Yushchenko's first 100 days: tackling economic problems (05/15/05)

Yushchenko's first 100 days: tackling economic problems

by Yana Sedova
Special to The Ukrainian Weekly

KYIV - When assuming office in January, President Viktor Yushchenko vowed to address such economic problems as bribery, slowing growth and inflation inherited from his predecessor.

He also needed to fulfill his campaign assurances of reform that would enable entrepreneurs to comply with the law and pay taxes, as well as integrate and compete with Europe.

In his inauguration speech, President Yushchenko reiterated these priorities, stressing that no one would feed at the public trough and that he would bring the nation's economy out from under the shadows.

Economists agree that the first 100 days of Mr. Yushchenko's presidency is a period too brief to draw conclusions. However, it is enough to reveal the new administration's economic priorities.

Reprivatization

Reprivatization was among the first economic issues addressed by the Yushchenko administration. At the first Cabinet of Ministers meeting on February 5, the government agreed to return Kryvorizhstal to the government.

Kryvorizhstal is Ukraine's largest steel mill. Ignoring several more lucrative bids for the factory, former President Leonid Kuchma had allowed the mill to be sold to a partnership consisting of his son-in-law Viktor Pinchuk, Donetsk oligarch Rynat Akhmetov and the former Donetsk Oblast Chair Boris Kolesnykov, who is currently in prison on charges of extortion and attempted murder.

Besides Kryvorizhstal, President Yushchenko said about 30 enterprises would be included in a reprivatization list he wants compiled.

His estimate markedly differed from that of Prime Minister Yulia Tymoshenko, who said that as many as 3,000 enterprises would be reviewed. The Cabinet of Ministers so far has compiled a list of 27 enterprises for examination.

"Enterprises of strategic importance cannot be privatized," said Valentyna Semeniuk, the new chair of the State Property Fund.

She added that Kryvorizhstal would soon be returned to the state and not resold since the government considers it a strategic enterprise.

The main lever the fund can use to claim the mill is the investment defaults from the oligarchs, Ms. Semeniuk said. "In this case, the contract of purchase can be canceled," she said.

The fund plans to examine state property and identify inefficient enterprises in three months.

The fund also initiated a delay in privatization of Ukrtelecom, Ukraine's largest telecommunications firm.

Ms. Semeniuk also said that about 20,000 state enterprises disappeared since 1991 - they were found neither among state nor private property. The fund will find out what happened to these enterprises, she said.

The fund expects to add to the budget about $1.3 billion this year, she said.

Inflation

Ever since the Verkhovna Rada passed the 2005 national budget, described by Mr. Yushchenko as the most socially oriented in independent Ukraine's history, the administration's political opponents have repeatedly warned of a looming threat of inflation.

The fourth-quarter 2004 inflation rate was 6.3 percent, and the first-quarter 2005 rate was 4.4 percent, Ms. Tymoshenko said.

In accordance with the new budget, minimum monthly pensions will increase 17 percent to $63 a month, and minimum monthly government wages will increase 27 percent to $63 a month, said Viktor Pynzenyk, Ukraine's finance minister. Government salaries for skilled workers, such as doctors, teachers and scientists, will rise 57 percent, Mr. Pynzenyk said.

The government planned to incrementally increase minimum wage payments through September 2005.

Until the 2.7 percent appreciation of the hryvnia against the U.S. dollar announced on April 20, the National Bank of Ukraine (NBU) kept the nation's money supply under control by buying excess hryvni in order to prevent inflation.

NBU chairman Volodymyr Stelmakh didn't precisely explain the reason behind the hryvnia's abrupt appreciation from 5.19 per U.S. dollar to 5.05 per U.S. dollar. But he insisted it is was necessary to comply with the 2005 budget, which is based on the 5.1 hrv per U.S. dollar exchange rate.

Additionally, "the poor will gain by appreciation of the hryvnia, because they don't have savings in dollar currency," Mr. Stelmakh said.

