Ukraine : restoring growth with equity - a participatory country economic memorandum

A WORLD BANK COUNTRY STUDY 20325 October 1999 Ukraine Restoring Growth with Equity: A Participatory Country Economic Memorandum m. A WORLD BANK COUNTRY STUDY Ukraine Restoring Growth with Equity: A Participatory Country Economic Memorandum Copyright @ 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in Ukraine First printing October 1999 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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CONTENTS A CK NO W LED G M ENTS ................................................................................................................................ VII ABSTRA CT ......................................................................................................................................................... IX UK RAINE: SELECTED IND ICATO RS TABLE ............................................................................................ X ABBREVIA TION S AND CURREN CY UN ITS ............................................................................................. XII EXECUTIVE SU M M ARY .............................................................................................................................. XIII 1. THE LONG ROAD TO RESTORED PROSPERITY................................................................................... STEADY ECONOMIC DECLINE .............................................................................................................................. 1 THE IMPACT ON SOCIAL CONDITIONS.................................................................................................................. 5 2. TRANSFORMING GOVERNMENT FOR GROWTH .............................................................................. 11 ADAPTING GOVERNMENT TO A M ARKET ECONOM Y ......................................................................................... 11 REFORMING PUBLIC SPENDING.......................................................................................................................... 15 UPGRADING THE TAX SYSTEM ........................................................................................................................... 21 M ANAGING GOVERNMENT DEBT....................................................................................................................... 22 IMPROVING INTER-GOVERNMENTAL FISCAL RELATIONS .................................................................................. 23 SHRINKING THE SHADOW EC ONOMY ................................................................................................................. 23 3. THE REAL SECTORS AND STRUCTURAL REFORMS........................................................................ 29 REVIVING AGRICULTURE................................................................................................................................. 29 FOSTERING PRIVATE SECTOR DEVELOPMENT.................................................................................................... 33 RESTRUCTURING ENERGY RESOURCES.............................................................................................................. 41 ADVANCING BANKING AND FINANCE................................................................................................................ 50 4. CAN UKRAINE ACHIEVE GROWTH - AND SOCIAL EQUITY?........................................................55 OLD AND NEW APPROACHES TO SOCIAL EQUITY .............................................................................................. 55 NEW JOBS - THE BEST POSSIBLE SOCIAL SAFETY NET...................................................................................... 56 H UMAN RESOURCE DEVELOPMENT ................................................................................................................... 58 THE SOCIAL SAFETY NET .................................................................................................................................. 71 5. RESTORING GROWTH AND LIVING STANDARDS ............................................................................ 77 UKRAINE HAS INVESTMENT- W HY N OT GROW TH? ......................................................................................... 77 LOW ER COSTS M EAN HIGHER RETURNS............................................................................................................ 79 REDUCING RISK................................................................................................................................................. 83 PROSPECTS FOR ECONOMIC REFORM ................................................................................................................. 88 BIBLIO G RAPH Y ............................................................................................................................................... 98 ANNEX A AN AGENDA FOR STRUCTURAL R FORMS ....................................................................... 102 ANNEX B UKRAINE'S GROWTH PROSPECTS: A COMPARATIVE PERSPECTIVE......................11 ANNEX C THE SHADOW ECONOMY IN UKRAINE. METHODS OF CALCULATING ITS SIZE. 117 ANNEX D LIST OF UKRAINIAN CEM PROJECT CONTRIBUTORS...................................................121 STATISTICAL APPEN DIX ............................................................................................................................ 127 iii TEXT FIGURES FIGURE 1.1 ECONOMIC RECOVERY IN POST-SOVIET COUNTRIES, 1998.................................................................... FIGURE 1.2 MONEY SUPPLY AND INFLATION, 1990-1998 ........................................................................................2 FIGURE 1.3 ANNUAL INFLATION AND PER CAPITA GROWTH RATES, 1960-19921 ....................................................2 FIGURE 1.4 CONSOLIDATED BUDGET BALANCE.......................................................................................................3 FIGURE 1.5 GDP GROWTH, 1993-1998.................................................................................................................... 3 FIGURE 1.6 TRADE WITH RUSSIA.............................................................................................................................. 4 F IG U R E 1.7 T -B IL S ................................................................................................................................................. 4 FIGURE 1.8 FALLING HDI IN UKRAINE, 1992-1995 .................................................................................................5 FIGURE 1.9 DISTRIBUTION OF CASH INCOME, 1997..................................................................................................6 FIGURE 2.1 CROWDING-OUT OF PRIVATE INVESTMENTS ........................................................................................14 FIGURE 2.2 EVOLUTION OF BUDGET REVENUES, EXPENDITURES AND BUDGET BALANCE.....................................15 FIGURE 2.3 CONSOLIDATED BUDGET EXPENDITURE INDEX ...................................................................................16 FIGURE 2.4 TOTAL FOREIGN DEBT/GDP................................................................................................................ 22 FIGURE 2.5 PROJECTED SCHEDULE OF TOTAL DEBT SERVICE................................................................................22 FIGURE 2.6 RANKING OF REGULATORY DISCRETION .............................................................................................24 FIGURE 2.7 TAX BURDEN AS REPORTED BY FIRMS.................................................................................................26 FIGURE 2.8 TRANSPARENCY INTERNATIONAL'S CORRUPTION INDEX.....................................................................28 FIGURE 3.1 AGRICULTURAL PRODUCTION.............................................................................................................. 29 FIGURE 3.2 INDEX OF REAL INDUSTRIAL PRODUCTION ..........................................................................................34 FIGURE 3.3 BRANCH COMPOSITION OF INDUSTRIAL PRODUCTION .........................................................................35 FIGURE 3.4 COMMODITY STRUCTURE OF UKRAINIAN EXPORTS.............................................................................36 FIGURE 3.5 PRIVATIZATION OF MEDIUM AND LARGE ENTERPRISES .......................................................................37 FIGURE 3.6 FOREIGN DIRECT INVESTMENT ............................................................................................................ 39 FIGURE 4.1 CONSOLIDATED PUBLIC EXPENDITURES ON EDUCATION AND HEALTH ...............................................59 FIGURE 4.2 TRENDS IN REAL EXPENDITURES FOR HEALTH AND EDUCATION.........................................................60 FIGURE 4.3 PRIVATE FINANCING OF HEALTHCARE.................................................................................................65 FIGURE 4.4 EXPENDITURES ON HEALTH ................................................................................................................. 67 FIGURE 5.1 INVESTMENT AND RATES OF RETURN IN SOVIET INDUSTRY.................................................................78 FIGURE 5.2 SHARES OF RUSSIA AND CIS-COUNTRIES IN UKRAINIAN EXPORTS, 1992-1998...................................78 FIGURE 5.3 CUMULATIVE FDI-INFLOWS 1989-97 PER CAPITA...............................................................................79 FIGURE 5.4 DOLLAR WAGES .................................................................................................................................. 81 FIGURE 5.5 WOOD-815 INDEX ................................................................................................................................85 FIGURE 5.6 ACTUAL AVERAGE GROWTH, 1961-96 ................................................................................................89 TEXT TABLES TABLE 1.1 FAMILIES WITH MANY CHILDREN OR ELDERLY MOST LIKELY TO BE POOR............................................7 TABLE 2.1 GOVERNMENT REVENUES IN THE FORMER SOVIET UNION....................................................................14 TABLE 2.2 SOCIAL INSURANCE FUND EXPENDITURES ........................................................................................... 18 TABLE 2.3 UNOFFICIAL PAYMENTS BY ENTERPRISES FOR OFFICIAL PERMITS AND "FAvORS", 1996 ....................27 iv TABLE 3.1 INDICES OF THE GROSS OUTPUT OF THE AGRICULTURE SECTOR, 1990-1998....................................... 31 TABLE 3.2 INDUSTRIAL OUTPUT INDEXES BY BRANCH......................................................................................... 34 TABLE 3.3 FOREIGN DIRECT INVESTMENT IN UKRAINE BY INDUSTRY ................................................................... 36 TABLE 3.4 PRIMARY ENERGY SUPPLY AND CONSUMPTION .................................................................................. 40 TABLE 3.5 BASIC DATA ON UKRAINE'S BANKING SYSTEM ................................................................................... 51 TABLE 3.6 DEPTH OF UKRAINIAN FINANCIAL SYSTEM .......................................................................................... 52 TABLE 3.7 DEPTH OF FINANCIAL SYSTEMS IN REGIONS OF WORLD....................................................................... 53 TABLE 4.1 GROSS ENROLLMENT RATIOS IN UKRAINE AND OTHER COUNTRIES BY INCOME, 1990-93.................... 59 TABLE 4.2 PRE-SCHooL EDUCATION, 1991-1997.................................................................................................. 62 T ABLE 5.1 H IGH C ASE SCENARIO .......................................................................................................................... 90 T ABLE 5.2 B ASE C ASE SCENARIO .......................................................................................................................... 92 T ABLE 5.3 L ow C ASE SCENARIO ........................................................................................................................... 93 TABLE 5.4 BUDGET FINANCING REQUIREMENTS AND AVAILABILITIES, 1999........................................................ 95 TABLE 5.5 BALANCE OF PAYMENTS FINANCING REQUIREMENTS AND AVAILABILITIES, 1999 .............................. 96 TEXT BOXES Box 4.1 NON-GOVERNMENTAL FINANCING FOR PUBLIC SCHOOL......................................................................... 58 Box 4.2 LOCAL BUDGET FINANCING OF SCHOOLS................................................................................................. 61 V ACKNOWLEDGMENTS This participatory economic study is based on Policies: Mr. Yaremenko (Deputy Minister of the findings of a joint team of the World Bank Economy), Mr. Soldatenko (Head of the Main and Ukrainian experts co-lead by John Hansen Department, Ministry of Economy), and Ms. (Economic Advisor, World Bank Office in Zinkevych (Deputy Head of the Main Ukraine), Ihor Shumylo (Deputy Minister of Department, Ministry of Economy). Economy of Ukraine) and Vira Nanivska World Bank and other experts who assisted and (Director of International Center for Policy complemented the work of the Ukrainian teams Studies). The participatory process in Ukraine included: Foreign Trade and Commercial benefited from the guidance of a CEM Advisory Policies: Michael Michaely with Veronika Board composed of Mr. Vasyl Rohovy, Minister Movchan; Intergovernmental Fiscal Relations: of Economy and Chair of the CEM Advisory Deborah Wetzel, Thomas Cochran, Mark Davis, Board, Prof. Anatoliy Halchinskiy, Advisor on Sean O'Connel, Leonid Polishchuk and Lucan Macroeconomy to the President of Ukraine, and Way; Public Expenditures on Education and the three co-leaders of the CEM process. Most Health: Frederick Golladay, Galina Sotirova, of the preparatory and review work was done Kate Schecter and Ghanaraj Chellaraj: Legal between June 1998 and June 1999. Threats to Fiscal Sustainability: Joachim The analysis in this report draws on a series of Lippott (Legal Advisor, TACIS/UEPLAC); policy studies that were prepared by Ukrainian Agriculture: Csaba Csaki, Mark Lundell and teams of experts, including the following: Ian Shuker; Banking Reform: Angela Agrarian Policy: Mr. Sablouk (Director, Prigozhina and Alan Roe; Coal Sector Policy: Agrarian Policy Institute) and Mr. Fesina Heinz Hendriks: Shadow Economy: Maxim (Leading Research Fellow, Agrarian Policy Ljubinsky; District Heating Policy: Carolyn Institute); Energy Policy: Mr. Vrublevsky Gochenour: Electricity Market Reform: Laszlo (Deputy Minister of Economy), Mr. Lovei, Istvan Dobozi and Sergey Milenky, Kiriniachenko (Head of Department, Ministry of Environment: Alexi Slenzak; Education Economy), and Mr. Skarshevsky (Expert, Prime Finance: Katerina Petrina; Fiscal Reform: Minister Service); Education Policy: Mr. Mark Davis; Gas Sector Policy: Laszlo Lovei Vitrenko (Head of Department, Ministry of and Konstantin Skorik; Housing and Water Economy); Health Care Policy: Mr. Vitrenko Sectors: Ihor Korablev; International Trade: (Head of Department, Ministry of Economy), Veronica Movehan; Labor Market: Arvo and Ms.Nagorna (Deputy Director, Ukrainian Kuddo; Pension Reform: Larisa Leshchenko Institute of Public Health Care); Fiscal Policy: and Katerina Petrina; Private Sector Mr. Chechetov (Deputy Minister of Economy), Development: Gregory Jedrzejczak and Mr. Skarshevsky (Expert, Prime Minister Vladimir Kreacic; Prospects For Economic Service), Mr. Lomynoha (Head of Department, Reform and Debt Sustainability: Andriy State Treasury of Ukraine), and Mr. Soldatenko Storozhuk; Social Assistance: Galina Sotirova; (Head of Sector, State Tax Administration), and Transport Sector: Pedro Taborga. Industrial and Foreign Trade Policy: Mr. Vrublevsky (Deputy Minister of Economy), Mr. Special credit goes to the International Center Tryneev (Head of the Main Department, for Policy Studies, a leading NGO think-tank in Ministry of Economy), and Mr. Yakubovsky Kyiv, for their support in this collaborative (Deputy Director, Research Institute of Ministry effort. A CEM facilitation team within ICPS of Economy); Shadow Economy Policy: Mr. comprising Sergiy Loboyko, Volodymyr Hnat, Borodiuk (Doctor of Economics, Accounting Andriy Bega, Vasyl Lashchivsky, Nazar Mahera, Larisa Romanenko and Christina Chamber of Ukraine), and Mr. Turchinov Mhr,Lrs oaek n hitn Chamber of Uriain, andget M TChmit, Lashchenko handled the complex process of (Meberof Parlameon, Budt Co tte, coordinating the work of the research teams, thereby making the participatory approach vii possible. A second team at ICPS headed by Hlib In June 1999 the draft report was discussed in a Vyshlinsky and Yevhenyia Yehorova handled joint Bank/Government conference in Kyiv publication of all reports produced by the CEM attended by representatives of the Government process. Special thanks are also due to of Ukraine, the World Bank, and a wide range Nadezhda Troyan and Tatiana Anderson for of representatives from the academic, donor, their dedicated work on document preparation, NGO, domestic enterprise, and foreign and to Victor Lukyanenko, Victoria investment communities in Ukraine. Special Antoshchuk, Maria Korchynska and Oksana thanks are due to all of the key ministers and Burakovska for interpretation and translation. ministries of the Ukrainian Government for their excellent comments on the draft and for the This report was prepared under the guidance of opportunt omdicus in the fi and PaulSieelbam (ounry Drecor),Praeep opportunity to discuss in detail the findings and Paul Siegelbaum (Country Director), Pradeep. Mitra (PREM Director), Hafez Ghanem (Sector policy recommendations of the report. The r acurrent document reflects the many valuable Lerede),andve). Greoy perrevk (edet comments that were received during the review Representative). The peer reviewers were William Easterly (PRDMG), Alex Sundakov process. (Economic Research Institute, New Zealand) The views expressed here do not necessarily and Marek Dabrowski (CASE, Poland). reflect those of the reviewers or of the The report draws significantly on the organizations for which the authors work. The macroeconomic analysis and data prepared by authors remain solely responsible for any errors the IMF, TACIS/UEPLAC, HIID, KPMG that may remain in this paper. Barents Group and other donors. viii ABSTRACT Since independence, Ukraine has suffered one of activity now hides in the shadow economy, the most severe economic declines of any making it even harder for the Government to country in this century. A decade of negative obtain the resources it needs to operate growth has left it with less than half of Soviet efficiently, to create a good business climate that output levels. The decline in living standards has attracts investment and growth, and to provide a been less than the officially-reported GDP good social system that develops and protects the decline-a large share of output is in the shadow people. The Government's high levels of economy, and much of the Soviet-era output domestic borrowing to cover its deficits and debt contributed little to the quality of life. But the service costs has crowded out the enterprise sharply increased poverty now facing a major sector from the capital market-with real interest share of Ukrainians is clear from indicators of rates exceeding 50 percent, few legitimate physical poverty such as falling life expectancy, enterprises can afford to borrow. rising infant mortality, and increased sickness. Escaping the downward economic spiral requires The origins of this economic decline are much a radical change in Government's role in the the same as in other transition countries-the economy. Leading industrial enterprises from twin shocks of collapsed trading relations and Soviet days are still owned by government, and sharply higher energy prices following the at the local level government interference both breakup of the Soviet Union. As most Soviet-era with the sale and movement of agricultural products were not competitive on world markets, products and with the operation of industrial Ukraine's ability to shift exports to the West was enterprises causes serious economic problems. limited. As the economy was heavily energy Although direct subsidies have been cut dependent, rising energy prices made it even dramatically, the indirect cost of support to loss- harder to compete on world markets. making agricultural and industrial enterprises in What has distinguished Ukraine from the other terms of tax privileges and exemptions, transition countries in the region that have more preferential procurement, and politically directed successfully replaced their old command lending from the commercial banks is not economies with market economies has been the sustainable. This is widely known in Ukraine, but degree to which Ukraine tried to protect the loss- strong vested interests in the status quo, which provides widespread opportunities for corruption, making enterprises from closure to preserve hv fetvl lce hne employment and income levels. To do this, the government lived far beyond its means, allowing Growth can be restored to Ukraine and poverty subsidies and other privileges to push can be reduced only if the government moves expenditures well beyond available resources. quickly to a more market-oriented role. High The difference was financed through priority actions include rapid privatization of hyperinflationary credit expansion during the virtually all large industrial enterprises including early years of independence, then by heavy those in energy and telecommunications; a sharp foreign and domestic borrowing. and measurable decrease in the government's The costs of these polices are now obvious, regulation of business; and fundamental changes in governmental organizational structures to Today the Ukrainian government struggles to. pay its bills on time and to meet its debt service encourage a shift from control to facilitation. obligations. Short of resources and faced with a These changes could lay the foundations for large backlog of arrears in wage and social Ukraine to raise living standards for all of its payments, the Government has put heavy people based on internationally competitive pressure on profitable enterprises to pay taxes, production. It has abundant natural resources, leaving many with little for investment and highly trained human capital, strong industrial growth. The combination of burdensome taxes work ethic, and an excellent physical and and intrusive regulatory intervention has geopolitical position. All it needs now is the encouraged widespread tax evasion-putting necessary policies and institutions. This report even more pressure on firms remaining in the outlines how Ukraine can accomplish this task. formal sector. Perhaps half of all economic ix UKRAINE: SELECTED INDICATORS TABLE Indicators 1995 1996 1997 1998 1999F GDP UAH billions (nominal) 54.5 81.5 93.4 103.9 130.6 Real GDP growth -12.2% -10.0% -3.0% -1.7% -1.0% US$ billions (PPP terms) 124.2 113.1 110.0 108.1 107.0 US$ billions (at market exchange rate) 37.0 44.6 50.2 42.7 31.9 GDP per capita based on market exchange rate (US$) 718 872 989 849 637 Atlas GNP per capita ($) 1,350 1,210 1,040 850 800 Gross domestic savings (% of GDP at market prices) 23% 20% 19% 18% 19% Gross domestic investment (% of GDP at market prices) 27% 23% 21% 21% 20% Agriculture and forestry (% of GDP at factor cost) 15% 14% 14% 14% 15% Industry and construction (% of GDP at factor cost) 42% 38% 34% 36% 38% Services (% of GDP at factor cost) 42% 48% 51% 50% 47% MONETARY STATISTICS Monetary base growth 132% 38% 45% 22% 28% Money supply (M3) growth 113% 35% 34% 25% 36% Monetization ratio (M3/GDP) 13% 11% 13% 15% 16% Exchange rate (UAH/US$, year end) 1.79 1.89 1.90 3.43 4.6 Inflation (CPI change, December on December) 181.7% 39.7% 10.1% 20.0% 17.0% PUBLIC FINANCES (% GDP) Consolidated budget revenues (including Pension Fund) 38% 37% 38% 36% 36% Consolidated budget expenditures (including Pension Fund) 43% 40% 44% 38% 38% Cash budget deficit 4.9% 3.2% 5.6% 2.7% 1.9% Domestic financing2 3.9% 2.5% 5.3% 0.9% 0.6% External financing 1.0% 0.7% 0.3% 1.8% 0.7% Accrual budget deficit 8.2% 8.4% 5.2% 3.0% -0.6% Total public debt (US$ billion) 8.2 10.1 14.2 15.2 15.0 Domestic 0 1.2 4.6 3.7 2.2 External 8.2 8.8 9.6 11.5 12.8 (continued on the next page) x UKRAINE: SELECTED INDICATORS TABLE (continued) Indicators 1995 1996 1997 1998 1999F BALANCE OF PAYMENTS (US$ billions) GNFS Exports4 17.1 20.3 20.4 17.6 15.8 Merchandise exports 14.2 15.5 15.4 13.7 12.3 % of GDP 46% 46% 41% 41% 50% GNFS Imports4 18.3 21.5 21.9 18.8 16.1 Merchandise imports 16.9 19.8 19.6 16.3 13.6 Energy 7.8 8.9 8.3 6.2 5.9 Merchandise trade balance -2.7 -4.3 -4.2 -2.6 -1.3 Current account balance -1.2 -1.2 -1.3 -1.3 -0.5 % of GDP -3.1% -2.7% -2.7% -3.0% -1.6% Direct foreign investments 5 0.27 0.52 0.62 0.74 0.45 Net international reserves (year end) -0.4 -0.3 0 -2.0 -1.7 Gross foreign exchange reserves, excluding gold (year end) 1.1 2.0 2.3 1.0 1.6 weeks of GNFS imports 3.0 4.7 5.6 2.9 5.2 INTERNATIONAL DEBT (US$ billion) Total external debt (DOD) 8.4 9.1 10.0 12.2 13.6 Public 8.2 8.8 9.6 11.5 12.8 Private 0.2 0.3 0.5 0.7 0.8 % of GDP (Mod = 30%) 23% 20% 20% 29% 43% Total external public debt service 1.5 1.2 1.2 1.8 2.0 % of GNFS Exports (Mod = 18%) 9% 6% 6% 10% 13% ARREARS (UAH billion) Total wage arrears 0.6 3.7 4.9 6.5 5.5 Budget sphere 0 1.0 0.7 1.0 0.5 Pensions arrears 0.1 1.1 1.3 2.0 1.7 IBRD DEBT (US$ billion) IBRD DOD 0.5 0.9 1.2 1.6 2.1 IBRD debt service 0.01 0.03 0.06 0.06 0.10 IBRD debt service/External public debt service 0.5% 2.6% 4.7% 3.5% 5.2% IBRD debt service/GNFS exports 0.0% 0.2% 0.3% 0.4% 0.7% Share of IBRD portfolio 0.4% 0.8% 1.1% 1.4% 1.7% 1IMF GFS methodology 2 Including privatization proceeds Negative-surplus 4 GNFS-Goods & Non-Factor Services BOP definition xi LIST OF ACRONYMS AND ABBREVIATIONS CEE Central and Eastern Europe CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development FSU Former Soviet Union UNDP United Nations Development Programme OECD Organization for Economic Co-operation and Development IBRD International Bank for Reconstruction and Development IFC International Finance Corporation MIGA Multilateral Investment Guarantee Association IDA International Development Association IMF International Monetary Fund EFF Extended Fund Facility NGO Non Governmental Organization NBU National Bank of Ukraine HDI Human Development Index VAT value added tax FDI foreign direct investment GDP Gross Domestic Product GNP Gross National Product PPP Purchasing Power Parity NAS National Accounts System GFS Government Finance Statistics GNFS Goods & Non-Factor Services NPV Net present value OVDP State domestic bonds FX, forex Foreign Exchange MONETARY UNITS UAH = Ukrainian Hrivnya USD = U.S. Dollar USD 1.00 = UAH 4.50 (October 1999) Vice President Johannes Linn Director Pradeep K. Mitra Sector Leader Hafez M. H. Ghanem Principal Economist John Hansen xii EXECUTIVE SUMMARY This country economic memorandum--one of the markets of other republics in the former three reports produced jointly by the World Soviet Union (FSU) and other communist bloc Bank, the Ministry of Economy, and the (COMECON) countries. This outward International Center for Policy Studies through orientation was partly a reflection of real a highly participatory CEM process-defines a comparative advantage and partly the result of shared vision for a strategy that will allow Soviet policies to foster the dispersion of Ukraine to halt its economic decline and move economic activity throughout the FSU. When toward a more prosperous future. trade and payments relationships collapsed with the breakup of the Soviet Union, Ukraine lost ECONOMIC DECLINE-AND GROWING markets that were vital to its enterprises, and POVERTY after years of isolation from Western markets, Officially reported GDP is now less than 40 its products could not compete in Western percent of its 1989 level-a decline twice as markets. severe as that in the United States during the Energy price shock. As energy was available at Great Depression, and worse than that in many negligible costs during the Soviet era, other Central and Eastern European countries Ukrainian farms and factories were highly (figure 1). Many factors including initial energy intensive. When Russia increased its conditions and external shocks, subsidies to energy prices by more than 10 times, many failing enterprises, monetary expansion, and Ukrainian products became uncompetitive in heavy borrowing have contributed to Ukraine's cost as well as design. economic decline and growing poverty. Initial conditions and external shocks Figure 1 Economic recovery in other former The most important initial conditions and Soviet states outpaces that in Ukraine external shocks have been: Economic Recovery in Post- * The breakdown in trade and payment Soviet Countries, 1998 relations that came with the collapse of the Soviet Union. * The higher energy prices introduced by _opellaglc Russia after the collapse. c e a0 * The large scale of Ukraine's agricultural c ee and industrial enterprises. * A reluctance to impose hard budget constraints. Trade and payments shock. Even during the Soviet era, Ukraine's economy was highly oriented to external trade, depending heavily on y0z yep a 1990 =100 John Hansen and Vira Nanivska (eds). 1999. Economic 1oldo0 Growth with Equity: Ukrainian Perspectives (World Bank 0 50 100 150 Discussion Paper No. 407). World Bank, Kiev and Source: World Bank 1998. Washington, D.C.; and John Hansen and Diana Cook 1999. Economic Growth with Equity: Which Strategy for Ukraine? (World Bank Discussion Paper No. 408). World Bank, Kyiv and Washington, D.C. Executive Summary xiii Diseconomies of large scale. The exceptionally Indirect subsidies, deficits, and debt large scale of the farms and factories inherited Although government sharply reduced from the Soviet era has made it difficult to. frestce Sote. Ths "it" dcatd ao budgetary subsidies to enterprises, it now offers restructure them. These "giants" created a financially failing farms and factories tax politically and socially important concentration privileges. Such largess has failed to revitalize of people who could lobby effectively for these enterprises, and it has drained resources subsidies that would delay real reforms. from other potentially viable firms. The full Soft budgets. The Government's willingness to negative impact of these tax privileges has not support failing enterprises with subsidies yet become obvious in terms of overall tax created a "soft budget" culture that helped put revenues for three reasons. the Ukrainian economy onto its precipitous First, to compensate for the loss of tax downward course. revenues, the government has increased the tax Subsidies, money, and hyperinflation pressure on profitable firms through high rates Largely as a result of subsidizing enterprises and intensive inspections. This drives once- and individuals, total deficits including directed profitable enterprises into financial distress- credits exceeded 20 percent of GDP in 1992-93, and into the shadow economy. The combination of tax privileges for loss-making enterprises and and money supply expansion peaked at more than 1,000 percent in 1993. This, together with tax pressure for profitable enterprises gradually reduces tax revenues, increases budget deficits, the monetary overhang from the Soviet era, lead to hyperinflation. Between the end of 1992 and raises the burden of debt payments, and creates a need to put even more tax pressure on the the end of 1994, prices increased by almost 500 andt putaeventmrpress times. The public lost confidence in the domestic currency, producing sharp declines in Second, many enterprises do not receive tax real money balances. Today Ukraine has one of privileges. This reduces the negative fiscal the smallest banking and monetary systems in impact-but creates an uneven playing field, the world relative to GDP, and much of the distorting the competitive conditions for available credit has been absorbed by the enterprises. Since attaining privileges can be government, crowding out the enterprises and more profitable than improving production and making it hard for them to borrow the money marketing performance, managers allocate their they need for payments, investments, and time and resources accordingly, and corruption growth (figure 2). increases. Third, a major share of taxes are being collected Figure 2 Government deficits exceeded not in cash but as "mutual settlements." total credit expansion Although tax revenues were reported to be UKRAINE: Crowding-out of Private around 35 percent of GDP, actual tax Investments (UAH bin) collections in cash were less than 20 percent of 6.0 - GDP in 1998-99. By allowing failing enterprises to remain in operation and "pay" 5.0 ODomestic Credit of their taxes with barter-if they pay at all-the the Banking System EBudget Deficit government has helped create a large virtual 4.0 (IMF methodology) economy. 3o -The illusion of stability With the exception of the aftermath of the 2.0 4 Russian crisis in late 1998, domestic price levels and the exchange rate have been 1.0 relatively stable since 1995. This stability was supposed to provide the foundations for 1996 1997 6 months of 1998 growth-but the economy continues to decline, albeit at a slower pace than before. The problem Source: World Bank staff estimates. xiv Ukraine: Restoring Growth with Equity is that Ukraine's stability is based on the weak The impact on social conditions foundation of tight monetary policy and an Human suffering has been the greatest cost of artificially stable exchange rate rather than on Ukraine's slow structural reforms. Family deep structural reforms. incomes have dropped sharply. Health The debt crisis standards have deteriorated. And adult literacy and school enrollments have declined. Between After the August crisis in Russia, Ukraine found and 1995 thenD hum de elopmen 1991 and 1995 the UNDP human development it difficult to roll over its billions of hryvnias of index (HDI)2 plummeted, moving Ukraine from t-bill debt, much of which had been sold to 32nd to 95th among 175 countries (figure 3). foreign investors who became wary of all emerging markets in the aftermath of problems in Asia and Russia. Once the t-bill debt could Figure 3 Economic decline has brought a no longer be rolled over, even at real annual sharp drop in Ukrainian living standards yields exceeding 70 percent, Ukraine was forced to restructure this debt, making it almost Falling HDI in Ukraine, 1992-1996 impossible to borrow new money on private international capital markets. 0.85 - - - The impact on growth 0.8 Ukraine's soft budget culture and the resulting high budget deficits have hurt economic growth in several ways. First, enterprises have 0.75 remained inefficient. If the government instead had enforced bankruptcy, growth-supporting structural reforms would have taken place far more rapidly. Second, as noted above, budget deficits have crowded enterprises out of the 0.65 capital market (figure 2). At barely 2 percent of GDP in 1998, Ukraine had the lowest ratio of 0.6 bank credit to the private sector of any 1992 1993 1994 1995 1996 transition country other than the Kyrgyz Republic (the ratio for transition economies in Source: UNDP 1998. general is about 40 percent). Third, commercial bank credit to enterprises is among the most TRANSFORMING THE ROLE OF expensive in the world, with real interest rates GOVERNMENT on commercial bank loans peaking at 100 percent in September 1998 and was still The government deficits that have played such running at 30-40 percent in the fall of 1999. a prominent role in Ukraine's continued economic decline reflect in large measure the The lack of structural reforms, a central theme fact that government has been slow to of this report, has led both to continued relinquish the role it played during the Soviet economic decline and to high budget deficits, era. propelling the vicious circular relationship between them. If Ukraine had more quickly implemented fundamental structural reforms in 2The Human Development Index is heavily influenced by enterprise ownership, market relations, the legal per capita incomes and thus by official GDP. Since around and juridical structure, and the role of 50 percent of total production in Ukraine may be in government, the economy would not have shadow economy and because much of this activity collapsed as far as it has. And if the structural escapes the official measurements of GDP, the real decline reforms had been put into place more quickly, in living standards may be considerably less than indicated by the dramatic decline in official data on per capita the budget would have been supported by a incomes. However, the physical indicators of the quality larger tax base, lowering the deficits. of life, particularly those related to health, indicate a sharp increase in the number of people living in real poverty. Executive Summary xv Moving from a Soviet to a market role find ways to increase its efficiency of resource Ukraine faced a major challenge when it use. For example, investments need to be made .its to increase the energy efficiency of hospitals. attied in enene inat 1991- esinedto Also, better diagnostic equipment would allow system of government that was designed to s implement Moscow's directives with one that orter hospital stays, allowing Ukraine to consolidate unneeded facilities. could design and implement the country's own market-oriented policies. Moving shadow activity to the formal sector. The government also had to undergo a The shadow economy-defined here as fundamental change-from being responsible production that does not pay taxes-accounts for the ownership, management, and control of for about half of all economic output in essentially all economic activity to being Ukraine. As a result, shadow economic activity in is vitally important to a major share of the responsible for facilitating economic activity in Uiian p o providing a e obs, privtel ownd eterpise. Ths cangehas Ukrainian people, providing badly-needed jobs, privel owndcult. enteres t T cange hs goods, and services. As in other countries, the been difficult. As a result, many old shdw eom is are cetdb administrative structures-such as the super- y gey y ministerial layer of the apparat between the government policies-high taxes and a heavy ministers and the Prime Minister, and sector regulatory burden. Barter also contributes to of Economy and shadow activity by making it hard to monitor reprsetive ofinthe-Minstrylin and tax financial flows. The very existence of the shadow economy leads to its expansion. A High priority should be given to measures that legitimate firm that pays its taxes has little hope will (a) reform the "Apparat" of the Cabinet of of competing against enterprises in the same Ministers so that it focuses on policy business that do not pay their taxes. The only coordination and support rather than on policy choice is to cease production or move to the making; (b) consolidate the Cabinet so that it shadow economy. becomes a small collegial body focused on Small firms remain small to avoid detection, strategic policy making; (c) reform the civil stuntin their rowth. Large firms spend mone service, clearly delimitating political and non- g b g y political posts, implementing pay reform, o rbss htte a otneaodn taxes. Firms that thrive are often not the most training of senior civil servants, and introducing efficient ones, but those with the best political merit-based promotion principles; and (d) reduce the number of business inspections and contis.Scemhofhe cnmc rds in ns ons activity in Ukraine goes untaxed, the sharply limit the number of routine inspections government must tax even more heavily the by the State Tax Administration, firms in the formal economy, frequently leaving Mobilizing and using resources efficiently these firms with no choice but to cease With the total tax burden including pension production or join other enterprises in the fund contributions running at about 35 percent shadow economy. As the resources available to of GDP, Ukrainian enterprises and people are government shrink, its ability to provide shouldering a burden comparable to that in services to firms and their employees shrinks, making it even less attractive for the firms to countries with considerably higher levels of per remain in the formal sector. The downward capita income. Worse still, about half of all economic activity is hidden in the shadows and at least half of taxpaying enterprises are losing Given the economic and social importance of money. The full tax burden is effectively borne the shadow sector, the objective cannot be to by only a small part of the country's suppress or control it. The objective must be to economically active population. implement policies that will encourage this By changing its role in the economy and in tivity to move into the formal, tax-paying society, the government will be able to limit its economy where it can grow openly with full resource requirements to only the highest- protection of the law. Ukraine needs to move priority activities. At the same time, it needs to iftly to reverse the shift of economic activity into the shadows. Otherwise the tax base will be xvi Ukraine: Restoring Growth with Equity eroded-leading to higher deficits, weaker percent of medium-size and large enterprises government services, and the risk of financial have been privatized. Although only about 15 and social strife (see chapter 2). percent of agricultural land is actually titled and held privately, most agricultural land is held Fightine'sarg c srratow Thy lwikesd t collectively by private cooperatives. Nearly all Ukraine's large shadow economy is widespread exotqoa.n aif aebe eind. corruption. In addition to corrupt enterprises Nor tad rins have been establised thathidein he sado ecoomyto aoid Normal trading relations have been established thxatide nd th shaow eonomy-tonpavd with all major trading partners, including a taxation and to profit from non-transparent arnsh adcoeatnareetbtwn bartr dals an nfotunte nmbe of partnership and cooperation agreement between barter deals, an unfortunate number of p . government officials and functionaries at all Ukraine and the European Union. Ukraine has levels seem to be corrupt, basing their decisions also signed a friendship treaty with Russia. less on what is best for economic growth and But some of the most crucial structural reforms the people's welfare, and more on what will be have yet to be implemented. The lack of true personally profitable. This shrinks the structural reforms in large enterprises is the efficiency of government, dampening prospects most serious problem facing Ukraine. The for restoring real economic growth policy of protecting enterprises needs to be abandoned and replaced as quickly as possible by a policy of hard budget constraints. Faced Ukraine's inability to move forward with with hard budget constraints and the threat of structural reforms has limited its access to closure if they do not become self-financing, resources from the World Bank, the enterprises will seek out new investors (both International Monetary Fund (IMF), and the domestic and foreign), new markets, new European Bank for Reconstruction and production technologies, and new management Development. Faced with relatively large fiscal methods. They will also lease or sell underused deficits of recent years, ranging from 3-6% of space and equipment, paving the way for the GDP, Ukraine has borrowed funds commer- creation of new enterprises that can employ the cially at high interest rates and with short people who will be laid off when overstaffed maturities. Although the ratio of debt to GDP in state enterprises release redundant employees. Ukraine has risen sharply in recent years and Although the design and implementation of now stands at about 40 percent, the real improved bankruptcy procedures is absolutely problem is the terms on which the debt was essential if Ukraine is to break the heavy chain contracted. of non-payments that drags the economy down, The key to reducing the debt service burden to bankruptcy must be implemented with care. In a more manageable levels is to implement the normally functioning economy, only a small structural reforms needed to restore access to percentage of enterprises go bankrupt in any borrowing from international financial given year-but the threat that they might is institutions. Such resources are available at enough to assure that most will do everything much lower interest rates and for much longer possible to avoid bankruptcy. In Ukraine, maturities. The structural reforms needed to however, so many companies are already gain access to such funds will reduce deficits bankrupt de facto that rapid implementation of and the need for borrowing. They will also bankruptcy proceedings that forced all of these increase growth and thus the resources needed companies into immediate de jure bankruptcy to repay old debts. Finally, accelerated reforms could have a cataclysmic impact on the will rebuild the confidence of investors in economy and on people. Many viable Ukraine, gradually restoring access to private transactions would be frozen or delayed by the capital flows. collapse of many banks and by bottlenecks in THE URGENCY OF STRUCTURAL REFORMS the nascent bankruptcy court system. Major efforts will therefore be required to put in Since independence Ukraine has made place an effective bankruptcy system that significant structural reforms in a number of proie urgently neded inetes for areas. All small enterprises and about 80 payme discipline w o ceting an payment discipline without creating an Executive Summary xvii economic and social crisis. As demonstrated by Although most agricultural land is technically Hungary and other formerly planned no longer held by the state, the collectives that economies, this can be done. control all but about 15 percent of the land are The state also needs to create a business climate little more than a cosmetic reincarnation of the that is attractive to business development-one old state controls. Collective members generally that stimulates investment, production, and operate as employees rather than as farmers- growth by providing a level playing field where often under the control of directors from the all competitors face clear, predictable, and Soviet era. Land ownership based on titles that equitable rules of the game. Such an can be mortgaged is essential so that farmers environment would facilitate the structural have collateral that can be used to secure loans transformation of old enterprises and would for the investments needed to renew the also stimulate the creation of new enterprises, equipment fleet and to provide working capital. the most important component in any program Access to banking system credit would help of structural reform. resolve the other big problem in agriculture- Reviving agriculture the continued state control of inputs and outputs through a system of commodity credits (credits The situation in the agricultural sector today is of inputs like seeds and fertilizer that must be calamitous. Ukraine, a country with a temperate repaid with physical products like wheat). Cash climate and perhaps the world's best credit would break the de facto state control endowment of rich black soil, has seen its over agricultural production and would agricultural output fall year after year (figure 4). introduce badly needed transparency in a Equipment is worn out. Incomes are dropping. shadowy environment dominated by physical And the government is under constant pressure transactions. to provide tax privileges and write-offs of unpaid taxes and credits. The most pressing Reorienting manufacturing issues in the sector in terms of structural Large-scale manufacturing is urgently in need reforms are the lack of effective private owners of profound structural reforms. None of the and the lack of efficient markets for agricultural industrial "giants"-enterprises with more than inputs and outputs. 750 million hryvnias in assets-have been privatized in a way that gives effective private Figure 4 Agricultural output continues to drop ownership control. Many of these enterprises sharply despite rich agricultural resources enjoy extensive tax privileges, making them a major source of budget deficits. State Ukraine: agricultural production guarantees for loans to enterprises, in some 45 cases involving millions of dollars, also create a 40 burden when the enterprises, unable to repay the loans, leave the debts for the state to repay. The key to structural reforms in manufacturing 30 is hard budget constraints, reinforced by 25 effective bankruptcy laws. Rapid privatization of enterprises of all sizes is also needed in all but a few exceptional areas. Such privatization 15 should be done in a way that vests ownership 10 control firmly in the hands of private investors without any blocking or "golden" shares held 5 by the state. Privatization should be done in 0- accordance with international standards, N < o b including a transparent, competitive process 1 41 40 that advertises worldwide to find all potential, Source: TACIS/IUEPLAC. Ukrainian Economic serious investors, especially those with good Trends. track records in the specific line of business. xviii Ukraine: Restoring Growth with Equity Adjusting energy The excess reserves deposits were a reflection Ukraine is one of the world's most energy- not of excess liquidity but of the profound Ukraineinstitutional weaknesses of a commercial intensive countries. During the Soviet era, when energy was available at 5-10 percent of world banking system that had grown content with prices, the wasted energy was mainly an arbitraging interest rates internationally, taking environmental issue. Today energy intensity is advantage of the implicit exchange rate a major economic issue. Energy accounts for guarantee of the stable hryvnia, and lending at nearly half of Ukraine's imports, creating a extraordinarily high real interest rates to the major drain on the balance of payments and government. The central bank is now working diverting resources that could better be used to actively with the IMF and the World Bank to strengthen the commercial banking system so import the capital equipment needed to increase th e in topyerl ait should in prodctiity, enhnce ntenatinal that it can begin to play the role that it should in coprdtivtys, nhanovide internati providing credit on a normal commercial basis competitiveness, and provide new jobs.toUrianeepis. to Ukrainian enterprises. Inefficiency is a constraint to economic growth ASSURING GROWTH WITH EQUITY and fiscal stability throughout the energy sector. In the coal sector, mines that have long been Under the Soviet system, income differences depleted continue to be operated for social were minimized. In contrast, significant income reasons, creating a serious drain on the budget differences are normal in a market-based and raising the cost of coal to domestic energy system, providing essential incentives. users. District heating facilities waste massive Increased income disparities are therefore a amounts of energy in conversion to heat, in common part of the transition process. At the distribution, and in utilization. To correct this, same time, basic social justice-a key objective extensive investments are needed in new for the Government of Ukraine and for the boilers, distribution lines, heat meters, and World Bank-calls for reducing or eliminating building insulation. Here, as with gas and absolute poverty. This can be done by ensuring electricity, physical inefficiency is exacerbated jobs-oriented growth, providing access to by low cost recovery rates, low cash collection human development services, and supplying a rates, and the lack of hard budget constraints. social safety net. As a result, all energy sectors are in bad financial shape, not even able to pay for inputs Figure 5 T-bill sales quickly absorbed all new on time, much less make badly needed credit investments in improved efficiency. The lack of appropriate prices and payment discipline Credit Fund Allocation compounds the problem by failing to provide Commercial Loans vs. T-bills incentives for more efficient energy use by (3-quarter average) 100% - customers. 