2002: THE YEAR IN REVIEW: Ukraine's economy marked by growth (01/12/03)

2002: THE YEAR IN REVIEW

Ukraine's economy marked by growth

Amid the several natural and man-made catastrophes and the continued political turmoil that dominated the headlines on Ukraine in 2002, the economy was the one area where the country experienced relative calm and continued growth.

Ukraine's economy again expanded in 2002, albeit a bit more slowly than it had in the previous two years. By year's end, the gross domestic product (GDP) was reported at 4.1 percent for the first 10 months of the year, which guaranteed that Ukraine would end the year with strong numbers. Inflation, which had began the year at a stable 6.1 percent had fallen even further, to a deflationary state of - 1.1 percent. This was the third consecutive year the Ukrainian economy had expanded after a decadelong downturn. In 2001 Ukraine had recorded 9 percent GDP growth, while in 2000 it was 6 percent.

As a result of continued growth and positive changes in the economic infrastructure, on January 8, J.P. Morgan Bank and Moody's announced that they had raised Ukraine's investment rating to make it one of the most investment-attractive global economies. In fact, in the CIS zone, only Kazakstan, with GDP growth of 12 percent in the past year surpassed Ukraine's strong showing. Russia saw stable growth at 6 percent.

On January 18, Vice Prime Minister of the Economy Vasyl Rohovyi added to the good economic news when he said that the income of Ukrainians after inflation had increased in real terms by about 18 percent. The average government wage had increased about 25 percent, finally giving the people real additional spending power.

Foreign investments also were up for the year, by 28.6 percent; nonetheless this still added up to a meager $4.9 billion total during the country's 11 years of independence. The largest foreign investors in Ukraine were from the United States, Cyprus, Great Britain, the Netherlands, Russia, the Virgin Islands and Germany, in that order.

While, at first glance, large investments from Cyprus and the Virgin Islands seemed incongruous, economic experts explained that they were investment savings originally transferred out of the country to these offshore havens and now returning to Ukraine.

While the year witnessed continued economic expansion, it was not controversy-free. The International Monetary Fund and the World Bank continued to prod Kyiv to move more quickly on economic reforms, especially in the spheres of privatization, bank reform and a new tax code, with many experts concluding that Ukraine continued to move too slowly. Ukraine failed to gain access to the World Trade Organization, a goal it had set for 2002. And, Washington upset Ukraine's drive for more open access to U.S. markets when it leveled economic sanctions to push Kyiv to bring CD and recording piracy under control.

The year began on a downbeat after President Leonid Kuchma authorized the dismissal of longtime Minister of Finance Ihor Mitiukov in favor of Ihor Yushko, a banker from the Donetsk Oblast. Mr. Mitiukov was dismissed on December 27, 2001, ostensibly due to "ministerial reorganization." While some right-center politicians, including Valerii Asadchev of the Our Ukraine political bloc, alluded to Mr. Mitiukov's failure to develop a budget that could have been utilized by pro-presidential forces for the upcoming elections as a reason for his dismissal, the conventional wisdom was that his inability to once again push a realistic national budget through the Verkhovna Rada had sealed his fate.

Mr. Mitiukov was replaced by a relatively unknown, but well-respected banker; Mr. Yushko lasted only until the end of November, when President Kuchma fired the government of Prime Minister Anatolii Kinakh.

Economic relations with the U.S. took a dive on January 23 when Washington announced it had placed economic sanctions on Ukraine in response to Kyiv's failure to enforce intellectual property rights and stop CD and software piracy. The action came after the Verkhovna Rada failed to pass an effective piece of legislation in support of CD licensing by rejecting a bill the U.S. preferred in favor of a less stringent one.

U.S. and industry experts had repeatedly warned Ukraine about its continued non-enforcement of international intellectual property rights standards in the months before the sanctions were announced. The bill banned Ukrainian imports of steel, textile and chemical products worth about $75 million annually to Ukraine's economy.

Ukraine reacted on January 18 by placing sanctions on U.S. poultry. Kyiv said it had long warned the U.S. about its inability to give assurances that only antibiotic-free birds would enter the Ukrainian market.

Ukraine continued an international dialogue on its aim to become part of the World Trade Organization. The country's movement towards that goal was slow, impeded by failure to gain free market economy status from the United States and other countries. About a third of the way through 2002 it pushed back its goal for entry into the WTO from the end of the year to the end of 2003.

The dialogue on WTO membership was a central part of Ukraine's activity at the World Economic Forum, an annual gathering of leaders of the business and economic spheres held this year in New York on February 1-4. Finance Minister Yushko and Vice Prime Minister of the Economy Rohovyi led a Ukrainian delegation that set itself the goal of getting the word out that Ukraine, with its economy on fire and reforms moving apace, was ready for foreign investment and full economic integration into the world economy.