Economists, on the other hand, said that the hryvnia's appreciation cost the average Ukrainian 5 or 6 percent of those savings kept in U.S. dollars.

The bank's decision was not well-received by the Ukrainian president, who remarked, "Do we have to use such coarse methods and rummage through the wallets of Ukrainians in the dark?"

The revaluation hit savings and complicated conditions for manufacturers, Mr. Yushchenko said. "The government should make manufacturers' interests its top priority," he added.

The Ministry of the Economy had been planning to appreciate the hryvnia step-by-step through the end of the year, said Serhii Teriokhin, the nation's economy minister. He criticized the National Bank's hastiness and said that Mr. Stelmakh should have consulted with his ministry first.

Additionally, the hryvnia's appreciation could potentially cut GDP growth by 2 percent, he said. In February, before the appreciation, Mr. Teriokhin predicted GDP growth of 9 percent.

Prime Minister Tymoshenko, however, did not criticize the National Bank.

"What we see now is a real market," Ms. Tymoshenko said. "This is the value of the hryvnia and the dollar."

According to the Constitution of Ukraine, the stability of the national currency is provided by the National Bank. Moreover, the exchange rate was a financial barometer for the economy of Ukraine. The appreciation came at a cost of some measure of stability and trust the government had earned with the Ukrainian people, experts said.

"If we, during the year, let the same devaluation of the dollar or any other currency happen again, it will indicate an exceptional absence of professionalism of people in power responsible for this sphere," said Oleksander Suhoniako, the president of the Ukrainian Banks Association.

The controversial appreciation of the national currency coincided with a fuel crisis in April in which world prices were rising.

Negotiations between Ms. Tymoshenko and Russian oil companies were successful. The companies agreed to cut prices, keep them reduced and supply the agricultural sector with diesel fuel at discounted prices.

Ms. Tymoshenko, in turn, promised to provide the Russian companies tax returns, to the tune of $25 million.

To make matters even more convenient, the hryvnia's appreciation further minimized any loss in revenue from reduced oil prices.

As a result, some Social Democratic Party - United national deputies in the Verkhovna Rada said the hryvnia's appreciation could have been one of the tactics used to persuade Russian oil companies to support the Cabinet's decision to cut fuel prices.

Mr. Stelmakh dismissed the notion as ridiculous.

Import duties

Reduction of import duties was also among the first priorities of the new government.

Unreasonably high import duties had caused Ukrainian businessmen to pay bribes to customs officials, Mr. Teriokhin said. The bribes were a fraction of what they would have paid in duties, and the Ukrainian government lost millions in revenues as a result, he said.

Customs inspections were tightened. To implement the reduced import duties, Ms. Tymoshenko proposed a "Smuggling Stop!" program.

The Economy Ministry prepared a bill to revise Ukraine's Customs Code so that the revised tariffs would be low enough to eliminate bribery and would comply with World Trade Organization standards.

Meanwhile, importers stopped trade in anticipation of a Verkhovna Rada vote.

Though the bill was read in the Rada, deputies did not pass the entire bill, citing its failure to take into account the inability of domestic manufacturers and producers to compete with certain imported goods, especially meat.

Instead, they settled for certain amendments that allowed lower duties on fruit and vegetables not grown in Ukraine, clothes, shoes and cellular phones.

These amendments have provided the foundation and support for the new "Smuggling Stop!" program already implemented.

At an April 27 Cabinet of Ministers meeting, Ms. Tymoshenko said about $257 million was added to the budget during the first quarter of this year due to the "Smuggling Stop!" program, calling this a real breakthrough.

Some experts believe that many businessmen who import goods into the Ukrainian market will not cut prices in response to reduced duties, but keep the higher difference instead.

The bribery system will continue, even after the initial amendments implemented in the Customs Code, said Oleksander Baranovskyi, a leading expert at the Razumkov Center for Economic and Political Studies.

"If you reduce import duties, that doesn't mean the situation will change immediately," he said. "We need time for it to start working."

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