90% - Bolstering banks 80% - Ukraine's commercial banking system has 70% - suffered greatly because of the government's 60% loose fiscal policy described above. As deficits 50% - increased, more and more of banking system capital was absorbed by the government (figure 5). Unable to appraise normal commercial risks 30% - and unwilling to buy more t-bills following the 20% - restructuring that took place in late 1998, banks 10% - began to place excess reserves in the central 0% bank, creating an illusion of excess liquidity , 5 R even though the money supply was C r &P' extraordinarily small relative to GDP. Source: Harvard Institute for International Development. Executive Summary xix Jobs-oriented growth energy costs of schools and medical The best way to ensure adequate incomes for all institutions, reducing under-used space, citizens is a jobs-oriented growth strategy-one lowering excessive staff costs, improving the pay and professional preparation of those who t .e remain in these sectors, and providing better employment in profitable enterprises, equipment and supplies. Government spending Developing sound macroeconomic policies and should focus on the highest-priority needs in a good investment climate are essential to this both sectors-particularly public health, and objective because this would allow Ukraine to rimar and secondar education. And user fees exploit one of its strongest areas of comparative a o and other cost recovery mechanisms should be advantage--a low-cost, well-educated labor implemented more widely so that those who can force with extensive industrial work experience. afford services can openly contribute to the cost High payroll taxes, an artificially appreciated 171 of their provision. exchange rate, excessive minimum wages, barriers to labor mobility, and widespread A social safety net unionization have all tended to increase the cost Much of the resistance to market reforms in of labor, discouraging investments in labor- Ukraine seems to come from the fear that ineniv activties Suchs ditotin alsorm hfata intensive activities. Such distortions also introducing a market-oriented system will cause increase the demand for capital-intensive incesenthe emaltingn foghr-p inv people to lose their jobs. As most Ukrainians investments, resulting in higher-cost production are already poor by international standards, and that is less competitive, contributes less to any or enterisa heaily ovr many Soviet-era enterprises are heavily over- economic growth, and generates fewer jobs. staffed, this fear is quite valid. An adequate A jobs-focused growth strategy does not mean social safety net must therefore be put into that the government should require enterprises place if market reforms are to enjoy general to hire or retain a certain number of workers. support. Nor does a jobs-focused strategy mean that the BARRIERS TO CHANGE government should subsidize employment. Instead, a jobs-oriented strategy means that the The participatory CEM process revealed a high government should introduce policies that degree of consensus on the policy stimulate the development of small and recommendations summarized above. Given medium-size enterprises. Throughout the world, this consensus, we must ask why so much still such enterprises are the leading source of remains to be done. Why has the reform process employment. In the United States, for example, been so slow and incomplete? The main reasons firms with fewer than 500 workers account for appear to be inertia, vested interests in the status 80 percent of employment. In addition to quo, and lack of institutional capacity. providing incomes to hundreds of thousands of families, the job opportunities created by fostering the development of small and All political systems must deal with inertia medium-size enterprises would make it much when trying to bring about change, but the easier to undertake the urgently needed challenge has been particularly great in restructuring of state enterprises. Ukraine. Ukraine was under the dominion of the Soviet Union much longer than, for example, the Baltic States-and was under the Access to quality health and education services sway of the Russian tsars for centuries before in Ukraine today is often severely limited that. The long tradition of following orders because the government lacks the necessary from Moscow has been hard to break. financial resources. As Ukraine moves forward, The lack of a sharp economic and social crisis al Thepl lack ofe afodal sharps ecnoi angscilorii all people will need affordable access to good has also contributed to inertia. Countries with health and education, regardless of their no way to avoid cold and hunger but through income. Steps need to be taken to assure the nowytavicldndhgebutruh inecoe . Step needi. beattken to a the dramatic change will take the necessary actions. necessary financing. Health and education During the first bitter winter after efficiency should be improved by cutting the Dinn e fors exmpe Etn w a tof kdependence, for example, Estonia was cut off xx Ukraine: Restoring Growth with Equity by Russia from its traditional supplies of energy schedules--or simply hide their activity in the and food, and the government was making shadow economy. When tariffs on utilities are plans to evacuate Tallinn to the countryside raised, vested interests run up arrears. The where people would at least have wood stoves Ukrainian economy will move forward again for warmth and cows for milk. In the event, only when powerful interests develop an Finland stepped in and made critical supplies interest in reform. This can best be available, but this dramatic crisis helped accomplished by engaging these groups in the convince the Estonians that they had no dialogue-and by strict enforcement of hard alternative but to dramatically reform their budget constraints and anti-corruption economy in order to gain full access to the measures. markets of Western Europe. Ukraine, a nation Institutional Constraints blessed with abundant natural resources including coal, gas, forests, exceptionally fertile The policy reform debates in the parliaments of soils, a relatively benign climate, and a well- Europe demonstrate how slow, painful, and developed physical infrastructure has been able demanding the change process can be, even to avoid a real crisis-the kind that leaves with top professional staff who can focus on a people demanding change at almost any cost. relatively limited range of issues. Imagine the problem facing Ukraine. The country must Ukraine's ability to delay or avoid profound rilly chng is ecomic hua economic reforms also reflects its exceptionally dvel and s econ systems- favorable geopolitical position. Lying on the border between East and West, the m and must do so after generations of living under mjr a closed system that provided little opportunity powers on both sides have actively sought to keep or attract Ukraine as an ally. As a result, to develop the necessary skills. Ukraine has enjoyed substantial resource Even if well-designed policies could be copied inflows-primarily energy on concessional directly from other countries without thought or terms from the East and financial support on discussion (an approach doomed to failure in concessional terms from the West. With all this most cases), Ukraine would still find it difficult support, Ukraine has not faced the kind of crisis to implement the policy reforms, for this often that forces profound reform. requires skills unknown under the Soviet Vested Interests system. This report has sought to help overcome some of the institutional barriers to The inherent wealth of Ukraine has directly reform in Ukraine by involving the broadest contributed to a second reason for slow possible group of stakeholders in the process of reform -vested interests. If Ukraine had been a preparing the analysis and recommendations destitute country at independence, few presented here and in the two companion individuals would have had selfish interests in volumes (Hansen and Cook, 1999; and Hansen preserving the status quo. Unfortunately, and Nanivska, 1999). But much remains to be Ukraine's relative wealth has created vested done to develop a consensus for reform. interests. The longer the reforms needed to Parliament and the public at large need to be create a transparent, equitable, and efficient brought into the policy debate and formulation, economic environment are delayed-the longer thus helping increase the quality and vested interests will be able work within the acceptability of laws. flawed post-Soviet system to appropriate as OPTIONS FOR RESTORING GROWTH AND much of the nation's wealth for themselves as possible. LIVING STANDARDS Vested interests also undermine economic The slow pace of structural reforms in Ukraine progress by thwarting policy initiatives, reflects the lack of consensus on an appropriate sometimes leaving only the appearance of development path. Three basic alternatives are reform with little substance behind it. For being actively debated in Ukraine today- example, when taxes are raised, vested interests preservation of the status quo, protection from arrange for exemptions and delayed payment competition, particularly from imports, and competition as in developed countries. Deciding Executive Summary xxi which of these three paths to follow is crucial, on a substantial increase in the volume of for this will shape today's design of policies for investment -and on major improvements in its the future. These three alternatives examined in efficiency. First, the production infrastructure detail in the "Vision" paper that was produced inherited from the Soviet era was massively as part of the participatory CEM process decapitalized by the mid 1980s, a situation (Hansen and Cook, 1999). The analysis there made even worse by the asset stripping that clearly demonstrated that a development path took place in the late 1980s and early 1990s based on competitiveness is the only one likely with perestroika. Second, much of the inherited to produce the sustainable improvement in equipment was energy-intensive, a reflection of Ukrainian living standards. This volume the low prices charged for energy under the therefore focuses only on measures needed to Soviet regime. Third, the inherited equipment establish a competitive market economy in was generally designed to produce Soviet-style Ukraine. goods that are not competitive outside the The competition-based growth strategy seeks former Soviet Union-or even within the region t mee nnow that the newly independent states can to maximize enterprise efficiency-and ipr ihrqaiygosfo ol thus overall economic growth and living mprthg standards-by creating an open, market-based economy within which enterprises must If Ukraine is to attract the investments needed compete both internally and externally to to become competitive and grow, it needs to remain profitable. Introducing such a strategy in establish a good business climate. Rather than the economic environment inherited from the using costly tax incentives and loan guarantees, Soviet era will require numerous changes. In the government should attract investment by the short run such changes will be disruptive- creating an environment that maximizes returns especially for those who temporarily lose their and minimizes risks for investors. This should jobs. Based on world experience-and on that not be done through fiscal interventions, but by of nearby countries such as Poland, Hungary correcting problems that make inputs artificially and Estonia that were part of the same Soviet expensive and that unnecessarily increase system until just a few years ago-it is clear investor risk. that a competitiveness strategy holds the best Increasing returns to investment. The key prospects for attaining the common goal of specthoa in prices affecting returns to investment in people from all parts of the political spectrum in Ukraine are those for capital, labor, materials, Ukraine-maximizing living standards for all Ukranias trouh 0susainblegroth.The government services, and foreign exchange. Ukralnians through sustainable growth. The Real interest rates on commercial loans are still challenge will be to find a way to handle the running 30-40 percent-an extremely high rate short-term disruptions in a way that makes that few legitimate enterprises can afford. adoption of this strategy politically and socially acceptable. Labor costs are basically low in Ukraine, but high payroll taxes and barriers to labor mobility Creating a good investment climate. No fixed need to be reduced to restore Ukraine's link exists between investment and growth. comparative advantage in labor-intensive Well-developed countries facing a slump in production. The cost to enterprises of demand can grow rapidly without significant maintaining "social assets," such as housing for investment simply by stimulating demand. workers, needs to be reduced. Material input Conversely, high investment may produce little prices are generally competitive, thanks to or no growth if the investment is poorly relatively low average tariffs, but this advantage targeted or the business environment is bad. for investors is being threatened by the current Given the dramatic collapse in demand for move to more protectionist policies. Ukraine's output since independence, Services provided by government-public substantial growth may be possible in certain safety, courts, infrastructure, education, areas without significant investment. But health-are all vital to profitable enterprise any significant recovery for the economy as a activity. Such services are largely paid for with whole will depend for at least three reasons xxii Ukraine: Restoring Growth with Equity taxes. In Ukraine the burden of taxes, measured URGENT REFORMS FOR STABILITY as a percentage of GDP, has been at least 25 as aperentae o GDP ha bee atleas 25 To avoid a serious economic crisis like Russia percent higher than in countries at similar levels ad arious economiuriss liecsi of per capita income. The burden for thoe years, Ukraine needs to maintain a sustainable hidingly in the awec ose hgher. n budget deficit, a realistic exchange rate, and hiding in the shadow economy-is even higher. son mneayplcs.Wtuths,te The ostof gvermentthu redcesthe sound monetary policies. Without these, the The cost of government thus reduces the rsoaino rwhwudb ital attractiveness of Ukraine to legitimate rsoaino rwhwudb ital investors, impossible, and the risk of a poverty-increasing crisis would be very high. The price of foreign exchange is also critical to investment returns. An artificially low value for foreign exchange reduces the cost of imports Because of the adverse terms on which Ukraine and value of exports in local currency. As a borrowed to cover past budget deficits, result enterprises find it hard to compete with attaining a sustainable balance between imports, and they may receive too little in local revenues and expenditures will require running currency from the sale of exports to cover their a primary surplus (excluding interest on debt) cost of inputs. A realistic exchange rate, of at least 2 percent of GDP. Ukraine cannot established by market forces free from afford to borrow to cover interest costs. This is administrative constraints, is thus vital to a sure road to debt pyramids and default. creating an attractive investment climate. A realistic exchange rate Reducing risks to investors. In addition to The exchange rate needs to be allowed to seeking maximum returns, investors seek balance the real underlying demand and supply minimum risks. In the past the government has for foreign exchange. Following the crisis in sought to reduce risk by offering guarantees on privte oans Ths aproah dos nthin to 1998, a broad range of implicit and explicit private loans. This approach does nothing to mesrsweinodcdt cnrlth measures were introduced to control the reduce risk-it simply shifts the risk from the demand and supply of foreign exchange in investor to the government. As a result, the Ukraine. As a result it has been impossible for government faces costly loan repayment obigovenmn facemuch ter loappah f the market to reflect the true scarcity value of obligations. A much better approach for foeg exhn.Tegvrmntsul government is to remove or mitigate the factors forein exche e oernment s continue to lift these controls as quickly as that increase risk. Unpredictable prices and possible. The devaluation resulting from lifting exchange rates make it difficult for investors to the controls would help ensure continued estimate the future return on investments. profitability for competitive exports and Inflation and devaluation are usually driven by provide a reasonable degree of protection, government deficit spending. Controlling allowing domestic producers to compete with budget deficits is therefore the most important step that can be taken to reduce the instability of prices and exchange rates. Sound monetary policy Other major risks that the government could Ukraine must walk a fine line with respect to reduce through good policies, making Ukraine monetary policy. If it were to follow a more attractive to investors, include non- substantially looser monetary policy as some enforcement of contracts; unpredictable politicians are urging, the country could slide changes in laws (especially tax laws); back into hyperinflation-with devastating inadequate property rights protection; and consequences, especially for the poor. But if it regulatory intervention by government continues to seek price and exchange rate inspectors that is random, nontransparent, stability by using tight monetary policy to unpredictable, and often costly in terms of compensate for loose fiscal policy, the formal bribes that must be paid. The government economy will accelerate its downward course. should fix these problems-all of which it can With loose fiscal and tight monetary policies, control-rather than offering guarantees that producers would be crowded out of domestic simply shift the risk to the budget. capital markets by excessive government Executive Summary xxiii borrowing to cover the fiscal deficits and would to bring firms from the shadow into the formal be unable to find financing at reasonable costs. economy, the tax burden on firms in the formal Under such conditions, monetary payments economy would continue to drain away the would increasingly be replaced by barter. Total resources urgently needed for investment and production would shrink. An increasing share growth. The reforms clearly need to be treated of economic activity would move into the as an integrated package. shadow economy. And the government- Top three structural reform areas without resources-would find it ever more difficult to provide essential human services Although virtually all of the structural reforms and public safety listed below are vital to Ukraine's future, one over-arching reform emerges from all this- URGENT STRUCTURAL REFORMS changing the role of Government. This in turn The urgent stabilization measures outlined in can be broken down into: the previous section will help prevent a serious * reforming the structure of government new economic crisis-but will do little to through administrative reform; stimulate economic growth. To restore growth and higher living standards, Ukraine needs to * reducing government control of production implement deep structural reforms as soon as through deregulation; and possible-reforms designed to fundamentally 0 reducing government ownership of change the role of Government in the economy, production through privatization. to create a good business climate, and to protect people during the transition. A full list of the Attaining these objectives will require structural reforms suggested in the body of this implementing many of the more detailed report are given in Annex A. The top priority reforms listed below to succeed. For example, items from that list needing action within the changing the administrative structure of next 6-12 months appear below. government will have no impact if the policies of the past continue to be imposed. Likewise, Even this short list of priority structural reforms t erring owne fompublic tie is firl lon an deandig, ut tyin to transferring ownership from public to private is fairly long and demanding, but trying to hands is simple. If this were the only objective, achieve sustainable results with a shorter list of he p y simpl y be gienay btto rcfoms-r byimpemetingonl som ofthe the property could simply be given away. But to reforms-or by implementing only some of the b ucsfl rvtzto eursago reforms-would almost certainly lead to failure since the reforms are closely inter-dependent, process that optimizes benefits to Ukraine in terms of selling price, new investment, For example, the government might choose to emlom ent in grwth Priv tional focs o prvatzig eterriss ut ot ddrss employment, and growth. Privatization also focus on privatizing enterprises but not address requires the reforms needed to assure that the issues of deregulation, expenditure and rqie h eom eddt sueta the ssus ofdergultion exendiureand privatized enterprises can function in a normal deficit control, the enforcement of bankruptcy, make enron et. 'market environment. or the "de-shadowization" of the economy, but this could easily lead to a worsening of an Implementing the following list of priority already bad environment. The newly privatized reforms in the next 12-18 months would help enterprises would find it difficult to make the establish such an environment. The list looks decisions necessary for profitable operation first at the changes need in the structure and because of excessive controls. Without effective role of Government, then at the key changes measures to reduce budget expenditures and required in policies for each of the main sectors deficits, government borrowing in local of the economy. financial markets would leave real interest rates Structure and role of government for working and investment capital beyond the reach of legitimate enterprises. Without strong * Apparat: Reform the "Apparat" of the actions to enforce payments discipline- Cabinet of Ministers so that it focuses on including an effective threat of bankruptcy-the policy coordination rather than policy privatized firms would continue to face a making. serious risk of failure because contracts for payment are not enforced. And without efforts xxiv Ukraine: Restoring Growth with Equity * Cabinet structure: Consolidate the Cabinet business climate, the government needs to so that it becomes a small collegial body privatize attractive enterprises (including focused on strategic policy formulation. firms in energy and telecom) through a transparent process consistent with * Deregulation: Reduce the number of trnatint pr ivtit busiessinspctins y haf a meaure by international standards. New privatizations business inspections by half as measured by should total USD 1.0 billion by the end of independent surveys; and sharply limit the the year 2000. number of routine tax inspections. * Tax privileges. Reduce tax privileges so that Agriculture all economic activity is subject to essentially * Bread of Ukraine. Privatize 100 percent of the same rates of tax (aside from "sin" taxes all commercial grain storage capacity in on alcohol, tobacco and a limited list of Ukraine. Government can then issue luxury items). competitive tenders for storage of state * Tax rates. Apply a flat rate of VAT, reserves, if such are still deemed necessary. somewhat lower than present levels across * Input supply and output marketing. Ban all the board except for exports which, by "commodity credit" transactions. Allow free international convention, are zero rated. entry and operation of private sector businesses in supplying inputs and * Enforcement of hard budget constraints. markein o uts iut sco Make enforcement of contracts, including marketing outputs in the agricultural sector. through the implementation of an effective * External trade policies in agriculture: bankruptcy system, an important focus of Remove all tariff and non-tariff barriers to government activity, thus establishing a export of agricultural products. badly-needed "hard budget" culture in Energy Ukraine. * Electricity privatization: Sell controlling * Inter-governmental fiscal relations. blocks of shares of all oblenergos to Implement formula based intergovernmental strategic investors on a competitive basis transfers and clarify inter-governmental through open international tenders with the expenditure responsibilities, assistance of internationally reputable * Social protection. Any budgetary support privatization advisors. deemed necessary for poverty alleviation or * Coal mine closures: Transfer at least 20 other reasons should be budgeted explicitly additional mines to UDKR for closure in the and included in the overall budget deficit. next 6 months and provide UDKR with no Consolidate fragmented social assistance less than UAH 25 million from the state program under the housing support program budget every month to cover the costs of so that it becomes a comprehensive, means- statutory benefits for laid-off miners and tested social safety net that is able to provide physical closure of mines. more adequate protection for the poor during the transition process. * Gas transmission privatization: Award a long term concession for the operation and management of the entire gas transmission * Tax policy, deregulation, contract enforce- system to an international consortium of ment, and bankruptcy. Major changes in strategic investors through a competitive government's role in these areas are vital to tender. creating a good business climate that fosters Banking system investment, especially in small and medium enterprises. * Bank closures. Initiate the closure of any major bank not showing any real prospects * Privatization. To help close the budget and for ecovery. BOP financing gap for 2000, and as a stimulus to creating a more favorable Executive Summary xxv Shadow Economy statements of Soviet GDP figures, the large Spread and lower tax burden. Reduce share of military and other non-consumable, incentives to hide in shadows by lowering non-productive output in Soviet GDP, and the tax rates-and by simultaneously widespread scarcity and low quality of enforcing consumer goods and services during that era, e iatax p rivileges a. Ukraine could probably restore or even surpass the real living standards of the late 1980s * Reduce regulatory burden. A major, within 8-12 years-or even earlier-even at this measurable reduction in the regulatory more modest pace of growth. burden imposed on enterprises is urgently In short, as bad as the 1990s have been for needed to encourage activity to shift to the Ukrainians, the future is promising if the formal sector. country implements the necessary policies- * Enforce contracts. Major improvements are and if Ukraine can, at the same time, preserve needed in the nation's economic court social solidarity and equity by implementing system to improve contract enforcement. jobs-oriented policies supported by an adequate social safety net. With such policies, the PROSPECTS FOR THE FUTURE children now becoming teenagers could be If Ukraine pursues a competitiveness strategy, enjoying a standard of living better than what takes the crucial measures needed to avoid their parents enjoyed prior to the collapse of the deficit spending, and implements essential Soviet system by the time they are having structural reforms, it should be able to halt children of their own. economic decline and restore growth within 12- Ukraine's only viable path to restoring past 18 months. The timing and speed of this growth living standards is to create a vibrant, export- will depend on the speed and quality of the oriented, internationally competitive economy necessary reforms. These, in turn, will affect the based on private sector initiative. To make this credibility of Ukraine as a location for possible, Ukraine will need to undertake far- investment, its ability to regain access to private reaching changes in the role of government, international capital markets, and its access to restructure production sectors, improve the increased support from international financial investment climate, and provide high-quality institutions. education, health, and social protection. The If work on the full agenda of structural reforms challenge now is to reach a national consensus summarized above (and detailed in Annex A) on the need for such changes, and then to begins immediately, and if Ukraine completes implement the reforms as swiftly as possible- most of the agenda within the next two or three before more time is lost and the process years, it could attain its official target of becomes even more difficult. Fundamental doubling 1997 per capita GDP by 2010. structural change will indeed involve pain, but the pain of not reforming would be even worse. If the pace of reform is less rapid but still much On the other hand, the gains from reforms will faster than since independence, annual growth be very large. With the necessary policy rates of at least 3-4 percent could be attained, changes in place, the future of Ukraine will At this pace, doubling GDP would take longer, indeed be bright. but Ukraine might still recover its previous living standards more rapidly than the raw numbers would indicate. Adjusting for the over- xxvi Ukraine: Restoring Growth with Equity 1. THE LONG ROAD TO RESTORED PROSPERITY All the countries that emerged from the former heritage also helps to explain Ukraine's Soviet Union saw living standards fall and subsequent problems-large enterprises poverty rise. But Ukraine has found it employing thousands of employees are much particularly difficult to restore growth. Why? A harder to downsize and restructure than small large concentration of energy-intensive ones because of the concentration of political industries made initial conditions in Ukraine and economic power. less favorable than in other countries. These Other formerly Soviet countries-the Czech initial difficulties were compounded by the Republic, Estonia, Hungary, Poland-quickly deficits resulting from slow enterprise reform imposed hard budget constraints on large public and by the government's tendency to live enterprises and privatized them. Ukraine, by beyond its means. Although hyperinflation- contrast, propped up these enterprises with direct fueled by printing money to cover the deficits- subsidies, directed credits, and tax concessions has ended, the deficits persist, and tight (Lunina 1999; l1chuk 1999). These efforts were monetary policies together with loose fiscal ostensibly made to prevent unemployment, but policies have created a fragile stability that has in retrospect it seems clear that other political brought stagnation, not growth. After years of forces played a major role. economic decline, poverty is a growing problem. And limited financial resources have made it difficult to clean up environmental Figure 1.1 Economic recovery in other former problems inherited from the Soviet era. Each of Soviet states outpaces that in Ukraine these obstacles is examined below. Economic Recovery in Post- Soviet Countries, 1998 STEADY ECONOMIC DECLINE Although Ukraine's large shadow economy makes it hard to measure GDP, officially reported GDP is only about 40 percent of the Gauto9 level in 1989. Already, the economic decline in Ukraine has been twice as severe and lasted tece twice as long as the Great Depression in the United States. Comparisons to the United State are flawed, however, because during the Soviet era _essis Ukraine's GDP was overvalued. Moreover, a Os,V large share of output went to inefficient investment and military production. To the iYJ eP extent that output has fallen because of declines e 1990 =100 in such production, the impact on living a190=l standards is less than is shown by official GDP data. Still, Ukraine's economic decline has been 0 50 100 150 severe (figure 1.1). Source: World Bank, World Development Indicators. At independence Ukraine was widely believed Many enterprise managers made large profits to have excellent prospects. It was the most by, for example, establishing private companies developed former Soviet republic, with to buy and sell goods to state enterprises at considerable capacity in heavy industry artificially high prices. Thus profits moved from (military-industrial complex, metallurgy, state-owned enterprises into private hands, and machine building, chemical industry). But this the government covered the losses with more The Long Road to Restored Prosperity 1 subsidies and other support. Some of the gains country like Ukraine, given that it is not from this system were shared with the growing and generating a surplus that can be government officials who made the transfers used to repay loans taken out to finance the possible, assuring their interest in maintaining deficit. the system. These problems were compounded by the tendency to impose direct controls rather than cometiive arkt slutins hen Figure 1.2 Financing of budget deficits led than competitive market solutions when hg nlto problems arise. High inflation Ukraine: Money Supply and Many of Ukraine's economic problems can be Inflation, 1990-98 traced to the hyperinflation of 1992-94. At its 10,000 peak inflation reached nearly 10,000 percent (figure 1.2). Hyperinflation was partly triggered 4 by the dramatic structural price adjustments that 1,000 came with the breakup of the Soviet Union. The price of energy, a crucial input for Ukraine's 100 farms and factories, increased about 10-fold. Inflation was also triggered by price adjustments in Russia in 1991-92. 10 Money Supply Growt A more important cause of hyperinflation, however, was the sharp expansion in the money supply in the first half of the 1990s (see figure 6 6 s . 1.2). This growth was directly linked to the financing of government deficits during the Source: National Bank and State Statistics Committee. early years of independence. Some countries have achieved respectable economic growth despite inflation. In fact, when Figure 1.3 High inflation tends to stunt growth annual inflation is less than 25 percent, it has little correlation with growth (figure 1.3). Annual Inflation and Per Capita Beyond that, however, growth generally drops Average of 127 Countries quickly-and Ukraine is no exception. During 1992-94 its economy declined by more than 50 3 percent. Though other factors contributed to the decline, inflation was an important problem. o Ballooning deficits 2 - Since independence budget deficits have B. .4- averaged between 6 and 12 percent of GDP- two to four times the 3 percent maximum set by 0 0 0 the Maastricht Treaty for EU countries (figure 2 . . ".0000 1.4).' Even the EU limit may be high for a W 0 Annual Inflation (in ranges, percent) These official figures significantly understate the real magnitude of the deficit because they do not take into Source: Bruno and Easterly 1995. account the accumulation of arrears in the early years of independence, nor do they reflect the quasi-fiscal deficits represented by loans that the government directed the banking system to extend to enterprises instead of extending subsides from the budget. Deficits may have estimated at up to 33 percent of GDP (World Bank 1993, ranged from 25 to 30 percent of GDP in 1992 and 1993. vol. 1, p. 4). Including quasi-fiscal operations, the deficit has been 2 Chapter I In the early years of independence these deficits percent for the year. And with economic were financed primarily by the central bank, uncertainty, output again turned down. Ukraine which explains the sharp increase in the money ended its ninth year of economic decline with a supply. More recently, the deficits were drop of 1.7 percent for the year, bringing the financed by heavy foreign borrowing and then overall decline since 1989 to about 60 percent. by treasury bills, many of which were sold to foreign investors. Slow reforms have been the main reason for high deficits. Of particular Figure 1.4 Budget deficits greatly exceed concern are the slow reforms in the role of the EU limit government (see chapter 2) and in the reform of enterprises in banking and in agriculture, U : lae industry, and services-collectively, the "real" balance economy (see chapter 3). The crisis of 1998 0 a. 7 In recent years the Ukrainian government has a cut budget deficits and limited the degree to - which these deficits are financed by borrowing from the central bank. As a result inflation fell -6 - to 10 percent a year in 1997, helping to slow the 2 _ economic decline (figure 1.5). In the second quarter of 1998 Ukraine experienced growth for -10 the first time since independence, and prospects -12- looked good for slight growth for the year as a . A i b whole. Then on August 17, 1998, the Russian so , 6 6 crisis hit. Source: Ministry of Finance. In the weeks that followed, Ukraine had extreme difficulty rolling over its debt obligations and would have fallen into default had it not been for an innovative "bail-in" arranged with its Figure 1.5 The economy is stabilizing, but there main creditors (see below). The exchange rate is still no real growth had already been under considerable pressure Ukraine: GDP Growth, 1993-1998 earlier in the year, and Ukraine borrowed (year-on-year % change, cumulatively) *Q4 Q I Q2 Q3 Q4 QlI Q2 Q3 Q4 QI Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 heavily to support the currency-spending 93 94 94 94 94 95 95 95 95 96 96 96 96 97 97 97 97 98 98 98 about $3 billion trying to defend the exchange 0 rate. But after reserves dropped below $1 billion -s (about two weeks' worth of imports), Ukraine allowed the currency to adjust. On September 1, -10 1998, the exchange rate band was moved from -15 1.802.25 UAHIUSD to 2.5-3.5 UAH/USD. -20 Administrative controls were introduced to prevent the enormous swings that had hit the -25 Russian exchange rate, and over the next few weeks the rate was allowed to climb to the upper end of the new range. Although central bank as -- intervention since September has been nominal, Source: State Statistics Committee. continued "short-term" controls on the foreign exchange market make it impossible to Although some analysts blame the crisis in determine how close the current rate is to a true Russia for Ukraine's debt servicing crisis, equilibrium rate. With the devaluation, inflation devaluation, increased inflation, and economic increased significantly, reaching about 20 decline, Ukraine's economic situation was the The Long Road to Restored Prosperity 3 real source of the problem. Other countries in Figure 1.6 Ukraine's dependence on Russia as a the region in close proximity and with trading partner has declined but is still significant substantial trading ties to Russia-the Baltic Ukraine: Trade with Russia countries, Hungary, Poland, Turkey-escaped 70 without major economic setbacks. The Russian EExports E Imports crisis simply revealed the underlying weakness 60 of Ukraine's slow structural reforms. Ukraine's trade links with Russia contributed to . 50 its economic problems after the Russian crisis. 040 Although Ukraine has diversified its exports and 0 imports since the breakup of the Soviet Union, 3 Russia remains an important trading partner (figure 1.6). More important than the initial a. 20 Russian devaluation were the impact of the Russian default on global capital markets and 10 the impact of the economic decline in Russia on its demand for imports from Ukraine. Largely 0 because of the latter, Ukraine's imports dropped 1996 1997 1998 14 percent and its exports, 13 percent. Source: National Bank of Ukraine. Still, short-term public debt was at the heart of Figure 1.7 T-Bill volumes and costs quickly rose to Ukraine's crisis. Although Ukraine's stock of t- unsustainable levels bill debt had grown at an explosive pace in recent years (figure 1.7), the biggest problem Ukraine: T-Bills was not the size of the debt-which was equal 80 - ---12 000 to about 10 percent of GDP-but the terms on which it was contracted. First, the average 60 - -_-1 maturity of the debt was less than one year, 40000 which meant that the entire amount to be paid 4- Real Return7 off or refinanced each year exceeded the stock 2eft scale) 8 8 000 of debt. Second, the interest rates that Ukraine 20 had to pay to place this debt were 0 0 - , ' 6000 ? extraordinarily high in real terms (see figure / 1.7). As a result monthly debt service exceeded a -20 T-Bill Stock monthly cash revenues during much of 1998. -4(right scale) 4 000 Had it not been for debt restructuring at the end - of the year, debt servicing would have exceeded -602 000 budgetary revenues by the end of 1998. I Until the East Asian crisis much of the foreign -80 - - - - 0 01 03 Q1 03 Q1 03 01 03 money to buy t-bills was coming from Russia, 1995 1996 1997 1998 because yields on Ukraine's t-bills were up to Source: World Bank data. 600 basis points higher than Russia's, and the stable hryvnia gave investors a false sense of If Ukraine had been in a strong position, it security. Once the East Asian crisis hit Russia would have been able to replace local currency and investors began to shy away from emerging borrowing with expanded borrowing in markets, interest rates in Moscow increased and European markets. In fact, during the first half Russian investors took their money back to of 1998, Ukraine borrowed about USD 1.1 Moscow. And once the Russian crisis erupted, billion there through a series of Eurobonds international investors began to stay away from denominated in deutsche marks and in European all emerging markets in the region. currency units at interest rates of 15 percent or higher in hard currency. But aside from a $155 4 Chapter I million t-bill placement through ING-Barings in pain that slow structural reform has caused August 1998-a placement made possible only (figure 1.8). by offering a 55 percent coupon in hryvnias and a guarantee of 17.5 percent in dollars-the Figure 1.8 Ukraine's human development government was unable to mobilize resources index has plummeted from abroad during the second half of 1998. And on September 9 Moody's downgraded Falling HDI in Ukraine, 1992-1996 Ukraine's credit rating to B3, placing it in the middle of the "lower non-investment grade" 0.85 category along with Romania and Russia. With international credit markets effectively 0.8 closed, Ukraine looked internally to refinance its debt. But this was not feasible for three 0.75 reasons. First, the government's gross financing requirements (the primary deficit plus interest 0.7 and amortization) greatly exceeded new credit creation in the domestic economy. Second, 0.65 asking the central bank to increase the money supply to cover the government's borrowing 0,6 requirements could have triggered a surge in 1992 1993 1994 1995 1996 inflation. Third, a substantial share of t-bills and other short-term government obligations had Source: UNDP 1997, Human Development Report been sold to foreign investors, and when those for Ukraine. investors wanted to liquidate their positions in Ukraine after the Russian crisis, Ukraine had In 1991 Ukraine's human development index trouble providing the necessary foreign placed it at 32nd place among 175 countries, but exchange. by 1995 it had dropped to 95th in this same group. During this same period Ukraine has had In the end Ukraine worked with its creditors to to deal with a variety of environmental restructure most of its debt, reducing the debt problems, including the aftermath of the 1986 servicing burden to more sustainable levels, at Chernobyl disaster. least for 1999. In doing so, Ukraine became one of the first countries to have a "bail-in" instead Falling incomes of a bailout. By this time international lenders of With an average income of $2,760 per person in last resort-such as IMF-had become cautious 1990, Ukraine enjoyed the third highest about bailing out international investors who standard of living among current members of had made risky investments. Thus in Ukraine the Commonwealth of Independent States the investors were asked to bail in-to (excluding the Baltic's).2 At the time Ukraine contribute through a restructuring of the was richer than two-thirds of the countries in the outstanding liabilities to the resolution of the world, at least according to official statistics.' debt servicing crisis. Life expectancy at birth was more than 70 years, THE IMPACT ON SOCIAL CONDITIONS Human suffering has been the greatest cost of 2 Yuri Dikhanov, "Decomposition of Inequality Based on slow structural reforms in Ukraine. Family Incomplete Information," World Bank, 1996, p. 22. incomes have declined, and health standards 3 Living standards were overstated by official statistics for have deteriorated. The sharp decline in at least two reasons. First, although the incomes were paid, Ukraine's human development index-which long queues were mute evidence of the fact that the money reflects life expectancy at birth, adult literacy exceeded what was actually available to buy, and thus rates, gross school enrollment, and real GDP money incomes did not reflect real incomes. Second, the dramatic evidence of the exchange rates used to convert rubles into dollars were per capita--provides artificially established by the Soviet authorities. The Long Road to Restored Prosperity 5 and the gross enrollment ratio of 76 percent was on public transportation and heating), the cutoff on par with that in Japan and Switzerland.' is normally $4 a day. By this criterion, about 75 But slow structural reforms since 1990 and the percent of Ukrainians were living below the loss of energy subsidies from Russia have taken poverty line (on a purchasing power parity a heavy toll on the average Ukrainian family.' basis) in 1997. Per capita incomes had fallen by 1998 to just $1,040 at market exchange rates, placing Figure 1.9 Many Ukrainians have fallen below Ukraine in the 40th percentile in terms of per the poverty line capita income. Many Ukrainians had substantial savings at the beginning of independence, but Ukraine: Distribution of Cash these were largely wiped out by the Income, 1997 250 hyperinflation of 1992-94.5 Increasing poverty £ 200 Of even greater concern than income levels is 0 E the 40 percent of Ukrainians now estimated to be living below the poverty line (figure 1.9). $. 150 Poverty Line Estimates of household expenditures from a UAH 73.7 or UAH 66 0) 1 in 1997 prices 1996 World Bank study paint a brighter picture, CL in 1.997 pric showing only 30 percent of people living below C the official poverty line. But the official Ukrainian poverty line at the time, equivalent to -3 50 about $0.80 a day, was certainly set too low, Poverty Line and so understates the incidence of poverty. 0 UAH 48.5 The World Bank normally uses poverty lines of 1 2 3 4 5 6 7 8 9 10 $1 and $2 a day to measure destitution and Income Deciles simple poverty in its low-income member Source: State Statistics Committee. countries, which generally lie in temperate or tropical climates. For transition economies, Growing income inequality also creates social which tend to be more urbanized and have and economic concerns. During the Soviet era colder climates (thus requiring more spending Ukraine (and Belarus) had the most equal income distribution of any republic, as measured by the Gini coefficient. This common 4 The gross enrollment ratio is the number of students measure of inequality stood at 22 for Ukraine enrolled in primary, secondary, and college education and 26 for the Soviet Union as a whole. expressed as a percentage of the population in the relevant age group for these levels of education. Similarly, the richest 10 percent of Ukrainians s This Soviet-era subsidy and related price distortions have earned 3.88 times as much as the poorest 10 been estimated to have added 2-3 percent to Ukraine's percent, compared with 5.66 for the Soviet GDP (World Bank, 1993). Union as a whole. 6 Since around 50 percent of total production in Ukraine By 1997 income inequality had increased may be in the shadow economy, the real decline in living y 1 standards is probably considerably less than indicated by significantly. Such a change is normal, even the dramatic decline in official per capita income data, but desirable, as a country moves to a system where the physical indicators of the quality of life, particularly income differentials provide incentives for those related to health, indicate a sharp increase in the people to get more education, work harder, and number of people living in real poverty, take on more responsibility in exchange for Expenditures are a much better indicator of living higher incomes. Today the situation in Ukraine standards than cash income for two reasons. First, people is similar to that in advanced market economies. tend to underreport income for tax and other reasons. For example, Ukraine's Gini coefficient of 38 Second, at the lower income levels in Ukraine, income in kind-the form of food from household garden plots- compares with 25 for Sweden, 33 for France, adds substantially to the cash income of households. 6 Chapter 1 and 40 for the United States.' Thus the solution Table 1.1 Families with many children or to Ukraine's growing poverty problem does not elderly are the most likely to be poor lie in reducing income inequality. Rather, it lies Poverty incidence in Ukraine in implementing the policies needed to Poverty headcount accelerate growth sharply so that even poor Indicator index families have enough income to avoid absolute Average 30 poverty. 0Number of children O 27 A final area of concern is the incidence of 1 32 poverty across population groups. From a policy 2 34 perspective this pattern is important because it 3 or more 48 suggests the social protection measures that Number of people over 65 would have the greatest impact on reducing 0 23 1 34 poverty at the least possible cost. The most 2 o4 vulnerable group in Ukraine is families with Dependency ratio (children and elderly) more than three children-especially if the 0 16 family is headed by a single parent, usually a 0.25-1.0 31 woman (table 1.1). The policy implications of 1.25-2.00 44 such findings, in terms of designing an 2.25 + 67 appropriate social safety net, are spelled out in No active adults 39 chapter 5. Rural/urban Rural 27 Deteriorating health Semi-urban 28 Sharp increases in sickness and death since Urban 33 1990 demonstrate the devastating impact of Regional distribution South 26 Ukraine's depression on the lives of ordinary West 28 people. Spending on health services is one of Central 29 the largest categories in the government budget, East 35 yet the system is deeply in debt and failing to Education deliver urgently needed care. Even radical Primary or less 37 reforms will bring results only gradually Secondary 31 because of entrenched inefficiencies. Still, it is Special. Sec. 27 essential for financial stability-and even more Higher 20 important, for the health and welfare of the Source: World Bank (1996), Poverty in Ukraine. peoplec-that these reforms be launched immediately. today and 2.0 in 1990, imposing an impossible burden on the working population. Population decline. Since independence Ukraine has experienced a sharp drop in Why has the population declined? Higher population growth-so sharp that the resulting mortality and lower life expectancy are increase in dependency ratios (the number of important factors. Among the leading causes of non working to working persons) may adult deaths are heart failure, lung cancer, undermine the financial sustainability of various alcohol-related problems, suicide, and other social programs. The threat to the pension forms of violent death, including accidents. system is significant because, under the current Migration has also played a role in Ukraine's pay-as-you-go system, today's workers pay the declining population. During 1991-92 more pensions of today's pensioners rather than people were moving into Ukraine than were saving for their own retirement. If current trends leaving, with particularly large inflows from the persist, by 2056, there will be only 0.5 workers Baltic states, the Trans Caucasian region, and supporting each pensioner, compared with 1.6 Kazakhstan. But since 1994 migration has reversed, as continued economic decline has forced people to seek economic opportunities World Bank, World Development Indicators, pp. 68-70 The Long Road to Restored Prosperity 7 elsewhere. On a net basis, more than 400,000 Ukrainian authorities in moving people from the people left Ukraine between 1990 and 1997. contaminated areas and in treating those who suffered exposure. This also confirms the Low birth rates are the final factor explaining Z experience in Belarus-which received a major the population decline in Ukraine. Birth rates exprence inlBelars-wh receiveda mao fel frm 1.0 er 0,00 i 195 t 1.i share of the fallout from Chernobyl-that the f990 andm 9.0per0,000 in 1997.8Thi the 19s iloss of life and rate of illness due to the disaster 1990 and 9.0 in 1997. The decline in the 1980s aemc oe hni omnyblee.I probably reflects the disintegration of the e m pfact, the psychological trauma of the accident economy prh aps e or the seems to have been worse than the physical Union and, perhaps more important, the dage reluctance of couples to raise children in post- Chernobyl Ukraine. The decline in birth rates Other leading causes of illness in Ukraine since 1990 is almost certainly linked to include diseases of the circulatory, respiratory, Ukraine's difficult transition to a market and digestive systems. In part because of its economy. large number of intravenous drug users, Ukraine has one of the highest and fastest growing rates As Ukraine restores economic growth and as g g g of HIV infection in Europe, with a growing the large cohort of today's teenagers reaches C number of full-blown AIDS cases. Syphilis is child-bearing age, there is every reason to .b also on the rise, increasing by nearly 8 times believe that the population will stabilize or even since 1992 and now 74 times the rate of g,row--reatly reducin- the risk of labor. e d i e infection in the European Union. Tuberculosis shortag:es and dangerously high dependency st and d l hy cases are increasing as well, and waterborne ratios in the pension system. diseases (including cholera) are a major source Morbidity and mortality. Slow structural of illness. reforms have contributed to high rates of In short, Ukraine is in the midst of a health care sickness and death in Ukraine. The average crisis. The solution is not more money, because death rate rose from 13.4 per 100,000 people in the government is already spending more than it 1992 to 15.4 in 1995, and is now more than 50 percent higher than in the European Union. In caneaffrd unle mador Instae rae 1995 life expectancy at birth was just 67 years et e in Ukraine, compared with more than 77 years structural reforms are required (see chapter 5). in the European Union. And infant mortality, at Education needs 15 per 1,000 births, is more than twice the rate Ukraine's education system is relatively good, in the European Union. and the problems that do exist will likely be The death rate from heart attacks and other easier to fix than those in the health system. circulatory failures is running three times the Education standards have been high for many level in EU countries. Over the past five years years and show no significant signs of deaths from heart attacks and related problems deterioration. Nearly 100 percent of Ukrainians have increased 40 percent. Other leading killers are literate, and with an average of 11 years of are "external" factors, including accidents, schooling completed, Ukrainian standards are homicides, and suicides. The stress of the consistent with those of the European Union. difficult transition to a market economy is seen Still, the quality and focus of the education in all of these indicators-especially in the system need substantial improvements to meet suicide rate, which for men rose from 41 per the demands of an industrial, modern market 100,000 in 1993 to 52 in 1997, compared with economy (see chapter 4). about 20 in Europe. Environmental problems- Despite the horrors of the Chernobyl disaster in and possible solutions 1986, the death rate from cancer today is the Ukraine is blessed with one of the world's same as the European average. In fact, cancer se alargest areas of fertile black soil, Europe's third has fallen sharply as a cause of death (from 16.5 longest river,audnfoetintesth st percent of all deaths in 1989 to 12.8 percent in ai a long coastline along the once-fertile Black 1996). This is a credit to the success of the 8 Chapter 1 Sea, and hydrocarbon reserves that could make Vody city in Dnipropetrovsk Oblast, where raw the country largely self-sufficient in gas within a uranium is processed and a dump for radioactive few years. But Ukraine is also burdened with waste is located. More broadly, tens of tons of serious ecological problems-the result not only used nuclear fuel, tens of thousands of cubic of the Chernobyl disaster but also of more than meters of solid radioactive waste, and tens of 70 years of Soviet exploitation and ecological millions of tons of liquid radioactive matter abuse. There is a massive backlog of have piled up at Ukrainian nuclear power environmental cleanup, especially for water stations, creating a massive environmental pollution and solid waste disposal. There is one liability for which there is no known affordable bright spot, however: the economic decline has solution. actually reduced air and water pollution. Industrial polluton. Industry in Ukraine Chernobyl and other nuclear contamination. adversely affects both the general environment The Chernobyl disaster and its effects have and the work environment for industrial overshadowed other environmental issues in employees. Despite the drop in industrial output Ukraine. The accident was truly of epic noted above, industrial air and water pollution proportions-it was the world's first major remain highly detrimental to human health. meltdown of a nuclear reactor core. An Economic losses from health-related problems estimated 26 people died almost immediately of have not been calculated at the national level, radiation poisoning, most of them the but visits to individual plants show that workers "liquidators" who contained the fire after the often do not wear protective gear and that there initial explosion and cleaned up the site are serious occupational health hazards in afterwards. About 3.25 million people were mining, chemical, and metallurgical industries. exposed to the radiation, with about 300,000 Such problems were largely underreported in forced to move out of the "exclusion zone" the past, but in the early 1990s reporting began surrounding the plant. The entire town of to improve. Prypyat, where Chernobyl workers lived, had to Working conditions are particularly unsafe in be relocated to Slavutych. Some 4-6 million heavily industrialized areas such as Donetsk, hectares of land have been closed to human home to many of Ukraine's mining, chemical, habitation in Ukraine, of which 3-5 million and metallurgical industries. Of 1.2 million hectares is agricultural land. Overall, about 6 w percent of Ukraine's population and 11 percent envir s ta re no pet sir an of its agricultural land were affected by the h ealt ta ar orplacesproblems accient.health standards. Major workplace problems accident. include unacceptable air quality (affecting 28 With the breakup of the Soviet Union, which percent of workers), high noise levels (16 originally helped pay the costs of the Chernobyl percent), and high vibration levels (5 percent). accident, Ukraine must now handle them largely During 1993-96 some 6,860 new cases of on its own. The sarcophagus covering the occupational disease were registered in Donetsk, burned-out Unit 4 at Chernobyl urgently needs nearly all of them associated with coal mining. $760 million in repairs. Replacing the During this same period 23,200 occupational generating capacity of the three remaining injuries resulted in more than 550,000 lost work reactors and shutting them down days. The exceptionally low life expectancy in permanently-a high priority not only for heavily industrialized areas reflects the severity Ukraine but also for its European neighbors- of these problems-men are expected to live would cost an estimated $130 billion, or 12 just 60 years. times the consolidated government budget for times tSeveral immediate, inexpensive actions at the plant level could improve safety and reduce Although the areas directly affected by pollution: Chernobyl are the common focus of attention Introducing better safety procedures and and concern regarding atomic waste, the most equipment to reduce industrial accidents. unfavorable ecological situation is in Zhovty The Long Road to Restored Prosperity 9 * Strengthening cleaning, housekeeping, and altering the municipal waste management materials handling programs to reduce situation. In many cities the municipal solid fugitive emissions. waste system has effectively collapsed, with infrequent residential collection, extensive * Repairing and maintaining process and ilea upn,c-ipslo aadu polltioncontol euipmnt.illegal dumping, co-disposal of hazardous pollution control equipment. industrial waste, and extremely poor landfill * Attending to operating performance operations and uncontrolled landfill access. generally-including that of utilities-to Over the short term a lack of capital financing increase efficiency and reduce emissions. impedes system improvements. Over the long * Installing minimum instrumentation and term the barrier to system sustainability is an controls. inability to recover costs and provide for capital renewal. Still, some steps should be taken. * Implementing energy- and other resource- Wastes should be separated, and landfills should saving measures. be managed better. In addition, institutional and Freshwater and drinking water. The quality of fiscal actions are required to place municipal freshwater and drinking water is increasingly solid waste on a sustainable financial footing in being undermined by industrial, agricultural, terms of cost recovery and capacity to meet and municipal pollution. Over the past few future investment needs. decades communal water supply and wastewater Environmental funds. Environmental funds have treatment infrastructure have deteriorated, been set up in Ukraine to fine polluters, creating significant health risks for urban discouraging pollution and increasing the populations. About 70 percent of Ukrainians financial resources available to fight pollution. depend on the Dnieper River for water supplies. Payments by polluting enterprises split up, with Water pollution is a concern along the southern 30 percent going to the national budget, 50 segments of the river, especially near the cities percent to the oblast budget, and 20 percent to of Dnipropetrovsk and Kamiansk, because of a the local budget. Fines are paid for pollutants concentration of industrial and municipal emitted into the atmosphere by stationary and activities and large volume of wastewater mobile sources; pollutants discharged into discharges. Eutrophication is a serious problem surface waters, territorial and internal sea for the entire river. waters, and underground waters (including Groundwater is a source of drinking water for wastes disposed through communal sewerage about 15 percent of the population. Problems systems); and wastes disposed in the result from major chemical, metallurgical, and environment. mining activities. Rural areas also suffer Resource pricing. Low prices for energy, water, problems because of poor sanitary practices and and raw materials and a lack of accountability poor waste management related to livestock among enterprises have encouraged excessive production. resource use and sustained energy-inefficient Municipal water and sewage treatment utilities industrial activity. These factors have also are good candidates for economic reform. These discouraged the adoption of more efficient utilities should operate on a commercial basis technologies. The consequent pressure on the and be given operating and financial government and the environment to supply these autonomy-including the ability to set rates for resources has exacerbated environmental water and wastewater treatment that reflect the pressures. true costs of these operations and create a self- Water consumption is particularly high in both financing capability. industry and agriculture. Yet water charges, a Municipal waste management. Many municipal means of encouraging conservation, are landfills do not meet sanitary standards, and insignificant. Although water and wastewater some have exhausted their capacity. Since the charges have been raised in recent years, they early 1990s the number of landfill users (mainly are still low in real terms. small businesses) has increased considerably, 10 Chapter 1 2. TRANSFORMING GOVERNMENT FOR GROWTH As noted in chapter 1, budget deficits have been ADAPTING GOVERNMENT TO A MARKET a key factor leading to the inflation, devaluation, high interest rates, shortage of working capital ECONOMY and investment, and economic decline that have The role of government in Ukraine has not plagued Ukraine since independence. changed sufficiently since Soviet days. The Government spending has not been kept in line government is still heavily involved in with revenues, and the government continues to production and marketing in key economic areas impose a much heavier burden on economic such as large-scale manufacturing and activity than is typical in other countries at agriculture. Although most small similar stages of development. Reforming nonagricultural enterprises have been privatized, government will require changing the level and the "giants" generally remain under government focus of government spending so that services control. Agricultural production operates largely that cannot be provided by the private sector can on the basis of collectives, not private farms, be provided at high quality and low cost by the and the government actively intervenes in the public sector, leaving all other activities to the marketing of agricultural output through state private sector. orders and controls on the storage and Major reforms are also needed to improve the movement of grain. Even privatized enterprises equity, efficiency, and transparency of the tax are closely controlled by government inspectors system. The revenues needed to finance enforcing tax, health, fire, antimonopoly, and government spending should be mobilized in other laws and regulations. ways that do not undermine investment, growth, The structure and size of government has also and family incomes. Similarly, reforms are changed little. Government remains highly needed in the way Ukraine manages its debt, centralized and bureaucratic. Though both internal and external, with a focus on centralized, however, the system is also reducing the total level of financing and fragmented. For example, people with securing funds at lower interest rates and longer responsibility for the sectors like agriculture are maturities. Finally, reforms in found not only in the Ministry of Agriculture, intergovernmental fiscal relations should but also in the Ministries of Economy and provide adequate resources to sub-national Finance, and in the Ministry of the Cabinet of authorities and ensure that these resources are Ministers-the "Apparat." The decision-making used efficiently. process is bureaucratic and the responsibility for This chapter concludes with a section on the policy decisions is ambiguous. government shadow economy, defined as the estimated half decision-making is presently subject to of economic activity in Ukraine that does not widespread criticism on the basis that decisions pay taxes. This topic is included here because are: (a) taken without strategic oversight and are the shadow economy is very much the result of not always consistent with the reform agenda; government policies. Those operating in the (b) can quickly be reversed; (c) are non- shadow economy do so primarily to escape transparent because responsibilities within burdensome taxes and regulations. This problem government overlap, and lines of accountability can be solved by reducing government are unclear; (d) are taken, in many cases, on the spending, thus limiting the amount of taxes that basis of private, rather than public interest; and need to be collected; spreading taxes more finally (e) are frequently delayed. For these widely to reduce the burden of taxes on reasons, government often fails to address individuals and companies; and easing the serious economic and social reform issues, burdens of regulatory compliance. and/or does not address problems effectively. Moreover, the institutional capacity of the key government agencies is weak. Due to the limited Transforming Government for Growth 11 history of policy making in Ukraine, few government capacity for reform design and competent policy analysts or policy change implementation is central to reform success. managers can be found in Government, and the A new role for government experience of the few who exist is based mainly on Soviet rather than market model. A Major reforms in the role of government are mechanism of getting input from stakeholders needed to improve the management of the and for building consensus in the development economy and ensure growth. Four areas deserve and implementation of policy reforms is absent. particular attention. First, the government As a result, government policy decisions are not urgently needs to move from own-and-control to made on the basis of a thorough analysis of market-based regulations and incentives. Such available choices with the selection of the most policies could replace many of the current appropriate ones. legions of inspectors and enterprise managers These institutional problems within the would become focus on investing and producing Government are compounded by political and rather than on negotiating with the inspection. economic uncertainties. Bad past policy This would stimulate economic growth, increase decisions have created crisis environment where the tax base, and reduce corruption. much of the government attention is focused on Second, organizational reform of the fighting the short term problems instead of government ministries and the Apparat is building the foundations for long-term growth. required to streamline the decision making Moreover, the lack of clear rules and failures to process and to enhance accountability. enforce the rules effectively as well as Ministries should be empowered with decision distortions created by bad regulations have making responsibilities and be fully accountable enriched a small part of the population, whose for the results. The physical structure and strong vested interests in status quo present a administrative procedures of government must serious barrier to further reform. be reformed to refocus its efforts on the needs of All these have created a seriously defective a market economy. policy framework which imposes major Simplifying the structure of the central constraints on the economic reform program and government is a necessary but not sufficient growth in Ukraine. As a result, economic condition for improved government activity remains weak-even though officially performance. The capacity to carry out recorded GDP contraction has slowed down, a ministerial core functions also depends on the further decline of 1-2 percent is expected in existence of a professional and motivated civil 1999; excessive government regulation and the service Similarly, the efficient delivery of uncertainties over the legal framework have public services depends on the existence of a discouraged external investment and hindered well-paid workforce matched to requirements. employment; protection by branch ministries of Civil servants should be trained in policy state enterprises under their control has delayed making techniques, as well as new management privatization and hindered private sector procedures and schemes of delegation should be development; high rates of taxation have developed. The civil service competitiveness encouraged growth of the black economy; and should be improved in relation to pay levels in public sector corruption is perceived to be a other sectors. However, the reform of the central serious problem. Administrative and regulatory reform should 9 An important precondition for an efficiently functioning bring the role, structure, and size of government Cabinet is a clear distinction of powers between the in line with the needs of a market economy. To existing three branches of power - Parliament, President and Cabinet, which is not the case today. This is a promote growth and raise living standards, the constitutional problem, but it could be resolved within the government should focus on creating a good existing constitutional framework. business climate rather than directly regulating 10 Average civil service wages are 0.7 times per capita economic activity and on providing human GDP in Ukraine. The corresponding figures for ECA and development support services. Enhancing OECD are 1.3 and 1.6 respectively. 