World Bank evaluates Ukraine's economic and fiscal policy in 2005

by Zenon Zawada
Kyiv Press Bureau

KYIV - The Yushchenko government is correct to halt any further reprivatization of valuable assets, but needs to limit government spending, which is now 5 percent of Gross Domestic Product (GDP), according to the World Bank's evaluation of Ukraine's economic and fiscal policy in 2005.

"It is important to provide certainty and stability to investors following a period of protracted uncertainty," said Paul Bermingham, World Bank director for Ukraine, Belarus and Moldova, in a December 16 statement released at a press conference that day.

"In this regard, the government's stated intention of not proceeding with further reprivatizations is welcome. At the same time, we urge Ukraine to adopt the legislation needed to set clear European-style rules to govern corporate activity," he added.

Such laws include a new joint stock company code, amendments to the law on stock markets and amendments to the law on banks and banking, he said.

While further such efforts aren't necessary, the Kryvorizhstal sale was a critical step toward Ukraine's modernization, said Mark Davis, the World Bank's senior country economist for Ukraine, in the press release. It demonstrated to all investors the benefit of a transparent privatization process, Mr. Davis commented.

"It promises to bring technology, market share, investment and jobs to Ukraine at a time when energy price increases will require technological innovation in heavy industry," he said.

The threat of wide-scale reprivatization and subsequent uncertainty regarding property rights contributed to this year's investment decline, the release said. Other factors were public investment cutbacks and increased tax pressures.

World Bank experts lauded President Viktor Yushchenko's government for "better-than-expected" budget execution.

Increased social spending has been paid for by eliminating most remaining tax privileges and tightened tax collection, the press release said. However, a significant share of the revenue increase came from the value-added tax (VAT) on imports, which is not a stable basis for social spending increases, the release said.

The World Bank supported Ukraine's decision earlier this year to eliminate free economic zones, the release said. Rather than serving the purpose they were created for, they provided large tax loopholes to privileged companies at the expense of taxpayers and investors outside the zones, the release said.

"In particular, it was noted that goods originating in the zones and shipped within Ukraine were often exempt from customs duties," the statement said. "This was unfair to investors outside the zones who had to pay customs duties on imports, and it created potential rent-seeking opportunities for zone administrators."

Eliminating free economic zones won't significantly affect economic growth, Mr. Davis said.

Looking ahead, the World Bank's Ukraine experts emphasized the need for limiting the budget deficit, which Prime Minister Yurii Yekhanurov recently projected won't be any higher than 2.5 percent of next year's GDP.

"In 2006, the fiscal policy needs to be directed into financing more of fixed and human capital, with limited increases of recurrent spending to keep the budget deficit under control and not to undermine macroeconomic stability," the release said.

The U.S. should follow the European Union and declare Ukraine a market economy, Mr. Davis said, and the Ukrainian government should pass all legislation for World Trade Organization ascension.

WTO membership would boost Ukraine's GDP by 3.5 percent per year, World Bank experts said.

Inflation was lower in 2005 than the prior year, but while monetary reserves are at an all-time high, "policy conditions haven't aligned with the announced goal of single-digit consumer inflation," the World Bank statement said.

Further expected declines in export prices accompanied by higher import prices, most energy-related, "is making economic performance in 2006 more challenging," Mr. Bermingham said.

At the same time, "2006 could be extremely good" if there's a good budget, relatively smooth elections and if investment increases, he added. "If not, we'll see more delay and stagnation."

President Viktor Yushchenko has announced a projected 7 percent GDP growth for 2006.

Copyright © The Ukrainian Weekly, December 25, 2005, No. 52, Vol. LXXIII

| Home Page |