Kuchma announces austerity program (02/01/98)

Kuchma announces austerity program

by Roman Woronowycz
Kyiv Press Bureau

KYIV - President Leonid Kuchma announced on January 21 that Ukraine is introducing an economic austerity program to fend off tremors from the economic collapse of Southeast Asia that have hit the country. The shock waves have caused international investors to quit the Ukrainian treasury bond market and have escalated an already severe financial crisis in the country.

Without the infusion of foreign capital, obtained chiefly through the international bond market, Ukraine will be hard pressed to service its borrowing debt, unless it finds the money elsewhere.

"The financial situation of the state is close to critical," said Anatolii Halchynskyi, the president's senior economic advisor. He explained that the major concern before the administration is "how to service the deficit and the national debt, which were earlier serviced through the credit market."

The next day President Kuchma signed a presidential decree ordering the government to cut costs to reduce the projected 1998 budget deficit from the current 3.7 percent of the gross domestic product down to 2.2 percent.

He also ordered his administration and the Cabinet of Ministers to reduce manpower by 20 percent and proposed that the Verkhovna Rada and local administrations do the same.

Speaking on national television that evening, the president explained that Ukraine must live within its means and that an unrealistic budget is not helping Ukraine overcome the international financial crisis. "I decided to sign the decree due to the imperfect and imbalanced nature of the budget, something that a portion of the Verkhovna Rada deputies recognize, and in conjunction with the aggravated situation in international financial markets," said President Kuchma. "This has hurt even the developed countries and naturally could not but affect the financial situation in our country."

However, Mr. Kuchma sought to reassure Ukrainians that the country is not at the brink of disaster. "The situation in the country is under control," stated the president.

Mr. Halchynskyi said Ukraine would continue to repay wage and pension arrears, which stand at $2.5 million (U.S.) and that the austerity program would "not lead to the worsening of people's lives."

The government hopes that by aggressively pursuing privatization and tax collection, and cutting departmental staffs and extraneous travel, it will collect sufficient money to make its debt payments.

It is relying on the privatization process, which this year will move into its most expansive phase, to supply a good portion of the funds. Ukraine hopes to raise 1 billion hrv (just over $500 million) from the privatization of large, state-owned enterprises scheduled for this year, explained Prime Minister Valerii Pustovoitenko at a January 21 press conference on Ukraine's financial picture for 1998, that was attended also by National Bank of Ukraine Chairman Viktor Yuschenko.

Ukraine will not revert to the policy of printing money to cover debts simply because timid international currency markets are leary of purchasing Ukrainian treasury bonds, explained Mr. Yuschenko. "Printing more money to cover debts is out of the question," he explained.

He also announced a new currency corridor for the hryvnia against the dollar, which had been anticipated for several weeks.

Because of world financial instability, the Ukrainian state bank chairman said the trading corridor for the hryvnia against the dollar for the first half of 1998 would be raised from 1.75 to1.95 hrv per U.S. dollar to 1.8 to 2.25 hrv. The NBU raised the corridor because it felt that maintaining an unrealistic value for the hryvnia could lead to further flight from the Ukrainian bond market.

Mr. Yuschenko forecast that inflation in Ukraine for 1998 would not exceed 18 percent, up from the 10 percent experienced last year.

The International Monetary Fund, which Ukraine is hoping will furnish a large portion of the money needed to service the national debt, issued a statement on January 21 supporting the institution of a new currency corridor and President Kuchma's austerity program. "The IMF supports the decision of the NBU and the government of Ukraine to widen the exchange rate band and the hryvnia in the context of a strong stabilization package ... and also welcomes the decision of the president and the government to reduce the fiscal deficit and accelerate structural reforms. This decision, accompanied by the continuation of prudent monetary and interest rate policies, will reduce pressures on the hryvnia," read the statement.

| Home Page |