The assessments of the development of the economic situation in Ukraine are fairly contradictory. On the one hand, many forecasts appeared in May-June, according to which Ukraine would not avoid an aggravation of the financial crisis in the middle-run or even in the immediate future, which crisis is likely to result in a breakdown of the stabilization of production which has just begun to show. According to A. Galchynsky, an adviser to the President, if financial policy does not undergo radical changes, the stabilization processes in the sphere of production that outlined in 1998 will not be stable and the economy may find itself at the new spiral of crisis development even in 1999, with real GDP down 2%-3%.
Victor Suslov, ex-Minister of Economy stated that an economic catastrophe was possible. Charles Saunders, research department head of IFC-Renaissance, in the course of a roundtable The Danger of Financial Crisis in Ukraine: Myth or Reality? in the Center for International Political Studies in Kyiv expressed his opinion that Ukraine was faced with a financial crisis.
The main threat to the process of macroeconomic stabilization, according to many experts, is related to fiscal rather than monetary factors.
But still, the arguments of opponents to the "catastrofic scenario" seem to be better grounded.
Though foreign borrowing undertaken by Ukraine in 1998 is rather expensive, it provides a possibility of restructuring the public debt -- it may become "shorter" but still significantly less expensive.
The situation with the collection of taxes continues to be difficult: as of 1 May, only 69.8% of State Budget revenues were collected as against the volume of predicted revenues. At the same time, in the first quarter of 1998 revenues of the consolidated budget exceeded the respective index of the last year by 10%. In Ukraine the rate of tax collection is higher than in Russia.
The situation in the area of privatization has improved radically. State budget receipts from privatization obtained in January-April 1998 exceeded the amount of receipts obtained throughout January-December 1997.
The relative financial stabilization during recent years and the decelerated devaluation of the hryvnia resulted in an improved public confidence in commercial banks. During the first 4.5 months of 1998 public deposits in banks increased 12%.
The level of real GDP in January-April 1998 was almost the same as in the previous year. Stabilization or growth are observed in the key sectors of the economy. Since a good crop is anticipated this year, there is hope that GDP will grow in 1998 compared to the previous year.
Many experts suggest that a crisis in the Russian share market will not affect the economic situation in Ukraine to any significant extent. The NBU, in response to events in Russia, applied far less tight restrictions than the Central Bank of Russia; therefore, an economic growth is still possible in Ukraine.
It is doubtless that a threat of financial collapse is not excluded in Ukraine. But it will be significantly less if the Government manages to realize a set of radical measures, which have been developed already, to decrease the 1998 budget deficit to 2.5% GDP (according to Ukrainian methodology) on account of an increase in revenues from UAH 1.8 bln to UAH 3.3 bln. At the same time, many of the measures declared by the Ministry of Finance with the goal of increasing budget revenues seem to be quite feasible and imminent, for instance, increase of the rate of excise tax on alcoholic beverages, tobacco-based products, gasoline, and diesel fuel (this measure may increase revenues by UAH 540 mln) and cancellation of VAT exempts, in particular, in sales of gas, critical imports, medicines, transport services and educational services (anticipated increase in revenues of UAH 425 mln).
Results of negotiations with the IMF related to granting the EFF credit (which are to take place in the second half of June) will greatly influence the economic situation in Ukraine. The government declared a firm intention to implement conditions to obtain the credit.
The NBU does not see any significant reasons for the devaluation of the national currency and intends to maintain the exchange rate in line with the parameters declared for 1998 at any price, as stated NBU Governor Victor Yuschenko. According to him, " a stable hryvnia is a canon of our economic policy." In January, the parameters of the exchange rate corridor were established in the range between 1.85 and 2.25 UAH/USD.
In Ukraine, there are resources, whose mobilization may rapidly improve the health of financial condition. The government of Ukraine has not shown until recently any market interest in the mobilization of such a significant investment reserve as assets of the public involved in the "shadow" turnover (first of all, funds in hard currency, which, despite a relative strengthening of hryvnia, continue to be the main means for public savings). Despite the drastic decrease in the living standard, a positive balance of purchases of foreign currency by the public was $1,285.8 mln USD in 1996, $835.7 mln USD in 1997, and $222.1 mln USD in January-February 1998. The overall amount of public savings in hard currency (minimum $8-9 bln USD) is comparable with the amount of Ukraine's public debt.
An equally important source is the re-import from abroad of Ukrainian capitals illegally exported in the first years of Ukraine's independence (the outflow of capital in that period, according to an estimate of Daniel Kaufman, ex-representative of the World Bank in Ukraine, was $200 mln USD per month). Many experts consider that public savings may be mobilized, if the interest rate paid on them is ensured at the level no less than the level of rate paid on external loans (at the same time, Ukrainian government tries to raise funds of Ukrainian citizens at terms far less beneficial than the terms of government loans or loans placed in the BIGL market where bonds are bought by non-residents). Moreover, no serious attempts have been made to provide attractive legal and economic terms for return of "figutive" capital to the country (they are estimated at $10-15 bln USD).
Author of the Review and comments
Alexander Koshyk, Ph.D. in Economics
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