12 Chapter 2 civil service is not likely to include any clear that the balance between government downsizing, as it is very small by international revenues and expenditures should be restored standards". not by further increasing the tax burden, but by Third, the rule of law should be strengthened. A reducing government expenditures. Priorities for major government function in a market public spending are discussed below. economy is to establish stable laws and a A key problem facing Ukraine today is that key judicial system that ensures equitable ministries lack the capacity to analyze policy enforcement of these laws. Currently the options, designing policies, and assuring their legislation is very unstable and the judiciary implementation. The existing institutional system is weak and is not trusted by the public. structures of the state are still highly oriented to A smaller size the old Soviet command and control mode. Critically important bodies such as the In principle, there are two options for cutting Ministries of Finance and Economy that should government deficits-increasing revenues or be taking the lead in defining strategic decreasing expenditures. Only the second option objectives for the future and designing the is viable if Ukraine wants to restore prosperity. policies needed to attain these objectives are The government is large for a country at bogged down in details of economic micro- Ukraine's income level, placing a heavy burden administration. Although the situation is on resources needed for private investment and expected to change shortly, an important share household consumption. of the staff in both of these ministries is still In other middle-income countries government located in the "branch departments" responsible spending averages 25-30 percent of GDP. In for controlling the enterprises in the key sectors Ukraine spending (including special funds) is of the economy including agriculture, energy, about 45 percent of GDP. Under the Soviet manufacturing, health, education, and the like. As noted above, the "apparat" of the Cabinet of system a large government was possible because Mnses frs ytaohr lyr o the government delivered many necessities to Ministra ors betwnothe rime workers at low or no cost-a major share of adisttvecnrlbtwnth Pim Minister and the ministries actually responsible household income came in kind rather than in for economic progress in these critical sectors of cash. But under a market system the government the economy. The focus and abilities of the can no longer play this direct distributional role. professionals talented in the Apparat need to be As a result people need real money in their redirected towards jobs that are consistent with pockets to buy enough food, clothing, and the needs of a market economy. shelter to survive. A .n Other countries such as those in Central Europe A government that is too large relative to its anthBlicStemodqukyafrte economy reduces living standards in two ways. aku of the Sovet Uon to rer the First, it takes money from people that they need aministr e SuctUo t tefchalleg to meet normal living expenses. Second, it takes of supporting the development of a market- money from enterprises needed to finance basdeonomy. the old Bn a theM expansion and growth. Both effects are evident based economy. The World Bank and the IMF in Ukraine. Agricultural and industrial are working closely with reformers in the d. Government of Ukraine to bring about the enterprises are severely decapitahized. Investment and working capital are scarce, and necessary changes and are willing to provide investment rates are low. There is clear evidence substantial financial support to this end, but so far the combination of inertia, vested interests in gornedunntemploymen inman areas of. Ithe status quo, and lack of adequate institutions government. And family incomes are low. In the end the decision on the appropriate size of have prevented meaningful change. government is a political one. Still, it seems The need for institutional change is by no means limited to CabMin, the central ministry offices in Kyiv. Improvements in structure and policy About to 0.45% of the total population, compared to an skills are needed in all sectoral ministries; average of 1.95% in ECA and 4.3% in OECD. Transforming Government for Growth 13 regulatory agencies need to develop greater economic instability will worsen. Even if short- skills and authority; a strong system of term liquidity problems are overcome, debt economic courts should be developed to handle levels are quickly becoming unsustainable, and the enforcement of contracts (through the structural and institutional changes needed bankruptcy where necessary); a better police for growth have not been made. Parliament and and criminal court system is needed to protect government must make the difficult political those operating legally from criminal activity; decisions needed to break the cycle of and more needs to be done to develop a system overspending, overtaxing, and economic for large scale privatization that is consistent stagnation. with international standards. Further parliamentary reforms may also be needed to Figure 2.1 Government deficits have encourage the formation of larger, more stable exceeded total credit expansion parties with a longer term, less populist outlook. UKRAINE: Crowding-out of Private The need for fiscal adjustment Investments (UAH bin) Fiscal adjustment in Ukraine has been slow and 6.0 - - -- --- unsuccessful. Government has hardly adjusted to the role that it needs to play if Ukraine is to 5 - Domestic Credit of have a viable market-based economy. Limited the Banking System progress has been made in modernizing budget E Budget Deficit and tax practices, improving the legal and 4.0 (IMF methodology) regulatory framework, and strengthening fiscal institutions. Prohibitively high taxes impede 3.0- economic development and foster tax arrears, tax offsets, and the shadow economy, eroding the tax base. Falling revenues combined with 2.0 poor commitment control and bad spending policies have generated consistent budget 1.0- arrears and fiscal deficits (table 2.1). 0.0 1996 1997 6 months of 1998 Table 2.1 Government revenues in the former Soviet block countries (percentage of GDP) Source: World Bank staff estimates. Country 1993 1994 1995 1996 1997 1997 Czech Rep 42 43 42 31 30 30 Efforts to rationalize spending, broaden the tax Lithuania 25 27 27 21 27 27 base, and control the deficit have moderated the government's role in the economy and shrunk the budget deficit (figure 2.2). But more needs FSU average 36 35 29 26 - - to be done. During 1992-94 the government Source: IMF data printed money. In 1995-96 it clamped down on monetary policy to reduce inflation and stabilize the currency. To reduce monetary emissions, it Fiscal deficits contribute to stagnation by cut the cash deficit. But the cash deficit was crowding out private investment (figure 2.1) contained by postponing spending and running The government is facing a liquidity crisis-set up arrears, making the fiscal situation appear off by the financial crisis abroad but better than it was. In 1997 the government exacerbated by Ukraine's lack of fiscal and began slowing the growth of arrears, but it did economic adjustment-and the central bank will so by reverting to large cash deficits, paid for by likely have to finance any new deficit spending issuing government securities to domestic and by printing money. Unless the budget is foreign commercial banks and by selling balanced, inflation, currency depreciation, and Eurobonds. In 1998 cash deficits and arrears 14 Chapter 2 again rebounded, accompanied by a rapid sufficiently deep to reduce the deficit and increase in tax arrears. In sum, relative to GDP, reverse rapidly expanding debt and debt service. little real fiscal adjustment took place between Time is running short, and Ukraine must act 1994 and 1998. before it finds itself in a debt service trap that Underlying these developments is the lack of a deprives it of domestic and foreign investment strong fiscal authority that can manage and for years to come. Though the measures strongoutlined in this section can make a big direct change while dealing with Parliament and dieen thy willon be psie wi othe foces Diagremens btwen plitcal difference, they will only be possible with a other forces. Disagreements between political srn oenetcmimn obekfo forces and interest groups have stalled reform. g g Reform-minded interest groups remain weak, the past, make politically difficult decisions, and and those who are in a position to break the follow through with persistence deadlock lack sufficient incentives or political REFORMING PUBLIC SPENDING will to do so. The government in particular has failed to identify its constituency or obtain a Ukraine has rationalized spending by curtailing strong coalition to back reforms. The resulting industrial, agricultural, and commercial support. slow pace of reform risks bringing the entire Between 1992 and 1994 spending on the process to a halt as the expected benefits do not "national economy" was cut 70 percent in real materialize, either with better policies or the terms, or from 24 percent of GDP to 15 percent emergence of an economic supply response. (figure 2.3). 12 The bulk of this cut was achieved by reducing directed credits to state enterprises, Figure 2.2 The consolidated budget balance which by 1996 were eliminated. Between 1994 is improving, but deficit are still and 1997 direct industrial support was reduced, unsupportable and by 1997 national economy expenditures were down to 3.2 percent of GDP. These cuts Evolution of Budget Revenues, were crucial to reform-efficient resource Expenditures and Budget Balance allocation requires that the private sector make s5 most decisions about commercial activities. But s0 the reduction in commercial support (to state- 45 40 - owned enterprises and agricultural cooperatives) 35 -was done in the absence of broader market 3 so --liberalization and reform (such as mass 0 2privatization, a serious commitment to 0 20 bankruptcy, and the implementation of tight - sbudget constraints). Without a mechanism to 5 stimulate cost-efficient production, the official o economy could not-and has not-responded. -1o -_ In mid-1994 the Kuchma administration -15 ------ -- initiated reforms that have touched on nearly 1990 1991 1992 1993 1994 1995 1996 1997 1998 every budget program (see figure 2.3). Between 1994 and 1997 spending fell by 27 percent in ODeficit BRevenues DExpenditures real terms, and by 12.5 percent relative to Source: World Bank staff estimates. GDP.13 Capital expenditures, which were The government's track record, combined with the continuing economic crisis, makes fiscal adjustment more difficult now than it was in the past. Yet the solutions have not changed. Taxes The national economy is defined here to include need to be reduced and realigned, and tax industrial and agricultural support, the State Reserve Fund, and directed credits to state enterprises from the central administration improved. Spending needs to be bank. cut and rationalized to allow for lower taxes and 13 Unless otherwise stated, changes in expenditures are to reposition the government in a market- reported on a real, accrual basis (that is, the nominal oriented economy. These actions need to be figures are augmented by the change in arrears over the Transforming Government for Growth 15 already low (3.6 percent of GDP), were cut to spending policy. Budget formulation is an open- negligible levels. As noted, national economy ended request process that emphasizes needs expenditures were cut from 15 percent of GDP over availability, and ultimately ends up being a to 3.2 percent. Universal subsidies were reduced bargaining process rather than a priority-setting and are now to be eliminated. Privileges and exercise (see World Bank, 1997) Moreover, entitlements have not been honored, but in the administrative control is fragmented and the past few years expenditures on benefits have assignment of responsibility for commitment increased anyway. Social spending has been cut control is not clear. Because tradeoffs are not by more than a quarter. Chernobyl Fund made explicitly at the outset and because expenditures have remained constant, while administrative control is weak, cash rationing defense spending has increased as a share of becomes the mechanism for allocating spending, GDP and spending on administration and justice for controlling expenditures, and, ultimately, for have actually increased in real terms. meeting deficit targets. Thus the composition of expenditures has changed dramatically since independence and Figure 2.3 Spending is down sharply has generally moved in a direction consistent with the role of government in a market- Ukraine: consolidated budget oriented economy. More recently, however, expenditure index, 1993-1998 with the government facing cash shortages and 80 (1990=100) high barriers to borrowing, changes are being _socialandcultura spending driven by short-term cash management 70 spending EBenef its imperatives and political pressures rather than 60 by a strategy to reduce the fiscal burden and OSubsidies 50 improve the structure of expenditures. This OChornobyl Fund approach has led to an unsustainable fiscal 40 o balance and a poor allocation of public OPension Fund 30 resources. There is now an urgent need for a clear, comprehensive, multiyear strategy. 20-- E Capital Toward that goal, the government should: DOtherexpenditures 10 * Improve budget formulation and U National economy implementation. * Encourage more efficient energy use in budget institutions. Source: Government data and World Bank staff * Rationalize and target social spending. etmts estimates. " Remove privileges. Budgets should be made more realistic, with * Introduce a modern treasury system to appropriations that accurately reflect national control public resource flows. objectives. Budget implementation should then be executed according to strict rules of control * Control or remove special funds. and responsibility. Three steps are needed to * Increase capital expenditures according to achieve these goals. well-designed priorities. First, a new budget system law should be passed Budgeting for efficient spending that provides for aggregate fiscal control. Any Parliamentarian suggesting to increase spending Today the budget is not an effective tool for or decrease revenues should be obligated to formulating and implementing government offer compensating measures so that the overall budget deficit is not increased. And except for measurement period and deflated by the consumer p the Budget Law and its amendments, laws index). should not increase spending or decrease 16 Chapter 2 revenues unless they are presented jointly with institutions should receive meters with the Ministry of Finance. regulatory control, which should receive basic meters, and which (if any) do not warrant meter Second, the budget preparation process should ' ~y installations. Thought should be given to prioritize spending programs, and budget intlaos.Tugthudbe ivno prioitiz spndin prgram, ad buget sharing the costs of meters with the energy execution should comply with these priorities. Once spending limits have been assigned to providers. spending agencies, the agencies should not be Another way to increase energy efficiency allowed to contest the limits, only the priorities would be to abandon norms-based budgeting, within the aggregate limits. This procedure which tends to allocate money in terms of space would lead to the final allocation of resources to be heated, for example, and move toward and better align commitments with available budgeting by strategic objective. Under this resources. approach the spending ministries would submit Finally, once the budget has been formulated, proposals to the Ministry of Finance on the programs and services they plan to deliver budget execution should be controlled at each prg y p stage of the spending cycle-commitment, (rather than a list of proposed expenses). The verification, and payment. There should be clear list would be subject to an ex ante ceiling rules for control (including the responsibilities imposed by the Cabinet of Ministers based on of the officers in charge of controls within line the importance of programs in different areas. f Ministers would then be judged on their ability minti and theorinrquistr ian, to deliver results under tight budget constraints, accounting and reporting requirements, andg g inspections and audits. Procedures for managing providing them with an incentive to conserve and monitoring personnel should also be energy. reviewed. Finally, the Ministry of Finance Rationalizing and targeting social spending should be able to issue sanctions in cases of Quality health and education services are mismanagement. essential for growth and prosperity. With Boosting energy efficiency shrinking public resources, these expenditures Energy-including gas, electricity, and must be rationalized to maintain quality. Since heating-is one of the largest spending 1992 real expenditures on health have dropped categories for most budget institutions. 55 percent and on education, 46 percent (about Substantial arrears have accumulated, in line with the fall in GDP). Moreover, there particularly in local health and education has been a shift in exenditures toward waes institutions. Nearly all budget institutions have and benefits-at the expense of capital expenditures and other recurrent expenditures electricity meters and at leastere ave such as books, school lunches, and energy. gas etes, ut hat etes ar alost Between 1992 and 1995 employment in these nonexistent. In the absence of metering, energy charges are based on square meters of floor sectors actually increased, most likely because the authority for employment decisions was space. This approach favors energy distributors y f y over budget institutions and destroys incentives transferred from the state to local managers. to conserve heat and gas. Expenditures for social protection have changed in recent years, with less spending on subsidies An obvious solution to this problem is to meter an re spending on sutsin all, or nearly all, budget institutions. Gas meters unive sbsdis hv beenfsets b can be installed for about $100, so all budget icraes usin and comn servic institutions should be fitted with them. Heat g meters are very expensive, particularly if they programs. This positive development should be are capable of regulating heat flow. Still, duplicated in other areas of social protection. Za But a number of untargeted subsidies remain, installing heat meters can have a high payoff, including child birth support and burial and a plan should be developed to install heat meters in budget institutions on a cost-benefit assisanc f ou of Social mnsuranciud basi. Te pan houl idntiy wich and support for single mothers, monthly child care allowance till the child is three years old Transforming Government for Growth 17 funded out of local budgets and Pension Fund. budget cuts, expenditures on some privileges (In the case of aid for families with children, the have been increasing. Further, unfunded Pension Fund is responsible for delivering the entitlements erode public confidence in laws, support). Pensions to servicemen and internal government resolutions, and stated intents, in agency personnel, as well as transfers from the return for often short-term political gain. budget to the Pension Fund for military pensions, have increased dramatically since Table 2.2 Social Insurance Fund expenditures 1995. Finally, outlays for privilege entitlements (percent) that are traditionally funded (including Function Share privileges to veterans and invalids of World Temporary disability allowance 55.0 War II, "labor veterans," and other elderly Sanatorium treatment 31.6 people) have also risen. Allowance for pregnancy and birth 9.5 High-quality health, education, and social Staffing 2.5 protection services should be a priority for any Onetime assistance for childbirth 1.3 government that wants an efficient market Burial assistance 0.5 economy. Chapter 4 of this study discusses how Source: 1998 draft budget of Ukraine. the government can increase the quality and In 1997 the Ministry of Finance prepared a list efficiency of human services in Ukraine. of privileges established by administrative Removing privileges authority as a precursor to the Rada introducing a draft law to remove privileges established by Various population groups are entitled to a l sain h diitainadteRd variety of low- or no-cost goods and services at g should agree to eliminate privileges in the near the expense of the budget or special earmarked futur funds. A number of these privileges have been f carried over from Soviet times; others have been Introducing a modern treasury system introduced since independence. In 1997 the The government regularly restricts the release of government estimated that if all privilege funds to spending units according to incoming entitlements were fully funded, about 17 million revenues, effectively rewriting the budget of Ukraine's 51 million people would receive 81 without Parliament's approval. This causes million privilege "hits." (A hit is defined as the serious disruptions within the economy, hurting entitlement of a single person to a single prospects for restoring growth. Sequestration privilege, allowing for multiple hits per person.) leads to arrears, a particular problem in the case The theoretical budgetary cost was estimated at of civil servant wages and pensions because 15.6 billion hryvnias for 1997-almost 20 funds have implicitly been committed for such percent of GDP. Since funding these expenditures before sequestration.14 entitlements would rapidly lead to Government arrears impede private sector hyperinflation, the government has development, increase shadow economy, distinguished between entitlements provided by I impose high social costs, and breed cynicism law, entitlements committed in the budget, and about government and market reforms in entitlements that are actually funded (Lippott, general. 1999). The difference between the second and third categories becomes payment arrears. Instead of using sequestration to control cash Privileges are not an efficient method of flows, the government needs to move quickly to compensating the population, whether for labor, heroism, personal ailments, or natural or human- 14 In theory sequestration prevents the commitment of made catastrophes. Where compensation is funds. However, as practiced in Ukraine and many other appropriate, cash payments are a more efficient countries, it is applied to expenditure categories such as way to improve welfare and decrease wasteful salaries of regular employees, which are a de facto But given the current fiscal ongoing commitment. In such cases, the term "expenditure arrears" would technically be more correct, especially such expenditures must be weighed against when the "sequestration" is applied after the goods or other alternatives. Despite the need for deep services have already been delivered. 18 Chapter 2 a modern treasury that can control public A lot of money has thus been wasted. The revenues and spending, manage budget cash payroll tax for the fund is being eliminated-a flows, monitor debt service, and forecast budget welcome move. The government should also expenditures. A consolidated treasury can limit future fund expenditures to medical greatly reduce the inefficiencies, informational support, compensation for losses, and capital problems, and losses associated with having and recurrent expenditures directly related to budget funds managed in a variety of different cleanup. In addition, it should audit the commercial bank accounts. The Treasury should Chernobyl Fund and make the results publicly advise Cabinet when formal changes need to be available, and amend the law on Chernobyl to made in tax or expenditure policy to correct remove privileges and other entitlements. emerging payments problems before they reach Social Insurance Fund. The Social Insurance crisis level and force day-by-day cash Fund relies on a 4 percent payroll tax to provide management and sequestration. The government welfare, disability, and health insurance (table is currently working closely with the World 2.2). Under current arrangements for temporary Bank and other donors to implement a project to disability, neither employees nor employers this end. have any incentive to economize on sick leave Controlling special budget and because sick leave payments are made entirely off-budget funds from the fund. Changes to disability payments Pension Fund. Pension Fund expenditures have are being made as part of the Government's remained stable in real terms, but individual program of economic reforms that is being contributions have fallen dramatically, and the supported by the International Monetary Fund fund no longer provides the assurance of a (IMF) under an Extended Fund Facility (EFF). comfortable retirement that it did in the Soviet Also, the payroll tax is to be reduced by 1 era. It has become, at best, a minimalist social percentage point in the 1999 budget. safety net. Other Social Insurance Fund expenditures still Several steps can be taken to transform the need to be rationalized, however. Payments for Pension Fund into a system that is both sanatorium treatment are effectively subsidies to financially sustainable and capable of providing state sanatoriums that enable them to attract a decent retirement (see chapter 4). From the patients through lower charges. This has fiscal perspective of this chapter, the encouraged widespread abuse of these facilities government needs to ensure that no bailout of in the form of "sanatorium vacations," crowding the Pension Fund is needed or undertaken, either out private providers. Pregnancy allowances and burial and childbirth assistance are allocated to from the general budget or from an increase in alwresrgrls ftereooi payrll txes.all workers regardless of their economic payroll taxes. situation. These kinds of payments should be Chernobyl Fund. Chernobyl Fund expenditures targeted only to the most needy, preferably are not sufficiently targeted toward victims and through direct budget support. cleanup of the disaster. Privileges, Several steps are needed to reform the Social compensations, capital expenditures, housing Insurance Fund. To prevent abuse and ensure construction, and resettlement account for an that payments are merited, part of sick leave astounding 79 percent of the fund's payments-say, the first two weeks-should be expenditures, while environmental cleanup and transferred to employers. Sanatorium benefits medical support make up only 9 percent. should be removed, and sanatoriums privatized. Privileges and compensations alone eat up 44 Overly generous and untargeted maternity leave percent, yet many certified recipients have not payments should also be pruned. Onetime been seriously affected by radiation. And many assistance for child birth and burial should be of the capital projects are inconsistent with the targeted to poor families through the general government's role in a market economy. Since budget. And the payroll tax should be reduced the early 1990s the fund's expenditures have by an amount commensurate with the savings hovered around 2 percent of GDP. from these steps (about 1.75 percentage points, Transforming Government for Growth 19 including the 1 point cut already proposed by (the rich spend more on fuel than do the poor), the IMF). fuel taxes can be raised to the point that they State Reserve Fund. The State Reserve Fund has become a major and valuable source of revenues as in some European countries. Under such traditionally been involved in a complex mix of conditions,owen he tes ole exc activities involving material reserves and codtnswhnheaxsolcedxed agictvtie insvolving mAterl resinere d t what is needed to maintain adequate roads, two agricultural reserves. Although designed to balance annually, the fund has systematically risks develop because of earmarking. First, more run an annual deficit of 1-2 percent of GDP, of e's money may be spent on roads than is justified simply because the money is primarily by not recovering budget loans to the y y agricultural sector. In 1998 the State Reserve there, making it hard to finance more urgent Fund was taken almost entirely off budget and needs such as public health. Second, if the was required to be budget neutral. At the same money is not spend of excessive road time, two new off-budget funds were created: infrastructure but is allowed to accumulate, the Leasing pool of resources becomes a popular focus of the Price Stabilization Fund and the raiding parties looking for resources to Fund.cter has been notere, ind o that prat "borrow" to finance unbudgeted expenditures, practices have been altered, and the need for a admyee eoeafcso orpin bailout remains a distinct possibility. If the Road Fund in Ukraine is to be kept as an The overmen shold rovie n furher extra-budgetary fund, the following principles direct or indirect support to the State Reserve sh Fund. If it fails to balance, it should be allowed should be applied: to dissolve. The Price Stabilization Fund has * road users pay for roads through an explicit been abolished and should remain so. The road tariff that is clearly separated from the Leasing Fund should be privatized. government's tax revenues; Road Fund. Not all the extra-budgetary funds * the road tariff is designed to ensure it does should be eliminated and financed through the not drain revenues from other sectors; consolidated funds of the budget. This is particularly true when the resources result from * the road fund is managed by a separate road a user charge and are employed by the extra- fund administration overseen by a board budgetary fund to improve services to those that includes representatives of road users paying the fees. An earmarked budgetary fund and the business community; effectively seals the relationship between fees * there are published legal regulations and services, making the activity much like that governing the way the funds are managed, of any private company which provides goods and periodic independent audits are held to or services in exchange for payments- assure that these regulations are followed. payments no one would suggest be co-mingled with the government's ordinary budgetary Increasing public investment funds. Public investment has fallen dramatically. Road infrastructure is a good example. The fuel During 1992-95 capital expenditures averaged taxes and tolls that usually finance road funds 3.3 percent of GDP-quite low by international are clearly paid by the users of the facilities, and standards (World Bank 1997). In addition, these resources are used to provide better allocations were spread over many projects, roads-and to finance related services such as some of which have dragged on uncompleted public transport which, by taking cars off the for years. Capital expenditures are politically road, provides better circulation for vehicles on and bureaucratically easier to cut than other the roads. recurrent expenditures, which helps explain why by 1998 they had been eliminated as a budget Even for roads, however, anearmarked extra- item (though some recurrent maintenance budgetary fund is not without risks. Because of expenditures are probably really capital inelastic nature of demand for fuel and the expenditures). somewhat progressive nature of a tax on fuel 20 Chapter 2 In some sense this has been a positive the 1999 budget, payroll taxes will have fallen development. Eliminating "white elephant" from 53 percent of salaries in 1996 to 37.5 projects is an important step in transition. But percent in 1999. While this is a positive the depth and length of the expenditure development, the burden on workers is still too moratorium have been extreme, and a serious high. Moreover, the structure of excise taxes is deterioration of the public assets will have long- not optimal-excises on petroleum products, for term consequences for public services. example, are too low. Raising taxes on such Advisable reforms include bringing the level of products could yield the revenues needed to public expenditures (relative to GDP) closer to offset cuts in the payroll tax and the personal world levels and developing public expenditure income tax (which should be no more than 30 projects on a qualitative basis, in a multiyear percent, with no exemptions but with a higher setting, to meet explicitly stated policy minimum threshold), easing the tax burden on priorities. workers. UPGRADING THE TAX SYSTEM An uneven incidence of taxation Significant efforts have been made to modernize The tax base is shrinking as economic activity moves from the formal to the informal economy the tax system, but these efforts have not ada e cnmcatvt mre usd proceeded smoothly, and the job is incomplete. ada e cnmcatvt mre usd procede smothl, ad te jb isincmplte, the formal sector (see the section on the shadow Constant revisions have generated uncertainty and considerable adjustment costs for the economy, below). These developments undermine the government's ability to collect government and taxpayers. News laws and taxes and lead to a more unequal distribution of procedures are often poorly planned, and special the tax burden-effectively punishing those interest groups distort initial designs. To raise the formal econo Efost Ukraine's tax system to international standards, mee revnue targe though drast the tax burden should be lowered. Taxes should be restructured to promote efficient use of enforcement practices induce economic agents to leave the formal tax system. Moreover, available resources. The tax base should be tolaehefrltxsyemMrov, avaiablesources The t boae should b substantial exemptions favor some sectors over broadened. And the costs of compliance should ohr n rd h vrl a ae h a be ct, hil taxadmnisratin soul be others and erode the overall tax base. The tax be cut, while tax administration should be baesolbe radnd ystnghig imprved.base should be broadened by strengthening compliance and enforcement practices, reducing A high tax burden overall tax rates, and eliminating tax The share of tax (and contribution) revenues in exemptions. GDP dropped 7 percentage points between 1994 High compliance costs for taxpayers and 1997-from 51 percent to 44 percent-but Myriad taxes and surcharges, a rapidly changing remains high relative to countries in the region tax environment, and largely unregulated with similar income levels. Although the tax enforcement practices imply high costs for rates for each of the main taxes are within t taxpayers. Because large firms can often use international ranges, the overall level is high their connections to avoid taxes, small and because each tax is at the high end of the spectum. evenueas a he high bec e thee medium-size entrepreneurs suffer, inhibiting the spectrum. Revenues are also high because there eegneo tog opttv,fra are more than 100 taxes and contributions. The ergee ofo government should eliminate the myriad small taxes that yield limited revenue and are a In the past revenue collection was highly nuisance for taxpayers as part of reducing decentralized and essentially automatic; the overall tax rates. center had little information on local performance. Now the central administration is Tesucinture of axaill raesdoues. oTax o t struggling to ensure a uniform application of the efficient use of available resources. Taxes on tax law nationwide-no small task given the labor, which is abundant, are high. Taxes on se' boee amnsrtv n energy, which is scarce, are low. If the y Chernobyl Fund tax is eliminated as planned for organizational methods. Further, a lack of Transforming Government for Growth 21 internal control creates opportunities for yields on domestic debt exceeded 60 percent. corruption. Efforts have been made to Such high yields are clear evidence that prices strengthen revenue agencies and to limit contact and the domestic currency were fundamentally between taxpayers and tax agents, but the results unstable and unsustainable. have yet to be felt. The unfavorable terms for debt reflect Ukraine's With falling compliance and weak revenue falling access to official credits, which offer collections, tax arrears are growing rapidly, lower spreads over benchmark rates. Countries especially in heavy industry and agriculture pursuing sound monetary and fiscal policies and (Ilchuk 1999). State enterprises withhold implementing structural reforms can usually personal income tax and pay enterprise profit depend on international financial institutions- tax, a value added tax, and a host of other such as the World Bank and IMF-to cover a contributions. As the economic situation of large part of their financing requirements at these enterprises has deteriorated, so has their modest cost.16 But during 1996-97 both ability to pay taxes. institutions reduced their lending to Ukraine administration pshould be because reforms were not implemented as Taxre pects oagreed. Ukraine received just $1 billion from the improved to lower the costs of compliance, reduce corruption, and make collections more Figure 2.4 Foreign debt is rising sharply efficient. A modernization strategy should be implemented for the entire revenue collection system. All tax legislation should be compiled in a code to ensure consistency and streamline 30%7 procedures. Legislation on the value added tax a. 25% should take into account the major deficiencies 20%- and allow time for implementation in the tax 15% agency and among taxpayers. Different agencies with revenue collection responsibilities-the State Tax Administration, Pension Fund, and o/ Customs-should cooperate with one another 1992 1993 1994 1995 1996 1997 1998 and be placed under the clear authority of the Ministry of Finance.15 Flat taxes for small Source: World Bank data. entrepreneurs should extend to cover the entrpreeur shuldextnd o cverthe Figure 2.5 Debt Service could soon become personal income tax and value added tax. And ureu 2.5ae opportunities for corruption should be Projected Schedui eof Total Debt Service eliminated, with integrity guidelines introduced for tax agents. 7- MANAGING GOVERNMENT DEBT The debt owed by the government has been rising dramatically (figure 2.4). The highly _ F- unfavorable terms on which this debt was secured have forced the government to borrow - ever-larger amounts to finance the primary . . . budget deficit as well as interest and amortization payments on previous debt- leading Ukraine into a classic debt trap. By the Source: World Bank data. time the market collapsed in August 1998, real 15 As implementing departments rather than policymaking bodies, they could retain considerable operating autonomy within clear policy guidelines. 22 Chapter 2 IMF and $600 million from the Bank in budget would have a high financial return-as debt support during these two years. systems and management improved, Ukraine's Until last fall Ukraine's stock of foreign debt creditworthiness and access to international was well within sustainable levels. But the capital markets would increase, lowering the recent devaluation significantly increased the cost of borrowing. ratio of external debt and of debt service to GDP. As a result Ukraine faces a rising debt MEGONM service burden that will leave it little room for RELATIONS maneuver in the event of another balance of Reforms are also needed in the fiscal relations payments shock or domestic economic between national and sub-national governments. downturn. World Bank esti-mates show that On the macroeconomic side, intergovernmental even in a high-case scenario in which the fiscal relations have a direct impact on fiscal primary deficit is held to zero over the next sustainability and on growth. On the three years and inflation and exchange rates are microeconomic side, they affect the efficiency relatively stable, foreign and domestic debt of resource use, the delivery of services, and the service will all but overwhelm Ukraine's ability development of private activity. to pay (figure 2.5).1 Under this scenarios at an Intergovernmental fiscal relations also play an annual rate of 40 percents per year, interest important role in redistributing resources to payments will reach 25 percent of government promote social equity. revenues by the end of 2000, interest to cash revenues will reach 80 percent, and debt service Oethpathreyeasaotoetido to GDP will reach 18 percent-or 2.9 billion government expenditures took place at the sub- hryvnPias a rmo h 18national level, and most social expenditures are made at the local level. The bulk of taxes are Setting debt management priorities collected by State Tax Administration Reducing the budget deficit is the most authorities, then shared between national and important step that Ukraine can take to reduce sub-national governments through tax sharing or the risk of future debt service problems. In fact, transfers. The current system lacks transparency, to avoid borrowing to pay interest on past loans, is unstable in terms of revenue-sharing formulas Ukraine needs to run a primary budget surplus and ratios, and does not encourage the most of at least 2 percent of GDP. A surplus would effective use of resources allow Ukraine to begin reducing the stock of Priorities for reform at the subnational level debt and would facilitate restructuring it on include defining the appropriate degree of more favorable terms. decentralization, matching the responsibilities of Ukraine also needs to significantly improve the lower governments to their decision-making entire debt management system. Accounting authority, building local sources of revenue, systems should allow more reliable and timely strengthening budget processes and information to be shared among the Ministry of implementation, creating a regulatory Finance, Ministry of Economy, and central framework for subnational borrowing, bank. Moreover, better training and debt promoting a "hard credit" culture, and management techniques are needed by those strengthening the institutional and legal who plan the debt strategy and those who framework for intergovernmental finance. arrange the placement of debts. Such actions _________________________SHRINKING THE SHADOW ECONOMY 6 World Bank loans to Ukraine, for example, have a The shadow economy is not really another maturity of up to 20 years, with up to 5 years' grace, and sector in the economy. Most activities in the carry a floating interest rate that is currently 6 to 7 percent. shadow economy are identical to those in the 17 These estimates were generated by a Debt Service formal economy-the only difference being tax Sensitivity Model which was created for Ukraine by the evasion. True, Ukraine's shadow economy has a World Bank under the guidance of the Deputy Minister of more sinister side-with illegal activities like Economy, Mr. Igor Shumilo. drug dealing, prostitution, and extortion-and, Transforming Government for Growth 23 as in almost any country, special police work is public services make it attractive for businesses needed to control these crimes. But such to move to the shadow economy where they can activities are not within the World Bank's area escape taxation. Tax revenues fall further, of expertise. The focus here is on why such a making it even more difficult for the large share of productive activity in Ukraine is government to maintain services. not paying its fair share of taxes, the impact this F tax vasin hs oneconmicand inanial igure 2.6 Regulatory discretion is excessive in tax evasion has on economic and financial Ukan,cetn_poruiesfroryin stability, and measures that can be taken to Ur g otr control it. Ranking of Regulatory Discretion (1= worst, 7= best) A broad consensus exists among government, 5.5, donors, honest businesspeople, and the general 5 public that the shadow economy has benefits 4.5 and drawbacks. The shadow economy creates 4 - 3.5 jobs, raises family incomes, and spurs economic growth-without it, living standards would be 2.5 intolerably low. But the shadow economy also 2 drains the strength of the economy. And if the 1.5 shadow economy spreads much further, it could . destroy civilized Ukraine by: M a * Further reducing the flow of tax revenues to Source: World Economic Forum 1997. finance the budget deficit, exacerbating financial and economic crises. The force of this vicious circle is multiplied by competitive pressures among enterprises. Those proUndeminti thergvcernm abilato, who pay taxes cannot compete with those who provide essential services such as education, do not, leaving them with two options close health, public safety, and environmental their doors, or go into the shadows. Many have quality. taken the latter road, and more will follow * Raising taxes for legitimate businesspeople, unless the government implements radical eroding their ability to provide jobs and reforms that provide greatly improved forcing them to choose between the shadow incentives to stay in the formal sector such as economy and bankruptcy. regulatory controls and taxes that are transparent, equitable and predictable; taxes that * Increasing lawlessness. are lower, and public services that attract them Efforts to stamp out the shadow economy could to remain in the formal sector. The latter create a social disaster, destroying the includes services to the enterprises such as production that is providing a basic living to enforcement of contracts, protection from Mafia millions of Ukrainians. The objective should not elements, as well as services to their employees be to destroy the shadow economy but to help such as the promise of decent pensions that are those working in the shadows to move into the linked to contributions and are paid on time. formal sector and to produce jobs and output Experience elsewhere indicates that the most while paying taxes. successful strategies for bringing shadow Controlling the shadow economy and bringing activity into the formal economy focus on otherwise legitimate activities back into the lowering high tax rates and easing intrusive formal sector can be exceedingly difficult regulatory controls. Less important but also because of the vicious circle that the shadow essential is seeking out and publicly punishing economy sets in motion, a vortex that sucks major tax evaders. The following sections draw more and more economic activity into its grip. on a rich collection of recent analytical work The government, short of tax revenues needed (see Kaufmann 1997; Kaufmann and Kaliberda to provide services to legitimate businesses, 1996; and Novitsky, Novitskaya and Stone raises taxes. High taxes plus the lack of good 1995). In addition, a major study on the shadow 24 Chapter 2 economy was carried out for this report by Causes and consequences of shadow activity Ukrainian colleagues (see Borodiuk and The shadow economy is exceptionally large and Turchynov 1998). growing. In an efficient market economy, The shadow economy-definition and businesses choose to operate in the formal sector background because the benefits they receive-legal at protections, public services, the psychological Ueastainetpes nformaconoien e benefits of being good citizens-exceed the costs of taxes, regulatory scrutiny, and legal * Illegal activities such as drug dealing, compliance. But in Ukraine the costs of being prostitution, protection rackets, and theft formal are excessively high, and the benefits from state enterprises. doubtful. * Marginal subsistence activities of micro Low benefits and high costs induce businesses enterprises that employ individuals and their to operate informally, reducing revenues to the family members. state and undermining its ability to provide services that might attract businesses into the * Legal activitivities that are hidden from formal economy. The key cost encouraging taxation, regulation, or other public scrutiny shadow activity is the burden of regulations and and official records. taxes as they are implemented. If rules look fine The third area of activity is both the largest part on paper but officials have considerable of the shadow economy and of the most discretion in implementing them-as in concern. It suggests that Ukraine's economy is Ukraine-the result is a higher effective burden highly distorted, motivating massive covert on business, more corruption, and a stronger behavior that does not exist in well-functioning incentive to move to the unofficial economy market economies. That distortion is rooted in (figure 2.6). excessive government intervention in the Burdensome regulation. The regulatory burden economy. can be measured in a number of ways. A simple The shadow economy is nothing new in measure often used in World Bank enterprise Ukraine. It is not a result of market reforms-in surveys-the time required for senior managers fact, it reflects Ukraine's slow progress in to comply with regulation-shows that Ukraine achieving those reforms. During the Soviet era has one of the most burdensome environments the central government created many economic in the world, with regulatory compliance regions. Few efforts were made to minimize consuming 29 percent of managers' time production costs, including transportation. In (Novitsky, Novitskaya, and Stone 1995). A addition, draconian restrictions on trade, 1997 survey by the International Center for currency transactions, and private property and Policy Studies (ICPS) found that in Kyiv business made people reluctant to obey managers of private enterprises meet with tax, legislation and trust the government to protect customs, licensing, and other officials 103 days their savings, investments, and property. These of the year. Similarly, a recent International conditions created a shadow economy. Finance Corporation (IFC) study found that During the 1980s the typical shadow economy small businesses endure an average of 78 businessman produced goods in state-owned inspections for year, requiring 68 written plants at night for his own benefit or made responses, consuming 2 days a week of the unaccounted extra output and disguised its sale manager's time, and requiring a cash outlay of through doctored accounts. In the early 1990s 4,200 hryvnias (about $2,100) a year." A he colluded with those in power to appropriate public property, materials, and tools for private 18 The IFC survey was carried out in late 1997 and use. Today he is a member of the Ukrainian interviewed 200 small businesses in four Ukrainian cities. The survey was carried out by the Ukrainian Marketing nouveau riche, having accumulated substantial Group Formula. Amanda Leness and Kyiv staff Nils capital by acting unlawfully but with the Andreas Masvie and Thomas Rader were involved in its protection of corrupt state authorities. design, implementation, and analysis. Transforming Government for Growth 25 survey by the State Committee on survey found that the average business faced Entrepreneurship Development and the ICPS of seven annual tax inspections. The average market venders in Kyiv suggested that officials inspection lasted more than 10 days and inspected them nearly every day: 25 times a required more than 80 percent of enterprises to month. Bureaucrats are vested with the