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Ukraine: Economic Analysts Forecast Bleak Future

Kyiv, 5 May 1998 (RFE/RL) -- Ukraine's financial system might start collapsing as early as this Summer, if the government continues the spending policies it has pursued since the beginning of the year, suggests a new economic forecast prepared by a Kyiv-based, independent think-tank (policy-assessment organization).

Due to be released this week, the forecast for 1998 prepared by the International Center for Policy Studies (ICPS) says, "Unless the government starts reforms it promised back in 1996, the sharp crisis that will destroy all achievements of previous years is inevitable."

The ICPS forecast gives an even grimmer outlook in the financial sector than its own forecast for 1998 released only four months ago. The ICPS said the mistakes the government made in its fiscal policies in the first three months of the year provide for rapid deterioration of the situation in the financial sector - its gravest possible consequence being the collapse of the national currency.

"The reason for the crisis is already here, and with the overall situation as unstable as now, the crisis can be triggered by even a tiny factor," said economic analyst Gleb Vyshlinsky, who led the team that prepared the report.

The ICPS forecast is the latest in a series of warnings from independent observers that Ukraine's government's ambitious plans to reduce the budget deficit this year by cutting expenditures will be useless without wide-scale structural reforms.

"To reduce (budget) expenditures, you have to have structural reforms," said Kwaja Sultan of the Harvard Institute for International Development. "You can also cut expenditures by increasing wage arrears, but this is not how it should be done."

Observers note wage arrears continue to grow, as the government continues to pursue foreign loans. At the same time, the sweeping tax and other reforms the government pledged - but failed to undertake two years ago to receive a $2.5 billion loan from the International Monetary Fund - remain on the agenda, as the government is trying to qualify for the same loan again.

Current wage arrears are estimated at $2 billion, and the government borrowed about $1 billion in the first three months of 1998 to cover other budget spending. However, the ICPS report says most of the sum was spent by the government during the parliamentary election campaign - which resulted in a budget deficit of seven percent of Gross Domestic Product - or, twice the planned target for the first three months of the year. With the government managing to collect only 60 percent of the planned revenues in the first quarter, the ICPS report labeled the government's plan to cut the budget deficit to 2.5 percent for all of 1998 as unrealistic. "The (2.5 percent) obligation ... is unachievable given the conditions at the beginning of 1998, and the present legal environment," said the report.

Analysts also project that, with the increase in foreign borrowing, the government's total planned budget revenues are less than the debt the government will be required to pay this year.

In Summer, the government will have to repay each month double the $400 million it was paying monthly in the first quarter for maturing T-bills and foreign debt obligations. In addition, the Summer period will require extra spending for the harvesting season.

Kyiv-based independent economist Oleh Soskin said, "The government is completely immersed in debts, and it does not seem capable of using other means to improve the situation."