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Ukraine: Economy Shows Signs of Stabilization

By Natalia Tchourikov

Prague, August 13 (RFE/RL) -- Ukraine's economic performance has improved this year but is still in a transitional state.

Inflation has declined steadily from 9.4 percent in January to 0.1 percent in June and July, the lowest in the last 5 years. This may be only a seasonal phenomenon and a new jump is expected this month following government reductions in rent subsidies. But there are good reasons to believe that Ukraine can escape its usual surge of inflationary pressures towards the end of the year.

The tough monetary policy of the Ukrainian government and the National Bank of Ukraine (NBU) has brought results. The exchange rate has stabilized and is now appreciating. Interest rates are declining in nominal terms and, in the opinion of the Ukrainian economic ministry, should soon decline in real terms.

The National Bank and the government have until now kept their promises to stick to a tight money policy. The government plans to restrict the budget deficit to 6.2 percent of the GDP, as approved by the parliament early this year. The deficit is financed with government bonds, although this has proven to be a difficult task.

The International Monetary Fund (IMF) gave a positive assessment of Ukrainian performance to the end of June and in August released the latest tranche of a standby credit. The tranche amounts to almost $100 million, and the whole standby loan designed to assist Ukraine in market reforms is $867 million.

Yesterday the IMF opened talks with Ukrainian government officials on a $1.5 billion currency stabilization fund needed for a monetary reform. The Kyiv government plans to introduce a new currency -- the hryvna -- to replace the karbovanets or coupons. These have been associated in the public mind with hyperinflation. Two years ago, Ukraine suffered more than 10,000 percent annual inflation.

Ukraine's foreign trade has risen. During the first quarter of 1996 exports rose by one-third compared to the same period last year. This occurred despite a real appreciation of domestic currency and numerous restrictions which persist in Ukrainian foreign trade.

But serious problems remain. Gross domestic product declined by 8.7 percent in the first half of the current year. It is uncertain whether it will pick up any time soon. Industrial and agricultural output fell by 3.1 and 7 percent respectively.

There are also major problems in the area of tax collection. According to Ukrainian tax authorities, in the Southern Ukrainian industrial region of Luhansk almost a quarter of enterprises do not pay taxes. Many of them enjoy official tax holidays. Those enterprises which do pay are imprecise in their calculation of payments; many are trying to underpay.

Failing to secure enough revenue from taxes, the government has been forced to reduce its budgetary expenditures in order to stay within a planned budget deficit. One of the steps has been to raise gas and electricity tariffs to compensate the costs of the state.

The government has also become tougher in dealing with enterprises failing to pay for power supplies. Last week Ukraine cut power to 20 percent of the country's industrial users for non-payment of electric bills.

In general, inter-enterprise arrears in commercial transaction remains one of Ukraine's most serious and persistent problems. And the government has so far failed to resolve this issue. Western analysts point out that until the government implements bankruptcy procedures, there will be no limit to the expansion of arrears.