provide the inspectors with office space, discretion to investigate every transaction and computers, telephones, and other equipment contract, and rarely refrain from exercising this (often purchased only to satisfy the inspector). discretion.19 So the total financial burden of taxes goes well Bureaucratic d . International e - beyond actual collections. The 1997 Global tions of administrative discretion confirm this Competitiveness Report rates the tax burden problem. The survey of corporate executives from the firm's standpoint on a scale of 1 to 7; a underlying the 1997 Global Competitiveness low score indicates that the tax system hinders Report assigns Ukraine a rank of 2 (next to competitiveness, a high score indicates the tax worst) on a 6-point evaluation scale of system enhances competitiveness (World regulatory discretion, roughly equal to Russia Economic Forum 1997). Among the countries evaluated, Ukraine had the worst score at 1.58, (World Economic Forum 1997). Canada and compared with 1.80 for Russia, 2.22 for Brazil, Chile rate 5 on this scale, while other Eastern and 3.50 for the United States (figure 2.7). The European nations (the Czech Republic, effective tax burden has a much larger impact Hungary, Poland) rank between 3 and 4. on the size of the shadow economy than do official tax rates. A one-point increase in this Figure 2.7 Heavy taxes make Ukraine index reduces the share of the unofficial unattractive to investors and stimulate economy by 6.5 percentage points, controlling the shadow economy for differences in national income. Tax Burden, as Reported by Firms Public services and corruption. Public services (1=Worst, 7=Best) take a number of forms. One crucial state service is to ensure property rights for land, 3.5 tangible assets, and intangible assets (such as 3 intellectual property). The Heritage Foundation evaluates the security of property rights on a 2 .5 scale of 1 (most secure) to5 (least secure). Chile scores a perfect 1 on this scale, along with 0.5 Canada, Germany, and the United States. By 0< contrast, Ukraine shares the lowest rank, 4, with g three other former communist countries- Azerbaijan, Georgia, and Romania. The Czech Source: World Economic Forum 1997. Republic, Hungary, and Poland score a 2, while Brazil and Russia score 3. Effective tax burden. Businesses in Ukraine frequently complain that, while marginal tax nother publ ic ser uity rates are not unusually high, the way they are involves public integrity-official corruption is assessed and the cumulative effect of multiple generally associated with bad services and less taxes make effective rates far higher, while the fairness in the delivery of those services. administrative burden is exceptional. The ICPS Ukraine's problems with corruption are well documented by enterprise and citizen surveys. A 1996 World Bank business survey found that 19 This paper draws on three ICPS surveys, two of which many regulatory procedures and permits-for were carried out on 300 firms in four oblasts in 1997 as loans, imports, border crossings, fire and health part of the Quarterly Rapid Enterprise Survey. For the inspections, telephone line installations, and the latter, see ICPS (1998). The third survey was carried out in cooperation with the State Committee on Entrepreneurship ke-required bribes (table 2.3). The costs of Development in a single rayon in Kiev and is referred to as such bribes fall disproportionately on small the SCED-tCPS survey. firms, deterring new firms from starting up and 26 Chapter 2 Table 2.3 Unofficial payments by enterprises for official permits and favors, 1996 Enterprises admitting need Type of license, service, or favor Average,fee (USD) to pay (percent) Visit by fire or health inspector 42 81 Visit by tax inspector 87 51 Lease in state space (sq. meter per month) 7 66 Export license/registration 123 61 Import license/ registration 278 71 Border crossing (lump sum) 211 100 Border crossing (% of value) 3% 57 Domestic currency loan from bank on preferential terms (% of value) 4% 81 Hard currency loan on preferential terms (% of value) 4% 85 Source: Kaufmann 1997. informal firms from joining the formal economy and service delivery systems have driven (Rose-Ackerman and Stone forthcoming). mainstream businessmen to commit illegal acts A 1997 survey found that half of all Ukrainians in order to survive. Continuing this system will blame the government for recent negative encourage a downward spiral of revenues, economic conditions (GLS Research and others public services, and the rule of law. 1997). Moreover, corruption was the leading How can shadow activity be reduced? cause cited for negative economic conditions. Current efforts. The government pursues a About 70 percent of respondents described variety of antishadow actions. For example, it government decision-making and lawmaking as enforces tax collection by introducing new corrupt and unfair. Transparency International rates corruption in a large number of countries axe,uing more pistica d methdf fro 0(mot ormt)to 0 no orupto. accounting, calculating, paying, and auditing from 0 (most corrupt) to 10 (no corruption). tae,xpnighemdteo tetx Russia and Ukraine rate poorly, the Czech tae,xpnig hem dteo tetx Reuic,Hu and Ukraineratepold ae ith administration, and investigating and punishing tax dodgers based on special normative acts middle, and wealthy OECD countries rate very well (figure 2.8). A 1 point increase in this integrity measure is associated with a 3.5 Similarly, the government has strengthened percentage point drop in the shadow economy budget revenues by increasing luxury taxes, (Johnson, Kaufmann, and Shleifer 1997). requiring collateral against tax liabilities, sequestering funds (refusing to allow The consequences .The high costs and small seutrig fns (fsng o alw The onsqueces Thehig coss ad sall obligations against authorized budgetary funds), benefits of participating in the formal economy reqirin al authoried mangers fularge creae a enrmos iforml scto. Te Wrld requiring local authorities and managers of large create an enormous informal sector. The World enepistoraydbsothbug,Pnin Bankestmats tat alf f Uraie'secoomy enterprises to repay debts to the budget, Pension Bank estimates that half of Ukraine's economy Fn,adtelk,adi saclrtn is in the shadow. Much of this shadow activity ban tcy proe agait cpa in is happening in mainstream enterprises. For dautot paymes The goernen example, a 1997 survey by the IFC found that alo tu inents Tha enoua 69 percent of Ukrainian small businesses fail to co inot toenage ibate a e report at least 30 percent of their profits. Thus a ies are reng on artosu as Ukraine's malfunctioning tax, regulatory, legal, indie ethos ton va sao incmes odirect methods to reveal shadow incomes Transforming Government for Growth 27 based on ownership of cars, houses, bank efforts. Anticorruption activities must not accounts, and other valuable assets, as well as become an uncontrolled witch-hunt, however, on expenditures for luxuries such as foreign and initial efforts should focus on increasing travel. incentives for honesty, educating bureaucrats A new approach. Excessive state intervention and private citizens through awareness and weak governance have stimulated the campaigns, and punishing a few major receivers growth of Ukraine's shadow economy. The nd payers of bribes. solutions are simple but difficult to achieve: Second, the most promising anticorruption reversing the downward spiral and reducing the reforms reduce the benefits that are subject to shadow economy. Ukraine should ease state the discretion of public officials. Some public intervention in the economy, limiting activities can be eliminated (or privatized), bureaucratic discretion and reducing the burden others subjected to competition and market of taxes and regulations for businesses. In forces, and others redesigned with clear rules addition, public services should be strengthened, and simple processes. Where rules and starting with better legal protections of property procedures are widely known, opportunities for and contract rights and a systematic attack on corruption are reduced. Reorganization within corruption, and extending to improving the government to consolidate and rationalize accountability and performance of civil responsibilities and lines of authority can also servants. increase accountability and transparency, and facilitate systems of budget and financial Figure 2.8 Corr ption is high in Ukraine control Transparency International's Corruption Index Third, government and private citizens must o______ _ _ .move quickly to stem the culture of illegality. One approach is to wage a public education -__campaign, beginning with integrity pledges and personal financial disclosure by top officials. u,4 Finally, there would be less temptation to accept bribes if the government reduced the number of < government employees and paid the remaining employees higher wages. Source: Transparency International 1997; Through the policy changes envisioned in the Lambsdorff 1998. World Bank's adjustment programs, the public sector improvements under the Public The government can combat corruption through Administration Reform Loan, and ongoing a four-pronged strategy. First, by boosting the Economic Development Institute integrity- benefits of honest behavior through civil service oriented activities involving government and and judicial reform, increasing the probability of civil society, the Bank is helping the detection and punishment, and imposing stiffer government enhance its efforts to create a more penalties. The probability of detection increases favorable and normal business climate in with better budget and financial systems, as well Ukraine. as with special oversight and investigative 28 Chapter 2 3. THE REAL SECTORS AND STRUCTURAL REFORMS As noted in chapter 2, major efforts are needed absolute advantages are in wheat and sunflower, to make the government a positive force for closely followed by corn and sugar beets. economic growth and higher living standards. Ukraine contains about 25 percent of the But in the end, raising living standards and world's rich black soil, as well as 27 percent of achieving financial stability depend directly on Europe's tilled soil-giving it 0.64 hectares of restoring real economic growth. For this, urgent tilled soil per capita, compared with 0.25 structural reforms are needed in Ukraine's real hectares for Europe as a whole (UNDP 1997). economy, which has shrunk by more than 60 Yet agricultural output has been falling for years percent since 1989. (figure 3.1). The country's fertile land is Ukraine is blessed with one of the world's most producing only a fraction of its potential, fertile environments-yet agricultural output has robbing Ukraine of the food that it needs for its dropped to less than 45 percent of the level in people-and for exports that could earn the 1990, bringing poverty to millions. Agriculture foreign exchange required for modern suffers from stalled reforms in land ownership agricultural equipment and technology. The land and from government intrusion in the marketing is basically as good today as it was 100 years of agricultural inputs and outputs, discouraging ago. What has changed is the ownership and private investment. From the Soviet era, Ukraine structure of farming enterprises and the policies inherited a large and sophisticated industrial under which these enterprises operate. sector, and it remains the world's eighth largest producer of steel and an important international Figure 3.1 Agricultural output has declined source of airplanes, rockets, and weapons. But steadily though privatization is proceeding for small and Ukraine: agricultural production medium-size enterprises, the "giants"-which 45 - account for a sizable share of industrial assets and employment-remain firmly under state 40 control. Moreover, industry must cope with 35- heavy tax and regulatory burdens. 30 Energy plays a leading role, supporting all other o25 productive activity. Financially and physically, -2 however, the sector is on its knees. Low tariffs, 20 low collection rates, and even lower cash D 15 payments have made it impossible for the sector to supply better, more reliable services at lower 10 cost. Finally, agriculture, industry, and energy 5 all need better access to high-quality, cost- effective financial services. But the banking 0 sector is weak, and excessive deficit financing ,90 6 e makes new loans hard to come by and very expensive. Source: Tacis/UEPLAC, Ukraine Economic Trends. REVIVING AGRICULTURE Agricultural exports. Ukraine traditionally was a The food and agriculture sector has greater net exporter of food and a major supplier of economic potential in Ukraine than in any other grain, sugar and livestock products to the rest of country of the former Soviet Union. Agro- the former Soviet Union. Ukrainian agricultural climatic conditions are well suited to the and food product exports decreased significantly production of grains, oilseeds, livestock, root in 1992-1994, mainly as a result of the and fiber crops, and fruits and vegetables. In breakdown of traditional trade links with the terms of production costs, Ukraine's greatest FSU countries. Falling incomes in countries to which Ukraine previously exported further The Real Sector and Structural Reforms 29 reduced exports to those markets, and a On the other hand, the production of potatoes combination of energy inefficiency in Ukrainian and vegetables has been fairly steady, and farming, sharply rising cost of livestock sunflower seed production has actually production, and trade barriers in western increased by over 20%. markets made it difficult to replace the markets Ownership trends and impacts. The relatively lost in the FSU. stable production of potatoes and vegetables With liberalization of foreign trade in 1995- reflects the importance of private smallholder 1996, agriculture and food exports began to agricultural production in Ukraine, which recover, reaching 21% of the total merchandise accounts for a major share of non-technical exports from Ukraine in 1996. But in 1997- crops even though only 14 percent of all 1998, the exports of agriculture and food agricultural land in Ukraine is truly in private products declined again, reflecting the holdings (including the 3 percent privatized continuing decline in agricultural production since independence). In fact, although the and increasing inefficiencies in the sector. increase in privately held agricultural land in Despite the low grain harvest in 1998, grain Ukraine since independence has been marginal, exports during 1998/1999 season increased to total production has actually risen on private land while falling by over 40 percent in the more than 6.2 mln tons, nearly 25 percent of "social sector" of farming. The latter includes domestic grain production. Sunflower exports 4:1 collective farms that, while private in name, also increased in 1998, reflecting Ukraine's comparative advantage in production of this continu e on larey a b o thoa crop. At the same time, sugar exports declined havy dre of gormental cotrl to the lowest level in the last ten years - to only prularly f loa ahrteetable 3.) 154 thousand tons during the 1998/1999 season. The production of potatoes and vegetables has The ugabeetdecine eflctedlowbecome the domain of private plots and private productivity farmers. The large-scale collective enterprises at the farm level-the average sugarbeet yield in remain the main producers of grain, sunflower 1998 was 17.4 tons per hectare, the lowest in more than 30 years, large inefficiencies at the majority of sugar refineries, and on the external Shadow economic activity. Agriculture is side, low international prices and import barriers heavily influenced by shadow economic imposed by Russia. Agricultural exports today activity-the direct result of widespread are mainly directed to Russia and other FSU discretionary government intervention in the countries and are dominated by grain, sunflower operation of agricultural markets both for inputs seeds and a few dairy products., and significant and outputs. Such controls provide widespread interference of the government in the sector opportunities for corruption including non- during the recent period. transparent barter deals, siphoning profits from Production trends. With falling demand for cooperatives and other entities either owned or exports in traditional markets FSU and higher effectively controlled by the local political energy prices after independence, Ukraine's structures, and provision of goods at favorable prices in exchange for various favors. Official energy-dependent agricultural sector found it g difficult to pay for the inputs and capital output figures on the farm sector are almost equipment needed to maintain production. The certainly understated because a substantial share of output is not being recorded in the official output decline since independence was far more stat is Wo e ing re ouce acut inherd thn incros. Lvesock statistics. Worse yet, by distorting resource actinoherdthan i n onsider o. Lvek allocation decisions and reducing economic production is considerably more energy ef.in ths evsv.hdweooi efficiency, this pervasive shadow economic intensive than crop production, so when energy y, cost roe, gainprouctin fll, nd eed activity also reduces real output for Ukraine and bcae rscre, grainproni we slanteed income to the farmers, one of the poorest groups became scarce, animals were slaughtered. Among crops, the greatest declines between 1990 and 1998 were seen in flax and soy (-80%), sugar beets (-60%) and grain (-40%). 1Sablouk and Fesina, 1999 30 Chapter 3 Table 3.1 Indices of the gross output of the agriculture sector, 1990-1998 (1990 = 100) Year All farms Social sector Private sector Total Crop Herd Total Crop Herd Total Crop Herd 1990 100 100 100 100 100 100 100 100 100 1991 87 83 90 83 79 87 97 97 97 1992 80 84 76 68 69 67 107 129 91 1993 81 93 69 66 74 57 116 149 91 1994 68 72 63 53 56 49 103 121 90 1995 65 74 56 48 54 41 106 134 86 1996 59 67 51 38 43 32 109 141 86 1997 58 71 44 36 48 23 110 143 86 1998 53 61 45 31 38 23 105 129 88 Source: State Committee of Ukraine in Ukraine despite the country's rich soil and plans had been worked out for about 1,250 other good climate. farms. Recent reforms Experience shows that only those FSU countries March 1999 marked the eighth anniversary of which managed to privatize agriculture de facto land reform in Ukraine and of attempts to make (Estonia, Latvia, Lithuania, Kyrgyzstan, the food and agriculture sector more efficient Armenia, and Georgia) managed to overcome and productive. In addition to land reform and output decline and restore economic growth. Ukraine is one of the less advanced in effective restructuring of collective and statefarms, agriculture/land reforms. Collective farming still agerturl reiromshvenc ibaizing dominates in the agriculture sector of Ukraine, thoessig m arkt eiroe, pcreatizng agrow bringing continuous output decline, fiscal prosstuiongand rae,k antensions, and serious social and political stress. Therefore, radical de-collectivization program Though some reforms have been achieved, must become the principal direction of the progress has been neither smooth nor agriculture policy in the coming years, along universal-the result of a continuous struggle with a radical reduction in government between supporters and opponents of reform. intervention in the markets for agricultural Faced with these tensions, the government has inputs and outputs, thus assuring that all farms, been unable to implement the policies required privatized or not, have full access to well- to address critical reform issues. Significant functioning markets. progress in some areas has been circumvented Despite eight years of reform, only 17 percent of by reversals elsewhere. agricultural land is cultivated by the private Land reform and farm restructuring. Moderate sector (family farms and household plots), and progress has been made in land reform and farm most Ukrainian agriculture remains effectively restructuring. Land share certificates have been collectivized. Moreover, the growth of private issued to 80 percent of Ukraine's large farms, farming has slowed considerably since 1994, with the number rising from just over 3,300 in The number of private family farms has early 1997 to 8,500 in mid-1998. Nearly 150 of stagnated around 35485, accounting for only 2 these farms have been fundamentally percent of agricultural land and production. In restructured, and by January 1998 land sharing 1998, about 93 percent of large farms reported losses, and most have accumulated significant The Real Sector and Structural Reforms 31 debt. The government needs to make every enterprises that have been privatized to a depth possible effort to renew land reform and farm of 70 percent increased from 2,200 in 1997 to restructuring. 3,900 in 1998 (out of a total of 4,800). Land markets. Shortly after independence, a Demonopolization of agro-industrial enterprises moratorium was placed on the sale of has been promoted aggressively by the Anti- agricultural land, even if privately owned. The Monopoly Committee, which has broken up more than 60 percent of the monopolists government argues that various decrees and . identified in the agro-industrial sector. But normative acts since then, including Presidential ietii n th ondsia sector.B of 194,hav mae th moatoium privatization with ownership by managers, Decree 666 oworkers, and raw material suppliers has not applicable only to land that was given to farmers resulted in restructured or more efficient by local municipalities. Parliament, however, enterprises. Most agro processing is operating continues to declare that there is a moratorium with low capacity utilization, weak corporate on the sale of land. The government has responded by enacting joint normative acts by Consequently it is unable to produce products the State Committee on Land Reform and of Justice. These acts: that are competitive even on domestic markets. Foreign investment is minimal. * Give a right to two or more members of a collective agricultural enterprise, joint progress has been made in liberalizing stock agricultural company, or agricultural pgress ha keen ad in lieang f towithrawadacnt and ots agricultural markets and prices. Price and cooperative margin controls on grain have been eliminated. from the farm enterprise. Most foreign trade restrictions have been * Limit to three months the period within removed and few additional barriers imposed. which a farm members' council of a As a result, the implicit taxation of agriculture collective agricultural enterprise has to give has been reversed. Yet farms have been unable its consent to one or more members who to respond to higher prices and expand output file an application to withdraw land plots. because they lack access to investment and * Limit to one year the period within which working capital, and corporate governance remains essentially unchanged. Government the withdrawing member must be given intervention in domestic grain markets inhibits foreign investment. By requiring in-kind The obstacles to direct private ownership have repayment of inputs, credits, and tax/pension leasing arrears, the government has placed itself first in line among creditors, seriously restricting farms' plots of land. In 1998 private farmers and new corporate-style farms began leasing land plots access to commercial loans. withdrawn from collectives and plots still in In 1995 and early 1996 the government collective agricultural enterprises but not being appeared to be committed to refraining from farmed. This positive development shows that intervening in agricultural import and export collective agricultural enterprises can supply markets. But in mid-1996 Parliament imposed land to the lease market. As members of duties on exports of live animals and hides. collective agricultural enterprises see their Then in October 1997 it adopted the Law on enterprises leasing land, they may become more Regulation of Agricultural Imports. This law, willing to withdraw the land they are entitled to which sets quotas for imports of certain animals from their enterprises and lease it. Some fear and meat products, would effectively increase that leases will be given at unreasonably low agro-industrial protection from about 21 percent rates, but the State Committee on Land Reform to nearly 30 percent if implemented in full. plans an information campaign to inform farm Protective measures contributed to the 1998 members about lease options and payments. decline in agricultural imports by 11 percent. Privatization in agro processing. Agro- During the same year, government convinced industrial privatization has proceeded Parliament to grant exemptions for export of reasonably well. The number of agro-industrial skins that are processed abroad and re-imported 32 Chapter 3 as semi-finished goods, easing the negative purchases. Nevertheless, most state purchase impact of the export taxes on primary contracts for agricultural products in 1997 were agricultural producers. The government has also not awarded on a tender basis or through resisted pressures to impose export taxes on commodity exchanges (which would allow sunflower seeds and other primary agricultural transparent private participation). Through products. Resolution 1417 of December 1997, the Cabinet Although it passed regulations for the Law of of Ministers stated that procurement of Agricultural Imports, the Cabinet of Ministers agricultural commodities for state reserves must go through commodity exchanges. In addition, has not authorized any import quotas. Moreover, g g y g in 1998 the government submitted to Parliament the 1998 budget eliminated resources for direct amendments to the law that cut a number of procurement of agricultural commodities (including grain), and the government issued unusually high tariffs (from rates of more than ds to iit ate urchasen chanel 50 percent to 30 percent). The government has tem to com oity echanges.nThesenae also asked that tariffs on livestock feed be cut to no more than 50 European currency units per encouraging developments. ton. An agenda for agriculture reforms The government has sent mixed signals to the The most difficult agricultural reforms are those private sector on domestic market development. involving the liberalization of domestic and A number of budget and off-budget programs international trade in agricultural products and have been created to channel inputs- the introduction of meaningful reforms in the machinery, fertilizer, seeds-to farms and to ownership of agricultural land. For agricultural accept payment in grain. This is basically a growth to recover: slightly disguised way of allowing the state to barter inputs for grain through state-owned grain b G ement in te inst stotmus elevators and state-owned or -controlled input bemlimit The ate mout of supply enterprises. In 1998 these programs cost commoit market oan focuswon about $400 million, and the system creates a deveo the ist iltfrew substantial risk that-as in the past-the government will try to collect outstanding debts * Farm restructuring must increase, with by requiring farmers to deliver grain. This genuine privatization of farms, approach seriously impedes private grain improvements in corporate governance, markets and, because it involves multiple levels and creation of hard budget constraints. of government, creates opportunities for A corruption. * Agro processing must be facilitated by creating secondary markets for enterprise The Government plans to privatize 445 of shares and developing a climate conducive Ukraine's 545 grain elevators and storage to foreign direct investment. facilities, and by the end of 1998 had privatized 165. Although privatization is proceeding well, * Open and competitive factor markets must the grain storage units being privatized are often be created i the sector-including a the less important ones. Moreover, it appears market for agricultural land. that even after privatization of all but 100 units, Implementing this agenda would encourage the state will still control a major share of grain domestic and foreign investors to supply the storage capacity. By some estimates the state, capital needed to improve the supply of primary through marketing arrangements and commodity agricultural inputs, storage handling, and loans, will maintain effective control or at least processing. influence more than 90 percent of trade in agricultural commodities. FOSTERING PRIVATE SECTOR In February 1997 the Cabinet of Ministers DEVELOPMENT issued Resolution 124 requiring competitive During the Soviet era, Ukraine's heavy procurement procedures for state grain industrialization-especially in iron and steel, The Real Sector and Structural Reforms 33 Table 3.2 Industrial output indexes by branch, % 1997 to 1998 to 1990=100 1995 1996 1997 1998 1996 1997 Industry-Total 52 50 49 49 98 99 Electricity 70 65 63 63 97 100 Fuel 44 41 44 43 105 99 Ferrous metallurgy 41 46 50 46 108 93 Chemical and oil-chemical 41 40 41 41 99 101 Machine-building and metal works 50 37 37 35 96 96 Wood, woodworking and pulp-and-paper 56 46 45 50 95 111 Construction materials 38 25 22 23 92 104 Light industry 32 24 24 25 95 t02 Food 47 43 39 39 85 100 Source: State Statistics Committee aerospace and transport aircraft, and other earlier, its losses are destabilizing the entire military equipment-underpinned relatively economy. Most of these old Soviet enterprises high living standards. Yet today Ukraine's cannot operate efficiently without the economies strong industry is one of iOts greatest sources of of scale associated with access to foreign weakness. These sectors depend on energy, on markets. In fact, their current crisis stems largely markets that have collapsed, and on a from the collapse of the trading relations formed management style that is not suited to a modem over many decades among the USSR and market economy. Council for Mutual Economic Assistance Privatization has helped, but many privatized countries. factories are still run by their old managers, The military industrial complex (MIC) in following outdated traditions. In many particular has suffered from these problems. The enterprises the absence of strategic or lead Figure 3.2 The industrial collapse since investors and the broadly based nature of share 1990 is coming to an end ownership have created serious problems with corporate governance. As a result of all these factors, industrial output has dropped at least 60 80 percent, and only in late 1996 did the situation 70 -- -- -- begin to stabilize (figure 3.2).2 60 The Soviet legacy 50 Production. A large industrial complex based on "40 strong centralized management dominated the 30 -- - economic landscape in Ukraine prior to the 20 disintegration of the USSR. Today this complex 20 needs radical restructuring. For reasons noted 10 0 2 Based on an adjusted index of industrial output that 1' resolves some of the index number problems inherent in the traditional way of calculating industrial output, Source: TACIS.EPLAC, Uk.ane Economic Trends, TACIS/UEPLAC estimates the decline at 73 percent to the third quarter of 1996, when the decline bottoms out. adjusted by UEPLAC. 34 Chapter 3 number of MIC enterprises and organizations restore living standards. Russian markets are in dropped by about 80 percent between 1990 and turmoil and will likely stay that way for quite 1999, and the number of workers fell by 85 some time. And even as the Russian economy percent. By 1999 the volume of armaments and improves, preferences will almost certainly shift war materiel production was only about five percent of 1990/91 levels. Figure 3.3 Heavy industry increases while Many of these old defense industry plants tried other manufacturing declines to convert to civilian products, but most of their 4C Branch Composition of Industrial Production conversion products" were non-competitive, (% of total industrial output) not only in foreign markets, but in domestic 0 5 10 15 20 25 30 35 markets as well. Warehouses filled with M-tallurg unmarketable goods, dragging down working capital and leaving the plants with no money to Fuel&Electricity replace and upgrade their antiquated fixed capital stock. With non-competitive final Machne-buidin products, Ukraine has turned increasingly to the production of primary products such as basic Food iron and steel with little downstream value added-and thus shrinking demand for the Light nation's substantial corps of well-educated scientists and engineers. OLers Radical reforms of the MIC is needed to make 01990 1998 its products again competitive on domestic and Source: State Statistics Committee international markets. The restructuring should focus creating a business climate that provides to developing new domestic sources of supply market-based incentives for reform and a legal rather than depending on scattered external framework that makes it easy for enterprises to sources. respond to such incentives without excessive Industrial production dynamics. The share of government intervention. Privatization of much heavy industries such as metallurgy electicity of the sector is still needed to assure that the and fuel has risen since 1993 at the expense of managers have the incentives to become more other manufacturing industries (figure 3.3). efficient, subject of course to normal Machine-building and metal works have governmental controls over any industry such as experienced most severe contraction. The armaments that has the potential to jeopardize sector's key problems have been a lack of national security and social welfare. political will to privatize leading companies in a Most industrial activity in the Soviet Union was transparent manner to strategic foreign highly energy-intensive-especially in iron and investors, a generally hostile business steel. It made little sense to invest in energy- environment that discourages investors from saving technology because energy inputs were market economies in taking larger positions in priced at 5-10 percent of world levels. But once Ukrainian machine-building and metal works, the energy prices charged by Russia moved to and the combined shortage and high cost of world market levels, broad swaths of Ukraine's domestic capital. energy-intensive industrial output became non Despite Ukraine's comparative advantage in competitive in world markets. agriculture, the food processing sector's share in Outside of military equipment, product design total industrial output actually declined between and quality were generally poor, so Ukraine 1993 and 1998 (from 14.4% to 12.7%). In 1997- found it very difficult to start exporting to 98, however, this sub-sector attracted more Western markets. Restoring exports to former foreign direct investment than any other sector. Soviet countries holds little hope of providing This plus the incentive of increased competition the engine of growth that Ukraine needs to The Real Sector and Structural Reforms 35 from imports brings hope that the sector may find it much easier to bribe bureaucrats than to begin to realize its intrinsic potential (table 3.3). become competitive. Ferrous and non-ferrous metallurgy has shown The main challenge for private sector the fastest exports growth and one the smallest development in Ukraine differs from that in contraction of output since independence (figure former Soviet republics that started enterprise 3.4). However, the relative competitiveness of reforms earlier. For example, in Moldova the this sub-sector is based more on barter constraints to privatization had more to do with transactions and non-payment of its bills for ideology than with vested interests. In Ukraine energy and raw material than on efficiency. enterprise reform is hindered by residual The Russian crises negatively affected industry, ideology but also by the untaxed incomes that including the exports of ferrous and non-ferrous an influential portion of the population draws metal. Reluctance or inability of Ukrainian from the current system. The challenges facing the industrial sector today Table 3.3 Foreign direct investment in Ukraine as the result of its Soviet past and the slow pace by industry (share to total, %) of reform since independence are greatly 1994 1995 1996 1997 1998 compounded by pervasive shadow economy Total 100 100 100 100 100 activity. Overall an estimated 50 percent of GDP Food 14 15 12 21 21 is produced in the shadow; in the industrial Domestic trade 10 22 29 16 16 sector, the share is probably considerably Machine building 23 13 10 8 13 higher, particularly among small- and medium- Chemical and oil-chemical 6 4 3 7 6 Fuel ... 1 1 1 3 sized firms where entire enterprises hide in the Metallurgy 5 5 3 2 4 shadows. But the problem also prevails among Light 6 4 2 2 2 large scale enterprises which, though operating Source: State Statistics Committee as registered, tax-paying firms, buy inputs at companies to substitute suppliers from the CIS inflated prices from and sell outputs below cost with suppliers in the West - even in cases when Figure 3.4 Industrial Products play a large role they do have the cash to do so, leaves them . highly exposed to up and downs of CIS markets. Problems. Inherited Soviet behaviors, visible at Commodity Structure of Ukrainian the enterprise and administration levels, are a Exports (min USD) major constraint to private sector growth in Ukraine. Many bureaucrats live off a growing number of licenses, permits, and controls. As Ferrous and other no- renusmtals this expanding class becomes entrenched and 5000o learns how to protect its interests, the Ukrainian economy risks stabilizing at a low level of 4000__- efficiency and output. Indeed, bureaucratic interference at the oblast level appears to be 30Mhea worse than in Soviet times, and is certainly more 0 worsethanin Sviettimes andis crtaily moeiMahineytan chaotic with the newly decentralized decision- transport Fod industry making system. Bureaucrats with a vested 2000 - interest in resisting deregulation are supported by "unreformed" owner-managers who abuse the perverse regulatory system. This symbiotic Mineral products relationship between bureaucrats and managers including electrical energy contributes directly to the poor performance of 0 state enterprises. Bureaucrats do not want 1994 1995 1996 1997 1998 enterprises to be highly profitable because that would make them more independent. Managers 36 Chapter 3 to parallel "daughter" enterprises in the shadow development efforts. Experience from around economy, thereby transferring profits into the the globe shows that state-owned plants tend to shadows beyond the reach of the tax authorities. be much less efficient than private plants-and By showing losses as a result of such transfer the situation is not likely to be different in pricing, some firms are able to get tax privileges Ukraine. And in today's global economy, it and even direct subsidies from the government, would be impossible for the government to further draining the government coffers. mobilize the billions of dollars of investment Such practices are problematic for both the required to modernize industry. Private and the esector-the investment, domestic and foreign, must take the govte e benrterps gains lead. Though the following recommendations toeulangte beng atest soth terh ad focus on reforming manufacturing enterprises, precluding the long term growth which is f pthey are equally applicable to enterprises in frequently potentially possible. Shadow .giutr,ifatutr,adtae economy activity thus poses a serious threat to industrial growth-to say nothing of the The challenges ahead government's ability to operate in a normal As noted, privatization of small enterprises is manner and to provide the services needed for essentially complete, and privatization of economic growth and human development. c' ~medium-size and l arge enterprises has First, small firms are encouraged to stay small to proceeded well (figure 3.5). Between 1995 and avoid detection, discouraging growth. Second, 1998 more than 9,500 medium-size and large serious investors are hesitant to enter sectors domiate byshadw ativty, nowng hat enterprises transferred at least 70 percent of their d n bshares to private ownership. The state still they will either face unfair competition from 4 those not paying their taxes, or will have to go into the shadows, exposing themselves to Figure 3.5 Privatization of medium-size and multiple risks. Third, firms operating in the large enterprises is nearly complete shadow find it dangerous to become profitable, for this exposes them to exploitation by tax Ukraine: Privatization of Medium and collectors, who extract bribes in exchange for privileged tax treatment, and by criminal elements who take advantage of the fact that 1995 firms operating outside the law cannot turn to the law for protection. Fourth, managers of shadow enterprises have to spend a lot of time 1996 and money defending themselves from such exploitation-or paying off the exploiters, and 1997 this reduces the human and capital resources available for economic growth. In short, the dominance of shadow economic activity in 1998 Ukraine is a major reason for the continued economic decline.3 0 20 40 60 80 100 Prospects. To succeed, Ukrainian industry must Percent of Privatizable Universe penetrate European and global markets with Source: PricewaterhouseCoopers/U.S. Agency for high-quality, energy-efficient products. Doing International Development. so will require intense private sector 3 Again it should be noted that the economic decline is 4 According to Vrubelvsky, Tryneev, and Yakubovsky probably overstated by official figures. While these figures (1998, p. 23), "even though about 75% of all enterprises are derived on a different basis than those of the tax have changed their form of ownership, the share of authorities and thus more fully reflect total economic working population employed in privatized enterprises activity in Ukraine, significant parts of GDP still appear to does not exceed 20%." Further clarification is needed, remain outside the official figures. however, on the definition of "private." The Real Sector and Structural Reforms 37 with much of the data on Ukraine, this has to be Bankruptcy Law prefers straight liquidation to qualified: as much as one quarter of these jobs Chapter 11-type restructuring based on an are in name only-people are not paid and do agreement between creditors and owners. not work. Problems remain in cash privatization Creditors' rights are further hampered by the of the largest industrial enterprises and utilities. priority given to collecting taxes-including New companies emerging from privatized state through seizure of assets and freezing of bank accounts. enterprises have better ownership structures than, for example, in Russia. During mass Vested interests of new owners and institutional privatization Ukraine auctioned more shares of weakness make bankruptcy or restructuring privatized companies to the general public. through liquidation even more difficult. The Independent shareholder registrars and public government has even tried to discourage disclosure requirements, introduced in the bankruptcy-the Agency to Prevent Bankruptcy reform program, make managers more was only recently renamed the Bankruptcy accountable to shareholders. And in enterprises Agency. No medium-size and large enterprises privatized by "buyout-through-leasing," have been declared bankrupt, though many are managers are more accountable to employees technically so. The second World Bank- than in other former Soviet republics. Still, the financed Enterprise Development Adjustment situation is far from ideal; regulatory Loan calls for three pilot liquidations of large enforcement and corporate culture remain weak. enterprises and for making the current Bankruptcy Law operational. A new bankruptcy The development of new small and medium-size B r y pty enterprises has been comparable to the results law is being discussed by Parliament, but the achieved in other former Soviet republics but outcome is unlikely to be consistent with the in Central European draft prepared by the government with the help mouchr. soe than of international financial institutions and other countries. More than 600,000 private firms have dors been registered, but only 100,000 have become d registered taxpayers. Among the rest, some hide The few isolated cases of enterprise in the shadow economy and some never really restructuring have been initiated by new outside existed as operating companies. In 1996 small owners (investment funds, banks, individuals), and medium-size enterprises accounted for just inside owners (primarily new managers), foreign 2.5 percent of overall industrial output. Even in investors, and donors (including the World the most advanced regions, these enterprises Bank). The objectives and scope of restructuring accounted for less than 10 percent of GDP and differ in each case. Restructuring by external employment. These data should be viewed with owners often includes searching for new caution, however, because most new private investments, reorienting production, and businesses operate in the shadow economy. reducing the labor force. Insider reorganization Corporate restructuring and liquidation, is usually oriented toward survival and preserving jobs, and is achieved by rebuilding Though the decline in industrial output was even pa old networks of cooperation, spinning off more severe than the drop in GDP, the decline in o g industry has not been all bad. The service sector technological units and cost centers. Searching has grown from 43 percent of output in 1994 to for foreign investors is a part of the agenda, but fear of losing control is a serious limitation. 50 percent in 1997, at the expense of industry, Eernalyisupportro jets aemol agriculture, and construction. Base industries- d coal, energy, metallurgy-have done better than designed as demonstration efforts, to train local machine-building and industries; many consultants and disseminate best practices- with mixed results. Among some 50 enterprises obsolete products have been eliminated. But while there have been changeslate se t interviewed by World Bank staff in March 1998, most had started some type of restructuring, and level, structural reforms have not resulted in about half of those had achieved short-term serious restructuring at the enterprise level, viability. But restructuring has not yet produced One problem is that bankruptcy laws do not significant macroeconomic benefits-hidden provide for restructuring and liquidation. The 38 Chapter 3 unemployment remains at 20-30 percent (though spent complying with the requirements of official unemployment is still around 4 percent) central, oblast, and municipal authorities. This does not include the considerable time managers Competitiveness and foreign investment. The doe.n in the on tie aners considerable control retained by line ministries s in iv lobbin the lCabint of Ministers, line ministries, and Parliament for and other government agencies is perhaps the valuable state benefits. Nearly all firms expect most important reason for the slow development privileges, even if the odds of receiving them of the formal private sector. This control, comine wt cope an ouded are small. Efforts to win the "lottery" for regains ed thth co le bedig ound privileges divert managers from the daily work regulations, has provided the breedin garounds a - needed to make their enterprises more for corrupt practices and bureaucratic needeto k erir inefficiencies. The Anti-Monopoly Office is one competitive. of the best-organized parts of government, but its enforcement powers are limited. A new Figure 3.6 Foreign direct investment is agency promoting entrepreneurship is only minimal starting to develop its capacity. Cumbersome customs practices inhibit Foreign direct investment competition. In addition, small businesses face 450 numerous fees, bribes, rackets, and red tape. The costs of regulatory compliance for Ukrainian 400 El Hungary enterprises have been estimated at more than 2.6 350 E Poland billion hrivnyas a year, or 2.9 percent of 1997 E]Russia GDP. And the government continues to , 300 *Ukraine intervene in the daily operations of enterprises I250 (even privatized ones), limiting competition and interfering in the rights of owners and creditors. 200 Since independence, cumulative foreign direct 150 investment in Ukraine has been less than $3 billion, compared with $8.4 billion in Poland 100 and $15 billion in Hungary (figure 3.6). As a 50 result foreign direct investment has played a negligible role in restructuring the Ukrainian 0 economy. Foreign portfolio investment is a 1992 1993 1994 1995 1996 1997 1998 slowly growing part of the securities market- Source: World Bank 1998. most (some $2 billion) was invested in high- yielding treasury bills prior to the 1998 crisis. The permits, licenses, and certifications that But Ukraine is a less attractive destination for enterprises need to operate border on the bizarre. foreign portfolio investment than its Three examples illustrate the problem: neighbors-it has neither the attractive resource- based enterprises of Russia nor the transparent * Local administrations must register each and well-regulated equity markets of Poland. export order, regardless of its size. There is also slow-growing investment in equity * Ukraine does not recognize even the most by specialized funds and Western institutional valuable Western product certificates investors (pension funds, insurance companies). (including ISO 9000), so enterprises have to State intervention and the behavior of enterprise secure a Ukrainian quality certificate. managers. Only by working directly with In Kyiv and Lviv the average private firm faces enterprise managers is it possible to understand more than 60 inspections a year, and in other how wasteful and unproductive the Soviet oblasts the average ranges from 25-50 a year. system was, and how little has been done to Perhaps worse than the frequency of inspections develop market skills and incentives. More than is the well-known tendency of inspectors to half the time of managers and their core teams is The Real Sector and Structural Reforms 39 harass companies, collect bribes, and exercise positioning to obtain subsidies and political vendettas. privileges from the government. Managers and owners of privatized enterprises Despite these problems, Ukrainian enterprises have no incentive to sell unused assets. Because are in some ways better off than enterprises in the land under buildings has not been privatized, other former Soviet republics. Many enterprises managers prefer to wait rather than to act. appear to have a better-developed industrial Moreover, enterprises require permission from culture and steeper learning curve. Almost the State Property Fund to sell assets if the state everyone interviewed by the World Bank- has retained even 1 percent of shares. And even oblast officials, managers, consultants-seemed completely private enterprises are not allowed to interested in learning about experience in other sell their (obsolete) equipment if it is on the countries of Central and Eastern Europe, "mobilization reserve" list-which may not particularly about restructuring results and the have changed since the peak of the Cold War. business environment. Divestment of social Ukrainian firms have faced much stronger assets to municipalities is well under way (though all the enterprises visited retain many resistance to possible labor force reductions than .o all the ente e visited ainomany was encountered in other former Soviet soilaetdu toheimed boriv was nconteed i oter orme Soiet capacity of municipalities). And a surprising republics. Regulations, severance payments, and apacit of m aliti nd aosurising number of small consulting companies have concern for workers are the three main reasons quotd b maages ad loal uthrites,come on the scene, almost all of them inspired quoted by managers and local authorities.bymsprvtzio,ahvewl-vlpd by mass privatization, as have well-developed Finally, all the negative behaviors observed at training facilities offering MBAs programs the firm level in the Soviet Union are present in jointly with Western universities. Ukraine, including mistrust, lack of entrepreneurship, and disregard for institutions, law, and quality. To try to survive in this Table 3.4 The energy sector has shrunk environment, managers have come up with their dramatically own solutions: PRIMARY ENERGY SUPPLY AND CONSUMPTION Year 1990 1995 1996 1997 1998 Primary Energy Production * Barter is dominant, accounting for up to Washed coal (mt) 130.7 65.6 54.3 56.7 57.7 80-90 percent of transactions, with the Crude oil & condensate (mt) 5.3 4.0 4.1 4.1 3.9 Natural gas (bcm) 27.8 18.1 18.4 18.1 18.0 usual sub optimal effects. Prices are lower Peat & wood (mt) 4.3 3.9 3.8 3.7 3.5 for outputs and higher for inputs. Deals Nuclear power (TWh) 76.2 70.5 79.6 79.4 75.2 Hydropower(TWh) 10.3 10.1 8.8 10.0 15.9 are nontransparent. It is impossible to Total Production (mtoe)* 116.8 73.1 69.8 70.9 71.5 switch to cheaper and better-quality raw Primary Energy Import q yCoal lint) 21.1 16.0 11.0 9.0 8.2 materials from the West due to lack of Crude oil (mt) 54.3 13.3 9.2 8.9 9.9 cash. And inequalities are rampant Natural gas (bcm) 87.3 66.3 71.0 62.4 53.5 c s . A d ie u lte ar ra p n -Petroleum products (mnt) 11.5 9.5 6.0 5.9 5.0 employees are paid in food and Total Import (mtoe) 150.6 87.2 81.1 72.3 64.5 shareholders receive sugar instead of rmay ergy Export 20.0 2.4 2.0 2.2 1.7 dividends while managers have nice cars. Petroleum products (mt) 11.3 1.4 1.4 1.3 1.7 Electricity (TWh) 28.0 4.1 4.4 4.3 3.6 Toa Eprt(to)28.3 3.6 3.5 3.5 3.5 * Daughter companies are created with the oital Epoergmonsumption (mtoe) 20 1566 143 1398 13 official task of providing inputs and Annual Percentage Change -1.7% -6.0% -5.1% -5.2% selling goods. But many daughter Eiy Ie Corsumptionper companies collect profits because, as USDofGDP 0.9 1.3 1.3 1.3 1.2 person 4.6 3.0 2.9 2.8 2.6 entirely private companies, they have Sor or Ban stf estimates. more flexibility in "rewarding" employees and have not thousands but only a few owners. Most of the privatized firms surveyed relied on this approach. An agenda for enterprise reform * Daughter companies also allow parent Several steps should be taken to build sound companies to show losses, thus entrepreneurial and fiscal foundations for future growth. First, transaction costs-including 40 Chapter 3 numerous fees, bribes, rackets, wasted time, red compete in world markets. But such financial tape, and noncommercial risks-have to be devices would create distortions of their own slashed to attract domestic and foreign and could easily lead to an even more severe entrepreneurs to Ukraine. crisis. The only viable solution is for the government to stop living beyond its means and Sed, enobterisbeter maaskls,kn l and start living within a budget that minimizes its need to obtain better skills, knowledge, and nedfr .eii fiacn. incentives to function in a competitive environment. In this way Ukraine can also better RESTRUCTURING ENERGY RESOURCES exploit the comparative advantage of its relatively cheap labor. Ukraine's energy intensity is about six times the Third, the rights of owners and creditors have to level typically found in nations at similar Third, income levels. For a country that must import be secure enough to make enterprises an attractive investment. These include the rights of over 50 percent of its of energy consumption at world prices, this creates an extremely heavy shareholders to engage in secondary trading of bre nteblneo et,o 0 burden on the balance of payments, on shares and to. use voting rights to influence production costs in every sector (especially company managers and the rights of creditors to industry, agriculture, transport, and energy), on register and execute collateral and to force residential utilities, and on the budget, which bankruptcy. . usually ends up subsidizing the consumption- Fourth, corporate governance needs to be and often the nonpayment-of energy by all of improved and will remain a challenge during the these sectors. If the energy sector is to meet the transition to privatized industry. In enterprises needs of the Ukrainian economy, it must that are not fully privatized, it is often unclear increase cost recovery so that it can pay for who should represent the interests of the state- imported and domestic fuels and invest in more or even what those interests should be. In such efficient energy production and distribution. circumstances the rights of minority shareholders are often unclear. A national agency on corporate rights has been established, The Ukrainian energy sector has gone through a but it remains to be seen how it will function. tumultuous period since the beginning of the The state maintains involvement even in 1990s. Total energy consumption today is only enterprises where it holds only a minority share, about 60 percent of what it was before making it difficult for the real owners to operate independence (table 3.4). A major decline-but the enterprise in a normal manner. In fact, considerably less than the reported decline in intrusive regulation ensures that the heavy hand GDP, resulting in the decreased energy of government is felt even in enterprises without efficiency per dollar of GDP shown in table 3.1. state equity ownership. The structure of the sector has changed dramatically during,this period, with most of the Finaly,the ovenmen neds t tae stong change concentrated in the period between 1990 action to reduce its budget deficit and to stop an 195cesr at ic eclin in crowding enterprises out of the domestic capital market. T-bills offered yields in excess of 70 domestic coal production, Ukraine has become somewhat more self-sufficient in primary energy percent in the summer of 1998, creating a powerful incentive for banks and other investors production over the period, with imports falling . from over 60 percent of domestic consumption to invest in this relatively risk-free government to oly 50 percent. Asidom ntuag paper rather than lend money at lower interest rates to riskier enterprises. Various tricks of production, which dropped by about 30 percent, financial engineering based on guarantees, domestic production of other energy sources extemnal funding, earmarked accounts, and stayed fairly stable, and nuclear power output directed lending could possibly be used to create actually rose. a parallel market that would make investment In terms of international trade in energy, imports and working capital funds available to have dropped by over half with the sharpest enterprises at rates that would allow them to declines being in the import of crude oil (down The Real Sector and Structural Reforms 41 over 80 percent), a reflection in part of the fact The willingness of such investors to come into that Ukraine no longer plays a major role in the sector is now jeopardized not only by the refining petroleum from Russia for shipment to blocking or majority shares still held by COMECON states. Another dramatic change government in energy companies, but also by has been the decline in Ukraine's energy exports the lack of payments discipline. With cash by nearly 90 percent, with roughly similar collections in electricity averaging only about percentage declines in coal, petroleum products, 10 percent of total amount billed, for example, and electricity. serious investors would find it almost imposbet aeapoi htcnb The transition in Ukraine to a market-based possible to make a profit that can be energy sector has been seriously hindered by reinvested to improve efficiency. widespread corruption, vested interests, and The lack of payments discipline is compounded institutional weaknesses. Under the Soviet by extreme under-pricing. For example, the cost regime, energy resources had a much lower of generating electricity cost from fossil fuels in value in the FSU than in the rest of the world, July 1999 was 2.95 US cents/kwh, but the and the government tightly controlled their energy distribution companies sold it for only distribution. When the FSU collapsed, so did the 1.86 US cents/kwh. Leaving the energy sector control system. At the same time, the value of with shrinking working capital stocks and energy imported from the FSU went up roughly nothing for investments in improved efficiency, ten-fold as prices moved toward world levels. under-pricing and non-payments are destroying The opportunities for corruption were massive, the financial viability of the energy sector and and opportunists quickly stepped forward. So far jeopardizing the future of the entire economy. little has been proven in court, so it would be A crisis in coal inappropriate to expand further on this point here. But we can say with little doubt that Ukraine's coal sector is in a calamitous corruption and shady dealings in the distribution situation: output has declined rapidly, the of Ukrainian energy supplies have created demand for subsidies is rising steadily, and the fortunes-and that much of the resulting wealth prospects for improvement are diminishing. The is now outside the country. sector, which accounts for 2 percent of Some market-oriented institutional structures employment and 6 percent of GDP, supplies a such as auction-based markets for gas and mere 50 million tons to the market (down from 130 million tons in 1990). Of this, about 30 elecricty ave been devlopd snce percent is waste rock. Moreover, much of the independence, in part with assistance from the prnt is oc ore or mucfthe Worl Ban an othr dnors Bu serous coal produced is of extremely poor quality. World Bank and other donors. But serious institutional barriers to reform remain in all Annual budget subsidies to the coal sector total energy sub-sectors. Of these, perhaps the three $750 million-about 7 percent of budget most important are the lack of real ownership, revenues and 40 percent of the budget deficit for the lack of an environment relatively free from 1997. In addition, in 1997 payment arrears corruption, and the lack of payments discipline. increased by $600 million. And productivity is At independence the energy companies became among the lowest in the world-in 1997 the more or less independent fiefdoms with control 500,000 people engaged in coal production over vast wealth and little effective oversight produced just 8 tons a man per month, compared from central or local governments. Corruption with 40 tons in Poland and 60 tons per man- was inevitable in such an environment. month in western Europe. Opportunists stepped into this vacuum and took Geology, history, governance, management, and control, often treating public assets like private. misguided policies explain the industry's Only a limited number of energy companies decline. Due to poor geology (with thin coal across the various sub sectors have been seams at great depth), the coal sector is largely privatized, and of these, few if any serious uneconomic and will generally remain that way, private investors with an established track though some mines could operate profitably if record in the sector have been allowed to they shed labor and social assets. Policies have purchase a majority interest. 