NEWS ANALYSIS: Ukraine may be getting serious about reforms (again) (03/30/97)

NEWS ANALYSIS: Ukraine may be getting serious about reforms (again)

by Markian Bilynskyj

Ukraine is facing difficult economic challenges in 1997. A worse than expected economic performance in January (GDP dropped by 8.1 percent in comparison with the same period last year), a fall in budgetary revenues, and a jump in salary arrears have been compounded by the government's inability to make headway with the 1997 budget and the tax package that have been stalled in the Verkhovna Rada.

In response to a direct hint from President Leonid Kuchma that he was dissatisfied with the work of the so-called "economic bloc" of the Cabinet of Ministers, Prime Minister Pavlo Lazarenko recommended - and on February 25 the president moved forward with - the dismissal of four ministers (finance, the economy, machine-building, the military-industrial complex and conversion, and statistics. President Kuchma's chief economic adviser, Valerii Lytvytskyi, explained that the government had simply failed to take advantage of the favorable conditions created for its budgetary and tax policies by last year's fiscal successes.

As yet, there is no agreement among observers over the significance of these changes. Some, for example, have argued that the appointment of the chairman of the State Property Fund (SPF), Yurii Yekhanurov, as the new minister of the economy will prove detrimental to the former body (particularly since appointing the head of the SPF is now the Rada's prerogative) even as he brings considerable experience, including a former position as deputy economics minister, to his new post.

Others, on a more positive note, see the appointment of Ihor Mytiukov to the Ministry of Finance as heralding a greater degree of cooperation between that ministry and the National Bank of Ukraine (NBU).

Some people were surprised by the removal of the Minister of Statistics Oleksander Osaulenko. Several national deputies from across the political spectrum are convinced he was removed for refusing to paint a rosier economic picture. However, the fact that the ministry's database included only 9,122 out of approximately 200,000 registered state enterprises does put into question the ministry's competence, let alone credibility.

However, there does appear to be something of a consensus that Vasyl Hureiev's transfer to the Ministry of Machine-Building is rather curious given his performance in the Finance Ministry; and, most importantly, that Viktor Yuschenko, chairman of the NBU, and Viktor Pynzenyk, vice prime minister for economic affairs, have strengthened their respective positions as key financial and economic players.

Along with changes to the Cabinet of Ministers President Kuchma issued a decree "On Measures for Ensuring the Collection of Budgetary Revenues and Increasing Financial and Budgetary Discipline" and a directive "On the Unsatisfactory Implementation of Means for Combating Crime." Despite their apparent incongruity, the two measures complement one another in a very important way: they both are a defacto vote of no confidence in the government by the president and his administration.

The decree on the budget revenues represents an implicit admission by the president that the 1997 budget is unlikely to be approval by the end of the first quarter - something the Verkhovna Rada signaled in December when it passed a constitutionally required resolution to extend the 1996 budget into the first quarter of 1997.

The budget controversy in Parliament centers on the fact that passage of the kind of budget that the president, the government and international multilateral lending agencies would like to see adopted requires substantial amendments to the existing tax system.

Essentially the original 1997 budget (ironically, the first one since independence to be submitted within the stipulated time frame) was calculated on the basis of yet-to-be adopted tax legislation. Despite veiled threats that the president might try to ram the budget through the Verkhovna Rada anyway, the government eventually had to concede that the "budgetary cart" could not be put before the "horse of amended, more rational tax laws."

The basic draft tax reform legislation, upon which the 1997 budget proposal was based, was presented as a package to the Parliament. The six laws that comprise this package are at various stages of passage. However, there is one major stumbling block: the law "On the Development of Domestic Enterprise and Balancing Budgetary Income and Expenditure." If approved the implementation of this law will require the abolition or reduction of numerous subsidies and privileges that affect large sections of the population. It also requires, as the title suggests, changes to customs, tariff and state investment policies. In total, approximately 60 other laws will have to be amended for this act to be adopted in more or less the form in which it was presented to the Verkhovna Rada. With parliamentary elections coming on the horizon, national deputies of all political stripes are reluctant to deal with such a potentially sensitive electoral issue.

Clearly, there are elements within the Rada that are only too happy to delay passage of the budget in the hope that any resulting popular discontent can be turned into a working majority following the next parliamentary elections.

However, the issue is not so straightforward. Speaking at a press briefing at the end of February, Viktor Musiyaka, deputy chairman of the Verkhovna Rada (hardly a radical), pointed out that work on the tax package was proceeding slowly primarily because of Rada doubts over whether the government had done everything possible to increase budgetary revenues in order to narrow the projected deficit. Instead, the government had in fact taken the easy way out and simply decided to lower taxes and cut social spending, and had failed to provide accurate budget calculations based on existing legislation.

It is, of course, possible to interpret Mr. Musiyaka's explanation as simply an exercise in shifting blame. However, despite the problems the presidential administration and government have had with the Verkhovna Rada, the dismissal of the Cabinet's "economic bloc" quite clearly points to the conclusion that the executive branch is no less to blame for the state of the budgetary impasse and the general economic malaise - and knows it. Moreover, the Cabinet changes again underscore the largely false nature of the "good executive- bad legislature" dichotomy often used to try to understand the goings-on in Kyiv.

