of performance-related data. Risk assessment is also inadequate, and the budget documents omit an evaluation of sensitivity to possible changes in the economic climate.

The 2004 ROSC recommended that the MoF, State Treasury, and National Bank of Ukraine (NBU) work in concert to lay out clear roles and coordination mechanisms for the treatment of cash and debt management data. The ROSC noted that "basic internal control procedures are in place, but are not well coordinated. Sustained emphasis on modern management-oriented systems and coordination among internal control agencies is needed" (p. 27). Additionally, there remain weaknesses in the procurement process. A new public procurement law was promulgated in 2000, laying the groundwork for a more open and competitive process. The IMF's 2004 ROSC found that the legislation had a number of attractive features, including "the framework for a decentralized procurement systems, transparent and appropriate procurement methods, [an] effective advertisement process, improved anti-corruption measures, and a regulated appeal process" (p. 28).

Public availability of information.

CP

The IMF's 2004 ROSC observed that "Ukraine budget documents cover central government fiscal activities, including information on the extra-budgetary funds (EBFs), and provide summary data on general government" (p. 20). Since the passage of the Budget Code in 2001, legislation mandates that the annual budget must be backed up with extensive data as well as with a public presentation of the economic and fiscal context. In addition, budget documents must contain data on government guarantees. However, the government's contingent liabilities are less well documented. Tax expenditure estimates must be included in the budget as well. In the opinion of the IMF ROSC, gross public debt figures are made available in a timely manner through monthly publications issued by the MoF. The ROSC noted that "reports are placed on the website about 25 days after month-end" (p. 20).

Consolidated state financial and nonfinancial assets are provided only on an annual basis. Most state enterprises furnish the Ministry of the Economy (MoE) with quarterly financial reports that include estimated data regarding assets and liabilities. The IMF 2004 ROSC noted that decentralization of SOEs has occurred in the absence of comprehensive and consistent reporting standards and that "no information on state property is currently reported on a regular basis to parliament, although some partial information is publicly available" (p. 20). On the other hand, the ROSC noted that "the State Committee on Securities and Stock Market (SCSSM) publishes government holdings in individual joint-stock companies" (p. 20). A variety of additional statistical data on enterprises is provided by the State Statistics Committee of Ukraine (SSCU), including net worth estimates. On the whole, the 2004 IMF ROSC applauds Ukraine's willingness to undertake the formal commitment to regularly publish fiscal data and its willingness to make advance release calendars available. In addition, the ROSC notes that "the budget code requires publication and dissemination of annual budget and accounts data and monthly budget execution reports. These are observed in a timely way" (p. 22).

Independent assurances of integrity.

EN

The IMF's 2004 ROSC reported that Ukraine had instituted appropriate mechanisms for the production of state general fund estimates, but that these mechanisms were not yet strong enough. Any variation between the principle fiscal aggregates as budgeted and their actual outturn must be presented to the parliament with an explanation. The accounting policies and practices employed in the preparation of the budget are not disclosed in the document, nor do they appear in the final accounts statements, but they are clearly formulated and available for consultation by administrators. In the judgment of the 2004 ROSC staff, procedures employed in account reconciliation and reporting are appropriate, and improvements are ongoing in the Treasury system.

There is provision for the conduct of independent, external audits, but it is not comprehensive. The 2004 IMF ROSC, therefore, called for a strengthening of audit external capacity. The independence of the national statistical office is mandated by law. In this area, however, the 2004 ROSC suggested that "strengthening oversight and follow-up mandate and capacity is a very high priority for the medium to long term. External scrutiny of macroeconomic models and assumptions is actively encouraged". (p. 32).