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Ukraine: Economic Growth Expected This Year Says EBRD

  • Stuart Parrott



London, 17 April (RFE/RL) - A report published by the European Bank for Reconstruction and Development (EBRD) says Ukraine should see "positive growth" in 1997, after several years of hardship in which its gross domestic product (GDP) has sharply contracted.

However, the report says growth will probably not begin to emerge until later in the year, and will depend on economic developments in Russia, the dynamism of the private sector and the overall pace of reform.

The report also says the extent to which parliament -- the Rada -- accepts the Government's reform proposals is "critical." The report notes that the Government is looking at measures to speed and improve tax collection, encourage foreign investment and boost economic growth. And the report gives two alternative scenarios.

According to the "best case" scenario, gross domestic product will grow about two percent percent during 1997, nine percent in 1998, and about eleven percent in each of the years: 1999 and 2000.

In the "worst case" scenario (in the absence of dynamic reforms), GDP will instead fall by a further four percent in 1997 and 1998, with production only recovering -- slightly -- in 1999.

The report -- prepared on behalf of Ukrainian authorities by the EBRD's country promotion team and bank staff -- was presented to the EBRD's sixth annual meeting in London this week. The report says that Ukraine adopted several half-hearted reform programs after independence in 1991, but then abandoned them mainly because of opposition in Parliament and at local level.

Since 1994, Ukraine has pursued macro-economic stabilisation, price-and-trade liberalisation, and has implemented a new mass privatisation program. But the report says: "Structural reform, including large-scale privatisation, has until recently proceeded slowly, while land and agricultural reform has been blocked by the strong agrarian lobby."

Partly as a result of its sluggish reforms, GDP declined by about 12 percent in 1995, and contracted by a further ten percent in 1996. One reason is that large-scale industry is still burdened by substantial inter-entrerprise debt and a shortage of hard currency. Industrial output, which declined by 28 percent in 1994 and by another 11 percent in 1995, fell an additional five percent over 1996.

Agriculture also put in another "disappointing" performance, down nine percent in 1996, after falling by two percent in 1995. This reflects a shortage of capital goods and fertilisers, and poor weather conditions. However, the report says the level of Ukraine's output is almost certainly understated, owing to the existence of the informal economy. Unofficial estimates from the World Bank suggest that by 1996 the informal sector was almost as large as the recorded economy.

The report says Ukraine has also had success in bringing inflation under control, owing mainly to the National Bank's "relatively tight monetary policy" -- an essential prerequisite to the introduction of its long-delayed new currency, the hryvna, in September last year.

In 1993, Ukraine was burdened with an annual inflation rate of 10,200 percent. In 1994 and 1995, this hyper-inflation was reduced respectively to 400 percent and 182 percent. In contrast, the all-year figure for 1996 was 40 percent -- below the target of 60 percent. In the last months of 1996, inflation was running at just over one percent a month.

The report says: "Monetary authorities have indicated their intention of keeping inflation below 30 percent, but this will depend on keeping a tight monetary policy." The government has put a high priority on controlling the budget deficit which, officially, was estimated at or below 3.5 percent of GDP over 1996. This compares with nine percent of GDP over 1994 and seven percent in 1995. However, the budget deficit is now rising again.

At the end of 1996, payments by the central bank to support agriculture and industry, and to fund gas imports from Russia and Turkmenistan, pushed the year-end figure to about five percent of GDP.

The report says 1996 saw an overall increase in the volume of trade. The report says: "The general trend has been for imports to increase at a faster rate than exports." For the year as a whole, the current account deficit reached $1.3 billion -- or three percent of GDP.

Longer-term projections suggest that, due to Ukraine's energy and raw material needs, and to rising demand for imported consumer goods, the trade deficit will continue to increase (some 70 percent of Ukraine's external indebtedness is energy-debt owed to Russia and Turkmenistan.)

The EBRD report also focuses on Ukraine's record on privatising state-owned assets and its moves to liberalise prices. The report says in the first two years of the privatisation program, begun in 1992, the pace was slow, due to excessive bureaucracy, but also to strong parliamentary opposition, particularly from the agro-industrial lobby. By July 1994, some 11,552 small, medium and large scale enterprises had been privatised -- although fewer of the latter.

A Presidential decree in November, 1994, introduced a new voucher-based, mass privatisation program (MPP). This required the State Property Fund to privatise at least 8,000 medium-sized and large-scale enterprises over 1995. By mid-1996, it was estimated that some 3,500 enterprises had been sold to private shareholders under the MPP.

During 1996, the pace of small-scale privatisation accelerated. By the end of the year, a cumulative total of 36,085 small enterprises had been privatised, including 29,211 since January 1995, the majority sold to workers and management. Meanwhile, 40 percent of all formerly state-owned housing had been privatised by the end of 1996.

By the end of 1996, it was estimated 82 percent of Ukrainians had taken up their privatisation vouchers with about half investing them.

The report says large-scale privatisation is at last gaining strong momentum in 1997. Each month, about 300 enterprises are prepared for privatisation. However, the state intends to retain control over underground mineral deposits, water resources, pipelines and distilleries, and radio and television transmitting centers.

Privatisation in agriculture has had less success, mainly because of opposition from Parliament to the sale of agricultural land. Even so, the number of registered private farmers increased from 32,000 at the start of 1995 to 35,500 at the end of 1996. However, state and collective farms still account for 85 percent of the total arable land area.

The government lifted most price controls in October, 1994, although prices were frozen in September, 1996, to allow for the introduction of the new currency. Now, the only goods and services which remain subject to price controls are bread, utilities, and water supplies.

For 1997, the priorities of the Government include reform of the tax system to reduce the scope of the black market, and to boost Ukraine's appeal to foreign investors. President Kuchma and the Government have also promised to take action against corruption and excessive bureaucracy, which are said to have depressed investor activity.

The report says the U.S. remains the largest investor in Ukraine, accounting for about a quarter of investments. Other important investors are Germany, Switzerland, the United Kingdom and Russia. The report says: "The purchasing power of the market of 52 million consumers offers considerable potential for foreign companies."
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