The IMF cooled Ukraine's heels on February 22 when it told Kyiv it must return more than $1 billion in value-added taxes it had improperly collected from Ukrainian exporters, or else fail to qualify for additional credits the international financial organization had proposed.

President Kuchma responded by suggesting that it was time to curtail the country's reliance on the IMF, whose loans had been used to shore up annual budget deficits. The president said that IMF demands were too often not in line with Ukrainian policy. Government officials supported the idea and said that Ukraine's balance of payments had been in the black for three years running, which indicated that IMF credits were no longer needed. However, Minister Rohovyi noted that Ukraine still needed a non-credit consultative arrangement with the IMF and reinforced the notion that Ukraine needed continued IMF relations to maintain credibility among global economic powers.

In May, after IMF and World Bank officials visited the country, relations improved as both international financial institutions took care to praise Ukraine's ascendant economy. The World Bank said it would soon be ready to extend another credit line of $250 million to Ukraine, while the IMF said Ukraine would probably qualify for a final $550 million tranche of the Extended Fund Facility program, which would expire in September.

However, the IMF continued to press Ukraine on bank and tax reform, as well as increased privatization efforts. In the end, Kyiv never received the final IMF installment, but maintained that it did not need it.

Ukraine received a boost to its financial health in general and in its efforts to join the WTO when Finance Minister Yushko announced on June 10 that the U.S. had agreed to restructure $179 million in Ukrainian debt on terms of the Paris Club of creditors. The deal was important because it was a signal of confidence to the international financial community on Ukraine's ability to repay its debt to the U.S., which totaled $286 million at the time. Later that year Ukraine reached agreement with Italy and Japan on similar restructuring on terms more advantageous to Ukraine.

While multinational corporations remained leery about entering the Ukrainian market with its lack of tax reform and stable legislative policies, one corporate giant, Microsoft, pushed forward on its commitment to the country by introducing a new Ukrainian-language software program for business. While Microsoft officially noted that it was responding to specific market demands in developing its "Office XP" product in the Ukrainian language, it downplayed the fact that the Ministry of Education had exerted pressure on it to develop a Ukrainian version of its basic software programs for use in schools. The Ukrainian government action, in turn, came only after the Shevchenko Scientific Society had used its influence to put the heat on them.

Nonetheless Microsoft's move gave the world the first computer programs exclusively in the Ukrainian language, which had the effect of adding computer commands to the Ukrainian lexicon.

Ukraine continued to strengthen economic relations with its closest neighbors in 2002, first during the annual Poland-Ukraine Economic Forum, held this year in Rzeszow, Poland, in mid-June. The main topics of conversation between government leaders who attended, among them Ukraine's President Kuchma and Polish President Aleksander Kwasniewski, included how relations might change between the two neighbors after Poland enters the European Union in 2004. Among the items discussed were: a new visa regime and problems with the transport of people and goods; customs issues; increased cooperation in finance and banking; expanded bilateral trade; and, of course, European integration.

President Kwasniewski said he would do all he could to "minimize the consequences of the introduction of visas."

The Ukrainian economic sector that has seen the most changes in the last years - since President Kuchma's agricultural reform decree in December 1999 - continued to develop strongly. In 2002 the farming sector enjoyed another strong grain harvest of nearly 36 million tons. While the numbers did not quite reach the 39-million-ton level reached the previous year, they were still encouraging.

While the number of private farmers in Ukraine continued to increase in 2002, affordable loans and credit terms, as well as legalized land transactions, remained at the top of their list of needs.

A limited opportunity to overcome high interest rates and a lack of collateral in developing the farming business came on September 29 when the U.S. Agency for International Development announced it would provide loan guarantees on certain loans to Ukrainian farmers and agricultural suppliers who qualified for a new program.

USAID said it would guarantee 720 loans made through the Nadra Bank, a Ukrainian commercial financial institution, which offered to provide the equivalent of $6 million in credits to allow Ukrainian farmers to develop various segments of their business. U.S. Ambassador Carlos Pascual called the program a pilot project.

As the year came to an end, the Kherson Oblast, the land of the Ukrainian steppe, could claim it had the most private farmers, with about 4,800 individuals using their own and borrowed capital to raise Ukraine's agricultural sector from the depths to which it had plunged in the 1990s. The region had already seen tangible improvements in the rural economy. Agricultural workers hired to work the fields were receiving steady pay, and villagers who leased out their portions of privatized lands were getting higher rent payments. As one local Kherson farmer said in the first part of November, "In the village, life is percolating."

| Home Page |