Although it deals with the current budget, the title of the president's unusually long decree on budgetary revenues implicitly acknowledges Mr. Musiyaka's criticism of the government's sloppy work at the Cabinet level in preparing the 1997 document. Its contents also point to a more fundamental obstacle to Ukrainian reforms than just plain carelessness and lack of professionalism: the overwhelming lack of discipline and accountability.

Apart from ordering the imposition of measures to hold down expenditures, pay salaries and pensions regularly, and increase revenues within the state sector, the decree goes further than any of its predecessors by clearly identifying accountability for failure to comply.

Thus, Article 1 ordered the Cabinet of Ministers to create by March 10 temporary implementation commissions. These are to be headed by the chairmen of state administrations at the various levels who, according to Article 5, will be held "personally responsible for the development and steadfast implementation of the decree."

The decree also addresses the sheer size of the government bureaucracy, something that bears critically on its functional and operational capabilities. The Cabinet was instructed to prepare within a month a plan for reducing the number of ministries as well as the number of staff by no less then 25 percent. Several previous prime ministerial attempts, including one by Mr. Lazarenko, to deal with this problem simply withered on the vine as a result of the prime minister's inability or unwillingness to expend the necessary political capital grappling with this Soviet-era behemoth.

In some respects even more interesting is the second measure, the presidential directive on combating crime.

Article 1 of this measure instructs the Cabinet to "comprehensively spell out the uncompromising position on abuses, arbitrariness, mismanagement and carelessness in the management of state property, on the dissipation of funds, their improper use and the avoidance of paying taxes ... uncovered by the financial bodies, audit services and tax administrations, and law-enforcement bodies, and to investigate ways of making every guilty official personally accountable." The Cabinet is also called upon "to use exhaustive means for imposing discipline in every state body and to close all channels for the illegal enrichment of individual operators and criminal groups."

Article 2 calls for a review within ministries and other central executive bodies of implementation of the laws on the civil service and the fight against corruption, while Article 8 instructs the Ministry of Justice and other appropriate executive ministries and agencies "to complete by March 1 the development of the Clean Hands program for combating corruption."

This latest attempt to get serious about reforms could evoke a weary sense of deja vu were it not for the significant fact that this time it seems to have been accelerated by external intervention. External criticism - whether public or private, but particularly the former - is difficult to ignore, particularly if delivered by parties deemed crucial to Ukraine's development. For too long corruption was an issue that seemed to be avoided for reasons of diplomatic tact. Now, however, the Kuchma administration appears to have been prompted into further action by the fact that institutions such as the International Monetary Fund and genuine strategic partners, like the United States, are no longer prepared to let issues like official corruption pass without comment. In fact, this kind of constructive oversight is perhaps one of the best assurances that the current initiatives - particularly the unprecedented "Clean Hands" program - will not be allowed to run out of steam.

In fact, taken together, the president's two recent measures quite reasonably could be interpreted as a de facto vote of no-confidence in the government. Speaking at a February 26 press briefing, Volodymyr Horbulin, secretary of the National Security and Defense Council, declared that more Cabinet changes should be expected soon.

Not surprisingly, against such an unflattering backdrop, rumors have begun to circulate over the prime minister's future. Yet, high-level officials in the president's administation have denied that he is under any threat. For example, asked recently whether the prime minister's fate had been discussed in presidential circles - or at meetings with certain Rada national deputies - the president's chief of staff, Yevhen Kushanariov, responded that "this question has not been raised and is not being discussed." Moreover, at the above-mentioned press briefing, Mr. Horbulin stressed that he agrees with the prime minister's assessment that his position is stable, stressing that the matter of Cabinet changes should not be personalized.

The prime minister's position does appear to be safe for the time being. What was expected to be a stormy "Government Day" - these are held once a month - in the Verkhovna Rada on March 12 actually turned out to the relatively successful for Mr. Lazarenko. He made no overt concession to any faction and, probably mindful of the impending nationwide strike on March 18, stressed that the mining sector's plight had nothing to do with the budget, but was caused by the failure of utilities to pay for their coal. He also promised that pensions would be paid up in full by March 20, that the government was meeting its current obligations and that all other debts would be cleared within six months after the budget is adopted.

But, as the late former British Prime Minister Harold Wilson noted, a week is a long time in politics. There is a feeling that Mr. Lazarenko will be dismissed following President Kuchma's address to the Verkhovna Rada, on March 21. However, there are those who counter that Mr. Lazarenko could stay in office well beyond then, if only because having him possibly return to his parliamentary seat might complicate the situation in the Verkhovna Rada for the president. It could also help launch a presidential candidacy that would compete for Mr. Kuchma's electorate.

But there are real concerns on the horizon for Mr. Lazarenko that could eventually make even the president's "negative" support for him inexpedient. A soon- to-be-released report by a temporary committee of the Rada investigating the state of the Ukrainian energy market - a sphere in which Mr. Lazarenko has been known to dabble - is said to attack the prime minister and other high-level energy sector officials by claiming that the market structure they developed and nurtured effectively exempts favored wholesale importers from taxation and places them under what amounts to a policy of "administrative protectionism."

Moreover, Mr. Horbulin's council is due some time soon to also examine the workings of the energy market. Interestingly in this respect, on March 4 while vacationing in western Ukraine, President Kuchma met with the head of Russia's Gazprom. Reportedly, the two discussed yet another restructuring of the Ukrainian gas market.

Markian Bilynskyj is director of the Pylyp Orlyk Institute, an independent public policy, research and information center located in Kyiv that is supported by the Washington-based U.S.-Ukraine Foundation.

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