42 Chapter 3 long emphasized the social and economic status temporarily, and the World Bank's Coal of miners, leading to high wages, employment Adjustment Loan that was approved in 1996 had numbers, and political power for miners. Scarce not been disbursed by early 1999. funds, combined with strong pressures to To generate cash for mines, stakeholders such as finance overdue wages, mean that no resources t are vaiabl toinvst i betermins. s a the Ministry of Coal Industry want to return to are available to invest in better mines. As a od plce-nldn etaiig ca old policies-includinc, centralizing coal result the entire sector is in rapid decline. o marketing and consolidating mines into a small In a liberalized and functioning energy market, number of large state holding companies. But local coal would quickly lose market share this strategy would have disastrous because it cannot compete with imported coal consequences for the economy. The state would and alternative fuels. And because there are no have to make large up-front investments in mine budget funds to compensate mines for their development and modernization and provide competitive disadvantage, conditions in the additional support by imposing import quotas sector will inevitably worsen. Without bold and duties-policies that would be unbearably action, nearly all mines will stop production, costly for the budget and for energy consumers. leaving behind a social and environmental Advocates of such policies claim, among other disaster. These developments are obvious-yet things, that Western countries want to force many Ukrainians still believe that coal has a Ukraine out of world coal markets, that this goal strong future because domestic oil and gas is supported by the International Monetary Fund deposits are thought to be depleting and coal is (IMF) and World Bank, and that the loss of the only major source of local energy. central control is a root cause of the industry's The government should be actively involved in misery. Such claims reflect the profound lack of restructuring the coal industry and privatizing knowledge about the true status and prospects viable mines. Instead the line ministry for coal is for coal mining in Ukraine today. demanding more public support to produce coal The government should undertake public and to modernize mines. Ukraine can develop a information campaigns to disseminate new, more efficient industry where well-paid knowledge on the coal industry's real long-term workers produce high-quality coal at prospects. The general public should know that internationally competitive prices and meet an the future Ukrainian coal sector should consist important share of domestic energy demand. But of a much smaller number of viable mines that doing so will require hard work, courage, and operate under commercial rules and, as much as social sensitivity. Several issues inhibit possible, under private ownership. At the same successful reform. time, coal mining regions should try to diversify Lack of a realistic long-term development plan. into new economic activities, creating a cleaner, Sector reform has not proceeded because the viable, and more prosperous environment. government has failed to develop a widely About 50 million tons a year-the same output accepted long-term development plan taking as today-could be produced with just 50 mines, into account the coal industry's prospects and not the 250 operating today. Uneconomic and the country's financial capabilities. As part of redundant mines need to be closed, the best the World Bank's Coal Sector Adjustment Loan, mines need to be separated and commercialized, the government placed all mines into one of and uneconomic mines that cannot be closed three categories: viable mines, uneconomic immediately for political and social reasons mines, and mines with uncertain status that need to be run under tight investment, could eventually go to either of the first two recruitment, and wage constraints. categories. Viable mines were to be grouped Regionally concentrated unemployment. into commercial holding companies, Regional unemployment is one of the main uneconomic mines were to be closed, and mines reasons that the government has not adopted a in the third category were to receive temporary realistic long-term development plan for the coal operating subsidies under strict rules and industry. Powerful political forces want to slow conditions. But this model has failed, at least down mine closures because of inadequate The Real Sector and Structural Reforms 43 alternative job opportunities-and given the enterprises are cumbersome. The social and economic decline and poor investment climate safety requirements associated with layoffs in Ukraine, this is a valid concern. But creating cause considerable debate, confusion, and sustainable new jobs is a slow and cumbersome inefficiency. And the Ministry of Coal Industry process that risks arresting the mine closure acts more as a lobbyist for the industry than as a process. At the same time, slowing down mine state body for policy execution. closures would have serious adverse effects on The government needs to provide a clear Ukraine's growth because of the drain on mandate for restructuring and to have efficient resources created by unprofitable mines, institutions in place for its execution. A new The government is reluctant to implement low- energy ministry may have to be established to cost measures that create jobs, such as micro promote economic efficiency and fiscal credit programs to establish new small-scale sustainability throughout the energy sector, enterprises and programs to make underused including coal. Alternatively, such capacity public buildings, factory sheds, and warehouses could be developed within the Ministry of available for new businesses. As a result the Economy. The state's highest coal policymaking Ministry of Coal Industry and other stakeholders body needs to fully support government often refer to the lack of financial resources for reforms. A special agency for mine closures employment creation as a reason not to close (UKDR), created as part of the Bank-financed mines. It is also cited that in western Europe the Coal Pilot Project, initially closed some mines, adjustment of coal indu§tries took 40 years and but restructuring funds for mining associations required huge sums of money, under a much have been misused. This agency must be better economic environment. These are well- maintained and strengthened. placed concerns, and the World Bank is seeking Nonpayment for coal shipped and cross- with the Ukrainian authorities to learn from the subsidies between mines. The decline of the best problems in other countries in order to design a mines is mainly caused by nonpayment for coal viable program for coal restricturing in Ukraine. shipped and by cross-subsidies to non The government needs to actively support, performing mines. Nonpayment is widespread, through regulations and financial aid, a major making true commercialization of mines program for closing uneconomic mines and impossible. Mines supplying coal to power promoting regional development and job plants receive less than 10 percent of its value in creation. Some unemployment is unavoidable, the form of cash payments-too little even to however. Initiative, flexibility, and innovation cover wages. Nonpayment causes wage arrears, are needed to identify new employment discourages workers, and leads to excessive opportunities, provide financing, and follow dealer profits and shortages of essential through on project execution. Without mine supplies. Closely linked with nonpayment are closures, the sector will weaken, the need for cross-subsidies from profitable to unprofitable subsidies will increase, and sustainable mines, causing lack of funds for investments and economic development of coal regions-as well improvements at the better mines and artificially as of the country at large-will be delayed. For extending the lives of the unprofitable mines. political and practical reasons, the restructuring Potentially viable mines need to receive the cash and privatization program could be broken into they earn and so should be taken out of mine phases. The first phase could, for example, aim groups, which drain their revenues. These mines at closing about 60 uneconomic mines over must imlemt investments to three years. pe.ihrtr prevent their further decline, secure their Weak laws, regulations, and institutions. The production capability, and increase profits. political and social reasons for not closing mines Apart from good management and worker are often mixed with unclear or contradictory education, the government should offer several regulations, exacerbated by institutions that lack support measures to help these mines escape the motivation and capability to address these from their financial trap. The state reserve problems. Procedures for creating new private system should buy coal only from the best 44 Chapter 3 mines. The state should provide cash support for non payments and low cash collections, limited social services that are still provided by mines, capital for new investment, government as well as compensation for labor redundancies. interference that makes it difficult to recover And support should focus on mines that execute costs, limited competitiveness in the power pool cost-cutting plans and prepare high-return market, and sluggish corporate restructuring. investments financed by commercial credits. Areas of advances. Essential components of a Such mines would either have to be independent competitive power market structure-called the or, preferably, belong to a company that has Energomarket-are in place, and the wholesale only viable mines. Because such companies do market is functioning. Generator scheduling, not exist and probably cannot be created within dispatch, and settlement operations comply with a short period, it may be necessary to create a the Energomarket Members Agreement, and in temporary agency that provides managerial September 1998 the National Electricity assistance to mines implementing a cost Regulatory Commission lifted the cap on reduction and investment program. This agency generators' price bids. could also support the formation of viable mining lomspniesra the rivtiation of Progress has also been made on another pillar of mining companies and the privatization of th Enroak -he M kt Fud profitable mines, distributing grants for social th e -wnerg martthe Maret Fnds activities and labor redundancies. Credits for Proceu re ajor imprvens ith investments would preferably be provided by wah poceur allotasenues All commercial banks. But if banks perceive the risk nncs amnsaenwtknit con to reduce incentives for barter. Excessive offsets of lending to the coal industry as too high, a are penalized. And companies that are owed special credit facility controlled by the agency large debts receive more cash. could be developed. In the medium term, the best possible solution Most tariff irregularities have been removed. would be to privatize the coal mines, selling Thermal power plants are paid according to concessions to private companies to extract the market rules. The wholesale price now includes coal under agreements that would assure a subsidy to compensate distribution companies substantial royalty payments to the budget in for having to serve, under existing law, line with international practice. Of the coal privileged customers at prices that do not mines in Ukraine today, only a relatively small recover costs. Following a significant real share would have adequate high-quality reserves increase in 1998, wholesale tariffs for generators be attractive to private investors. Furthermore, are at market levels. The transition to market- the investors would have to be allowed to adjust based retail tariffs for nonresidential customers employment levels in line with economic started in October 1998 and was expected to be realities. But the effort would be well completed by the end of 1998. However, this worthwhile for privatizing the mines would de- process was delayed by Parliament, which politicize the sector, leading to more normal passed a law prohibiting government from operations and relationships. Because of the increasing tariffs, but after a protracted legal political ramifications, this process needs to be battle that went to the Constitutional Court, the done according to high standards of consultation government began to take the necessary steps in and compliance with legal norms to avoid social March 1999. These measures will also help raise backlash that could set reforms in the sector residential tariffs (set in hrivnya), which fell back by many years. below industrial tariffs (set in dollars) with the accelerated exchange rate depreciation starting Prospects for power in late 1998. After years of slow developments, reform in the powe (eectrcit) setorhas ecetly een Payment collections for distributors were 97 power (electricity) sector has recently been preti pi-uut19,cmae ih8 moving forward, with progress in the sector's percent in Ar-ust 1998, ompared.wTh8 structure, legal and regulatory environment, and C improvement was smaller for generators: from in privatization. But slow movement or even impr ent wa smaler for generato om reversals have occurred in other areas, with high percent to 8 percent Casroletons continue to be low-18 percent for distributors The Real Sector and Structural Reforms 4 and 7 percent for generators. Though customer inventories. Their problems are compounded by debt for electricity fell in 1998, it is still interference in tariff policy by Parliament and unsustainable high ($1.5 billion in August the government, particularly the Ministry of 1998). Further reductions are needed through a Energy. In addition, the Presidential vigorously applied disconnection policy. administration, local authorities and Areas of slow or no progress. The power Government frequently prevent electricity sector's financial distress has persisted due to companies from switching off some categories . . of customers who do not pay for the electricity rampant nonpayment, causing financial losses . y y for power companies. The result is a In fact, in the period prior to the Presidential elections, oblenergos were not allowed to switch deteriorating electrical system, occasional fuel offcanone. oble s ake t certh shortages, poor customer service, rotating power the National Electricity Regulatory Commission outages, and constrained ability to privatize (EC snttuyidpneto oiia (NERC) is not truly independent of political power companies. pressures as originally intended. Its The culture of nonpayment for electricity is independence needs to be established if condoned and even aggravated by the investors are to have confidence that the government. Government agencies are regulation of the sector will create a good responsible for two-thirds of unpaid electricity investment climate. bills. On occasion the government interferes Because of nonpayment and fuel inventories that with the National Electricity Regulatory Commission's jurisdiction to set market-based arenloweandaunevenlypdistributed,ecompeition tariffs and issue licenses to distributors. By aong generation anistsbeen limt . . .As a result generation and distribution costs abusing the financial viability of the power continue above normal levels. Rampant barter sector, the government is able to delay the ievtablte structralent rfs nleedeli the increases effective fuel costs by 20-30 percent, inevitable structural reforms needed in the poecmansarovstfdadsdld sector's role and in state enterprises. Unpaid with social assets, and deferred maintenance and consumption-whether through privileges, moenzto.hr ehia efcy. subsidies, unauthorized connections, or non reporting or misreporting of consumption- About 40 percent of the shares of distribution absorbs 20 percent of generated electricity. companies have been sold. Successful and Cash collections are low because customers and sustainable sector reform ultimately hinges on distributors lack incentives to increase cash the depth and quality of the privatization payments. Some taxation policies and aspects of program, which is managed by the State the Market Fund Procedure make it beneficial to Property Fund. In this regard, the absence of accept barter payments, offsets, and other cash strategic investors and reputable investment and forwarding advisers in recent privatizations raises serious surrgate in ieuof cllecingconcerns. Foreign strategic investors seem to cash to the Energomarket clearing accounts. As have litein st ntly shemgto have little faith in the constantly changing a result power companies find it almost Z impossible to raise new funds for much-needed privatization procedures. Thus implementation of a transparent process consistent with Pmeniztsiob arexno limite togal internationally accepted practices-including Payments problems are not himited to final aponmtoforindvss-hudba consumers. Private distribution companies have been ignoring the Energomarket procedures top priority. which demand that all money collected by Financial and technical assistance. In its efforts distributors should be sent directly to the to design and implement power reforms, the Energomarket transit account. Instead, they are government is working with key donors, retaining the cash collected for their own including the World Bank, European purposes. Commission, European Bank for Reconstruction As a result, all four generating companies are and Development, U.S. Agency for International Development, and donor countries. Technical experiencing severe shortages of cash, leaving them without adequate funds to maintain fuel assistance seeks to: 46 Chapter 3 * Implement market-based retail tariffs Initial reforms. In 1994 Parliament banned the without government interference. privatization of transmission and distribution * Achieve effective collection of retail tariffs pipelines and related infrastructure, so these and make credible arrangements to collect belong to the State Property Fund and are not among the assets of gas companies. Gas production, transmission, and storage functions * Ensure rule-based operation of the were assigned to Ukrgazprom. Ukrnafta wholesale electricity market, with a produced most crude oil. In addition, there were comprehensive and transparent Market several smaller, partially privatized oil and gas Funds Procedure. producers. * Facilitate privatization of a controlling Until 1996 Ukrgazprom was solely responsible share in all four generators and all 27 for importing gas. But then, facing a massive oblenergos. buildup of payment arrears, the government took a radical step: it eliminated government Goals for gas guarantees for gas imports and gave private gas In 1990 Ukraine consumed 115 billion cubic traders exclusive rights to import and sell gas to meters of natural gas, representing about 40 customers in certain oblasts. With this move, percent of primary energy consumption. Ukraine became one of the first countries to Domestic wells provided 28 billion cubic unbundled gas transmission and distribution meters; the remainder came from Russia and from gas import and supply. Turkmenistan. By 1996-97 gas consumption has Another important reform was made in gas dropped to 80-85 billion cubic meters a year. exploration and production. Domestic gas output This decline did not reflect major energy has the potential to increase to 30 billion cubic conservation measures, but rather the collapse of meters a year with large but economically economic output since the 1980s. In fact, given justified investments over a period of three to Ukraine's economic contraction, the energy five years. Recognizing that these investments intensity of the economy in terms of gas would have to come from abroad, the State consumption has actually risen. The share of gas Geology Committee started awarding in primary energy consumption has surpassed 50 exploration and production licenses to private- percent, making Ukraine one of the world's mostly foreign-companies. most gas-intensive economies. Competing reform concepts. These two steps- Ukraine has significant proven and probable gas the transfer of responsibility for gas imports to deposits, both onshore and offshore. Domestic te traer an es awardboftexplraion an gas fields now produce about 18 billion cubic private traders and the award of exploration and meters a year. Imports from Russia provide 60- production licenses to foreign companies-have 65 billion cubic meters a year, including 30 had mixed results. Gas traders have improved payment discipline among industrial customers; billion cubic meters that Ukraine receives from RAO Gazprom as payment in kind for transit of the government stopped accumulating additional debt to Russia and Turkmenistan; and foreign Russian gas across Ukraine to Europe. Ukraine det inves meno to the usream has large gas storage facilities, a well-developed gas inust ment discipline rem tranmision sysem, nd n etenive gas industry. But payment discipline remains dstrision system, alow among households, budget entities, district heating companies, and power plants. The The main challenges for gas are to privatize the frequent redistribution of supply franchises sector without creating exploitative private among traders has led to occasional violence and monopolies, place gas sales on a solid charges of corruption. And no major commercial foundation, encourage energy multinational oil and gas company has found conservation, and, perhaps most important, Ukraine's legal and regulatory framework increase collection rates, particularly cash attractive enough to make large-scale payments. investments in gas exploration and production. Even with respect to external debt, success was The Real Sector and Structural Reforms 47 only partial: RAO Gazprom claimed that the those who wanted to eliminate regional gas Ukrainian government was responsible for the import and supply monopolies. The new cabinet arrears accumulated by private traders because decided that the import and supply of gas to the traders were pressured by government industrial consumers should be liberalized in officials to maintain supplies to politically 1998; that traders should be allowed to import important customers. and sell gas to industrial consumers at freely in negotiated prices; and that gas distribution Although the system was left largely intact in 1997, the need for additional reforms was companies should be given exclusive rights to .Even Ukrgazprom, a sell Ukrgazprom's domestically produced and transit-fee gas to households, budget company that once defended the status quo, now argus tat i canot nsue a elible organizations, and district heating companies. argues that it cannot ensure a reliable transmission system unless privileged customers Meanwhile, the State Property Fund sold the (households, budget entities) are made to pay for majority of shares of several gas distribution domestically produced and transit-fee gas. All companies to company managers and employees shippers (RAO Gazprom, traders, and private at very low prices. The newly privatized gas producers) have complained that the distribution companies kept enough revenue to metering and control of gas flows in the cover their wages and other recurrent costs, and transmission and distribution networks are only sent the remainder to Ukrgazprom. As a inadequate. Potential foreign investors in the result Ukrgazprom's financial situation upstream gas industry want assurances that they continued to deteriorate. can access the gas transmission and distribution netwrksandC feel maret hei ga. A Recent developments. In early 1998 supporters of vertical integration focused on establishing commission set up by Parliament has demanded Naftogaz, a company whose assets include that territorial supply monopolies be abolished everything that the state owned in the oil and and a properly functioning gas market be gas industry Establishing Naftogaz, it was established. argued, would solve several problems: Two very different reform concepts emerged in the debate. The first, put forward by N L ow t colletn because Ukrgzpro an theStat Oi andGasNaftogaz could take away the right to Ukrgazprom and the State Oil and Gas C Committee (SOGC), favored vertical integration operate the distribution system from of the oil and gas industry to increase the flow distribution companies whose of revenue from consumers to producers and performance was not satisfactory. transporters, and to facilitate the reallocation of * Limited foreign direct investment in oil profits to fund priority investments. The second and gas production, because Naftogaz reform concept-recommended by foreign could enter into joint ventures. investors, the World Bank, and the European Underfunding of priority investments, Bank for Reconstruction and Development and supported by the Anti-Monopoly Committee aus Naftigacl la r and the deputy prime minister for economic reform-argued for the separation and A February 1998 presidential decree ordered the privatization of Ukrgazprom's production, government to establish Naftogaz. The decree transmission, and marketing activities, the also ordered steps to unbundled gas production, elimination of exclusive supply franchises, the transmission, and distribution functions-but privatization of gas distribution companies, the this unbundling was to take place within the liberalization of gas prices, and the framework of Naftogaz. A government establishment of an independent regulatory body resolution issued in June 1998 approved the to ensure open access to the transmission and charter of Naftogaz and appointed its chairman distribution networks. and supervisory board. The change of government at the cabinet level in In April 1998 another presidential decree mid-1997 opened a window of opportunity for ordered the transfer of responsibility for the 48 Chapter 3 regulation of the gas industry from the Ministry * Separating and privatizing the gas of Economy and the SOGC to the National production activities of Ukrgazprom and Electricity Regulatory Commission. Given the the gas exploration activities of the State time required to recruit gas specialists and Geology Committee. implement necessary organizational changes, the National Electricity Regulatory Commission had introi icentives aditriauto not egu to uncion y lte 198.improve the collections of gas distribution not begun to function by late 1998.copne ad,i cssof or companies and, in cases of poor In August 1998 Ukrgazprom was abolished and performance, transferring to other entities its production, transmission and distribution, (domestic or foreign) the rights to operate and trading functions were formally separated the distribution system and supply gas to by establishing three companies- non industrial customers. Ukrgazproduction, Uktransgaz, and Trading * Improving the metering, tracking, and House Gaz Ukraine. The newly created balancing of gas flows, including the companies were subordinated to the state-owned introduction of contractual arrangements Naftogaz. Naftogaz also received 50 percent for the settlement of differences on a daily plus one share of Ukrnafta, 100 percent of state and monthly basis. shares of the oil pipelines in Druzba and Pridneprovska, and state shares of the offshore * Introducing a distance-dependent gas producer Chernomornaftogas and smaller transmission tariff, a two-part distribution gas ompaies,tariff, and a storage fee. gas companies. Required refonns. Though important gas These reforms may adversely affect several reforms have occurred, much remains to be well-connected actors in the sector. Private done. The following steps, if implemented traders may lose their best customers if within two to three years, could help restore the financially liquid industrial companies purchase financial health of the gas industry, increase their gas at auctions. Central and local budget revenues, address the complaints of governments' ability to provide gas to insolvent investors in gas exploration and production, and industrial and agricultural companies and cash- ensure the reliable transit of gas from Russia to strapped budget entities will be greatly reduced. central, southern, and western Europe: Managers who cannot adapt to a market environment and workers who are redundant * Developing the legal and regulatory will lose their jobs. Government officials who framework for the sector, including benefit from nontransparent gas trading will also approval of production sharing be worse off. In summary, advocates of arrangements for oil and gas and centralized, vertically integrated, and opaque establishment of two independent structures represent the greatest threat to regulators for downstream and upstream successful reforms. operations. A new design for district heating * Organizing regular gas auctions where gas tradrs nd arg cosumrs an ay ash District heating tariffs force industrial traders and large consumers can pay cash cnues t rs-usdz oshl for as-ased on reey neotited consumers to cross-subsidize household for gas-based on freely negotiated prices-from gas producers Z and consumers. Consequently, in cities outside p ' sKyiv-which has resolved this problem- households pay less than 80 percent of the cost * Establishing a state-owned joint stock of service. The government has declared that company to operate the transmission district heating tariffs (as well as other utility network and appointing a consortium of tariffs) will be raised to cover 100 percent of domestic and foreign companies to costs, but it has been unable to introduce this manage the shares of this company for at final jump in tariffs. This move should be made least 15 years. Ukrainian state ownership as soon as possible, but Parliament has been in the consortium should be limited to 25 moving in the opposite direction: in 1998 it percent plus one share. The Real Sector and Structural Reforms 49 passed a law banning increases in tariffs for As in all energy sectors, late payments and non- domestic utility services. payments are a serious problem in district heating. Incentives are needed to improve the In late 1998, as noted above, the president of g Ukraine appealed to the Constitutional Court to collection of beating bills-including prevent Parliament from intervening in the disconnections, formal rescheduling of arrears, administrative details of government, such as the and public awaeness campaigns. To promote setting of tariffs to ensure full cost recovery for energy efficiency, proper pricing signals should commercial operations. The court reversal of the be sent to consumers through tariff levels and structures. These reforms would make it easier lawoin Meachi199ang t goher s, hxelped for lenders to finance needed investments. In avoid derailing the government's Extended adto,itrainlacutn tnad . addition, international accounting standards Fund Facility (EFF) program with the IMF. Because household consumers are more must be introduced so that district heating expensive to supply with heat than large enterprises can follow commercial practices. industrial consumers, substantial prices are still Most district heating enterprises are municipal required in residential tariffs, but initial steps enterprises, which allows munici-palities to have been taken towards establishing more interfere in their activities. Converting equitable district heating tariffs. municipal district heating enterprises into joint District heating tariffs also need to be revised to stock companies with supervisory boards would allow for greater commercialization and address a number of other issues:. independence and should be encouraged. " Depreciation is based on historical values- Finally, the district heating sector maintains a which are far below current replacement system of privileges that applies discounts of 25 costs and so do not allow for future replsamnt of asset allpercent, 50 percent, 75 percent, or 100 percent to the heating bills of various groups (military * Depreciation rates are based on unrealistic- personnel, war veterans, Chernobyl victims, and ally long economic lives (about 75 years on so on). A large portion of households exploit average)-which makes it difficult for such privileges. These jeopardize the financial district heating enterprises to renew their sustainability of heating companies because assets on a self-financing basis. municipalities do not adequately compensate * The district heating tariff structure contains them for the discounts. Such privileges should be phased out, replaced by a comprehensive .l social safety net program targeted to assure that with fixed and variable components would na allow for more transparent information chaer 4). about the marginal cost of heat supply. Billing for heating and hot water is typically ADVANCING BANKING AND FINANCE based on norms (that is, on square meters and Without a strong banking sector to intermediate numbers of persons, respectively) rather than on actual consumption, because most residential pv buildings are not metered. While this system of credit on commercial terms to enterprises that will use it well-Ukrainian enterprises will billing provides an incentive for consumers to contiue t se rcipin shortaes of install heat meters (since heat losses are paid by wo working and fixed capital, preventing them from investing in the plant and equipment needed to consumers can afford them. The same holds true produce high-quality goods that can compete for budgetary consumers, which are also often with imports in the domestic market and as not metered, although industrial consumers are typically metered. Incentives are needed to improve the metering of household and Some of the capital required by Ukrainian firms budgetary consumers. can and should come from foreign sources as loans, portfolio investments, and foreign direct investments. But aside from some small 50 Chapter 3 Table 3.5 Basic data on Ukraine's banking system, 1998, end of period As % of total As % of Millions of banking estimated 1998 Indicator hrivnyas assets GDP Total banking sector assets 19,918 19.2 Total bank lending to the economy 8,855 44.5 8.5 Government securities holdings of commercial banks 2,096 10.5 Total deposits in banking sector 8,278 8.0 Total households deposits in the banking sector 3,089 3.0 Total deposits in State Oshchadnyi (Savings) Bank 811 0.8 Source: IMF data. countries with great mineral or petroleum Public confidence in banks was undermined by wealth, foreign savings rarely equals more than the hyperinflation of 1992-94. Though 3 percent of GDP, and in most cases much of confidence recovered through early 1998, it has that small amount goes for consumption rather suffered again from the recent financial crisis than investment. Although Ukraine can and (tables 3.5-3.7). should seek to sharply increase foreign direct Previous Bank documents have analyzed the investment in local production, it will have to weaknesses of the banking sector in mobilize most of the savings needed for . considerable detail (World Bank 1995). Recent investment in fixed and working capital from conseabe del (ord an 1995). R nt events have largely confirmed the variety and domestic resources. depth of these weaknesses, as well as The reforms discussed in chapter 2-reforms aggravating many long-standing problems: that would sharply reduce the government's undercapitalization, weak corporate governance tendency to crowd private investors out of and management, poor asset quality, limited domestic capital markets-are an essential capacity to manage and cope with risk, precondition to accelerated investment and excessive political intervention in some banks- growth. But major improvements are also the list is long. needed in the banking sector so that it can One of the institutional factors contributing to mobilize savings efficiently and make wise the painful decline of the Ukrainian banking lending decisions. Given the current status of the sector has been "kartoteka 2," a system retained domestic banking system, this will be a major from the Soviet days that forces commercial challenge. banks to serve as collection agent for the State A downward spiral Tax Administration (STA). When the tax authorities determine that an enterprise is in The contours of Ukraine's banking system- arrears, they have the right to demand that the comprising some 180 banks-remain poorly commercial bank place a note in Kartoteka II defined. The sector still has a long way to go (Ukrainian for "Card File Number 2") indicating before it can mobilize significant savings and that any money entering the account of that allocate those resources to the most productive enterprise must immediately be removed and sectors to promote economic growth. In recent etrrs utimdaeyb eoe n sectrs tokromte's ban eoi rothr Inret given to the tax authorities. Due process, which years Ukraine's banks, like those in other former is routine in all developed countries for Soviet countries, have failed to foster public attachment of assets, is not required of the STA, confidence (which would increase resource nodoetrisshvanfecveigtf mobilization through banks) or improve their apl o enterprises te to appeal. Consequently, enterprises tend to capacity and service (which would support minimize their use of commercial banks because economic development through better resource cash flow management and prioritization among allocation). creditors becomes impossible. Firms have been The Real Sector and Structural Reforms 51 Table 3.6 Depth of Ukrainian financial system (percentage of GDP) 1992 1993 1994 1995 1996 1997 1998 Currency 10 9 7 5 5 7 7 Domestic currency deposits 36 17 12 5 4 5 4 Foreign exchange deposits 4 7 9 3 2 2 5 Total money (M2) 50 33 27 13 11 13 15 Forex deposits/total bank deposits 10 28 42 37 34 26 42 Currency/M2 (domestic currency) 22 34 36 50 55 57 59 Source: National Bank of Ukraine, Ukrainian Economic Trends, and EU TACIS publications. destroyed because kartoteka takes their cash, opportunities for banks, and to an increased making it impossible for them to purchase the volume of non performing loans. The blame for inputs required to stay in operation and earn the these adverse developments can be laid squarely resources needed to repay creditors. By at the door of the huge fiscal imbalances discouraging firms from keeping their money in analyzed elsewhere in this report. At various the banking system, kartoteka weakens the stages in the past year, the fiscal situation has banking system, depriving it of the deposits that created additional problems for banks by: it needs to become an effective financial intermediary. This in turn increases the cost and Deprii ema scarcity of capital in Ukraine, further reducing the prospects for restoring growth. * Pushing many into an excessive exposure to In a sense, kartoteka is the Soviet equivalent of T-bills. a bankruptcy and arbitration system, and it has * Imposing direct losses through the T-bill been retained in Ukraine partly because an restructurings initiated in August 1998. effective market-based analogue is not yet in place. The best solution would be for Ukraine to * Contributing to the buildup of bad loans as a develop a good system of economic courts result of continued high real interest rates. capable of handling, with full due process and * Leaving the Central Bank little choice but to right of appeal, the full range of normal apply emergency restrictions on banking bankruptcy work. This institutional development activities (in the interests of macroeconomic is essential. As long as banks instead of courts stability), with further negative conse- keep the card file and extract money from quences for bank profitability. accounts upon instructions from the tax administration, the prospects for restored Ukrainian bankers are justified in arguing that economic growth based on a strong banking there is an ongoing banking crisis layered on top sector will be dim indeed. of the structural problems that they have faced for some time. But this crisis is unlikely to be as The current crisis-quiet but serious dramatic as recent crises in other parts of the Long-standing structural problems in the world-including Russia, where banking Ukrainian banks have been intensified by the systems are generally much larger and more recent turbulence in international and local fully developed. The payments system, though financial markets. Above all, the real under threat, has proved reasonably robust. economy-and so the banks-has faced interest Despite of a brief run on deposits in August rates that have been unsustainable high in real 1998, the situation recovered remarkably terms. These high interest rates have led to even quickly after the announcement of the IMF worse shortages of credit for productive sectors, program in early September. And while the to an intensified lack of profitable lending large depreciation of the national currency 52 Chapter 3 caused a 30 percent erosion of banking capital, state and local authorities had on the banks. that capital was too small to allow most banks to With new private commercial banks coming into expand their activities and increase lending. Z I the market, improved supervision, increased Still, the situation is serious. There can be no transparency in market operations, and access to real recovery in banking until real interest rates new profitable instruments such as government return to more sustainable levels-and that will securities (t-bills) during the past few years, the require deep fiscal adjustment, which itself will influence of government in the banking sector hurt many bank clients. Problems have become has been lessening. The sale of t-bills carrying more evident for large banks, and at least two of interest rates peaking at over 80 percent allowed the five largest banks are thought to be banks to enjoy yields which in the past would insolvent. The situation has become truly have been allowed only to a few privileged dreadful for many small and medium-size banks. banks. For the moment, and in the absence of serious pol ecisions,aboutistructuralnreformsinithe The right to manage state budget funds has been policy decisions about structural reform in the onofteIpratrmiigpivlesouh one of the important remaining privileges sought sector, the Central Bank believes that it has little b bk be short-term choice but to support the system with clos wit th implemtating rofessioa "liqidiy lons"manyof hichareactully close with the implementation of a professional "liquidity loans"-many of which are actually treasury system and unified budgetary accounts. bailout loans-but at the expense of further Thuhtecm riabnkgsyem n Though the commercial banking system in pressure on inflation, to say nothing of its own Z pressure onailti, tUkraine is far more professional today, it is still far from de-politicized-as seen by the highly The five specialized banks that constituted the political discussions in Parliament about the banking system in Soviet Ukraine were used to Law and Banks and Banking and the Law on the move money back and forth between the state National Bank, laws which seek to decrease the budget and the state enterprises, filling gaps degree of political control over these when financial balances did not quite match the institutions. material balances. Competition between the five Strategies for the future banks was almost unknown. Although the normal tendency is to focus on the The banking system continued to play a highly sottr rbeso h akn ytm poitcze rl ate ndpednc. h short-term problems of the banking system, politiciz used role ar in ennce. Tget which are certainly serious, the temporizing govnmto usvoed etrrisebnks. torine b t measures likely to be taken from this perspective funds to favored enterprises. During the early colaslmkthsiuinwre.Tsits Zn could easily make the situation worse. Thus it is years of independence, the banks got special important to look first at a long-term strategy for benefits from the Government such as free the sector, then decide what actions can be taken access to budget funds, state procurement in the short run to advance toward the long-term contracts, and government guarantees for trade o t. finance deals. But they also accumulated a heavy burden of bad loans and equity Long-term strategy. At the macroeconomic investments. The dominance of public enterprise level, it will be difficult to achieve progress and assets in the portfolio of banks led to abusive improvements without substantially rectifying insider lending, reflecting the influence that fiscal policies. First and foremost, measures are Table 3.7 Depth offinancial systems in regions of world, 1994 (percentage of GDP) Latin Item OECD America C.E.E. NIS Ukraine Total money (M2) 73 23 42 20 13 Bank deposits 67 18 25 12 7 Currency 6 5 17 8 5 Source: National Bank of Ukraine. The Real Sector and Structural Reforms 53 required to justify lower real interest rates-the their risk management abilities, including reforms to do this being mainly fiscal in nature. borrowing for this purpose (for example, The economy cannot function efficiently with through the Bank's proposed Financial the real interest rate well above 20 percent There Services Project). is also a more general need to improve the . b opertin eniromen forbans ad teir * Central bank interventions in individual operating environment for banks and theirbakcolbesrtudmreowd clients. It is not possible to have sound banks in ban coul benstructured m ta an unhealthy economy. In the absence of good buildng erskmget semsltan toward the simplistic penalty-based borrowers, banks will either disappear as puy traditional lenders or engage in risky lending to approach curently be ursue nonviable private and state enterprises that are Liei cou alo be use ore hoping for future government bailouts. Required effectively (for example, by not providing measures include better corporate legislation, a foreign exchange lcs k new bankruptcy law, streamlined collateral donae proper in echan risk evaluation, repossession and realization anaemet yses in plaeaioul procedures, establishment of registries for acs tituins fro irntinal movale nd imovble roprty, andfinancial institutions and grant-funded movable and immovable property, andtehiaassan. restructuring of inter-enterprise arrears. Within the banking sector, the main challenge is * Encouraging the flow of long-term to use a more effective mix of carrots and sticks. resources to the banking system through The previous strategy relied very much on foreign direct investment and funding sticks-a problem when some banks are from international financial institutions. politically more powerful then the regulator. Short-term strategy. Earlier analysis and The future mix should intensify measures such experiences of other countries suggest that there as those already incorporated in the World is no short-term solution for systemic malaise. Bank's Financial Sector Adjustment Loan Issues such as corporate governance, (FSAL): management skills, and public confidence need Adjusting the legal framework to give the to be addressed as soon as possible, but the regulator the tools to rehabilitate troubled desired results will be achieved only in the long banks and liquidate failed banks (for run. Nonetheless, the authorities should continue example, by rapidly promulgating the to: draft Law on Banks and Banking * Rationalize central bank support to banks so Activity). that financial and human resources are not Upgrading the quality and organization of wasted on revitalizing dead banks; this will bank supervision (by eliminating all but in any case be crucial for attracting donor the most liquid collateral deductions in support to bank restructuring. loan loss provisioning, temporarily * Rationalize and encourage increased bank skewing the foreign exchange exposure capitalization through consolidations, rule to allow long but not short open mergers, and liquidations. foreign exchange positions, and upgrading offsite analysis and internal * Support operation of the payments system. communications between the offsite, * Impose stricter prudential requirements and onsite, and licensing departments in the higher qualitative criteria for bank owners central bank). and managers. * Creating incentives for banks to strengthen * Strengthen banking supervision. their institutional capabilities, especially 54 Chapter 3 4. CAN UKRAINE ACHIEVE GROWTH-AND SOCIAL EQUITY? Growth is vital if all Ukrainians are to enjoy minimized. Workers received a large share of higher living standards. But growth is not their incomes in the form of food, housing, enough. Without the right policies, growth may education, communal services, medical care, benefit primarily the rich and do little to help access to recreational facilities, and other goods the poor. Some may argue that growth and and services-either at no cost or at prices that equity are mutually exclusive-that recovered only part of the cost of supply. consumption by the lower classes reduces the This system allowed the government to savings available for investing in growth. But minimize income differentials, but it also even very poor people save and invest, and destroyed the incentives for individuals to invest income provides customers for products and in their education and to work harder. Thus, as thus the basis for investment and growth. While Ukraine moves to a market-based economic it may not be possible to maximize growth and system, it is entirely normal-even desirable- equity simultaneously, it is possible to increase that income distribution will become somewhat both of them at the same time. This should be less equal. Some people will always have less Ukraine's primary goal. than others, and some people will always be Social equity has long been of great importance living in relative poverty. But the efficiency in Ukraine. But the Soviet approach to equity gains from a market system will ensure that, must be replaced by market-friendly approaches while some people will have less than others, if Ukraine is to halt its economic decline and they will have far higher incomes than they do restore living standards. Most important are today. policies that create new jobs by encouraging As Ukraine moves toward a market economy, investment, particularly in new small and the challenge will be to prevent absolute medium-size enterprise, and facilitating labor poverty. No household should have an income mobility, helping workers in depressed regions so low that it cannot afford the food, shelter, move to areas where jobs are opening up. The clothing, medical care, and education needed for government must also ensure universal access to survival and health, for basic human decency, basic education and health. Finally, to prevent and for raising children to become solid, people from falling into absolute poverty, the productive citizens. Access to these basic human government needs to put in place a basic social needs for all Ukrainians is the definition of safety net for families that have lost their "social equity" used in this report. incomes due to unemployment, age, or infirmity.' Ukraine is seeking market-based mechanisms that ensure that no citizen has to live in absolute OLD AND NEW APPROACHES TO SOCIAL poverty. Some political parties want to attain EQUITY this goal using the Soviet approach-by expanding government spending and by During the Soviet era there was little difference extending already widespread privileges. Such between minimum and maximum wage rates in parties may block privatization and restructuring Ukraine. Aside from the privileged apparatchik so that agricultural and industrial enterprises can classes, differences in living standards were also continue to play the redistributive role they played in the Soviet era. This chapter draws heavily on the work of Olexandr But as this report has demonstrated, continued Yaremenko and Mykola Soldatenko (1998), and on the reliance on Soviet methods has been a key work of World Bank Staff including Arvo Kuddo (labor reason for Ukraine's economic decline. The policy), Galina Sotirova (social protection), Larisa Leschenko (health policy), Katerina Petrina (education methods are responsible for the tax pressures on policy), and Frederick Golladay and his colleagues (see enterprises, the pyramid of debt that the country bibliography for details) is struggling to repay, and the failure of large Can Ukraine Achieve Growth-and Social Equity? 