Kuchma cautions that further reform is needed to sustain economic growth (09/09/01)

Kuchma cautions that further reform is needed to sustain economic growth

by Roman Woronowycz
Kyiv Press Bureau

KYIV - President Leonid Kuchma warned on September 3 that the country would not sustain economic expansion without further reform efforts, most importantly a new tax code and an austere budget plan.

Speaking before a special commission on development of the 2002 budget, the president said the re-ignited economy, which currently is the hottest in Europe, should not allow for either a sense of complacency or unfounded euphoria because no firm evidence exists that the current expansion is sustainable.

"I do not share the excessive optimism over dynamic economic predictions for the next year," said Mr. Kuchma. "The predicted 6 percent growth will not develop by itself."

The Ukrainian government has established targets of 6 percent economic growth and an inflation rate of around 10 percent as the basis for the development of the 2002 national budget.

The president said that without a new tax code no assurances of continued economic expansion could be believed, especially in the face of a global economic slowdown. Currently the U.S. and European economies are struggling at around 1 percent growth, while the Japanese economy has seen a slight downturn this year.

Meanwhile, Ukrainian government figures released in mid-August paint a picture of a Ukrainian economy on fire, including an 8.5 percent rise in the gross domestic product (GDP) in the first six months of 2001 as compared with the same period last year, a nearly 18 percent rise in industrial output, a 6 percent gain in the agricultural sector and a record crop harvest approaching 38 million tons of grain.

Those numbers look even stronger when considered along with the inflation rate, which stands at a minuscule 3.3 percent for the year. Most strikingly, for the last two months the country has seen deflation, at a rate of 1.5 percent in July and 0.2 in August.

However, Mr. Kuchma said that unless the Verkhovna Rada approves a new tax code with reduced rates to make the business environment more investor-friendly, the Ukrainian economy would cool off considerably and soon.

"The explanations given that the tax pressures will be reduced in 2003 are not acceptable to me or the Ukrainian economy," stated the president, at times cajoling and other times chastising the ministers and national deputies who are members of the commission.

A new tax code has been in the works for three years, but it has failed to move to the Parliament floor for a general vote.

Mr. Kuchma explained that procrastination and self-satisfaction are extremely dangerous and contradict the basic principles of sound economic policy. He cited changes in Russia's tax stance as a concrete example of the threat that remains before the Ukrainian economy. He explained that beginning in January 2002 Ukraine's largest trading partner and competitor will reduce the tax burden of its businesses by one-third, to 24 percent, which will give it a significant advantage over Ukraine in stimulating production and investment.

"In such a situation how are we to assure the economic competitiveness of our products on the Russian market," the president asked.

He criticized Prime Minister Anatolii Kinakh and his Cabinet for a lackadaisical approach to tax code reform and threatened drastic actions if the issue is not resolved.

"In an earlier presentation I stated that I was convinced that a reason for the dismissal of [the government of Prime Minister Viktor Yuschenko] was his unconstructive position on tax reform, first and foremost. The situation is being repeated," explained Mr. Kuchma with his characteristic bluntness.

The president also expressed concern over a rise in tax arrears, which he said is equal to one-third of expected budget receipts. He said only three oblasts have reduced the tax debt to the government in Kyiv, while the amount owed by all other oblasts has risen.

Turning to the budget, the president said he was dissatisfied with unrealistic budget forecasts and overspending. He added that he is "troubled by the dangerous wave of unreasonable optimism" in regards to the opportunities available in developing the 2002 budget. He said he expected that the Ministry of Finance as well as local officials would not forget that next yearís budget and the countryís financial policies must remain restrained and austere, adding that talk of new budget assignations and preferences must cease.

"The government needs to learn to tell people the truth, the truth as it is: the country does not and will not have in the near term sufficient financial resources to resolve all problems, including those of social services, that have grown over the years of the crisis," explained Mr. Kuchma.

He presented a three-point plan for continued economic growth: a balanced and deficit-free budget for 2002 ; limited debt reliance; and maximum stability of the currency.

He also stated that even in its second year of expansion the Ukrainian economy has a long way to go before it comes out of the 10-year depression into which it has dug itself.

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