Colloquium 1995 Panel I : Balance Sheet of Economic Reforms in Cooperation Partner Countries

Balance Sheet of Economic Reforms in Cooperation Partner Countries: The Case of Ukraine Vladimir Kuznyetsov Ukraine is moving as quickly as it can to reform its economy. Vladimir Kuznyetsov outlines the main aims of the reform package: these are to cut the budget deficit, reduce governement spending, and put an end to government interference in the economy. There have been successes: taxation has been reformed; prices have been freed; inflation has fallen (though it is still much too high); and the energy debt to Russia has been cut. Despite this progress, there is still resistance to be overcome. Privatisation, for example, had to be helped along by government decree. In mitigation, Vladimir Kuznyetsov points out that although reform policies may be second nature to the West, his country has lived under central planning for 70 years, and the old ways are not undone in three or four years. Dr. Kuznyetsov is the Head, Department of the Economy, Administration of the President, Ukraine.

Ukraine has gained a new degree of international authority due to its resolute wish to establish itself as a sovereign nation of 50 million people in the heart of Europe. The Ukrainian people have democratically elected a new President, who, along with the entire leadership, understands how much remains to be done before Ukraine - a land of great natural, scientific and technological potential - can ensure an appropriate standard of living for her people. President Kuchma announced a new economic strategy for Ukraine in October 1994, which is based upon the twin principles of market reform and financial stabilisation. This programme is supported by the Supreme Rada of Ukraine. We have achieved success in implementing the first stage of reform, to the extent that some positive trends are now evident. For example, the collapse in output has now stopped, the volume of production is slowly increasing each quarter, whilst inflation is much reduced. Furthermore, the foreign trade and current account positions have also improved. But these positive trends are not yet secure. Economic policy must set itself tasks beyond the macro-level in order to stimulate production and improve social conditions. For this reason, the main aims of our current economic policy are to: Strengthen social welfare programmes. Accelerate privatisation. Carry out a more flexible agrarian policy. Stimulate production. Implement an active industrial policy. Boost investment. Strengthen government control over the reform process.

Budget Policy In 1995, the main aims of fiscal policy are to reduce the deficit, increase revenue, and maintain financial discipline. On 6 April 1995, the Supreme Rada of Ukraine approved the state budget for 1995. This will: Reduce the budget deficit to 3.3 percent of GNP. Reduce overall expenditures by a sum equivalent to 6 percent of GNP. Decrease state subsidies by changing social protection systems. Sharply reduce state subsidies to industry. Exclude state purchases of agricultural products from the budget. Reduce levels of state investment. Fix cash limits on social programmes. Introduce a system of financial control. In other words, we are eliminating, step-by-step, all main forms of state subsidy and price controls. Some social programmes will also be terminated. These measures will help to balance the state budget. Monetary and Credit Policy By making the Ukrainian currency internally convertible and by holding currency auctions on the Interbank Currency Exchange, the monetary environment in Ukraine has stabilised. This process was helped by introducing a tight monetary policy to reduce the rate of inflation. Moreover, re-financing credits issued by the National Bank of Ukraine are now distributed by credit auction, whilst interest rates have been adjusted according to the level of inflation. Thus interest rates have fallen from 252 percent in January to 75 percent in June. Favourable pre-conditions for the introduction of a new currency now exist. These are price stabilisation, a market exchange rate, the receipt of external credits to cover the current account deficit and the acceleration of economic reform generally, especially of privatisation. Agreement has been reached in principle to go ahead with monetary reform this autumn. Taxation Policy Taxation policy aims to liberalise tax structures to reduce overall rates of taxation whilst widening the tax base. The main changes introduced by the government have therefore been to: Replace the general tax level of 22 percent with variable rates whereby agricultural firms pay 15 percent, manufacturing industry pays 30 percent, and the trade sector pays 45 percent. Reduce VAT from 28 percent to 20 percent. Reduce the maximum rate for personal income tax from 90 percent to 50 percent. Raise the domestic price of natural gas to $42 per 1,000 cubic metres. Abolish various tax privileges. Introduce a new law "On Enterprise Profit Taxing" combined with a 20-fold increase in land taxes to promote the efficiency of fixed capital use.

Price Policy Since October 1994, new principles of price policy have been established to: Limit administrative fixing of prices to the bare minimum. Promote price liberalisation in general, especially in the fuel and energy sectors. Gradually remove the social expenses element from production prices. Liberalise prices generally to facilitate Ukraine's integration into the world economy. Restrict "shadow economy" activity. Due to these measures, the budget deficit was reduced to 9.5 percent of GNP last year, whilst prices began to convey real information as to the supply and demand of goods. But price liberalisation also boosts inflation. Nevertheless, inflation during the first quarter of 1995 was 159 percent against a forecast of 178 percent, and the rate of growth in the external debt (due to energy imports) has dropped sharply. (But Ukraine's natural gas debt to Russia remains high. It increased from $0.25 billion to $1.41 billion over the first 10 months of 1994). Overall, these are positive developments. Finally, social assistance will be paid to poor people most at risk from price reform. Privatisation Delays in implementing the privatisation programme both in 1994 and this year have cost Ukraine. Presidential decrees aim to accelerate the process in 1995, and will: Institute a "mass privatisation" programme. Privatise about 8,000 large and medium-sized enterprises. Privatise fixed capital in the agriculture sector. Kick-start land reform and land privatisation. Although small-scale privatisation has practically finished (with about 24,000 units - 90 percent now in private hands) - the slow rate of larger-scale privatisation is due to opposition in the Supreme Rada, which has failed both to approve the State Privatisation Programme, and to draft amendments to privatisation legislation. Agricultural Sector The absence of reform in this sector over the past few years has led to both infrastructural decay and hyper-inflation. The key issue is to dismantle administrative control, a process which has begun. More than four million people now own land as private property, accounting for 15 percent of all arable land and 40 percent of agricultural output in 1994. Now that land sales are legal, we expect this trend to continue. Furthermore, the substantial reduction in state orders and an end to the centralised distribution of inputs has stimulated market development. The volume of state orders has been reduced to just 5-6 percent of gross output with market prices being paid. Since January 1995, weekly commodity exchange sales of agricultural produce have been introduced, with a weekly turnover of about 12,000 billion karbovanets. The state remains the main buyer at this exchange.

Conclusion I have just outlined for you the current economic situation and the state of the reform programme in Ukraine. Some of these measures may seem obvious to you, but are not obvious to the majority of our people who have lived under a command-economy for more than 70 years. The pace of reform is the key question, and we are moving forward as quickly as possible. In a few days, a new Government of Ukraine will be formed and a new Economic Programme will be proclaimed, which will build upon the President's "Annual Economic Report" delivered in April 1995. I hope that economic reform in Ukraine will win new support inside and outside my state.