55 enterprises to restructure and become efficient. One of the most serious problems in the labor These policies simply make poverty worse. The market is the accumulation of wage arrears. In burden that they inflict on the budget has also September 1998 wage arrears equaled 6.4 made it impossible for the government to billion hrivnyas (about 6.5 percent of GDP). alleviate inherited environmental problems. More than three-quarters of the wage debt was Market-friendly approaches to social equity are more than three months overdue-one of the urgently needed. highest levels among transition countries. Because many transactions are still based on NS-ET EST barter and cash payments are delayed or even SAFETY NET nonexistent, part of wages are paid in kind, and Tensions in Ukraine's labor market are rapidly there is no meaningful methodology to increasing. Between January and August 1998 recalculate or tax such wages. In August 1998, state employment centers had 1.5 million however, in-kind payment of wages was registered job seekers, of whom 1.2 million estimated at 14 percent of total wages, including were officially unemployed. Relative to the 63 percent in agriculture and 10 percent in same period in 1997, the number of applicants industry and construction. was 39 percent higher and officially Strengthening macroeconomic and sector unemployed persons, 52 percent higher. And by policies the end of 1998 at least 2.4 million job seekers were registered at state employment centers. During transition the best way to minimize increase during 1998, unemployment and poverty is to restructure Despite the sharp enterprises as quickly and vigorously as unemployment in Ukraine was just 3.7 percent possible. This may sound illogical given the of the able-bodied population, compared with many redundant workers who will have to be 2.1 percent a year earlier. This is still a very low laid off during the restructuring of public rate relative to many other transition economies, eis utas t isumany of eewrr espcialy hos inCenralEurpe.Buta lbo enterprises. But as it is, many of these workers especially those in Central Europe. But a labor are not being paid, and so will not suffer force survey in October 1997 found that only 27 financially from being laid off. Furthermore, the percent of active job seekers registered at longer failing enterprises are allowed to stay in employment offices-the lowest share among production-consuming inputs that are worth 13 transition countries in Central and Eastern more than the goods produced-the greater will Europe and the former Soviet Union. Weak be the economic decline, and the more costly employment services, small unemployment and lengthy will be the recovery process. benefits, and limited job offers make Ukraine's Instead of protecting enterprises, the employment centers unattractive to job seekers. Ine ou focus ontecting pe government should focus on protecting people Hidden unemployment and underemployment by providing a solid social safety net in cases are considerably higher. In the first half of 1998, where extended unemployment threatens 2.2 million workers-accounting for 17 percent families with poverty (see below). of formal sector employment-were on Job-focused growth strategies. Ukraine's best administrative leave. And 1.8 million workers- hope for minimizing unemployment is to follow 14 percent of the workforce-were engaged in a growth strategy that quickly creates productive part-time employment. new jobs. An open, competitive economic There has been a major shift in employment environment favors small over large enterprises, from the secondary to the tertiary sector, and and small businesses tend to create more jobs labor retrenchment has been especially severe in per million dollars of investment than large ones the industrial sector. Between late 1996 and do, because small firms are generally much less mid-1998 the number of industrial workers capital-intensive. Small enterprises also tend to dropped from 4.3 million to 3.7 million, be more flexible and thus better able to seek out Employment in services is on the rise, however, opportunities that create new jobs. A reflecting the horizontal mobility of the labor competitive environment encourages the force to more productive sectors. efficient use of resources, generating more value 56 Chapter 4 added-which means that more money can be lack of satisfactory housing in new locations paid to workers. A competitive environment (particularly rental housing) and large also brings rapid closure to bankrupt companies, discrepancies in housing costs across regions. allowing banking and budget resources to be The Ukrainian Constitution also may inhibit used to create new jobs and to support workers labor market flexibility. Article 22 states that delayed in moving from one job to another. actions should not be taken that would worsen Finally, a competitive environment encourages people's living conditions. Thus amendments to new exports to profitable new markets, existing laws regarding social guarantees to generating foreign exchange that can be used to workers could be interpreted as violating the create additional jobs, pay higher wages, and import products of higher quality and lower cost right. n Berti no i ing a rd n thandomsticllyprodcedequialets.rights and liberties, not living standards and benefit levels, and so should not be taken as a Though it may create more short-term barrier to reforms that will, in the end, greatly unemployment, a jobs-oriented competitiveness improve the living standards of workers (Kuddo strategy will sharply reduce long-term 1998; Lippott 1999). unemployment, create more new jobs, and Though Ukraine has adopted a number of new increase wage payments far in excess of what laws on employment, the 1972 Labor Code is can be attained with a preservationist or... c still in effect. Individual labor contracts are the protectionist strategy.2 Valuable years have been lost in Ukraine. But with a firm commitment to m mi een neddti a aret economy. Written labor contracts are rare, and a competitive, jobs-oriented growth strategy, when their rights are violated, workers have a Ukraine can expect excellent results within one weak institutional basis to complain. Thus a to three years given its many advantages- group of experts should develop a new, market- including a strong work ethic, well-educated oriented labor code or new labor laws. Labor population, extensive natural resources, and laws are not as elegant, but they are technically good trading relations with important markets. less complicated than labor codes. Ukraine also Labor market flexibility. Countries that are the needs to improve institutional mechanisms for most successful in maintaining low implementing and enforcing labor laws and unemployment maintain low barriers to the regulations. movement of workers from one job to another. Without labor market flexibility, enterprises that need to downsize will remain burdened with too Job-oriented macroeconomic policies that many workers. Policies that limit labor mobility promote competitiveness should be supported also make labor more scarce and costly for by active employment programs-including job growing enterprises, reducing their search assistance, small business development, competitiveness and their ability to grow, and public works programs for temporary employ more workers, and generate higher employment. standards of living. Job search and training assistance. State The largest barriers to labor market flexibility in employment centers provide services that could Ukraine are laws and regulations that prevent be considered active support measures, enterprises from laying off workers and prevent including job search assistance, job counseling, or discourage workers from seeking alternative and psychological and adaptation support. But employment. Political pressures are also between January and August 1998, of 1.5 important in state enterprises-which is one of million registered job seekers, these centers the strong arguments for privatization. Common were able to place only 17 percent in jobs. barriers to workers seeking new jobs include a During this period 25 percent of job seekers left the roster of registered unemployed without finding jobs through the system. And during 2 See World Bank and ICPS (1999) "Economic Growth 1998 only 4 percent of unemployed workers with Equity: Which Strategy for Ukraine" for a discussion participated in training programs. of these strategies . Can Ukraine Achieve Growth-and Social Equity? 57 Small business development programs. To help sector, the government will need to retain an establish more favorable conditions for the important role in certain areas-one of the most development of small business in Ukraine, small important being the development of human business development programs were developed resources. Communicable diseases and in 1997-98 at the national and regional levels. uneducated people impose high social costs. These programs envisage the number of jobs in Conversely, a healthy, well-educated population small businesses increasing from 1.18 million in has benefits that reach far beyond the 1997 to 1.25 million in 1998, to 1.33 million in individuals concerned. Government 1999 (Yaremenko and Soldatenko 1998, p. 29). involvement can ensure that market-based Public works programs. The state employment economic development is accompanied by high centers support labor-intensive public works standards of education and health care. programs as a form of emergency job creation. This is not to say that the government should be During 1998 an estimated 4 percent of job the sole or even primary provider of education seekers participated in public works programs. and health services. In fact, if done well, Participation in public works programs is increasing the private sector's role in providing limited by the fact that the enterprises and local these services will reduce the burden on communities that are supposed to run these government-lowering taxes, stimulating programs often cannot afford to pay even their economic growth, and increasing consumer own workers. Moreover, international choices (Vitrenko and Lukovenko 1998; experience with public works schemes has Golladay and others 1998). generally not been favorable. Small programs at Increasing the formal role of the private sector the local level may, however, have political and in ceasin e fom l l o he rate e economic benefits that help compensate for the ealthad econowi aso h r the costs.role of shadow economic activity in these sectors. Corruption in the form of under-the- HUMAN RESOURCE DEVELOPMENT table payments is a particular problem in the health sector where doctors, painfully short of Next to social protection (discussed later in this funds to purchase the medicines and other chapter), education and health are the largest supplies that they need to do their job-and categories of budget expenditures, each often living on salaries approaching poverty accounting for 10 percent of the consolidated levels-take informal payments in exchange for government budget in 1998. Though major preferential treatment. Expanding private sector areas of activity can be devolved to the private involvement in providing medical services Box 4.1 Non-governmental financing for public schools In Ukraine education used to be provided exclusively by the state, but now private schools are permitted. Under the fiscal pressure the government has realized that education should involve a partnership among the government, parents, and communities. Such a partnership in Ukraine is developing in the form of school boards that raise financial support from parents and sometimes from the communities. For example in Kiev, a secondary school was established in 1991 as an experimental school-laboratory of the Pedagogical University. In early 1992 parents in each class held the meetings and decided to establish a school fund managed by a School Board, which each year decides on the size of levies per child. Originally the amount of the contribution was equal to the price of the bottle of vodka. Using this symbolic amount of money parents, have demonstrated their willingness to pay for the high quality education of their kids rather than spending this money on alcohol. The revenues of the fund also include donations from physical and legal entities and fees for additional courses. The levy per student now averages 5 UAH per month. The funds raised are mainly used for renovating the building, paying for communal services, and providing bonuses for the best teachers and pupils. With the additional funds mobilized through private contributions the school is now able to provide classes in computer science, three foreign languages, and early education services. Source: Bank staff interview 58 Chapter 4 would provide a legitimate outlet for this authorities to get preferential treatment for the obvious demand and willingness to pay for admission of students into select schools and better services. At the same time, this would occasionally to assure certification of those who reduce the burden on the public health services, would otherwise fail. allowing them to focus their scarce resources on supporting those who cannot afford to pay for private services. Other reforms as outlined Ukraine has a remarkably well-developed below would simultaneously improve the education system. But the system also places a financial strength of the public sector health- heavy burden on the budget, and in several areas care providers. the curriculum has not kept pace with the needs of the emerging market economy. Figure 4.1 Relative public spending on Accomplishments Ukrainians are well educated. education and health have been fairly stable Adult literacy is about 98 percent, and gross enrollment ratios compare favorably with those Consoldat ic EHentus in upper-middle-income and high-income on0 Ecountries (table 4.1). In 1997 total enrollment was nearly 9.2 million, or 18 percent of the 5.0 - --- population-a ratio that has remained a unchanged since 1990. 4.0 0 I Issues. Ukraine's pattern of education is still 3.0 influenced by the Soviet past, both in terms of C- curriculum and physical structures. Soviet 2.0 education sought to prepare people for specific, 1.0 lifelong roles in the economy rather than to develop individuals' talents or prepare them to 0.0 - -- T - adapt to changes in the economic environment. 1993 1994 1995 1996 1997 1998 Soviet education placed strong emphasis on F 7 training scientists, engineers, and other technical 0Education II Health I - E specialists, and the teaching methods stressed Source: Ministry of Finance. memorization of facts rather than methods of analyzing and solving problems. As a result Shadow economic activity appears to be less of a problem in the education sector. Informal paymntsarereguarl mae byparntsfor Table 4.1 Gross enrollment ratios in Ukraine payments are regularly made by parents for adohrcutisb noe 909 extra services such as better supplies, special classes, and access to computer training, but in Primary Secondary Tertiary most cases, because of the transparency and Ukraine 86 88 46 direct accountability of the relationship between Low income 76 28 6 Lower middle income 101 55 21 teachers and parents, these payments are not a Upper middle income 98 76 17 source of personal enrichment but simply a High income OECD 102 98 42 payment for services that cannot be supplied by Source: Ministry of Education. the government. Such payments are normal in every country and should not be sent through Ukraine has a shortage of specialists in business the formal budgetary process. The payments are management, economics, international relations, small and putting them through the budget the social sciences, and the humanities. In 1992, would be inefficient, destroying the direct link 60 percent of certificates and degrees awarded between payments and services that keeps this by higher-education institutions were for the relationship transparent and voluntary. The only study of engineering. Only 6 percent were for substantial problem in terms of corruption and management or economics. As a result Ukraine shadow activity in education that this study has has a serious shortage of well-trained policy identified is informal payments to school analysts who can guide the country into a Can Ukraine Achieve Growth-and Social Equity? 59 market-based future. At the same time, skilled failures together with the withdrawal of women engineers are having trouble finding work. from the labor force appear to account for a The physical inefficiency of the education sector major share of the decline in preschool enrollments. In 1997 the cost per student in is also imbedded in the inherited system. School kindergartens was higher then in vocational and builing arenotenery eficint,impoing higher education-an extraordinary relationship high energy costs on school budgets (box 4.2). binernation andardin tenhi The low density of building usage leads to high litern stnprshoole n ae Zr., lifetime returns to preschool education, care maintenance costs. Teaching staff and education s b insttutonsare ragentd beaus ofthe should be exercised in making major cuts in this area. Still, some adjustments would be justified. specialization inherited from the Soviet system. Financing. As a share of GDP, government spending on education has been steady or even Figure 4.2 Health and education spending rising since independence (figure 4.1). But in have fallen faster than GDP terms of real expenditures, funding has dropped Trends in Real Expenditures for dramatically in line with GDP (figure 4.2). Health and Education (1991=100) Today the largest blocks of government spending arrears are in the education and health 65 sectors. These arrears are concentrated at sub- 60 -- ---- national levels of government, which are responsible for all but some technical education \Health through the secondary level. E 50 ducation II45 As noted, arrears in payments for the energy _ consumed by schools and universities are a ? 40 serious problem. These cannot be allowed to 35 -- continue growing without even more serious effects on educators and their families and on 30 - -- the financial viability of energy companies. Yet 25 1 the budget resources allocated to education 1993 1994 1995 1996 1997 cannot be increased without worsening the budget deficit or creating problems elsewhere in Source: Golladay and others 1998, p. 9. the economy. The only viable solution is to introduce structural reforms in education that Parents finance only 15-20 percent of preschool sharply increase the sector's efficiency. education costs, and many parents are exempted from this payment by various privileges. Preschool education. Since 1991 preschool fo hspyetb aiu rvlgs Prschtutiool hveuaio. d Sc 1 perehol Requiring parents to cover more costs, together institutions have absorbed about 16 percent of the education budget. But the number of with the following additional measures, could percent since rationalize preschool spending, increasing kindrgatnes ha drppe 43economic efficiency and sustainability: 1992, while the cost per student has fallen by just 26 percent (table 4.2). As a result the ratio * Increasing the ratio of students to teachers. of students to teachers fell from 11:1 in 1985 in *Establishing a standard for per child costs 6:1 in 1997. In 1997 only 36 percent of the that includes only spending on teachers' relevant age group was enrolled in preschool; rates were far lower in rural areas (19 percent) .alai n fan cingeacd to allocating central fmnancmng according to than in cities (43 percent). Z this norm. All other expenses should be Only part of the dramatic decline in preschool covered by parents or communities. enrollments can be explained by falling birth rates. The rest appears to be linked to Ukraine's * Leasing preschool space that is not needed economic collapse. A large share of preschool education was provided by factories, and factory 60 Chapter 4 Box 4.2 Local budget financing of schools The financing provided by local authorities is barely School budget for 1999, thousands UAH sufficient to cover teachers' salaries, leaving almost Consumption 729 nothing to cover the remaining costs of education. Goods and services 717 With sharply higher prices for heating, many 408 schools face a crisis situation. This problem is Wagers sarie.spbenes . .Materials and office supplies, highlighted by the financing of a secondary school repairs and maintenance 93 in Kiev. Communal services 217 With help from donors, the school installed a new, Heatin208 more efficient heating system that reduced the cost of heating by about 25%. Even so, budget resources Water supply 4 fell about 60% short of needs. Contributions from Electricity Others12 parents in the form of fees for special classes, Others . Revnues526 books, and other materials helped cover the Revenues shortfall. By leasing part of the building, the school Local budget financing 433 managed to cover all expenditures on electricity and Parents financing and water supply. Nevertheless, the school accumulated leasing space in building 93 arrears on heating costs amounting to nearly 40% of Balance -204 reveues.Arrears on heating 204 revenues. Increased heating costs due to the higher price of energy compared to Soviet days have raised total school costs by over 30 percent. This increase is equal to about 90 percent of the deficit. In short, school financing has not kept up with the rising cost of energy, and even with energy saving measures in place, the schools do not have enough resources to cover costs. More will have to be done on the one hand to increase efficiency-through better use of building space, energy and staff, and on the other, to provide more adequate funding. The latter will require measures to bring the shadow economy into the tax net and to reduce lower priority expenditures. Source: Bank staff interview with school. * Encouraging private preschools. High staffing levels are caused by the Transferring responsibility for preschool perception that employing large numbers of teachers ensures better education. But three education to local budgets and giving additional factors play major roles. First, many localities the taxation and user charge rural schools are very small-enrolling, on rights needed to raise the required average, just 30 students per age cohort. Urban revenues. schools, by contrast, have about 100 children * Using proceeds from the divestiture and per age cohort. Second, highly specialized privatization of social assets to help cover teachers are often employed only part time. costs. Teachers in grades 5-11 are required to have been trained in the subjects that they teach, and General primary and secondary education. while many have been trained in two related During 1991-97 financing for general primary subjects, some are prepared to teach only one. and secondary schools averaged about 65 Thus teachers of specialized subjects often percent of the education budget.1 In 1997 cannot be employed full time, even in large secondary schools contained 7.1 million urban schools. Finally, specialized classes at the students and 571,000 teachers. Between 1985 upper secondary level have small enrollments. and 1997 the ratio of students to teachers Ti rbe sepcal rnucdi droped rom 14: to 2: -lo by This problem is especially pronounced in dropped from 14:1 to 12:1-low by schools that allow students to specialize in the sciences, arts, business, or agriculture. The financial savings from reducing high In Ukraine, the term "secondary" generally applies to staffing intensity are smaller than might be what would be known in the US as primary and secondary. expected, however, because Ukrainian teachers' Thus, when the term "secondary" is used in this chapter, it salaries are quite low-averaging 121 hrivnyas should be taken to apply to all education from grades 1-11 (ages 6 to 17). a month (about $60) during the first quarter of Can Ukraine Achieve Growth-and Social Equity? 61 1997, or 55 percent of average GDP per capita. both the quality and the fiscal sustainability of In 1996 teacher salaries and payroll taxes Ukraine's education system. accounted for just 54 percent of the budget for There are no quick fixes for the poor financial basic education-compared with 60-70 percent in Western education systems. And even if the thre oraes ofpoetil sving-staf average ratio of students to teachers were reduction, school consolidation, and energy increased, it is unlikely that the additional con, h csation, and energ workload could be imposed without providing conerv towie shor-term additional compensation to teachers. In addition, expeniuesrealizeln-erainiTe following measures would help rationalize increasing workloads would often require that spending on secondary education: teachers receive additional training. This cost, along with the cost of increased unemployment * Raise the ratio of students to teachers. support for out-of-work teachers, would have to * Lower heating and lighting costs through be included in any assessment of the net benefits of increasing class size. Finally, secondary nw eir sinsa schools have a number of other pressing (and pricey) concerns-including a dire shortage of * Remodel interiors to improve space use, textbooks and computers (Vitrenko and reducing the operating cost of buildings. Lukovenko, p. 7). * Consolidate rural schools and small urban schools, lowering administrative costs. Table 4.2 Preschool education, 1992-97 * Involve communities, through parent- Indicator 1992 1995 1996 1997 teacher associations, to help schools and Number of 2,063 1,536 1,342 1,171teceasoiin,tohlshosad Numbdrer oteachers compensate for the limited children resources of regional and central Share of total 18 14 13 11 governments. Such organizations, which students can respond quickly to problems, are (percent) widespread in Western schools. Cost per student 863 646 501 636 * Sell or rent textbooks rather than (1997 hrivnya providing them free of charge. per year) E . Attention should also be given to raising and revising teacher salaries, to retaining highly Article 53 of the Ukrainian Constitution speaks qualified teachers, and to funding schools based of free access to a complete general secondary on line-item allocations for specific inputs such education. But careful legal analysis seems to as salaries, books, and overhead. The exact mix indicate that this is a general social objective, of expenditures can then be optimized to not a specifically guaranteed right that maximize efficiency in line with local realities. everything associated with secondary education Vocational education. During Soviet times will be free. Though most parents want all vocational and technical schools were services provided by public schools to be free of established to meet enterprises' demands for charge, parents end up paying sizable fees for skilled technicians, and graduates were extracurricular tutorials and voluntary and automatically employed. Today many forced assistance. Money also comes from enterprises are being forced to cut costs and corporate and other sponsors. Total non-budget retrench staff-reducing the demand for financing-whether private, shadow, or vocational school graduates. Moreover, studies unofficial-totals 500 million hrivnyas, or about in a number of countries show that general one-quarter of budget allocations to education. education yields higher rates of return than More private support for both public and private vocational education. Strong cognitive skills secondary education, a widespread practice in developed in grades 9-11 improve the on-the- most modern economies, could greatly improve job trainability of students, whereas narrow 62 Chapter 4 vocational training does not. Vocational established the accreditation system for private education should be reconfigured to the needs of entities to ensure quality educational programs. market-oriented enterprises, and vocational and The role of private resources. The government technical programs that have seen enrollments should not attempt to provide the entire range of fall should be phased out. education services from its budget. Rather, it Higher education. Ukraine spends more money should ensure more equitable access through on higher education-18 percent of the national subsidies, insurance schemes, voucher systems, education budget in 1997-than on any level and tax credits that make secondary education other than secondary education. During 1990-97 affordable to all and higher education affordable the number of university students remained to a reasonable number, with merit scholarships roughly unchanged, while the number of tutors for outstanding students from poor families. The and professors grew by 10 percent. Between public sector can partner with the private sector 1985 and 1997 the number of higher education through one of several schemes: institutions grew by 6 percent, mainly because Public funding for private schools. In the of private sector development. Netherlands two-thirds of students attend Higher education is expensive in all countries. publicly funded private schools. Experience has But even if part of the cost is borne directly by shown that where the private sector works side students, every possibility for lowering costs by side with the public sector, the private sector should be explored. Several areas need to be is usually more efficient and effective. examined in Ukraine for possible savings. First, Public schools, private management. In Bolivia are there too many separate institutions? the partnership between the government and a Second, are the schools operated efficiently? religious non-governmental organization has Third, are curriculums aligned with the needs of been so successful that the government is a market economy? Fourth, are too many studying it as a possible model for education Ukrainians enrolled in higher education? Higher reform. education is clearly desirable. But if it means less money for other critical social needs Providing students with a choice. In the United tradeoffs will have to be made. States vouchers have been proposed as a .solution to weak schools. Students would be Regarding consolidation, higher education souint.ekshos tdnswudb Regardutin csoldproaton, hier e on given vouchers, funded by public tax dollars but institutions should probably be cut to noemo redeemable in private or public schools. Schools than three to five universities and five to eight wudte aet opt o tdns colleges in every regional center (Vitrenko and Lukovenko 1998, p. 10). The number of higher Excessive state support for private schools, education institutions in the regions today is however, will encourage children from affluent extremely high and cannot be economically families to attend elite private schools, leaving justified. public schools to children from underprivileged s thomes. The mix of backgrounds that prevails in As t cos recver, hiher ducaion ublic schools has considerable social benefits, institutions have started to charge tuition fees- promoting a broader sense of society. Thus which in 1997 were equal to 20 percent of pooigabodrsneo oit.Tu whicht ixend97 re equal togreucntiof. Ukrainian policymakers will have to strike the budgtona eenditurs fosenge higher appropriate balance, which may well consist of Additionaculd efforts for tstrengthening h r supporting private education without providing education could include further promoting cost dietpbi fiacn. o t recovery (and limiting state subventions), establishing student loans, expanding merit Reviving health care scholarships to top students who show a Ukrainians have excellent access to a publicly financial need, and encouraging private funded, Soviet-style health care system. Primary provision, which tends to be more responsive to care is provided through a dense network of changing skill requirements in the labor market. modest hospitals and simple primary care Taking into account the development of private facilities. In rural areas a rudimentary network higher institutions in 1998 the government has of first-aid stations provides first-line care. But Can Ukraine Achieve Growth-and Social Equity? 63 except for headaches, indigestion, minor The share of GDP allocated to health care has abrasions, insect bites, and the like, the been fairly steady, at close to 4 percent (figure paramedics stationed at these facilities must 4.1 above). Still, the collapse in economic refer patients to district or oblast hospitals for output since independence has sharply reduced care. In urban areas polyclinics, staffed with available resources to the sector, a decline only physicians and often attached to a hospital, partially offset by the substantial inflows of provide outpatient services. In 1996 there were humanitarian aid. However, increasing spending about 29,200 primary health care facilities-one on health care in the absence of restored for every 1,800 people.4 economic growth would almost certainly Secondary and tertiary care is offered by referral worsen the government deficit-further hospitals and research institutes. There were exacerbating economic decline and lowering 1,035 hospitals in 1996, equipped with 528,000 living standards. inpatient beds-one for every 96 persons. But Thus the main challenge for the health care many of these facilities are not well equipped, sector is to improve quality while cutting costs. and most are poorly supplied with diagnostic This will require major efforts to increase the materials, drugs, and dressings. As a result, staff efficiency of health care operations, focus on time and inpatient care are often substituted for preventative rather than curative services, move material inputs. Diagnoses could usually be from the Soviet specialist system toward a more made quickly on an outpatient basis if better generalist approach, establish a better laboratory and imaging facilities were available. expenditure balance between staff, facilities, and Moreover, conservative treatment plans are supplies, and increase private funding for health adopted, with patients kept in hospitals for long care (figure 4.3). periods to allow doctors to monitor recovery. As Physical efficiency. The health care system a result the average hospital stay is nearly 17 Z-1 suffers from many of the Soviet-era problems days-roughly twice as long as in the West. afflicting the education sector-including The health care system is in crisis. As noted in buildings that are neither space- nor energy- chapter 1, the overall health of Ukrainians is efficient, an excessive number of specialized deteriorating. The death rate is climbing. institutions, and general excess capacity. Birth rates are falling. Life expectancy has dirtrop e sarp e nlling.Life ecnce of The number of hospital beds per 1,000 people is drppreventable y. com n e i incdne of very high by Western standards. In 1996 there were 580,400 hospital beds in operation-about tuberculosis-is rising rapidly. This deterioration has set in despite the fact that the bes r e very 1,000 people. system spends far more than it receives. Unable best p eitave 2reds peri1, Popl to pay its bills, the system has trouble heating its in 199 D e ind, Mxc tUgal, Spain, the United Kingdom, and the United buildings, keeping the lights turned on, retaining Z 4:1 States had fewer than 5 beds per 1,000 people its highly trained staff, purchasing modern equipment for diagnosis and treatment, and providing patients with the medicines and even Enormous resources are wasted, particularly the food that they need to live. given the low average occupancy rate for the beds by patients who actually need to be in hospitals. Changes in diagnostic and treatment facilities and techniques could sharply reduce This section on health draws heavily on work done for the need for hospitalization and the average the CEM by Ukrainian and World Bank researchers. The hospital stay. The inefficient use of beds is notes prepared include Yuriy Vitrenko and Antonina particularly costly given that hospitals are Nagorna (1998). Health System. Kyiv: ICPS and World expensive to heat because of large amounts of Bank; Frederick Golladay et. al. (1998). Review of Public wasted space, the low energy efficiency of the Expenditures on Health and Education in Ukraine. b Washington: World Bank.; and Katerina Petrina. (1998). buildings, and the cold Ukrainian climate. Ukraine: Financing education during economic transition. Kyiv: World Bank, processed. 64 Chapter 4 About one-third of all bed-days of care provided Preventative and curative care. Preventable by Ukrainian hospitals are used by persons who sources of sickness and death have become a do not have a medical problem. These "social" critical problem largely because the Soviet-era patients include the homeless, elderly, orphaned, public health system focused not on preventing and indigent. As a result of the large number of disease and death, but on delivering specialized, social admissions, the occupancy rate for expensive curative care. The incidence of most hospital beds is highly seasonal, with fewer than illnesses could be reduced markedly through a a third of beds occupied during the warm good public health program that emphasized summer months and most hospitals being full healthier lifestyles, more extensive inoculation during the coldest months of winter. The social campaigns, and better water and sanitation cases do not place a significant burden on the facilities. medical staff, but they account for a large Controlling communicable diseases is a public portion of the costs of food, linens, and responsibility because the spread of disease reposiultybeaueehespeaiondses housekeeping. cannot be controlled by individuals or even neighborhoods acting alone-control requires Figure 4.3 The financing gap in Ukrainian collective effort. The breakdown of public healthcare results from the small private health programs since the collapse of the Soviet contribution Union-particularly immunizations and sanitary inspections-has increased the incidence of Private financing of healthcare preventable and communicable diseases. In (percent of total expenditure) addition, the social disruption that has 60% - - --- -- accompanied the economic collapse has contributed to a growth in violence and in antisocial behavior, making violent death a 40% - - leading factor in mortality. The spread of intravenous drug use and the explosive growth of a commercial sex industry have contributed 20% __ ~~ to a serious increase in sexually transmitted diseases, including AIDS. Drug use and prostitution are poorly documented in all 0%- countries, and the relatively recent emergence e 9of these problems in Ukraine has meant that 'O eprograms for monitoring and controlling them 0 are not well developed. For these reasons, experts believe that drug abuse and sexually Source: Vitrenko and Nagorna (1998), p. 8, and transmitted diseases are much larger problems World Development Indicators, World Bank. than official statistics suggest. Dramatic actions should be taken now to combat the spread of Efforts are being made to reduce the ratio to 8 AId in kraine. AD isprarly beds per 1,000 people by 2000. To meet that D S becase I s s ri ly target, more than 200,000 beds will have to be qeyer ece in Afria and closed. But even then, Ukraine will still have det rat e a Afma arelofwhe twice as many beds per 1,000 people as the pouat. m inece withe wealthiest industrial countries. Moreover, the wout visibesom s ten begIn closure of beds will not result in significant deveopi ublo AIs bef te savings because the design of buildings deloig fl-ow AIS bor th snavings beca esnotallo dini to bilnse authorities fully realize what is happening or are generally does not allow administrators to close peae ohnl h rss xeinefo ward in rde to educ hetingand prepared to handle the crisis. Experience from warinance oeto reduancl h e a countries seriously afflicted by AIDS indicates maintenance costs. Mechanical systems-yy numerous negative impacts on economic heating, and plumbing-are not zoned or nueos egtv imason cnmc heatng,andplumingarenot one or performance including (a) sharp falls in average separately regulated, so closing a unit may not labor produit (b) arg perage affet opratig cots.labor productivity, (b) large percentage affect operating costs. Can Ukraine Achieve Growth-and Social Equity? 65 increases in health outlays both private and high cost of the Ukrainian health care system. public resulting in lower domestic savings and Given the deep institutional roots of the current aggravated fiscal deficits, and (c) lower structure, several years of institutional reform investment in both physical and human capital and re-education will be required to create a because of the other effects and a consequent more efficient structure. Thus immediate cost decline in actual and potential growth rates. savings will be difficult to generate in this area. Investing now to prevent these serious economic Staffing levels, facilities, and supplies. A key problems later would bring a very high rate of reason for declining health care in Ukraine is return. If necessary, funds should be borrowed that fnanci ealready in shr sp fromtheWorl Bak orothr coparble that financial resources, already in short supply, forms te Worldmbank rothe r cise om le are not allocated to the highest priority uses. Since 1992 the share of budget resources going cost would still be relatively modest, thus avoiding an economic and social cataclysm later to staff has risen from less than 50 percent to more then 60 percent, reflecting the system's that could seriously derail economic progress. Z tendency to retain staff at the cost of other Preventing sickness is much cheaper than crucial inputs-even though the number of treating it. Switching approaches would involve medical personnel per 1,000 people is already retraining medical staff and launching public quite high by international standards. inoculation and information campaigns. Though Expenses for building maintenance, especially such efforts have costs, the move to a more prevntaive pprachshoud sartimmeiatly. for energy costs, also absorb a large share of the preventative approach should start immediately. bugtEnryaoeasup2-0ecntf .eie en oecs-fetv,eeyn budget. Energy alone eats up 20-30 percent of the budget of the typical urban hospital, a sharp finds it much more pleasant to be well than to increase from the situation in 1990 when energy get well. was heavily subsidized. Partly as a result of Specialist and generalist care. As with increased heating costs, the hospitals and clinics education, the Soviet approach to medicine cannot buy the modern diagnostic and treatment emphasized a specialist approach, both in equipment needed to improve the quality of medical staff and in medical institutions. In medical care and to reduce its costs. Modern Western countries the family doctor or general equipment and techniques-such as imaging practitioner is the cornerstone of the health care equipment and micro-surgery-is far less delivery system. Priority is given to public invasive than traditional diagnostic and health care in the form of "First Medical- treatment techniques, thus saving money by Sanitary Aid" because it is the most economic reducing the length of hospital stays. And with way to meet most of the health needs of the modern equipment, many operative procedures largest share of the population. In Ukraine, can be done on an outpatient basis. Less however, the medical system has become highly invasive techniques also result in less pain and overspecialized. For example, barely more than faster recovery. 10 percent of the doctors treating adults in urban An exterally financed investment project is areas are generalists, but they have to handle needed that would allow Ukraine to invest in the about 40 percent of initial patient referrals and equipment and training required for modern care. World experience shows that family doctors can provide full medical help to 70-90 techniqeserthealng trmh pro percent of the patients. Ukrainian authorities would e slf-financithu savn o have estimated that the share of general practitioners in the health protection budget Staffing levels and patterns. Ukraine has 4.5 should be increased to about 40 percent doctors per 1,000 people-compared with 2.0 in (Vitrenko and Nagorna 1998). Germany, 1.6 in Sweden, and 1.3 in Poland. Ukrainian authorities claim that these ratios Overspecialization is also a problem in medical Uld not ored irect thesern education. Curriculums tend to slot individuals rtos be Ukre use a imore sie into narrow specialties, and institutions tend to ,,isbcueUrie ssamr nlsv inou n specialztis,sandoisutins ted toe definition of "doctor," including administrative personnel who have been trained as physicians 66 Chapter 4 but who do not actually work with patients. But lines available in other countries, they will have a similar problem emerges in assistant-level to pay more out of their own pockets. staffing in the health care system. In 1996 the Ukrainian health care system employed about 583,000 trained assistants (nurses, laboratory Figure 4.4 Ukraine lags comparator technicians, medical assistants, and so on). This countries in total health expenditures despite implies 95 patients per assistant in Ukraine, strong public contributions compared with 715 in the United Kingdom and 435 in the United States. Thus the number of Expenditures on Health physicians and assistants is much higher than 61 would be needed in an efficient, well-equipped health care system. 5 - The high ratios of doctors and health care 4 - assistants to patients served reflects the Soviet approach to medical education and health care 3 delivery. Low retirement age and the possibility of receiving both pension benefits and wages encourage doctors who have achieved retirement age to continue working. Even the Soviet government did not pay pension benefits to working pensioners in health and education; Total Public given the current fiscal crisis, Ukraine is excessively generous to pay both. Pension EMiddle Income Countriesi Ukraine policies may therefore be another major reason Source: World Bank 1998; government data; the ratios of doctors and of health care assistants World Bank staff estimates. to patients has increased since independence and is now high by international standards. This Although there is a strong resistance in Ukraine may also help explain why graduates of medical to formally asking people to pay a larger share universities have trouble finding jobs. of their health care costs directly, a clear willingness and ability to pay exists in Ukraine. Publc an prvatefinncin. Gvernent Individuals are spending substantial sums on spending on health care in Ukraine is slightly medical ire in ria com an larger as a share of GDP than in the average p middle-income country (figure 4.4). From this informal payments in health care system, we can conclude that the health care crisis is not purchases of prescribed drugs and the like. the result of a lack of effort on the part of the The concept of free medical care is embedded in government to finance the sector. In fact, a Article 49 of Constitution. This does not mean slight reduction might even be possible relative that the Constitution guarantees the maintenance to GDP. of all existing medical institutions. It rather On the other hand, total expenditures on health obliges the state to maintain adequate networks . at a standard not worse that now. The structural as a share of GDP are significantly lower than in refors ot es e that. comparable countries. This reflects the heavy co.r oe e .iinc ineth car depedene inUkrine n sate-rovded could bring more efficiency mn health care will deedccae ind hui eo statproded be in compliance with the Constitution. The medicl car an .hsteshrl oe Constitution also does not ban private networks contribution of individuals to their health care fortmedical cae ot recove f ervices need. Ony 2percnt o helth are for medical care or cost recovery for services eedures Ony 2 eret of healtdar, rendered. To the contrary, it encourages the expreduresmuarehcoer byv invidualsstate to develop networks of different kinds of compredwithmuc higer evel inthe ownership (Art.49, para.3 of the Constitution). average middle-income country (see figure 4.4). TheeConstitution,alsoaexpressivelysenvisages If Ukrainians want better health care along the Troc uton al insre. introduction of medical insurance. Can Ukraine Achieve Growth-and Social Equity? 67 Medical services always have cost, and in the * Introduce a safety-net scheme that would end, the people of Ukraine have to pay-either assure that no Ukrainian would ever be directly or through their taxes. The main denied necessary medical treatment for lack question is the balance between private and tax- of income. based state financing and the impact that this balance has on the efficiency with which health ree b rsthest care services are delivered. World experience indicates that, if people have to pay at least a The human environment-water, sanitation, significant part of their medical costs directly, and housing they will take a greater personal interest in the Z-1 Access to safe water, sanitation, and adequate cost-effectiveness of the services received, thus Acce ofe wat anitio an aqte increasing the efficiency of the healthcare shelter often prevents families from sliding into system. Iso, when people have to share in the absolute poverty even though incomes are low. cost of medical service, they take better care of The government has a role to play in providing themselves, and they avoid bothering doctors water and sanitation, especially in developing with minor ailments that could be cured with countries such as Ukraine, because of the nonprescription medicine and other remedies, externalities involved. Modest investments in The reduced burden on clinics and hospitals providing access to clear drinking water and would make it possible for these institutions to sanitation improve the health and thus the spend the resources saved on better facilities, quality of life for the individuals directly equipment, and supplies for those who actually affected. Such access can also prevent the need help. spread of communicable diseases, preventing major economic losses for society as a whole. In addition to easing the burden on the budget Major investments are needed to increase the and increasing the quantity and quality of quality, accessibility, and efficiency of medical services, a greater role for paid medical Ukraine's water and sanitation. services in Ukraine would lead to greater efficiency. When people have to share in the Water and Sanitation Background. Ukraine's cost of medical service, they take better care of slow transition to a market economy has hurt themselves, and they avoid bothering doctors municipal water and wastewater services. with minor ailments that could be cured with Artificially low tariffs, poor payments nonprescription medicine and other remedies. collection, and limited financial support from The reduced burden on clinics and hospitals the national government have left negligible would make it possible for these institutions to funds for maintenance and investment, placing spend the resources saved on better facilities, many water and wastewater systems in danger equipment, and supplies for those who actually of physical failure. Inadequate water treatment need help. has brought an increase in water-related diseases. The population has become To improve its health care system by increasing increasingly dissatisfied with the quality of access to paid medical services, Ukraine should: services and is worried about the safety of the * Introduce a nominal fee for each visit to a water supply. If the country's water and wastewater infrastructure is allowed to continue deteriorating, the quality of life for many * Place a cap on the value of medical services Ukrainians will decline further. that any family can receive in a given year The old Soviet command and control system without payment. together with the current subsidy policies create * Introduce a national health insurance system severe disincentives and distortions that make that would allow individuals to pool risks the sector inefficient: (a) poorly managed water and help pay for future medical costs that companies lack incentives and tools to turn exceed the annual cap through low, stable themselves into more efficient institutions; (b) monthly payments. water and wastewater systems are poorly constructed and maintained, many of them now 68 Chapter 4 on the brink of collapse and hampered poor enhancements; (e) bringing in the consumer as a plant performance, excessive water participating party in water company decision consumption, large network losses and high making and assuring social sustainability of the energy consumption; and (c) investment policies transition; (f) restructuring remaining public are poorly focused, emphasizing new capacity at sector operations; and (g) ensuring the expense of potentially more cost effective environmental sustainability. investments in system rehabilitation and Successfully implementing a strategy along these efficiency enhancements. The financial lines would have a highly positive impact on the problems and inability to raise resources are quality and reliability of water supply and exacerbated by falling household incomes, sanitation services throughout Ukraine, thus which limits the capacity of many to pay reducing physical poverty even when monetary significantly higher water and wastewater incomes are still low. tariffs. Agenda for policy change. The Government's Housing. Background. Because the Soviet response to these problems has evolved slowly. housing system was not able to provide Some reform principles have been endorsed, but adequate housing for the population, the average implementation is limited especially at the local Ukrainian today in urban areas has about 18 sq. level. Water companies continue to be poorly m. of housing space about one third the average managed institutions desperate for cash, in Western European countries. Furthermore, neglecting maintenance and unable to undertake factory-based standardization lead to a limited urgent rehabilitation of plants and networks. choice in housing design. Despite the shortage . . .of housing space, homelessness is still a The prime objective of reforms today is to relati rae pole n i ptly strengthen these companies so that they can because oa hosin id pram tat improve accessibility and quality of the water pecse vr por, andy beca beds supply and wastewater services at affordable prtcshevypo,anprlybaueed suppy ad watewter ervces t afordble in medical facilities are commonly used during levels, thus restoring public confidence. For cl ea t pre shelter. this, water companies must become independent, well managed and financially In the Soviet era, energy efficiency was not an viable utilities. Efforts have been made to turn important design consideration because of low water companies into autonomous and well- energy prices. Consequently, buildings were managed water utilities by turning them into constructed with poorly insulated exterior walls private joint stock companies, but political and and roofs, exposed metal joints, and leaky legal obstacles-such as the restriction that windows. The existing housing stock is largely municipal governments cannot own stocks- old and in poor condition, requiring extensive have prevented this approach from moving deferred maintenance, capital improvement, and forward. Government is now developing in some cases, demolition and replacement. The legislation to allow the privatization and economic recession since independence has concession of water utilities. reduced the government funds allocated to housing construction, and most municipal, state Investing in the future. Future reforms in the enterprise and cooperative housing construction wate suply sectr soul incudethe has stopped. The shortage of funds and poor following key elements: (a) promoting private colleton of pamet hav incr sector activity (b) transforming present water main of the inrhosn compnie ino idepndet "orpratze, maintenance problems of the existing housing companies into independent "corporatized' tc utilities regulated by local governments; (c) stock. gradually turning water companies into Housing privatization was one of the early financially self-sufficient institutions through priority areas for Government, which sought tariff reform and better revenue collection; (d) through policy changes to develop a private introducing least-cost strategies for selecting housing market and to gradually eliminate investments that give preference to plant and government controls other than those required network rehabilitation and efficiency for public safety. The Law on the Privatization Can Ukraine Achieve Growth-and Social Equity? 69 of the State Owned Housing in Ukraine became progress until after the Presidential election in operational in early 1993. The housing sector in late 1999. Ukraine since then has been going through a Agenda for action. The government needs to gradual process of transformation as take action in the following areas to strengthen government control of the sector decreases and a t f market-based housing system slowly begins to fingin ukrainei emerge.of housing in Ukraine: emerge. Today over 50 percent of all apartments targeted * improve availability of financing for for privatization have been privatized. This households for home purchases and for process has resulted in state-owned and private developers for housing construction; apartments co-existing in the same buildings, * encourage local governments to release creating problems for the maintenance of land in the urban areas for private real building shells, mechanical systems, and estate development to enterprises and common spaces. Municipal housing other groups interested in utilizing maintenance companies commonly continue to specific sites; be responsible for the management and maintenance of the buildings. * replace current burdensome local government land and building regulations, Policy reforms in housing. Since 1994, the which act as a disincentive to real estate Government's program of economic reforms has development, with a modern, a direct impact on the housing sector, especially development-friendly set of regulations through the phase-out of subsidies for housing, consistent with international best heating, hot water, drinking water, sewerage, practices; and and gas. While representing a major accomplishment, this process is far from * implement cost recovery measures to complete. Current cost recovery levels for improve the financial viability of housing residential services only average about 60 remaining in the public sector and of the percent today, compared to the 80 percent set as public utility (communal) services a target in 1997. Prospects deteriorated further provided to the housing sector by the in 1998 for attaining reasonable levels of cost pubhc sector. recovery when Parliament passed a law on July Rapid implementation of reforms along these 23, 1998 banning increases in tariffs for lines would not only contribute directly to domestic utility services. The battle over improved living environments for the people of communal tariff rates continued at time of Ukraine, but would also stimulate jobs and writing,' and few expect to see significant economic growth. Because housing is labor intensive and depends primarily on locally- produced materials, it can be an excellent tool for employment generation and for stimulating The President twice vetoed Parliaments law of July 1998, d o t eno ativt Wit th Wld but Parliament twice over-rode the veto, a measure that endangered lending from the IMF and the World Bank. In Bank and USAID assistance, reform-oriented late 1998, the Constitutional Court began to review an city administrations have accelerated the appeal by the President's administration that Parliament privatization process, have created private did not have the constitutional right to pass such a law, housing maintenance utility companies, and which infringes on the domain of the executive branch and directly imperils the integrity of the national budget. The have worked to strengthen related communal Court decided at the beginning of 1999 that the Parliament services, thus helping create the conditions decision to ban the tariff increase was not legitimate. needed for a strong housing sector in Ukraine. According to the decision of the President in May 1999, all oblast administrations declared the increase of local If the government simply establishes an communal tariffs to 100% of the cost of services with appropriate legal environment and makes public different terms of effectiveness mainly during May - June land and housing available for sale to private 99. But in June 1999 the Parliament has decided again to developers, the private sector can mobilize the ban the tariff increase and the case is forwarded again by the President to the Court. investments needed to improve the housing 70 Chapter 4 stock and to provide new housing at prices statistically predictable, and the common way to accessible to all but the very poor. For these protect individuals is to share the risk though people, the government does have a special role insurance. Everyone, young and old, contributes to play-providing subsidies that allow the very to the insurance fund for health and old age in poor to have minimum shelter while still being sickness and in health. When sickness strikes or able to afford the other necessities such as food old age arrives, those who suffer can draw and clothing. Ukraine is exceptionally well resources from the fund to cover the cost of positioned in this regard, having worked with an sickness and the loss of income that comes with external donor to establish a well-run program old age. that provides support to families so that they do Ukrainians need to examine the following not have to spend more than 15 percent of their questions when considering ways to improve the income on housing. effectiveness and financial sustainability of The financial viability of the program could be health care and pension systems: improved and its burden reduced if those with incomes at the higher end of the range of those siWhospays or tei eligible were to pay 25 percent instead of 15 percent of their income. The efficiency of the * How do they pay? other social safety net programs described in the next section could also be improved if they were combined with the means-tested housing * How can these costs be minimized? program. * How can the services provided under THE SOCIAL SAFETY NET these programs be improved without increasing costs? Politicians and government officials often argue that a slow pace of reform in Ukraine is needed Health insurance. As noted, Ukrainians pay a to preserve social peace. The Ukrainian small share of the cost of the medical services authorities are not alone-countries around the that teu. T ramatic eclnesin personal world share this concern when faced with incomes resulting from the economic collapse makin pharofound chnesn whecnoicd make it difficult to implement major changes in making profound changes in economic and ti raimdaey e ipeses social structures. A good social safety net is thus this area immediately. A few simple steps, vt thowever, would greatly facilitate the transition vital to the success-and even the feasibility- toagdhelhisrnepgam of reforms. Ukraine has a social safety net, but to a good health insurance program. spending in real terms on social protection has First, Ukraine already has a health insurance dropped even more dramatically than overall progran-one that is fully funded by the budget expenditures since 1993, a period when government with no direct contributions by more, not less, social protection was needed patients. As taxpayers, however, patients are (figure 4.5). More importantly, the system already paying the full cost of this health leaves important segments of the population in insurance program. Patients need to see a more poverty while supporting some who are not direct link between what they pay and what they impoverished. The current approach, which use. A health insurance program could be depends on a system of unemployment created by reducing the taxes paid or by asking insurance, is fragile and likely to fail in the face citizens to pay part of this money into a health of the substantially higher unemployment that is insurance fund and the rest directly to health likely to come with the enterprise reform effort care providers as services are used. needed to restore efficiency and growth. Health care providers, who could be state or Protecting the sick, the elderly, private, would recover their costs from two and the unemployed sources-the health insurance program and the Sickness and old-age are insurable risks. citizen. In line with practice elsewhere, roughly Everyone is likely to suffer these debilities at 80-90 percent of costs would be covered by the some point in their lives. These risks are insurance program, with the remainder coming Can Ukraine Achieve Growth-and Social Equity? 