Paper/Speech Details of Conference Program for the 14th NISPAcee Annual Conference Program Overview V. Working Group on Public Sector Finance and Accounting Author(s) Sergii Slukhai Taras Shevchenko National University Kyiv Ukraine Title Ukrainian local governments and financial markets File Paper files are available only for conference participants, please login first. Presenter Abstract Borrowing, a common source of local revenue in developed and many transitional economies, has not yet occupied any significant role in Ukraine: its percentage in local government revenues is very close to zero. There are three types of borrowing allowed for local governments: (i) bank loans, (ii) short-term loans from the budgets of higher level for covering current budget deficit, and (iii) long-term loans to cover the gap in the SNGs’ development budget. Issuance of municipal bonds is allowed to fund the investment projects only. It is stipulated in legislation that local long-term borrowings are the full responsibility of the respective sub-national government. The debt servicing should be maintained by annual allotments from the current budget. The pioneer issues of municipal bonds in the years 1995-1998 (there were registered 23 bond issues with about UAH214 million total subscription value) have stayed for years only experimental ones, with no positive outcomes and no further development; many municipal bond issues were emitted to fund housing construction. For most of them, the rate of subscription was far below any appropriate level – lower than 10 per cent. The very negative case with Odessa municipal loan (in value of about USD 45 million) issued in 1997 and further insolvency of the issuer has caused a long-term ban of subnational governments’ operations on the financial markets. One of the main reasons for such a result was a very subjective, non-systematic regulation of the matter. In 2001, the Budget Code created some general legal framework for regulation a procedure of local governments’ borrowings on the financial markets. But only in 2003 the central government issued particular regulations concerning this matter that opened a new page in the history of Ukrainian municipal borrowings. In 2005, the new municipal bonds of Kyiv, Kharkiv and some other big cities were successfully subscribed. Most of subscribers are in fact international investors. The prospective for Ukrainian municipal bond market at the moment are not very clear. There are several reasons for it. First, the negative experience in 1996-1998 has discouraged the prospective buyers both in the domestic and external markets for a long time. Second, the population prefers to deposit money to the commercial banks instead of lending it to the public institutions; so only commercial banks could buy local securities for their own risk. Third, the taxation does not encourage domestic investors to buy bonds. The paper will contain the evaluation of the current borrowing practices and analyse some characteristics of a current “bond boom” in Ukraine from its prospective to be a sustainable source of funding the local development needs.
