Prime Minister Lazarenko predicts Ukraine's economic revival in 1997 (10/27/96)

Prime Minister Lazarenko predicts Ukraine's economic revival in 1997

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Prime Minister Pavlo Lazarenko on October 15 appeared before a packed session of the Verkhovna Rada of Ukraine, with President Leonid Kuchma in attendance, and gave a 40-minute presentation on the budgetary plan of the Cabinet of Ministers for 1997.

It was the first comprehensive policy speech by a government leader on the goals for next year, which the Ukrainian government has said will be the first year of economic revival in Ukraine.

For all practical purposes, it sounded more like a state of the nation address, with the prime minister going beyond simple budgetary and financial matters to expound upon a future policy for a reinvigorated Ukraine as well as on immediate problems that need to be resolved.

He underscored the still serious economic situation in the country, but alluded to the possibility of economic revival in 1997.

"In the last period, productivity has been slowed, inflation is under control, a national monetary unit has been introduced which helps to establish certain financial stability," said Mr. Lazarenko.

However, he said Ukraine's economic situation "remains complex and dangerous." He cited the continued fall in manufacturing and agricultural production. "A major part of the industrial establishment is either closed or on the verge of bankruptcy and closing ... in the last five years the area of land under cultivation has been reduced by a third, while the annual harvest and heads of cattle have fallen by a third."

He said an oppressive tax policy has led to unforeseen budget deficits because revenues and taxes are not coming into state coffers, and to the creation of a huge gray economy - fully 40 percent of Ukraine's total gross domestic product (GDP).

Mr. Lazarenko zeroed in on seven areas the government will address in 1997 to stimulate the economy: monetary reform and financial stabilization; implementation of radical tax reform; restructuring of the budget system; reform of national production; privatization of state property; stabilization of the agro-industrial sector; and reform of existing social policy.

The prime minister said the hryvnia must remain stable vis-à-vis Western currencies and that the goal is to transform it into a "basic instrument for payments and capital creation."

He said the banking system must develop procedures similar to Western banking norms, that it must become less speculative in its investment plans. He added that the National Bank of Ukraine must develop means to assure that money stays within the banking system and that long-term credit rates increase.

He criticized international financial institutions for not increasing their aid to Ukraine but then suggested that it is time Ukraine attracted private banking institutions. "One has to increase the presence of the most important private banks in Ukraine by developing large banking joint ventures, for instance."

He identified taxation as one of the main reasons for the development of Ukraine's shadow economy and called for complete tax reform. However, he defended the largest industrial firms, stating that "they do not escape taxation because they have no objective possibility to hide in the shadow economy."

The plan that was presented is to reduce taxation of commercial entities by half by January 1, 1997. He said the goal is to bring entrepreneurs out of the hidden economy by lowering taxes, money that would be supplanted by a widening of the tax base.

The new tax program would also increase the amount of government income from workers' incomes. He said the government must work to have employers increase workers' wages, which would increase government revenues accordingly.

Another goal outlined was for a general amnesty for people who have carried money out of the country, so they would have an incentive to bring it back into the Ukrainian economy.

However, as Mr. Lazarenko explained, tax reform without budgetary reform will not help Ukraine, because it would not give Ukraine a tax base sufficient to maintain adequate budgets.

The prime minister offered four proposals to reform the budget: the legalization of capital, which the government has figured would bring $5 billion into the Ukrainian market and put approximately $1 billion into the treasury; development of a more efficient and thorough tax collection system; creation of an attractive climate for foreign businesses; and the streamlining of government organizations and monopolies.

Mr. Lazarenko then turned to the need to stimulate production in order to get the economy fired up. He called it "the highest long-term priority."

Reorientation sorely needed

He emphasized that the main task ahead is to reorient producers away from the Soviet-style "production for the sake of production," as he put it, towards a profit-oriented attitude. "Our aim is to make production market-competitive," said Mr. Lazarenko.

He called on the Parliament to pass laws on bankruptcy and the liquidation of bankrupt property, which he called indispensable for efficient national production.

In the manufacturing sector, the prime minister identified four industries that must become much more competitive for Ukraine to increase its production because of their importance to the economy: mechanical and metallurgical complexes, chemical manufacturing, food production and light industries.

In regard to privatization, he said, "Privatization is necessary not as an end in itself, but as a means to find effective owners and proprietors capable of using the property efficiently and with a goal of growth." He reported that Ukraine is now 51 percent privatized.

Five goals, if realized, would make the effort a complete success, he said: sale of large blocks of stocks in large firms must be done competitively; a system of post-privatization support and adaptation must be developed; privatization must include the land on which the capital sits; obstacles to the free sale, purchase and usage of property and of privatization certificates must be lifted; and increased efficiency and administration of property which is owned by the state must be realized.

When Mr. Lazarenko addressed the problems of Ukraine's agricultural sector, he came out with both barrels blazing in a Parliament that consists of many former collective farm managers. "We no longer have funds to cover losses of inefficient agricultural enterprises," he forcefully declared. He proposed that to remedy the matter, shareholders in collective farms be given the right to buy, sell, inherit or give away their portions of land, and that recording practices be developed to track such transactions.

Land Code must be revised

He stated the need - which he said the Cabinet of Ministers will turn into a draft law proposal - for a revision of the Land Code of Ukraine, "which must correspond to the principles of a market economy and create conditions and guarantees of investment in agricultural production."

He also declared that by the end of 1996 all agro-related industries will be privatized, if the Parliament gives its approval.

Among the policies proposed for freeing up the agricultural sector were: a differentiated soil tax, creation of a modern infrastructure for the agro-economy; the creation of a network of financial institutions that would support farmers, especially between harvests, which would include government guarantees for agricultural loans and the right to mortgage property.

Finally, Prime Minister Lazarenko spoke of the type of social safety net that should be provided Ukraine's citizenry. "Today ... only 13 million citizens produce material goods. According to calculations every working person apart from himself supports three others. This is a unique case in world practice," he explained.

When the burden of Chornobyl and other ecological disasters are added to that, it is an unsustainable burden, he said. He said the government must now begin assigning aid not with a broad sweep of a brush but only to those who truly need it. He said that 3.6 percent to 3.9 percent of the GNP of Ukraine will still go for social welfare costs in 1997, a figure he called unacceptable.

In closing, Mr. Lazarenko came up with a truly challenging proposal that he said he would take on personally: to be the first prime minister to present a budget before Parliament and return the following year to defend it.