71 directly from the patient as a copayment. The age, and growing their own food in family amount that each household had to contribute to garden plots. Given that the retirement age is 55 the cost of health care (including both insurance for women and 60 for men, most retirees still premiums and copayments for services have at least 5-10 years of useful working years received) could be limited to a maximum (by international retirement standards)- percentage of income-much as housing costs especially since the average Ukrainian woman are capped. With such a program, users could be who retires at the official age can expect to live "charged" the full cost of services, helping to for another 22.1 years, and the average man for establish the principle of cost recovery. another 14.3 years. Moreover, early retirement schemes reduce the average retirement age to 54 At the outset the program could begin with the s state funding out of tax revenues a major share for women and 58 for men. It is not surprising of the insurance premium and the citizens that about 15 percent of 'young" pensioners continue to work after retirement. paying the rest. This balance could gradually be reversed by lowering payroll and other taxes On the negative side, the pension system is not while raising the share of the premium to be financially sustainable and is running up large paid directly by citizens. arrears-2.1 billion hrivnyas as of November 1, Mechanisms could be established whereby the 1998. Some pensioners are not even receiving health insurance program would be recognized the meager pensions to which they are entitled. by private physicians, who would be able to Despite numerous attempts to raise additional recover part of their cost of providing services funds, there is no sign that the buildup of arrears recover prt ofithaboutstto pbevidntrservice through the program. This would provide a is about to be controlled. voucher-type mechanism by which the The Ukrainian pension system is based on the government could support the development of pay-as-you-go approach, which means that the private health care system, thus reducing the current payments into the system are used to burden on the government health care system. meet current benefit obligations. Like pay-as- Developing a full proposal for a national health you-go pension systems all over the world, the care scheme is beyond the scope of this report. Ukrainian system is in crisis. In fact, it faces But the above points provide an idea of how even more severe problems than other countries because of Ukraine's low retirement age, such a systen -which would gradually C . . numerous early retirement schemes, and revolutionize the financing and quality of the nmer arly retirement shems,ond unfavorable demographic situation-the Ukrainian medical systemi-could be introduced dependency ratio is rising rapidly because birth with minimal social disruption. rates are low and the population is aging Pensions. Insurance against the loss of income rapidly. in old age is commonly believed to come largely fm tUkraine's pension system lacks some features of from the Ukrainian government-and to be anodarisuncsytmbasehres hopelessly inadequate. Critics claim that the average monthly pension forces old people to practically no link between contributions and benefits. Today's pension benefits are little live in poverty. In late 1998, for example, the y t . . more than a minimal social safety net. Yet official poverty line was 73.7 hrivnyas per despite very low pensions, the pension system is person, but the average pension was only 54 not sustainable because of massive wage arrears hrivnyas-less than a third of the average monthly wage. But the situation is both better and worse than the data would indicate. The Ukrainian system is highly redistributive to On the p side, most Ukrainians insure pensioners who have contributed little or against loss of income in old age not only with othing and to members of certain groups who are legally eligible for higher pension benefits pensions, but also in many other ways- . pnsluins, b oin may ter wa- (civil servants, prosecutors, military officers, including working for pay after normal rim a, dwar veterans, Chernobyl victims). The Pension retirement age, developing and maintaining. Fund has to finance not only old age, disability, family networks that will support them in old survival, service, and social pensions, but other 72 Chapter 4 benefits such as military pensions, Chernobyl This will take time, and a lot of technical benefits, and other allowances that, in theory at assistance will be needed. Until the institutional least, are covered through transfers to the reforms needed to assure the integrity of the Pension Fund from state and local budgets. financial sector are in place, the government Shifting these non insurance payments directly should be cautious about introducing a to state and local budgets would allow moving mandatory pension program where private to a real system of pension insurance that financial institutions play a major role. offered higher benefits to elderly Ukrainians. Establishing a personified record-keeping In response to the need for pension reform, a system where records are kept by individual three-tier system has been proposed. The first worker rather than by enterprise is already under tier would maintain the pay-as-you-go system as way, and this is a good first step toward a sound a defined benefit scheme-but it would system of contribution management. The gradually be downsized and restructured. The remaining elements of the future pension system second tier, a mandatory defined contribution, should be introduced gradually to ensure the fully-funded program, would be financed with security of the system while minimizing the gradually increasing payroll contributions. The transition costs. third tier, which would be voluntary, would Unemployment insurance. Ukraine's offer supplementary protection through tax- employment services are under severe pressure. advantaged occupational pension and personal The budgets of state employment centers are saving plans for people who want more income v . in ol age.very limited, and the number of unemployed is increasing steadily. Employment tax compliance Pension reform should proceed in stages, with rate is only about 66 percent-which means gradual introduction of a three tier system. The that, of the planned revenues of 634 million most urgent task is to reform the basic pay-as- hrivnyas for 1998, state employment centers you-go tier to make it more financially expect to collect just 420 million hrivnyas. As a sustainable, and the government has already result the centers have had to reduce its active made proposals to this end. Political pressures employment programs and divert a major part of so far have forced it to avoid increasing the revenues to paying unemployment benefits. The retirement age directly. Instead, rules have been average duration of registered unemployment is changed so that, to be eligible for pensions, 30 increasing (averaging 8.5 months per job seeker years of service will be required for men and 25 in 1997), further increasing the costs of benefit years for women by 2000. By 2010 it will be 35 payments per unemployed worker. years for both men and women. In place of the Unemployment benefits in Ukraine are current fictitious replacement rate of 55-75 relatively high: 100 percent of average wages at percent of last earnings, which the government the last job for the first two months, 75 percent can no longer provide, the new proposal for the next three months, and 50 percent for the establishes a much more realistic replacement next seven months. The average benefit rate of 35 percent for the pay-as-you-go tier. replacement rate began increasing in 1996. At After the presidential elections, further efforts should be made to raise the pension age as has atetie the ra of tere nefit to th been done in other countries, thus helping assure average;wage wash16fpercent;fin 1997 it was 25 the longer-term financial viability of this percent; and i the first half of 1998, it was 27 impotantprogam.percent. Despite inflation, the minimum important program. monthly unemployment benefit has been held at Successful pension reform will require 16.6 hrivnyas (less than US$ 5)-a level far establishing supervision capacity for investment below the poverty line (73.7 hrivnyas). funds, banks, and insurance companies, A draft law on compulsory social insurance for implementing huge administrative changes in the unemployed, which is with the Cabinet of the collection of both first- and second-tier Ministers, is designed to reconfigure contributions, and developing modern unemployment benefits. The new system will management information and computer systems. require that workers have recorded contributions Can Ukraine Achieve Growth-and Social Equity? 73 to the unemployment insurance fund and forward, sharply higher official unemployment unemployment benefits will be set as a rates are inevitable. This will put pressures on a percentage of the average salary during the last fully adequate system that could destroy the two months of work. But even with the new budget, creating deficits that, as in the past, law, the insurance principle is not fully would lead to macroeconomic problems like followed. The draft law also proposes partial capital shortages and inflation that would ruin unemployment benefits to workers who lose prospects for economic growth, making long- salary due to administrative leave or temporarily term unemployment inevitable and creating reduced working hours. The introduction of even more pressures on the budget. Under such temporary benefits responds to the massive circumstances it is very difficult to design unpaid administrative leave in the country unemployment insurance systems that would today. not bring the worst possible results-financial Introducing temporary unemployment benefits ruin of the government, shattered expectations for the workers, and a vicious circle of deficits, will almost certainly delay the restructuring of economic stagnation, and continuing unemploy- enterprises, and if state employment centers . have to pay such expenditures, this will further mn limit employment programs for those who have unemployment trap, a full-scale unemployment already registered as unemployed. In addition, program should be deployed very carefully, z:1 making certain that it is properly sequenced since temporarily unemployed or partially . C employed workers will still be on enterprise ith respect to the pace of industrial e restructuring and the availability of government payrolls, the state employment centers will not resourses. Since those who are officially be able to offer other employment services, uemoed may in fac ae oeriquit incldingjob laceent.unemployed may in fact have other quite adequate sources of income including jobs in In 1999 the financial obligations of the state the informal sector, employment of other employment centers will increase significantly, household members, and extended family primarily because of the November 1997 support, a better strategy would be to make amendments (effective January 1999) to the certain that a fully adequate income-tested Law on Employment regarding severance pay social assistance program is in place to assure and unemployment benefits. Under the amended that households have enough income to avoid law the state employment centers are obligated absolute poverty. to pay two out of the three months of severance Housing Subsidies. Ukraine introduced a payment entitlement. Although this amendment might facilitate retrenchment of excess labor, it housing subsidy program in 1995 under which Z families are eligible for support if their will significantly deplete revenues of the f t_1 payments for housing and communal services employment fund. The government is worried pa exceed 20 percent of household income (or 15 about the consequences of this measure for state budgets and has suggested pg percent for the poorest strata of population). potpnig Numerous abuses by applicants, calculation implementation for one year. Strengthening C mistakes by housing subsidy office employees, public employment services and their finances mistaes ou subsidy oc emloes late transfers of subsidy funds by local budgets remains a key issue for labor market policies. and misuse of budget funds over the years led to The deep restructuring needed in the economy, creating an audit program, which has improved particularly in the old Soviet-era enterprises, the integrity of the system. Substantial changes also indicates the need for caution in since the program began have also improved unemployment insurance schemes. Today there eligibility criteria, procedures for assigning is widespread hidden unemployment in the subsidies, and mechanisms for making the large-scale enterprises of Ukraine caused by payments. Procedures are in place that require attempts to preserve the status quo through repayment of overpaid subsidies and impose lower wages, unpaid leave, short working weeks disciplinary, financial and criminal liability in and similar schemes. As the unavoidable the case of abuse. restructuring of Ukrainian companies moves 74 Chapter 4 Today about 20 percent of the population cut-off point) and using characteristics of receives subsidies, a number that increases to household as the criterion (e.g. single mothers). about 15 percent during the heating season. The Group or geographic mechanisms. Here groups estimated targeting accuracy is high, with er' of candidates are granted eligibility on the basis relatively few non-poor receiving support; o conversely, relatively few poor fail to receive charace eample inUrane singe supprt. he rogrm nw apear to e a characteristics. For example, in Ukraine single support. The program now appears to be a pesors ecie enon uplmt. model upon which a more comprehensive pesors ecie enon uplmt. mrodel upon whi assmore copreheve However, the lack of a poverty map and reliable program of family assistance could be constructed, reducing, the fragmentation and regional poverty assessment does not allow the Zn C,use of geographical targeting. overlap among existing programs (see PADCO, ui 1999). Unification of targeted social assistance Self-targeted programs. Some services and programs will, however, require significant programs are ostensibly available to all, but are investment in information technology including designed in a way that discourages the non-poor hardware, software development, from using them. Three factors usually communications systems, financial reporting discourage non-poor from participating - time, and auditing systems, and a widespread stigma, and low quality. Self-targeting can be upgrading of the information technology skills. accomplished, for example, by requiring This work should be accompanied by the participants to work. This may involve helping development of a new methodology for to deliver the service, for example by helping in establishing the poverty level, which in turn community kitchens. It may also involve should be linked to eligibility for social providing a more general service such as trash assistance. Now that Ukraine has decentralized collecting or helping to maintain community tariff setting and has moved in principle to 100 infrastructure. Or it may be a full job in percent cost recovery, reforms should also focus construction, as in public employment on privatizing housing, creating condominium programs. Time, as we know, has an associations, and restructuring locally owned opportunity cost. The opportunity costs in terms utilities. Such reforms could greatly improve the of time taken away from other activities as well well-being of low income families, reducing the as the energy expenditures may discourage the need for assistance programs. leakage of benefits to persons who are poor Oe according to the declared income but who in reality are non poor because of informal sources Targeting. Ukraine has a large informal sector of income. The time costs are highest in the that makes it hard to find any indicator that work fare schemes. Care must be taken, would provide an accurate measure of however, to assure that the work time required household income and consumption level. is limited so that participants are not locked into Official information on individual household the welfare scheme-they must be given income rarely reflects the real wellbeing of the adequate time to search for regular employment. family and thus their need for government In fact, the program should be designed to assist support. In providing social services and participants in the job search process. The benefits it is possible to use three broad classes program may even include a training of targeting mechanisms. component, though this is usually best done in Individual assessment mechanisms. This cooperation with potential private sector mechanism requires that program managers employers. make decisions based on the eligibility of Based on the above, it is clear that self-targeting individual applicants. Examples of individual should be pursued wherever possible in assessments options in Ukraine are mean tests designing social assistance programs in Ukraine, (in housing subsidy program and some family for they involve the lowest administrative costs, childcare assistance programs the eligibility leaving more resources available to help the criteria is household income that is below the poor, and they are least subject to abuse and corruption. Can Ukraine Achieve Growth-and Social Equity? 75 Fragmented and overlapping programs. As part these programs at the subnational level has of its efforts to establish a market economy, the mainly contributed to the buildup of arrears. In Ukrainian government has moved the social 1998 arrears at local level on education, health protection system away from the provision of and social protection funding were 90, 61 and non targeted subsidies for foods and services to 44 percent of total arrears on these programs targeted programs for groups with low incomes respectively. or specific needs. Programs have developed in a The fragmentation and duplication of programs haphazard way and as a continuation of the pre- haphardwayand s aconinutionof he re- and the use of different targeting approaches can transition tradition of privileges. As a result the lad t of ifcant ter in clus an current system is fragmented in its approaches exclusin izing e ffecin of C exclusion, jeopardizing the effectiveness of to targeting, financing, and administration. programs in reaching the needy. It can also Different programs use the family, the reduce overall efficiency in using scarce social individual, or the household as the unit of protection resources. Fragmentation and assistance. Programs differ in the eligibility duplication also appear to keep administrative criteria they use in certifying individual needs costs higher than necessary. The complexity of based on circumstances such as disability, old program financing makes it difficult for the age, having a child, single parenthood, or government to analyze and plan the use of household income (the housing benefit). Some scarce resources. The inadequately defined programs simply follow the political logic of division of responsibilities between local and providing additional assistance to privileged central governments in areas such as defining groups such as war veterans. This fragmentation eligibility and financing and administering of targeting approaches is compounded by a assistance programs has resulted in maintaining similarly fragmented administration of unfunded mandates and entitlements to programs. Programs are administered by a assistance (arrears on payments), leaving variety of governmental and non-governmental vulnerable populations without assistance and agencies-including central government diminishing confidence in the ability of the institutions, employers, local social protection system to deliver on its promises. offices, and local authorities. The social assistance system should be Weak and fragmented financing. Social restructured in a way that ensures effective assistance programs are financed from a variety programs and efficient use of scarce funds. This of sources. For example, pension supplements to goal could be achieved by consolidating pensioners with low pension levels or with programs, introducing unified targeting special personal circumstances are paid out of approaches, and streamlining financing and the Pension Fund. Special central funds, such as administration responsibilities. A unified the Chernobyl Fund, pay benefits under some targeting approach could use a guaranteed programs. Other programs are entirely or partly minimum income to define program eligibility. financed out of local budgets. Data show that in The unit of assessment could be the family or aggregate, while poverty has been increasing, the household, and the guaranteed income could social protection spending has suffered a harder be differentiated for household or family size hit during the economic crisis than consolidated and structure and for additional needs stemming government expenditures as a whole, dropping from specific family or household circumstances from 14 percent in 1995 to 10 percent in 1998 (single parenthood, disability). In developing of the total expenditures. such a program and defining benefit levels, In addition, a comparison of oblast expenditure careful consideration should be given to work on social protection, health, and education incentives. Work already done to create a during 1992-98 shows that the largest means-tested, household-based assistance fluctuations have occurred in social protection program for housing costs provides an excellent foundation for further work. (e.g. PADCO expenditures, indicating the uncertainty and 1999). unpredictability of social protection funding. In 1 general the lack of stability of financing for 76 Chapter 4 5. RESTORING GROWTH AND LIVING STANDARDS Restoring living standards in Ukraine will be a exhausted the patience of its creditors, the major challenge. Complex structural reforms are government would find it almost impossible to needed to create a business climate favorable to borrow domestically or abroad, and enterprises investment. Perhaps even more important, such would face extreme shortages and high costs for investment must be used efficiently. fixed and working capital. Under such circumstances, sharp declines in living standards Increasing investment from domestic and would be inevitable-and could easily lead to foreign sources will require raising returns and socl conit reducing risks. Many countries, including Ukraine, have tried to increase investor profitability through tax holidays and direct UH NVGSTEN subsidies, but such policies are not sustainable and can easily make the investment climate Official national accounts statistics indicate worse. A far more effective and sustainable gross investment rates of 25-35 percent of GDP strategy is to remove distortions that artificially during 1989-95, with a drop to 18 percent in inflate the cost of critical inputs (capital, labor, 1997. While well below the 35-40 percent seen materials) and that reduce the effective selling in East Asia before the 1997 crisis, these rates price of outputs. This would stimulate increased are similar to those for other middle income private sector investment in the "best" areas- countries. The combination of modest but those with the greatest potential for efficient sustained investment and continued economic competitive production. decline indicate that Ukraine's problems lie not Equally important are policies that minimize the in the level of investment, but in its nature and risks facing investors. The government should efficiency. avoid using loan guarantees or other During 1993-94, a large share of available mechanisms which only compensate for capital went into the accumulation of commercial risks. Such policies increase moral inventories that could not be sold, raising the hazard, encouraging enterprises to undertake annual share of inventories to more than 10 risky investments that they would otherwise percent of GDP and significantly lowering the avoid. Total risk actually increases. Instead, share of fixed capital formation in total government can and should reduce specific risks investment. Even so, fixed capital formation did such as frequent changes in the tax code, not fall as much as might have been expected in unclear property rights, costly and inconsistent a highly inflationary environment. Nor do the regulations, lack of juridical enforcement of substantial rates of investment seem consistent contracts, and lack of adequate protection from with the continuing economic decline since extortion and other Mafia activities, then. If Ukraine can design and implement the The disconnect between reported investment policies needed to increase the volume and and economic decline is perhaps because efficiency of investment, prospects for restoring investment is captured more accurately than growth are excellent. But if the government output, and output is relatively underreported. retains its current intrusive role in production, Authorities can track the import of capital lets deficits return to higher levels, finances the equipment and other large-scale purchases for deficits through increased borrowing, and investment more easily than output, much of begins printing money in a doomed effort to which is hidden in the shadow economy. In stimulate growth, it might achieve a year or two addition, investment may be overstated in of positive growth-but a crisis situation would enterprise accounts to increase reported costs, quickly return. Another crisis would be far thus reducing taxable profits. But even after all worse than the one of late 1998. Having the necessary statistical adjustments are made, Restoring Growth and Living Standards 77 an obvious question remains: if investment has percent of the output in these years was been relatively high in Ukraine, why is the produced "for the warehouse." economy still shrinking? The investment puzzle has several solutions. Figure 5.1 The Soviet system collapsed because First, the enterprises that Ukraine inherited from ofgross inefficiency in using capital the Soviet era were heavily decapitalized. Second, much of the capital stock that was still Investment and Rates of functioning was designed for a world that no Return in Soviet Industry longer exists. Third, policies do not foster efficient production. Percent 3 5 -1 --- - " - - - - - - - - -- , - - Massive decapitalization during Investment 30lihru the Soviet era share of GDP 25 Ukraine inherited an impressive capital stock 20 from the former Soviet Union. But capital 15 productivity in the Soviet Union began Return on declining steadily in the 1950s and by the 1970s investment was close to zero (figure 5.1). Capital productivity in Ukraine followed a similar trend, and by the time of independence Ukrainian 1950 1960 1970 1980 farms and factories were economically decapitalized even though they had a fairly large physical stock of capital. The modest investment that has taken place since Figure 5.2 Trade dependence on Russia has independence has not been enough to reverse a ropped significantly since independence generation of effective decapitalization. Shares of Russia and CIS Countries in Existing capital stock was forUkannExotofGds a difernt wrldUkrainian Exports of Goods, a different world 1992-1998 (percent) Even the capital stock in place at independence so was designed for a world that disappeared with the Soviet Union. The low-price energy of the 50 - Soviet era vanished, making energy-intensive farms and factories uneconomical to operate. 40 Changing the energy efficiency of an entire production system requires a far higher rate of 2 30 investment than is required simply to replace worn-out capital. Investment has fallen far short 20 of the required levels, leaving Ukrainian goods costly because they are energy inefficient and 1011- uncompetitive in all but basic raw and intermediate materials - and a few exceptional 0 1992 1993 1994 1995 1996 1997 1998 products such as weapons. uCIS NRussia Ukraine's traditional export markets collapsed _CIS -Rusia along with the Soviet Union (figure 5.2). Partly Source: Ministry of Statistics. because of the energy intensity of its Soviet-era factories-but also because these factories could Ukraine is still struggling to retool its factories. not produce modern goods-Ukraine was It needs to emulate the successful economies of unable to redirect its output to other markets, Central Europe and the Baltics in improving the especially to the European Union. Output physical and operational efficiency of its plummeted in 1993-94, and more than 10 enterprises so that it can increase its production 78 Chapter 5 and export of high-quality, high-profit products Limited foreign investment in Ukraine, in fact, to rich markets in Europe and the rest of the helps account for its continued economic world. Progress has been made in redirecting decline (figure 5.3). markets. As seen in figure 5.2, the share of Ukrainian exports going to markets outside Figure 5.3 Foreign direct investment in Russia jumped from about 60 percent in 1992 to Ukraine is low relative to other countries nearly 80 percent in 1997, with comparable reductions in the share going to Russia and other Cumulative FDI-inflows 1989-97 members of the CIS. per capita in USD But more progress is needed if Ukraine is to Hungary become a truly prosperous country. Otherwise a czech Republic major share of its industrial goods will be low- n Estonia profit products-like basic iron and steel and Slovenia basic chemicals-many of which are shipped to low-profit markets like Russia, often on a barter Kazakhstan basis. This is a trap-the low profits from these Poland products and markets make it difficult for Croatia Ukrainian producers to finance the investments Slovak Republic needed to break into larger, more profitable Bulgaria F markets. Georgia Ukraine needs to increase not only the quantity Russia but also the quality of investment. The number Ukraine 40: of dollars or hryvnias spent is a misleading Belarus measure of investment unless the capital is invested in ways that maximize the efficiency and rate of return on investment. The quality Source: Government data and World Bank estimates. and marketability of the goods produced by the investment is vitally important. Ukraine needs The importance of investment, including the to attract technology and design skills, strong role of foreign direct investment, brings production methods, plant management us to the focus of the rest of this chapter-the techniques and marketing expertise, and access measures that Ukraine must take to create an to foreign markets. investment climate that will attract much higher foreign and domestic investment. What the The need for policies that balance average investor seeks in an investment climate returns and risks is very simple-the highest possible returns Global experience shows that the best way to with the lowest possible risks. Ukraine's task is gain all these ingredients vital for the efficient therefore very straightforward-maximize production of high-quality, internationally living standards by creating a more productive competitive goods is to attract foreign direct economic environment that stimulates investment. A strong correlation exists between investment and growth. economic growth and foreign direct investment. LOWER COSTS MEAN HIGHER RETURNS Although Russia is one of the largest markets in the Some countries try to increase investment world from a geographic perspective, it is relatively small returns by providing tax holidays and even from an economic perspective, with a total 1995 GDP direct subsidies to investors. But this approach smaller than that of the Netherlands. In terms of per capita i . income, and thus ability to purchase higher-quality, higher- 1s dangerous because it involves high fiscal risk. profit goods, Russia ranks on par with Belize and Costa The revenue losses and budgetary expenditures Rica based on 1997 World Bank data. Furthermore, are usually up-front costs-while the returns (in Russia's geographic dispersion increases both selling and the form of higher tax revenues) may never transport costs, further reducing its profitability as a com Investo r a oftenus oad hoc market. come. Investors are often suspicious of ad hoc Restoring Growth and Living Standards 79 subsidies because these can be taken away as The cost of capital is an obvious problem for easily as they are given. The removal of special domestic producers. But three closely related privileges for foreign investors in Ukraine in problems arise for foreign investors as well. 1997 shows how easily this can happen. First, although foreign investors usually bring in e rsubstantial amounts of reasonably priced capital The recent decision to establish "free economic frmara,ms.losekt iac ato zone" inUkrine s anthe exaple f a from abroad, most also seek to fmnance part of zone" i Ukain isanoter xamle f a their domestic costs with local currency to policy based on tax privileges that fails to rdec chan e cesinrks Hh address the underlying problems of greatest g. ig domestic interest rates make such financing concern to investors. Furthermore, the zones jeopardize the government's revenue base, imssible.lSe alre sre of orei placing an even heavier tax burden on all the ivsmnsivlesm omo atesi episanves thea ier do tax r e te sall with a local investor. High local interest rates privilees tmake it extremely difficult to find a local investors who are able to finance their share of A far safer and more effective approach would the deal at a reasonable cost. Third, high interest be to take steps that, by removing market rates are almost always a sign of potential or distortions, reduce the costs of inputs for actual financial and economic instability- producers. The most important costs for any driving away investors. investor are capital, labor, domestic material - -To lower the cost of capital, the government inputs, imported inputs, infrastructure services (such as public utilities), and government needs to eliminate its budget deficit, pay services (most of which are paid through taxes). obligations on time, stop running up arrears, Most of these key inputs cost more than is repay or restructure the most costly portions of economically warranted in Ukraine today. its debt, and establish a strong record of economic reforms. It is especially important for Capital costs Ukraine to take the measures needed to restore The extraordinarily high cost of capital in and enhance the flow of funds from the IMF. Ukraine is the key factor driving up costs and This move will make it easier for the World discouraging investment. This high cost is the Bank and the European Bank for Reconstruction direct result of excessive government deficits, and Development to provide financing for small which have had to be financed on highly and medium-size enterprise development, unfavorable terms because, with faltering financial sector development, and activities that economic reforms, Ukraine has not had full increase the overall productivity of investment access to credit from international financial and of workers. Efforts are also needed to gain institutions (including the IMF and the World access to the full facilities of IFC and the Bank). Credit from these institutions would Multilateral Investment Guarantee Association have been available at a fraction of the interest (MIGA), both of which are designed to rates and for maturity periods at least 10-20 encourage foreign investment in countries like times longer than the short-term t-bill debt used Ukraine. The ratification of the establishment instead to finance government deficits. agreement with IFC was a most welcome development in this respect. The extraordinarily high cost of capital has been examined in earlier sections of this report. Real Labor costs interest rates that still exceed 50 percent a year Dollar wages in Ukraine have risen sharply make investment impossible not only for since independence when trading relations domestic investors, but for foreign investors as collapsed and the dollar became highly priced well. Investors in Ukraine must compete both in relative to the domestic currency (figure 5.4). export markets and with imports in the domestic With the devaluation of about 45 percent market. The foreign producers of these goods between early 1998 and April 1999, the upward generally pay, at most, 5-10 percent in real trend in wages has been arrested, and wages are terms for their capital. now slightly more competitive. Direct labor costs have been competitive relative to real 80 Chapter 5 wages in neighboring countries in Central * For some enterprises, maintaining social Europe. These wage rates should make a variety assets such as day-care centers, clinics, of products internationally competitive. "Give housing, and resort facilities is a substantial and take" contract manufacturing operations indirect cost of labor. In most cases such such as the sewing and export of garments based social assets should be put on a cost on imported materials should also be as recovery basis and turned over to municipal profitable for Ukraine as it has been for a governments, NGOs, or the private sector. number of other countries in the region. Still, Domestic materials and services several problems need to be addressed: The monetary cost of domestic inputs generally does not seem to be a barrier to achieving good Figure 5.4 Dollar wages have risen sharply, but returns on investments in Ukraine. Producers devaluation will make them more competitive generally face domestic competition, and Dollar wage (USD/month) average tariffs are still relatively low. But the low quality of many locally produced inputs so creates high costs for domestic producers. And 80 - - in the longer term, investors' biggest concern is that Ukraine may pursue an increasingly 70 protectionist strategy, creating sharply higher costs for the protected domestic goods needed 60- -- - as inputs. g 0 - --- ---m-- Imported materials 40 - The direct cost of imported materials is not a barrier to investors because average tariffs are 30 still quite low-about 15 percent 20 - - - -(Michaely/Movchan 1998). In fact, some investors (such as Daewoo/AvtoZAZ) enjoy 10 --- -- - - duty-free imports, creating undesirable distortions. On the other hand, if current M E M protectionist tendencies develop further, the M U, V 0 ( t- r c 0 0 high cost of imported goods is likely to become a barrier to investment. Source: UEPLAC, Ukrainian Economic Trends. Of greater concern are the indirect costs that distort the real price of imported goods, discouraging investment activity. In early 1999 * Regulations and political pressures for the biggest problem was obtaining foreign enterprise-financed severance obligations exchange for purchasing materials. In a force firms to retain unnecessarily large continuing effort to artificially support the work forces, and can quickly offset the exchange rate, the government imposed a range advantages of low individual wage rates, of administrative controls for access to foreign making investment unprofitable. The exchange. Another cost-raising barrier to government should establish an adequate imports is the government's quality and social safety net, then remove most standards inspection system. Ukraine generally limitations on the release of workers (see does not accept goods just because they meet, chapter 4). for example, European standards-and insists * Payroll taxes, currently equal to 37.5 on subjecting even products widely sold in percent of the payroll, need to be reduced to Europe to its own costly laboratory inspections. make the employment of workers more The fees, reportedly up to $250,000 for one attractive (see chapter 2). widely reported case involving standard household cleaning products, seem designed to Restoring Growth and Living Standards 81 cover more than the cost of inspection, and the * Transportation Transportation costs in delays are costly. Similar problems arise with Ukraine are higher than they should be not the customs service. All these barriers to only because of physical inefficiencies, but imports and the opportunities they create for also because of problems in policies, corruption are also barriers to the investment so especially those related to delays in border urgently needed for restoring growth. Fixing crossings. Noncompetitive transportation these problems would not require significant costs deter investment, especially for time or money-it is basically a matter of export-oriented projects-the kind of political will. projects that should be of highest priority to One approach that has worked well in other Ukraine. countries such as Indonesia is to put customs Government services and quality inspection on a commercial basis, Including government services as an input to engaging one of the world's private companies production and treating them as a factor of that offer pre-shipment inspection services. Once goods have passed quality certification by conventional. But this approach is entirely the inspection company at the point of origin, they are automatically cleared in the country of appropriate. In market economies, governments inspection play a critical role in assuring efficient, destnatin. Te pr-shimentprofitable production and low risks. For company also handles all customs revenues, exale proidla and order, example, governments provide law and order, passing them directly to the national treasury. In othe contres te icresedcustms eveues register contracts and third-party claims, enforce other countries the increased customs revenues thrueofhegmtruhefcivcuts the rules of the game through effective courts, that result from reduced corruption have more and run programs for health, education, and than paid for these services. transport that are vitally important to workers, Infrastructure services their families, and their employers. Several potential and actual barriers to Enterprises pay for most of these services investment exist in public utilities and other through taxes, and the tax cost of these inputs is infrastructure services. an important factor in deciding whether to invest. Serious problems exist on this front in Ukraine that serve as a major deterrent to more than the economic cost for energy investors: supplies as a result of government efforts to cross-subsidize households. With the * Many services are of low quality. For support of World Bank energy loans, example, small and medium-size Ukraine has made commitments to correct entrepreneurs often fall prey to protection the pricing and cost recovery problems in rackets because the government is not the energy sector. But progress has been providing an adequate system of law and slow. order. In addition, contract enforcement * Telecommunications. This sector is still services, including bankruptcy proceedings, relatively underdeveloped in terms of are unsatisfactory. coverage and service quality. Poor * Services cost too much, as measured by the communications services significantly taxes that must be paid to obtain them. The increase costs to investors. But there is a problems of high tax rates, large bright side. The telecom sector could be one government structures, and a small tax base of the most promising sectors for because of the large shadow economy were privatization and investment once the discussed in chapter 2. government establishes an appropriate policy framework for the privatization and * The regulatory burden is excessive. subsequent operation of the national Regulatory provisions are numerous and telephone system. nontransparent. Too many inspectors administer flawed rules and regulations in 82 Chapter 5 an ad hoc manner. Complying with create a strong incentive for enterprises to stay regulators costs time and money, both small and hide in the shadows so that they do directly and in the form of bribes. All these not become attractive targets for Mafia thugs. costs discourage investment (again, see But staying small reduces economic growth, and chapter 2). enterprises that hide in the shadows create fiscal Fixing these problems should be a top priority problems for the government. They depend on for the government in its search for investment government services but do not contribute to the and renewed economic growth. cost of providing them. Much needs to be done to create better law and order if Ukraine wants an environment in which competitive activity flourishes and generates higher living standards. Much can be done in Ukraine to improve returns to investors by implementing the measures just noted. But it is not just low returns that keep The problems of law and order in Ukraine with away investors. In fact, rewards to investing in respect to criminal activity will be left to studies Ukraine can be high, especially for enterprises by experts in that field. This report, however, operating in the shadow economy. But so can must highlight the need for better law and order the risks. The government has the power to in civil and commercial law, especially in the reduce these risks in concrete, sustainable ways. enforcement of contracts. Failure to honor contracts destroys the foundations of a market Government guaranteed loans are not the wayt economy-and of society. Widespread failure to reduce risks. Such guarantees are dangerous, as horcntasisne ftemsteou the Ukrainian government is now learning. Guarantees create a serious risk that budget complaints of investors about the local business climate. As highlighted by the large and resources may have to be used cover the Z repayment of tens of millions of dollars of growing stock of inter-enterprise arrears in loans. Guarantees do not reduce risk-they Ukraine, the failure of contracting parties to simply shift risk from the enterprise to the deliver and pay according to contract is the most government. In fact, because guarantees create frequent problem. Inter-enterprise arrears, for moral hazard that encourages enterprises to example, amount to 85 percent of GDP, up from assume more risk than they otherwise would, 65 percent in 1996 and much higher than is state guarantees for loans can actually increase typical for well-functioning market economies. etotal amount of risk and thus the danger of a By focusing on the resolution of conflicts rather e . . . than the enforcement of contracts, the court new financial crisis... system is biased against those who stand to lose Real, sustainable risk reduction must instead when contracts are not carried out as written. come through measures that fundamentally This problem is driving away millions of dollars change the level of risk. These measures include of potential investment that could give average establishing basic law and order, judicial Ukrainians a better life. enforcement of contracts, a transparent and The actual frequency of bankruptcy may be low, predictable legal framework, clear property but all enterprise owners and managers should rights, and a level playing field. feel that, if they do not honor contracts for Basic law and order delivery and payment, the other party could take In an environment of lawlessness and them to court, where they could lose ownership criminality, the enterprises most likely to thrive of their assets. Ukraine needs to complete the reform of its bankruptcy law and improve the are lawless andcriminal-ardl The kind ta institutional framework of economic courts to Ukraine wants to encourage. The emergenceo handle arbitration and bankruptcy. Abundant a large shadow economy and the associated tehiaassaneasbnprvddote Mafia-type activities--including protection tehiaassaneasbnprvddote afiatypextativi,ties-inldien prtetn legal front, and a good draft law is available. raket extdfor thoeft anee m de Time will be required to develop an institutional makeit hrd or hnes busneses t be network sufficient to handle a large number of successful. In fact, these law and order problems Restoring Growth and Living Standards 83 bankruptcy cases, but technical assistance could degree to which the inspector selects and readily be mobilized to asset in this process as interprets the legislation in a manner favorable well. Furthermore, only a fraction of the to the investor may depend on how much of the "bankrupt" firms would actually have to be resulting tax savings are shared with the taken into court. Faced with a credible threat of inspector. The process is predictable, but the bankruptcy, most firms would almost certainly results are not. find a way to solve their problems. Once it has The lack of equity in current laws also creates created a credible threat of bankruptcy, Ukraine risks for investors and distortions in the can begin the second phase of transition- allocation of investment resources. The biggest moving from the transfer of ownership from polmi a ocsin.Teeeepin public to private hands to the consolidation of problem is tax concessions. These exemptions publric toprat consrolneededfoleffective and privileged rates, which can be granted (and ownership and control needed for removed) on an ad hoc basis, make the tax enterprise management. system highly inequitable and create serious A transparent and predictable risks for investors, both directly and indirectly. legal framework Directly, an investor may invest on the basis of . . . various tax concessions, then, after the money t mhas been locked up in fixed assets, discover that is that the rules of the game are not clear. Less than a decade ago, Ukraine did not have its own t destroying the profitability of the investments. laws, and many of the laws that it inherited from dl the Soviet era worked against the development Indirectly, the investor may be harmed if a local of a normally functioning market-based competitor is given tax concessions and he or Ukraine she is not. This is a particular risk for enterprises me reetdayferen t cl lga s of competing in the same line of business with make repeated reference to the legal codes of la'est-ondnerie. the Soviet Union. The process of changing these laws has created great confusion, increasing Efforts to clarify conflicting tax laws and costs and risk for investors. regulations, remove special concessions, and of civil, commercial, establish a transparent, predictable, and Forml coifictionequitable tax code are under way. Many criminal, and tax law has not been completed, dnin cd treEurop a Ui n making it difficult to assure consistency. The UoS.rAgencyfrinte Deop mnt, and hast wit whch lws ave eenwriten- U.S. Agency for International Development, and the World Bank-are assisting. If done well, the combined with the lack of well-established procedures, the shortage of good law libraries, resulting tax code will greatly reduce risk by ncreasing transparency and predictability, and and the dearth of people trained in this work- by rdcn. euaoy dsrto n has produced a jumble of often contradictory b legislation. The absence of a system for cruption-stimulating investment and economic growth. publishing court decisions in a legal gazette further complicates the jobs of lawyers, judges, Property rights, privatization, and investors who are trying to understand how and enterprise reform written laws should be interpreted. The lack of clear property rights in Ukraine also Contradictions and lack of transparency in the creates an unnecessarily high level of risk for legal environment create serious risks for investors, both directly and indirectly. Directly, investors. If those in charge of drafting the most serious problems lie with the legislation cannot create a consistent set of privatization process. Small enterprises in trade rules, investors have no way of knowing how and manufacturing face many potential threats the rules will apply. One of the biggest problem to their ownership rights because of the poorly areas is taxation. Tax legislation has become an defined and often intrusive regulatory and tax impenetrable briar patch of contradictions system. But the most serious problems arise waiting to snag the unsuspecting with medium-size and large manufacturing businessperson. The only guide-and often the enterprises, public utilities, and agrarian final authority-is the tax inspector. But the enterprises. 