ANALYSIS: Uncertainty persists about Ukraine's economic prospects (06/14/98)

ANALYSIS: Uncertainty persists about Ukraine's economic prospects

by Viktor Luhovyk
RFE/RL Newsline

The Ukrainian government recently announced its intention to cut the planned budget deficit for 1998, saying the move marks the beginning of a new wave of reforms. But the announcement stopped short of providing details, leading to doubt about whether the measures will ever be fully implemented.

The May 29 announcement said the deficit will be cut to 2.3 percent, down from the 3.3 percent level approved by the Verkhovna Rada in December. Officials said more reforms will follow immediately, as the cash-strapped government tries to qualify for a three-year $2.5 billion loan from the International Monetary Fund.

The decision to cut the deficit was prompted by the rapidly worsening financial situation. The IMF and the World Bank suspended their aid programs in April, after the budget deficit in the first three months of this year doubled the planned target of 3 percent.

Most affected has been the market for treasury bills (T-bills), issued by the Finance Ministry to finance the budget deficit. The ministry's payments for maturing T-bills have exceeded the funds raised from issuing the new debt this year, reflecting foreign investors' reluctance to purchase the T-bills. Last year, foreign investors had held half of Ukraine's T-bill market, but were purchasing only 10-25 percent of the securities in recent months.

Unable to restore foreign investors' interest in the T-bill market, the government borrowed more than $1 billion internationally in February and March at a high 16 percent interest rate to cover budget losses and pay off some wage arrears in the run-up to March 29 parliamentary elections. The exodus of foreign investors from the T-bill market forced the National Bank of Ukraine to spend up to $1 billion to prevent the hryvnia from falling.

But many observers say the government must now start raising more than $2.5 billion to pay off mature T-bills and foreign debt in the next three months. This could lead to a drop in the value of the hryvnia after June 20, when first debt payments have to be made. The Finance Ministry can now sell only T-bills whose maturity period does not go beyond 1998, and analysts say that the government may again try to borrow at a high interest rate to cover its outstanding obligations amid growing concerns that the country may eventually go bankrupt.

"The government behaves like the passengers of the 'Titanic,'" said Volodymyr Dubrovsky of the Harvard Institute for International Development, alluding to the government's persistent policy of acquiring new loans to pay off old debt.

Meanwhile, serious structural reforms are still only being talked about. "We started talking about liberalization of foreign trade, bankruptcy regulations, and new taxation policies five years ago," said Vitali Migashko of ING Bank Ukraine, who then added, "Can anyone say today that at least some of these measures were introduced adequately?"

At the beginning of the year, the government announced plans to lay off thousands of government employees by the end of the year to reduce budget expenditures and implement a number of deregulation measures. However, many of these measures are still to be put into effect months after they were first discussed.

"What dominates the current Cabinet is concern with its own interests," said former Minister of the Economy Viktor Suslov. Having won election to the Verkhovna Rada, Mr. Suslov resigned from the cabinet last month, after criticizing the anti-reform stance of its many departments.

The situation may be further exacerbated by tense relations between the government and the legislature. "The newly elected Parliament is not likely to be more friendly toward the government than the previous one," said liberal lawmaker Serhii Teriokhin, who was among the proponents of a radical tax reform discussed by the previous legislature. "And with the government being politically and professionally weak, there are no reasons to believe in financial stability," he added.

The government measures aimed at averting the financial crisis have to be approved by the Parliament. But the legislature thus far seems unwilling to do anything of the kind.

Victor Luhovyk is a Kyiv-based correspondent for RFE/RL.