There was much comment last week on the expected increase in the minimum wage and pensions. The Government plans to increase budget expenditure by UAH 7.2 billion (USD 1.4 billion), the lion's share of which will be directed towards improving living standards as from 1 April. It was following agreement on increasing social security benefits that the President agreed to withdraw his veto of the 2007 budget last December.
The Government however lacks the necessary funds to meet these commitments and therefore will have to increase the budget deficit by a further UAH 2.6 billion, bringing the total to over 3% of GDP.
The President's Secretariat reacted negatively to the expected deficit increase, pointing out the unacceptability of financing increased social expenditure through new borrowing, insisting that the existing budget can cope with the increased payments by utilising "internal resources."
Such an increase in social expenditure is in itself inflationary and a further increase in the budget deficit will make it tough for the Government to keep the annual inflation rate within single digits. However, inflation appears to be under control, remaining at a record low of 1.1% for the first two months of 2007.
The economy continues to grow at a strong pace. GDP for January grew by 9.3% with industry registering impressive growth of close to 16%. This high figure can be attributed mainly to two factors, the first being the low comparison base - at the beginning of last year industry experienced unsettling business conditions. The second factor is the high prices for metals and chemicals, which are set to continue for the remainder of 2007.