84 Chapter 5 Small enterprises. The privatization of small who are redundant and lack modern enterprises (largely shops) has gone well and is management skills-it is difficult for this considered complete. Real owners have been relatively close community of "owners" to fire created in almost all cases, and many small, themselves. It is much easier for them to privatized enterprises are now thriving. In continue trying to operate the enterprises with agriculture, a large number of Ukrainian the full complement of workers, staying afloat families own "dacha plots"-small plots of with special concessions from the government land, usually in rural areas and often associated and banks, and by running up arrears on taxes, with a small cottage or dacha, where a loans, wages, and supplier credits. significant share of household vegetables and fruits are grown, especially among low-income families. Some family farms have also been Figure 5.5 Wood Index ofshare values created, but here success has been more limited. Wood-15 Index And as discussed in chapter 3, most "private" land is still held collectively without individual 3,000 titles, creating serious issues of ownership. Medium-size and large enterprises. The 2,500 privatization of medium-size and large 2,000 - -- -- enterprises (and farmland) has involved significant ownership problems. Enterprise 1,500,50- privatization has depended on certificate privatization, which allowed individuals to purchase shares in enterprises using certificates 500 that were distributed to all Ukrainian citizens, who were compensated for the value of savings 0 lost during the hyperinflation of 1992-93. This o e so q CP 'e i process effectively transferred legal ownership . & 4 e . of the majority of shares in more than 8,000-or nearly 80 percent of-medium-size and large Source: Wood/Eastem Economist. enterprises in this group. But certificate privatization has not created Solving this problem will not be easy. But it is effective owners in the sense of individuals or crucial to establishing a productive, growing small group of individuals who can actually economy where investors can become real assert control over enterprise operations. The owners-owners who are free to manage expected consolidation of ownership through enterprises to maximize profitability. At the sales of certificates and shares in the secondary sectoral and enterprise levels, the most market has not taken place-a reflection in large important strategy will be for the government to measure of the unfavorable investment climate impose a hard budget constraint on all that has discouraged investments of all kinds, enterprises, regardless of sector, location, or both direct and in portfolio ownership. The ownership. As has been seen in Estonia and depth of malaise in the local investment scene is Hungary, enterprises faced with a true hard shown by the local stock market value index budget constraint: (figure 5.5). Without "real" owners, enterprises * Lease or sell unused or underutilized have tended to remain under the control of the buildings, equipment and land old "Red directors" and employees of these enterprises. * Buy out worker shares. Because many of the enterprises that have been * Find new investment partners, domestic or privatized through the certificate process remain foreign. under the control of enterprise managers and * Develop new designs, products, markets, workers from the Soviet era-including many and management techniques. Restoring Growth and Living Standards 85 * Invest in more efficient production Such privatization should at the same time be equipment and technologies. done very carefully. Experience in Russia, with Nigeria, and many other countries demonstrates rdutin st i ees n cien. that hasty privatizations done without due attention to best-practice standards open the In addition, although the privatization of small door to rampant corruption, making it possible and medium-size enterprises that were once for privileged insiders to grab valuable public state-owned is well advanced, Ukraine lags assets at little or no cost. Depending on local behind comparable and more advanced conditions, a variety of different techniques can countries in terms of developing new small and assure good privatization, but privatizing large- medium-size enterprises. This reflects the scale enterprises will almost involve: (a) adverse climate that small and medium-size advertising the privatization offerings as widely enterprises face in terms of burdensome taxes as possible, both internationally and and regulations, lack of predictability and domestically, to assure that the best potential transparency in laws, and inadequate investors are aware of the possibilities and enforcement of contracts. The numbers of small openly compete for the enterprises, (b) and medium-sized enterprises in Ukraine are preparation of detailed information on the almost certainly understated because many hide companies to be privatized, (c) making this in the shadows, escaping not only taxation but information readily to all seriously interested even registration. But even if the total was investors, (d) allowing interested parties do doubled or tripled, it would still be clear that come in and do their own "due diligence" on the Ukraine is missing a major opportunity to enterprises, and (e) assuring that the bid expand employment and output by not creating evaluation and award process is as fully an environment that stimulates the development transparent and equitable as possible. of small and medium-size enterprises. These measures greatly reduce the risk that The giants. The process of transferring corruption will rob the country of benefits that it ownership from public to private hands for the should have received from the privatization large enterprises-the country's crown jewels- process. They will also reduce the risk of a has barely begun. Of an estimated 277 public backlash in response to perceived enterprises with assets exceeding 170 million corruption that could lead to the re- hryvnias, about half have minority private nationalization of certain enterprises. Such participation, often in the form of workers and might be justified in the case of serious managers. But it appears that none of these has corruption or incompetence of the process, but been successfully privatized to a depth of at such actions seriously undermine investor least 70 percent. confidence and interest in future privatizations. It is also desirable to fix at least the most serious F tdefects in the business climate prior to the sale investment climate and attracting large-scale of the "crown jewels," thus increasing the foreign investment, priority should be given to 41, t,probability that the best investors will come privatizing the giants-most of which are in the C, forward and bid. metal, machine building, and chemicals sectors. This situation reflects major problems-and Ukraine is making progress in establishing the major opportunities. These large enterprises rules of the game for large scale privatization- account for a substantial share of all employees a process that needs to take place largely on a in public enterprises and the majority of capital competitive, case-by-case basis with a single (as measured by book value). The stakes for lead investor or consortium of investors winning privatization are therefore high, both for the competition and taking a controlling interest. workers and for the economy. Given the key Internationally acceptable procedures for role of these enterprises in the economic and selecting the adviser that will conduct each trade social life of Ukraine, it is important that the sale have been developed for Ukraine. The list much-delayed privatization be launched as of enterprises subject to trade sale privatization quickly as possible. is known, and priorities have been established, 86 Chapter 5 with the highest priority going to the directly or indirectly controls much of the privatization of UkrTelcom, the national activity in both agriculture and industry. telephone company, and to the regional (oblast- Because the government directly controls the level) electricity distribution companies (the t ,, 2 ~assets of the "giants," private investment in oblenergos).~ subsectors dominated these enterprises is more A substantial portion of the shares of electricity risky. By privatizing its interests, the distribution companies have already been government would gain, receiving privatization diffused to private holders through certificate proceeds and reducing its fiscal responsibility auctions and similar measures, and this will for supporting these enterprises. It would also make it harder for lead investors to attain a gain because such privatization would level the controlling interest-something that most playing field, making it interesting for other serious investors will insist on. Because the enterprises to begin operating in these sectors. government has declared its intention to retain a This would increase the government's tax base, minority blocking position (25 percent of shares raise living standards, and reduce social plus one share) to give it a veto on any major protection payments. decisions of the private owners, many of these Government exit from the giants would also enterprises, particularly the electricity stimulate investment in new small and medium- companies, will likely be relatively unattractive size enterprises that would serve as suppliers to to private investors. Thus it is important to the giants. In industrial countries small and move forward with trade sale privatizations medium-size enterprises are by far the most before even more enterprises find their dynamic source of new jobs and job growth- shareholdings diluted to the point that they are but especially in the manufacturing sector, many no longer attractive to serious investors, of these enterprises depend on profitable, large- A level playing field scale enterprises as customers for their products. Conversely, small and medium-size enterprises The problems that a distorted playing field can oneend on e drg e enterprises create for enterprise profitability and returns on mterialpin Bu these s n d m e investments were discussed above. An uneven mtra nus u hs ml n eim invetmets wre iscssedaboe. A unven size enterprises cannot be healthy if the large- playing field also increases risks for investors, particularly when competition from other scale enterprises on which they depend for sales domestic producers is involved, or inputs are sick. Restoring the giants of Ukraine to health through privatization and The presence of government as an active restructuring is thus vital to the economic producer creates risks for private competitors success of the small and medium-size who generally cannot depend on the government enterprises where most of the jobs will be for fiscal and financial concessions that will created to absorb redundant workers from help them compete if they are too inefficient to overstaffed public enterprises. compete on their own. Although Ukraine may Indirect government control comes not only have privatized more than 80 percent of from its powers of taxation and regulation, but industrial enterprises, and close to 100 percentg of agricultural enterprises, the governmentrst also through its ownership of enterprises that play an important role in the life of private enterprises. On numerous occasions Ukrainian government, often at the sub-national level, has 2 Unfortunately, on 15 December 1998 Parliament rejected used its control over vital inputs and outputs to the government's draft law that would have launched reduce the profitability of individual farms and privatization of UkrTelcom, saying that it would transfer the rents to the state-or to individuals undermine the nation's economic security. A compromise approach involving stage-wise privatization looks possible, operating under the umbrella of the state. Until but it seems doubtful that serious lead investors willing not the risk of such state intervention is removed-a only to purchase shares but also to make major new key objective of the World Bank's proposed investments of their own funds would be attracted to a Pre-Export Guarantee Facility project-private company where control still rested firmly with the government. investment in the potentially rich and productive Restoring Growth and Living Standards 87 agricultural sector will remain too risky to with which these reforms will yield higher attract any but a few intrepid investors. living standards. The path chosen by Ukraine Unfortunately, this project was rejected by for future growth will almost certainly involve Parliament in December 1998. elements from each of these three strategic The principle of establishing a level playing options. The country will probably chose to u bsacrifice competitiveness and growth in certain poel indulstrbeial udeelopment.meOn f te areas to preserve specific elements of the status brootestknownduexiapleso in. i e pacge quo for cultural and political reasons. It may oiest-knonextomhes p ngrar istry. Inckae protect certain activities from the full force of of incentives to the passenger car industry. In cmeiintdyi oe htteeatvte addition to being potentially costly to the budget Z1 may become internationally competitive and to consumers, these preferential tax m bomp measures distort investment incentives, drawing investment resources into lines of production But there can be no doubt regarding the that may be competitive only if given necessary direction. The policy compass must exceptional tax treatment, or creating point to a competitive future for Ukraine. opportunities for artificially high private profits This final section of the report quantifies the (rents) at the expense of the public in areas were results that could be attained with different rates Ukraine can be competitive. In the absence of of reform and progress towards the goal of such a policy-induced bias, investment would establishing a competitive economy as well almost certainly go into lines of activity-such as production of vehicle components-where as the consequences of deviating from this low-wage, high-skill countries like Ukraine can strategic goal. be highly competitive. The actual pace of reform described in this report must be decided by the people of PROSPECTS FOR ECONoMIC REFORM Ukraine., and this will become the main determinant of whether Ukraine follows an Ukrane fces a chice etwen tree optimistic High Case or a Base Case Scenario. fundamentally different economic strategies for t fisc and or polie ise as the future. First, it could seek to preserve the "esental refom neprevioces mst b status quo, as is being done in Belarus. Second, implemented rigorously under either scenario. it could try to protect domestic producers from international competition with high external stability are attained, the exact pace of reform tariffs and other barriers to trade, as was done ant oe nmi th canpbe a mero throghot LtinAmeica n te 160sand and thus of economic growth can be a matter of throughout Latin America in the 1960s and pltcljdmn.A oeeg ain 4-- political judgment. As a sovereign nation, 1970s. Finally, it could undertake the structural ' refoms utlied n tis rpor to reae a Ukraine must decide where to strike the balance reforms outlined in this report to create a between the desire to avoid change and the vibrant, market-based economy that can deiefrhhrino.Teuosofts compte ntenatinaly-tkingcar atthe desire for higher income. The purpose of this compete internationally-taking care at theg section is simply to quantify some of these same time to ensure that low-income groups are ipctions so to poiy sionstcan protcte bya gvermenttha fouse no on implications so that good policy decisions can t bbe made based on a full analysis of the probable business but on people. consequences of the two high case alternatives. Those who have collaborated in preparing this The following projections provide a strong case report-including professional analysts from the for an immediate acceleration in the pace of government, from a leading Ukrainian NGO, reforms-almost a shock treatment like Estonia and from the World Bank-strongly agree that and Poland used to get the sharply higher living the competitiveness approach is the only one standards that they are enjoying today. If nearly capable of producing the permanently rising all of the structural reforms examined in this living standards that are desired by all alo h tutrlrfrseaie nti livinisandrard ess tha ae eird btal study were implemented with the next 12-18 Ukrainians, regardless of their political months, Ukraine could possibly attain the affiliation. Questions may arise regarding the growth rates shown in the high-case scenario sequencing, the feasible pace, and the speed below-and thus the growth rates targeted in the 88 Chapter 5 government's program through 2010. The Base Thailand, and Solomon Islands) operated under Case Scenario quantified below assumes a special circumstances, and in several cases the slower pace of reform with correspondingly less growth proved to have been built on weak favorable results. Finally, the Low Case foundations. assumes that macroeconomic and structural reforms move seriously off track, with grave Figure 5.6 Few countries grow by more than consequences to economic growth and living ive percent a year over a sustained period standards. Actual Average Growth The High Case1961-96 In its Program Ukraine-2010, the government sets as a goal the doubling of 1997 per capita 70% GDP by 2010. Prospects for significant growth 60%- through 2000 are limited by the aftershocks of 50% the 1998 crisis in Russia and by the fact that 40%-- fundamental structural reforms-even if 30% implemented immediately-will take time to 20%- bear fruit in the form of higher growth rates. 10%- The government therefore anticipates most of 0% the growth taking place during 2001-10, when below 2 2-5 above 5 Per capita growth rate range growth would have to average 7-8 percent a year to attain the targeted doubling. With Source: World Bank staff estimates. exceptionally strong policy performance, including immediate and full implementation of Part of the increase in GDP growth projected in most of the measures discussed in this report, the 2010 document is assumed to come from the Ukraine might be able to attain these goals. integration of shadow economic activity into the Other countries that started from a low initial formal sector. About 10-15 percent is already base-China, Vietnam-have attained added to formal sector GDP in calculating total comparable growth rates. Such rates were GDP, but moving shadow activity into the approached by the East Asian tigers before the formal sector would increase reported GDP. On recent reversals. Further evidence that such this basis, and with strong reforms, the growth rates might be possible for Ukraine is ambitious targets of the 2010 program could be found in the fact that the World Bank is realized. Under this scenario, increased tax projecting close to 5 percent growth for 2001-07 revenue from activity now in the shadow for Europe and Central Asia as a whole, and economy would make it possible for the Ukraine could possibly average growth 2 government to lower tax rates, stimulating real percentage points higher than this regional economic growth elsewhere. The increased average given its strong basic endowments- revenues would also make it easier for the including low wage rates for well-educated government to maintain programs that would workers, good basic infrastructure, and close increase the real and monetary incomes of the proximity to rich Western markets. poor. However, it should be remembered that a shift of business activity from shadow economy But attaining the high rates of growth projected into an official sector does not per se produce in the 2010 document would require any new income or wealth. Shadow economy extraordinary efforts. Fewer than 5 percent of already provides a living for a significant share the world's countries have managed to sustain of the population, and covering more of the growth rates in excess of 5 percent since 1961 informal sector in official statistics, does not (figure 5.6). And among all middle-income incraseporit Tfore, res t countries, only six maintained annual rates of imree e ic groth fdmenta growth averaging more than 7 percent for 10 investment-savings balance, productivity and years between 1970 and 1995. All these tec ngia innoan-sould be countries (Botswana, China, Indonesia, Oman, tcnlgal iovin-hud b c implemented vigorously to ensure a real longer- Restoring Growth and Living Standards 89 Table 5.1 High Case Scenario 1997 1998 1999 2000 2001 2002-05 2006-09 Growth Rates (%) GDP -3.0 -1.7 0.0 2.0 4.0 6.5 8.0 GNFS Exports'2 0.0 -13.4 -7.5 4.0 4.1 7.3 9.9 GNFS Imports1,2 2.0 -14.0 -12.5 2.9 4.5 9.1 9.7 Prices3 17.3 13.2 25.0 18.0 12.0 9.0 8.0 Percent of GDP GNFS Exports' 40.6 41.6 51.5 54.3 53.3 50.8 48.7 GNFS Importsi 43.7 44.4 52.0 54.3 53.5 53.7 52.3 Current Account Balance -2.7 -3.1 -1.1 -0.4 -0.5 -3.0 -4.0 Gross InvestmentO 21.4 20.7 21.0 21.4 22.0 24.7 29.2 Consolidated Government Expenditure 43.6 38.9 37.5 35.9 35.7 34.0 33.3 Consolidated Budget DeficitC -5.6 -2.6 -1.8 -1.3 -1.4 -1.3 -1.6 External Debt Indicators6 Debt Service/GNFS Exports (%) 6.6 14.2 15.4 20.2 17.8 13.0 13.4 Debt/GDP (%) 21.7 30.1 41.7 41.4 38.3 36.0 28.9 Interest/GNFS Exports (%) 3.3 5.2 5.1 5.3 4.9 4.5 3.9 Net Foreign Direct Investment Infows (mln. USD) 581 747 550 900 1100 1404 2055 As a percentage of GDP 1.2 1.8 1.7 2.9 3.3 3.4 3.4 GNFS - Goods & Non-Factor Services Value growth GDP deflator 4 Including inventories accumulation and net acquisition of valuables IMF GFS methodology 6 Including public and private debt. At annual average exchange rates Source: World Bank staff estimates. term improvement in welfare-even after economic courts. Restoring economic growth shadow economy source of growth is exhausted. quickly enough to revive living standards within If Ukraine does attain the goals set out in the the next generation will depend heavily on 2010 program, it can expect to see the economy implementing profound structural reforms as evolve as indicated in table 5.1. rapidly as possible-but these will need to be Policy measures that improve the efficiency of supported by raising gross domestic investment capital use are one of the most critical significantly. requirements for the success of the 2010 International experience indicates that rapidly program. But measures that increase investment growing countries commonly invest 25 percent in the economy are also vitally important. Due or more of GDP. Despite the substantial to high level of neglect during the final years of physical and social infrastructure inherited from the Soviet era and since independence, more the Soviet era, Ukraine will almost certainly than 60 percent of the capital stock in industry is need similar levels (at a minimum) to attain the now estimated to be obsolescent. Major desired rates of growth because of the energy investments will be needed in capital repair and inefficiency and low technical quality of much technological upgrading for industry and of this equipment-especially in the sphere of agriculture to restore growth and living consumer goods production. While public standards. Ukraine also needs investments in capital expenditures will also rise slightly as a supporting physical and institutional percentage of GDP to provide adequate social infrastructure, including a good system of infrastructure, the locomotive of growth must be 90 Chapter 5 private investment in a business-friendly the "urgent reforms" needed in the High Case to environment if Ukraine is to realize the full prevent another financial crisis including a potential of the high-case 2010 scenario. lower the budget deficit, controls on Eliminating the government's budget deficit government borrowing, prudent monetary (negative savings) will significantly increase policy, and a realistic exchange rate. The other Z high case reforms-such as changing the role of total savings in the economy, freeing resources for far more productive private sector government from Soviet to market models, investment. Under the high case scenario, the privatizing, and establishing real markets for agriculture-are also required to attain the Base investment-savings gap would be closed gq f2-4 percent of GDP. Case Scenario. In no way is the Base Case throuh foeign avins ofScenario a "muddling through" scenario. A major share of this will need to come in as Hoevr, a ino theexperienceiof foregn iret inestentbecuse uchcaptal However, taking into account the experience of foreign direct investment because such capital thpatdceantesrnghoUkie' tend tobe ar mre tabe thn prtflio the past decade and the strength of Ukraine's tnestoe fard mor sablefthantlportfolo left-wing political parties that oppose rapid investment and would significantly reduce mre-retd rfrs h ae cs Ukraine's external debt service burden. mre-retd rfrs h ae cs assumptions are less optimistic than those in The success of the High Case Scenario will be high case regarding the feasible pace and closely linked to exports. If a good business consistency of the reform process. climate is created in Ukraine, this will attract invetmet (speiall foeig diect Under the Base Case Scenario it should be investment) thtespeitiin Ukriest possible to achieve growth rates of 3-4 percent a investment) that is interested in using Ukraine's yerThuhcnirallortanhsen low-ost, hig-skil laor orce for year. Though considerably lower than those in the High Case Scenario, these growth rates are manufacturing internationally competitive higher than those attained by about 70 percent products for export. The resulting export boom of the world's countries on a sustained basis would provide the foreign exchange needed to purchase additional capital equipment and the ove ept 25 yearsand wl the r e inputs to produce more goods, both for export improveent nolivingestandard s would and for domestic consumption, thus raising ascfas 4vercen oer 12 yers wol increase average incomes by 60 percent. The domestic living standards. The strong inflow of increase would be far greater for Ukraine's poor foreign exchange generated by export success would provide a real foundation for a stable familis mny o whom wouldeo from exchange rate, contributing to domestic price rcin at ae imet stability and thus to even higher rates of investment and growth. A 60 percent nominal increase in GDP based on internationally competitive production might In short, the strategy that lies behind the High enabinay Ukriian ahed of wh Case Scenario, which is similar to that in the they wrin 1990 tainint acco thefa govenmet's201 prgram isto mplmen as they were in 1990, taking into account the fact government's 2010 program, is to implement as quickly as possible the fundamental policy that much of what was produced during the changes needed to create an upward spiral Soviet era was either of very low quality or where investment, production, and exports work designed for military use (and thus did nothing directly to raise real living standards). The together to create higher living standards.deretwhcnoiaicmsdunght Z degree to which nominal incomes during that Base Case Scenario period overstated real incomes is seen in the The strategic development objectives and massive buildup of savings accounts in banks- fundamental policies assumed for the Base Case not because Ukrainians suddenly became Scenario are identical to those for the High Case exceptionally thrifty, but because it was hard to find anything to buy. A savings account Scenario. International competitiveness remains n a the means of attaining sustainably higher living sufficient to buy several cars is not particularly standards. The only difference is the rate of valuable if there are no cars for sale. If GDP policy reform-and thus the rate of economic figures for 1990 are discounted by, say, 20 growth. The Base Case Scenario requires all of percent to account for military production that could be neither consumed nor invested to Restoring Growth and Living Standards 91 Table 5.2 Base Case Scenario 1997 1998 1999 2000 2001 2002-05 2006-09 Growth Rates (%) GDP -3.0 -1.7 -1.0 1.0 2.0 3.9 4.5 GNFS Exports,2 0.0 -13.4 -10.5 4.8 3.1 4.3 5.5 GNFS Imports"2 2.0 -14.0 -14.5 3.1 3.4 5.3 5.7 Prices3 17.3 13.2 27.0 20.0 17.0 10.5 10.0 Percent of GDP GNFS Exports' 40.6 41.6 49.5 52.2 54.2 51.7 48.2 GNFS Imports' 43.7 44.4 50.5 52.4 54.5 53.3 50.7 Current Account Balance -2.7 -3.1 -1.5 -0.9 -1.1 -2.0 -2.9 Gross Investment4 21.4 20.7 20.1 20.3 20.8 22.1 24.3 Consolidated Government Expenditure 43.6 38.9 37.6 36.6 35.4 34.8 34.8 Consolidated Budget Deficit5 -5.6 -2.6 -1.9 -1.6 -1.3 -1.0 -1.1 External Debt Indicators6 Debt Service/GNFS Exports (%) 6.6 14.2 15.9 20.6 18.9 14.5 13.5 Debt/GDP (%) 21.7 30.1 41.4 40.6 40.4 37.4 31.4 Interest/GNFS Exports (%) 3.3 5.2 5.3 5.3 5.0 4.3 3.8 Net Foreign Direct Investment Infows (mln. USD) 581 747 500 750 900 1031 1463 As a percentage of GDP 1.2 1.8 1.6 2.4 2.9 2.8 3.0 GNFS - Goods & Non-Factor Services 2 Value growth GDP deflator 4 Including inventories accumulation and net acquisition of valuables IMF GFS methodology 6 Including public and private debt. At annual average exchange rates Source: Official data and World Bank staff estimates. produce consumption goods, and by another 20 and growth because the measures taken to curb percent to account for shortages of consumer the burden of government and to develop an goods, 4 percent annual GDP growth over the attractive investment climate are not as next 10 years or so might be sufficient to restore adequate. As a result private investment plays a the average real living standards that prevailed less prominent role than in the High Case at the end of the Soviet era. Scenario. If the Base Case Scenario is realized, the Even though investment under the Base Case macroeconomy can be expected to evolve along Scenario is lower than under the High Case the lines shown in table 5.2. Economic growth is Scenario, finding financing for this investment brought about by an increase in investment, just will be more difficult given the less favorable as in the High Case Scenario. Similarly, exports investment climate. Foreign direct investment, a play a vital role. But because structural reforms non-debt way of financing foreign savings, will take place more slowly in the Base Case not be forthcoming to the same degree because Scenario, investment and export growth do not the business climate will be less attractive. As a increase as much as in the High Case Scenario. result the government will have to resort to Even more important, the investment that does larger foreign borrowing to obtain the foreign take place is less efficient in generating output savings needed to achieve the investment 92 Chapter 5 required to produce the target average growth find a third way somewhere between a system (see table 5.2). where responsibility for production lies squarely w Cwith the state and one where responsibility lies Lhoow a seara ssquarely with private business will almost through to disaster certainly lead to failure. In short, the third way Some groups in Ukraine, while recognizing that leads to the third world. a return to the Soviet Union is not an option, As shown in table 5.3, any attempt to continue Table 5.3 Low Case Scenario 1997 1998 1999 2000 2001 2002-05 2006-09 Growth Rates (%) GDP -3.0 -1.7 -1.0 6.0 4.0 -0.9 -2.5 GNFS Exports1,2 0 -13.4 -10.5 4.7 2.9 -0.3 -3.2 GNFS Imports,2 2.0 -14.0 -14.5 6.5 2.0 -0.7 -3.0 Prices3 17.3 13.2 27.0 45.0 90.0 110.0 100.0 Percent of GDP GNFS Exports' 40.6 41.6 49.5 47.7 46.1 44.2 39.5 GNFS Imports' 43.7 44.4 50.5 49.5 47.4 44.8 40.2 Current Account Balance -2.7 -3.1 -1.5 -2.6 -2.3 -1.0 -1.0 Gross Investment4 21.4 20.7 20.1 22.0 24.0 24.9 23.1 Consolidated Government Expenditure 43.6 38.9 37.6 39.5 39.8 41.9 47.5 Consolidated Budget Deficit5 -5.6 -2.6 -1.8 -8.8 -10.0 -11.3 -10.0 External Debt IndicatorS6 Debt Service/GNFS Exports (%) 6.6 14.2 15.8 20.5 22.6 17.9 15.1 Debt/GDP (%) 21.7 30.1 39.8 37.7 37.1 34.8 33.8 Interest/GNFS Exports (%) 3.3 5.2 5.2 5.0 5.2 3.3 2.8 Net Foreign Direct Investment Inflows (mln. USD) 581 747 500 500 450 348 228 As a percentage of GDP 1.2 1.8 1.6 1.4 1.2 0.9 0.6 GNFS - Goods & Non-Factor Services 2 Value growth GDP deflator 4 Including inventories accumulation and net acquisition of valuables IMF GFS methodology 6 Including public and private debt. At annual average exchange rates Source: Official data and World Bank staff estimates. nevertheless want to preserve as much of the Soviet past as possible. They claim that the changes made over the past decade are proof This statement, which has been attributed to Vaclav Klaus, rings all too true for Ukraine. After years of hesitant reforms that have left much of the old Soviet system in solution because of the "special conditions" of place, GDP has declined so severely that Ukraine could Ukraine. The emotional appeal of this position soon be eligible to join the group of the world's poorest is understandable. Few people prefer change to nations that are eligible to borrow from the World Bank's stability, and many lived much better under the affiliate, the International Development Association. Another widely-cited aphorism is relevant here: "Those who do not long for the benefits of the Soviet system have to the Soviet past is impossible-and efforts to no heart-and those who think that the Soviet system can be restored have no head." Restoring Growth and Living Standards 93 muddling through with partial reforms would These reforms will be difficult. But the leave Ukraine dangling between the Soviet and alternatives-high debt and high inflation, market economic systems-producing dire muddling through, or protectionism-would consequences. With a surge of monetary lead to far more serious social problems. High expansion, Ukraine might be able to enjoy 12- debt and inflation would lead to artificial 18 months of accelerated economic growth, like economic growth, followed by a crash with Belarus did. But as now shown by the social consequences far worse than the crash of Belarussian experience, this growth would not late 1998. A strong program of rapid structural be sustainable and would inflict high costs on change and the development of a strong market Ukrainians in the form of high inflation, economy is the only way to meet the aspirations growing scarcities, and reduced investment for of the Ukrainian people for sustained higher long-term growth. Without the incentives and living standards, as reflected in the freedom of action that come with private government's program for 2010. ownership of agricultural and industrial assets, In short, doing nothing means going backwards. productive efficiency would decline, a trend that Ff woul be omponde by ontiued Failing to push forward from the current status wouldn et comprveiound b r ctued with a strong program of reforms will inevitably gove nt, neiterveins Undr resus lead to higher deficits, more inflation, and conditions, neither foreigners nor residents decline. would be particularly interested in investing in Ukraine, slowing investment and growth. Slow Financing the future government reforms regarding its role and size Given the severe financial crisis of late 1998 would make high budget deficits likely, wab d' and continuing debt service pressures, how is increasing the pressures to borrow at high costs Ukraine going to be able to find the necessary in unfavorable capital markets. Faced with fnaing toicover-te buet fict the cussen limited investor interest in its t-bills, the account deficit and repay foreign debts? The government would put pressure on the central lont -e financingparets as? Te bank to increase monetary emission, rekindling above, look good under the Base Case and High the fires of inflation that burned Ukraine so Case Scenarios. But will the country be able to badly during the early years of its independence. get through the next two to three years? Of the three generic policy alternatives, only For the next two to three years, the financing one-competitiveness through economic and requirements for the High Case Scenario woul structural reform-will put Ukraine on the path be very similar to those for the Base Case of long-term, sustainable growth needed to Scenario. It will take some time for Ukraine to restore living standards. Implementing the reap the benefits of structural reforms before it necessary reforms will require difficult launches into the sharply higher growth of the decisions and sustained efforts over many years. High Case Scenario. After takeoff, the more Quick results are unlikely. Some of the buoyant economic growth and better investment necessary reforms-especially the restructuring climate of the High Case Scenario would make or closing of loss-making enterprises-will financing even easier to obtain than in the base cause temporary unemployment. Two measures case scenario, so a detailed discussion is not are therefore urgently needed to sustain social needed here of that alternative. consensus during the transition: This section demonstrates that under either First, Ukraine needs to develop a business- scenario there is no room for error or friendly environment that stimulates the creation backsliding in reforms, but the situation will be of new jobs, especially in small and medium- sustainable if reforms move forward quickly. size enterprises. Second, Ukraine needs to On the other hand, the Low Case Scenario is not design and implement a social safety net that sustainable from any perspective and will not be protects families from absolute poverty and discussed further here. helps them find new jobs. Ukraine faces financing challenges on two fronts over the next few years-financing 94 Chapter 5 government borrowing requirements and financing requirement in 1999 of $3.8 billion. In financing the balance of payments.' round numbers, the main components of this requirement are as shown in the upper half of Table 5.4 Budget financing requirements table 5.4. and availabilities, 1999 Assuming that policy performance is Billions sufficiently strong to keep the IMF program on Requirements of USD track, thus making additional financing possible from other sources such as the World Bank, Primary budget deficit (excl. interest) (0.5) about $2.3 billion equivalent of financing could Interest 1.2 become available without further debt External 0.7 renegotiation or restructuring (see bottom half of table 5.4). The budget financing gap of about Domestic 0.6 $1.5 billion for 1999 could be met as follows. Amortization 2.5 The local currency portion of the gap, External 1.3 equivalent to about $1.2 billion, could be more Internal 1.2 than filled if the central bank were to roll over the $1.5 billion equivalent that it holds in t-bills IMF quota increase 0.5 maturing in 1999. Total budget financing required 3.8 Filling the $0.3 billion foreign currency Availabilities component of the budget financing gap could External financing 1.8 be more difficult but could be handled as World Bank (adjustment lending) 0.7 follows given the reasonably solid external IMF 0.8 payments situation anticipated under both the Base and High Case Scenarios. If the Other 0.3 government were to roll over the entire stock of Domestic financing 0.3 t-bills held by the central bank with no payment T-bills (excl. central bank) 0.1 of interest in 1999, it could use the surplus over Central bank (inl. t-bills) 0.3 domestic financing requirements to purchase about $0.3 billion of foreign exchange from the Privatization 0.1 central bank, thus covering the gap. A far better Total budget financing available 2.3 approach, however, would be to accelerate the Roll-over of NBU-held T-bills 1.5 privatization of state-owned enterprises to Total (including roll-over of NBU- 3.8 foreign investors, thereby generating the held T-bills) additional foreign exchange needed and Source: World Bank staff estimates preserving the nation's minimal external reserves. In fact, strong efforts to increase . f a privatization-especially of the 200 industrial Financing the budget. The fmnancial crisis of late "gat"-ol alohv,,srn pstv 1998 highlighted the importance of sound fiscal iancou als he anstro ptie management. The base case and high case inuec on teprrm ce fths companies in terms of investment, job creation, scenarios assume that the government will ' vigorously implement the program of fiscal and poiity,dad expots,aleai h financial prudence that it has worked out with the IMF in the context of the Extended Fund Financing the balance of payments. Ukraine's Facility. The government faces a gross external financing requirements also appear in the top half of table 5.5, which shows medium- and long-term external debt repayment as part 4 The borrowing requirements discussed here are similar to of the external financing requirements. In fact, the better-known public sector borrowing requirement, but the budget financing and the external accounts here we include only borrowing of the consolidated financing tables are closely linked from this government (including the central bank); the borrowing of perspective. As shown in the lower part of table public enterprises is excluded. Restoring Growth and Living Standards 95 Table 5.5: Balance of payments financing * Arrangements can be worked out with the requirements and availabilities, 1999 central bank regarding a rollover or refinancing of the large stock of t-bills that Billions it holds. Requirements of USD * The government sharply accelerates Goods and non factor services trade 0.3 structural reforms, enabling it to gain and deficit retain full access to IMF and World Bank Medium- and long-term external debt 2.0 financing. service * Net current transfers are sustained at historic International reserves increase 0.9 lees.hs rnfes hc nld levels. These transfers, which meclude Total financing required 3.2 current grant financing from the donors and Availabilities transfers of funds from Ukrainians abroad, Medium and long-term external 2.0 depend heavily on a domestic environment borrowing of stability and progress. World Bank (adj. and project) 0.7 * Foreign direct investment flows are IMF 0.8 sustained. Other multilateral 0.2 Developments and risks in 2000. The following Other 0.3 developments and risks can be seen for internal Net current transfers 0.6 and external financing for the year 2000. FDI and portfolio investment 0.6 * The burden of foreign debt amortization Total financing available 3.2 doubles between 1999 and 2000, rising from Source: World Bank staff estimates $1.3 billion to $2.2 billion, largely as the result of about $1.0 billion in fiduciary 5.5, balance of payments will be fully financed loans and Eurobonds that will fall due in in 1999 if Ukraine implements the EFF as 2000. planned (thus maintaining access to IMF and World Bank funding) and maintains a Although World Bank and IMF competitive exchange rate and free current amortization shows large percentage account convertibility (thus ensuring that increases-especially for the World Bank as enterprises have access to the resources they grace periods on its loans begin to expire- need for production and that exporting is the absolute burden of World Bank and IMF profitable). A good foreign currency regime is amortization is modest (less than 30 percent also vital to ensuring that imports are not of the total). underpriced through an overvalued domestic * The interest payment burden can be stable if currency. If the domestic market were flooded Ukraine avoids taking on new high-cost with imports, the resulting balance of payments t-bill debt. deficit could be very difficult to finance. * Despite the assumed increase in the primary Risks for future budgetary financing budget surplus from 1.6 percent to 2.0 Risks in 1999. This analysis indicates that, while percent of GDP, gross financing fiscal situation is sustainable in principle, requirements in 2000 will remain avoiding another major financial crisis depends unchanged at about $3.8 billion. heavily on the following assumptions: * In 2000 the total budget financing * The government controls spending and requirements ($3.8 billion) and availabilities maintains revenue efforts sufficient to ($2.3 billion) will be similar to the levels of assure a primary budget surplus of at least 1999, But with a falling stock of central 1.5-2.0 percent of GDP. bank-held t-bills falling due, the potential for rollover is less, and the financing gap will climb from about $100 million to about 96 Chapter 5 $500 million, making increased efforts to Given that Ukraine's access to international accelerate privatization even more urgent to capital markets is likely to remain negligible cover the budget deficit in 2000. during 2000, and given that the external lenders who rescheduled debts in 1998 are unlikely to Risks in 2001. If debts are repaid as scheduled be willing to reschedule the same debts again in rather than rescheduled in 2000, the financing 2000, the only viable source of financing picture in 2001 does improve with residual appears to be a sharp increase in privatization budget financing requirements dropping from proceeds. The World Bank is working with the $3.9 billion to around $3 billion, but this is not government to agree on a plan to generate enough to resolve the problem. Privatization and roughly $1.0 billion in cash privatization continued market reforms will therefore remain proceeds, largely from investors who would pay crucial to avoiding a balance of payments crisis in foreign exchange. Meeting these targets in 2001. The estimated $2.0 bn of financing this would also significantly expand the resources would bring into the country would make a available from the multilateral lending agencies. major contribution to alleviating external debt . . repaymeontresuresnt and suoting t Without such privatization revenues, it is hard to see how Ukraine could escape a major balance fledgling economic growth. i eof payments crisis in 2000. Such a crisis could Risks for future balance of be triggered by new economic problems in payments financing Russia, a refusal by Russia to provide energy To minimize future balance of payments resources to Ukraine without full payment in cash at world prices, a failure to roll over a debt problems, Ukraine needs to move as quickly as possible to implement policies sufficient to obligation, problems in the energy sector assure the following: triggered by Y2K glitches, or a number of other factors, any of which have a significant * a primary budget surplus equal to at least probability. Once a crisis started, people would 2% of GDP, which would reduce the risk of flee from the hrivnya into dollars. As foreign high-cost foreign financing for the budget exchange reserves ran low and NBU could no deficit (as in 1996-98). longer defend the currency, the exchange rate would depreciate precipitously, triggering panic for a dfexi exchangeate thateb cmpns and leaving the government little option but to for domestic inflation, thereby helping cap o xhnecnrl n rd ensure the international competitiveness of capo xhnecnrl n rd ekrnse'sg the internationa otitaive of restrictions. The resulting shortages of imports Ukraine's goods and the profitability of wol puhdnprucin nimrt entepries poduingthes gods.would push down production in import- enterprises producing these goods. dependent factories, resulting in further * liberalized internal markets to ensure economic decline and job losses. Shortages of growing supplies of internationally important consumer goods including energy competitive goods. could also develop, causing widespread suffering and even unrest. Without major and Hoee,ee'falo hs motn rapid improvements in the nation's economic measures are put into place, Ukraine still faces a picis an ma ent s cni potentially serious balance of payments undesa na an nt be dismssed financing problem in the year 2000-one driven almost entirely by the $1.0 billion of But if Ukraine establishes the favorable business restructured T-bills and Eurobonds that will fall climate needed to attain a dramatic increase in due that year. These payments push estimated the pace of privatization, it will generate the external financing requirements from $3.2 resources needed to avoid serious economic and billion in 1999 to almost $4.0 billion in 2000. social problems-and it will create a market- Even after all other feasible sources of financing oriented environment that would attract are taken into account, a gap of up to $1.0 investments that go far beyond the privatization billion remains. of existing enterprises, thus creating jobs, economic growth, and higher living standards for all. Restoring Growth and Living Standards 97 BIBLIOGRAPHY Companion volumes from the Country Economic Memorandum Project Hansen, John, and Vira Nanivska (eds). 1999. Economic Growth with Equity. Ukrainian Perspectives (World Bank Discussion Paper No. 407). World Bank, Kiev and Washington, D.C. Hansen, John and Diana Cook. 1999. Economic Growth with Equity: Which Strategy for Ukraine? (World Bank Discussion Paper No. 408). 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"Ukraine: Financial Sector Review." Washington, D.C. 100 Bibliography . 1996a. Poverty in Ukraine. Report 15602-UA. Washington, D.C. - 1996b. World Development Report 1996: From Plan to Market. New York: Oxford University Press. . 1997. "Ukraine: Public Investment Review." Washington, D.C. . 1998a. Assessing Aid: What Works, What Doesn't, and Why. A Policy Research Report. New York: Oxford University Press. . 1998b. World Development Indicators 1998. Washington, D.C. World Economic Forum. 1997. Global Competitiveness Report. Geneva. Bibliography 101 ANNEX A: AN AGENDA FOR STRUCTURAL REFORMS Introduction Structural reforms are needed throughout Ukraine to accelerate the transition from a soviet economy to a market economy. Some of these reforms will be vital simply to minimize the risk of further poverty-creating financial crises. Almost all of the reforms will be required if Ukraine is to attain the rates of growth that it has targeted in its plan for the year 2010. The reforms needed in Ukraine are grouped below in three thematic areas: changing the role of government, improving social conditions, and structural reforms. All of these reforms should be have been implemented many years ago; all are urgently needed. However, given the situation today, those flagged with a large arrow (4) are more urgent than others - either to prevent a crisis or to create conditions necessary for the success of other "downstream" reforms. Given the urgency and complexity of the reforms that are needed within the next 18 months to prevent a major economic and social crisis, the list below does not try to cover the longer-term structural measures that will be required to fine-tune the economy for greater efficiency, thus maximizing long-term economic growth. Critically urgent reforms Although the most urgent reforms are marked with an arrow in the presentation below, three areas of reform need to be highlighted up front because they are so vitally important in the short run to avoid a serious crisis that could bring economic and social strife to the country. These reforms focus on assuring that the country as a whole and the government in particular lives within its means. This is vital so that Ukraine does not return to the pattern of profligate spending that marked the years after independence. These reforms include: * Keep budget expenditures in line with revenues at all times, running a small surplus in the short run, for this will make it easier to avoid a debt crisis. * Avoid printing money to cover budgetary deficits or to finance quasi-budgetary expenditures. * Allow exchange rate to devalue as necessary to build international reserves and to maintain a stable real exchange rate that makes domestic products more competitive on both foreign and domestic markets. Although the list of reforms below is long, the number of different ministries, agencies, committees and working groups that can be mobilized to work in parallel on these reforms is formidable in a country with the size and expertise of Ukraine. Therefore multiple reforms can easily proceed in parallel if the will to reform is present. For example, the Ministry of Agriculture can easily move forward with land titling while the Ministry of Health introduces improved energy efficiency in hospitals. The process will be demanding, however. Institutional mechanisms will have to be established to coordinate policy formulation across sectors. Also, technical assistance programs need to be expanded dramatically to help Ukraine develop policy analysts able to evaluate, design and promote implementation of market-oriented economic policies. Rapid action is technically feasible in Ukraine because, with the support of extensive foreign technical assistance programs, some local policy analysts have been trained and have already started doing policy analysis and formulation in a number of critical areas. Some reforms such as large-scale privatization and expansion of the economic court system will require substantial financial resources. However, if evidence emerges that Ukraine has clearly shifted onto the path of radical economic reforms, the necessary resources could easily be mobilized from private and official external sources. Money is not the problem. What has been lacking is the will to reform. 102 Annex A ROLE OF GOVERNMENT Structure and actions of Government 4 Apparat. Reform the "Apparat" of the Cabinet of Ministers so that it focuses on policy coordination rather than policy making and delegate to ministers the responsibility for policy making in their sectors (An important precondition is to enact the law on the COM). 4 Cabinet structure. Consolidate the Cabinet so that it becomes a small collegial body focused on strategic policy making. 4 Civil service. Reform the civil service, clearly delimitating political and non-political posts, implementing pay reform, training of senior civil servants, and introducing merit-based promotion principles. 4 Deregulation. Reduce the number of business inspections by half as measured by independent surveys in a random selection of cities; and sharply limit the number of routine State Tax Administration inspections. Fiscal policy Budget Process and Policy Issues 4 Overall Budget Deficit. Hold to maximum of 1% or less of GDP at least until adequate credit is available domestically without crowding out productive investments and until more access to international capital on normal conditions is restored. (A primary surplus of at least 2% of GDP is also needed.) 4 Inter-governmental fiscal relations. Implementation of a formula-based transfer system and reduced dependency on tax sharing can improve the incentives for local government tax collection and augment the overall transparency and stability of the fiscal system, and contribute to better management of budgetary resources at all levels of government. 4 Budget Process. Pass and implement a "Law on the Budget System and Budgetary Processes" that creates clear rules of the game, including clear allocation of expenditure responsibilities and revenue generation authority between the sub-national and national levels of government. * Budget Coverage. Bring all revenues and expenditures of the Central Government and its agencies under the consolidated government budget. Extra-budgetary funds such as Road and Innovation should either be abolished or be forced to compete for funds within the consolidated government budget. * Treasury operations. All government revenues and expenses should flow through the Treasury (the term "government" here excludes only state enterprises, which should operate on a commercial basis and, in most cases, be privatized as quickly as possible). The technical capacity of the Treasury needs to be improved so that it can handle the additional work. Fees and fines collected by authorized bodies such as Customs, State Tax Administration and various police agencies should not remain with the bodies collecting them. * Treasury deposits. All government resources should be held by the National Bank, not by commercial banks. Where funds need to be moved to the NBU, however, this should be done in a phased manner to avoid unwarranted banking failures. Any government resources that have to be held in commercial banks as an interim measure should be in interest bearing accounts with interest credited at normal commercial deposit rates. Any payments to commercial banks for handling government revenue collection or disbursement activity should be billed and paid explicitly, not through interest offsets. If commercial bank services are required in the longer term to support treasury operations, periodic tenders should be issued for these services on a competitive basis. An Agenda for Structural Reform 103 Expenditure Issues 4 Budget expenditure levels. Limit budget expenditure commitment authority of spending agencies to levels consistent with emerging revenues to avoid further accumulation of arrears. Enforce through strong Treasury system. 4 Arrears. Avoid any accumulation of new budgetary expenditure arrears by tightly controlling expenditure commitment authority in line with realistic estimates of revenues. Consider securitizing and factoring outstanding arrears. Avoid writing off tax receivables; this endangers future revenue collections by creating expectations of further write-offs. 4 Procurement. To reduce risk of corruption, use open competitive bidding for procurement for at least 50 percent of the value of government purchases, gradually raising this percentage thereafter. 4 Staffing levels and patterns. Reduce total staffing in line with IMF agreements and streamline the structure of Ministries and the apparat in line with the plans developed for the Public Administration Reform Loan from the World Bank. * Subsidies. Move steadily to at least 80 percent cost recovery during 1999 for all communal public transport services. Put policies in place that will assure full pass-through of cost increases to maintain or further improve cost recovery levels. * Privileges. Eliminate all privileges that allow certain categorical groups to enjoy a variety of government-supplied services at low or no cost. Protect those affected from risk of poverty with a means-tested social safety net system. * State Reserve Fund. Require zero budget deficit in State Reserve Fund Operations effective immediately. Force fund to cover any deficits by sale of assets. Implement full annual review of SRF by outside auditor. All procurement should be done through open, competitive tenders. No barter deals should be allowed. * Security. Reduce expenditures on external and internal security forces. * Human services. The most important areas of government expenditure in terms both of the money involved and the impact of peoples' quality of life are human services- health, education, and the social safety net. Because of the issues related to these programs go far beyond the need to control expenditures, the policy recommendations for these programs are presented separately below. Revenue issues 4 Revenue collection in cash. A plan should be developed to assure that non-cash payments to the budget are reduced by 30 percent per year over the next three years. More rapid progress would be desirable. 4 Tax privileges. Reduce tax privileges (concessional rates and exemptions) so that all economic activity is subject to essentially the same rates of tax (aside from "sin" taxes on alcohol, tobacco and a limited list of luxury items). To the extent possible, a flat rate of VAT should apply across the board, except for exports which, by international convention, are zero rated. Any budgetary support deemed necessary for poverty alleviation or other reasons should be budgeted explicitly and included in the calculation of the overall budget deficit. * Personal income tax. A flat rate Income tax of about 25 percent with almost no exemptions or deductions, and a liberal minimum income cutoff level before any tax is paid, would increase revenues, reduce corruption, and be reasonably progressive, particularly at the lower income levels. 104 Annex A * Corporate income tax. A flat rate equal to the top personal income tax rate with minimum exemptions and deductions would reduce corruption, legal manipulations, and increase tax revenues by encouraging enterprises to rejoin the official sector. * Value added tax. Improve system by operating on international standards in terms of accrual accounting, time allowed for government to rebate VAT credits (overpayments), and auditing procedures for tax rebate claims. Move and keep the VAT on an accrual basis, preferably without the dual accounting system required under current transitional arrangements. 4 Bankruptcy and hard budget constraints. The existence of a credible threat of bankruptcy is one of the most effective ways of assuring the enforcement of contracts. Although Ukraine has a bankruptcy law on the books, it is ineffective. A new draft is available which appears to be consistent with international practice. This should be approved and implemented as quickly as possible to provide the essential foundations for a good business climate in Ukraine. * Customs. Develop a customs code and other international trade laws in line with international standards. Consider contracting out the customs function to a reliable international pre-shipment inspection firm to improve service and reduce corruption. Monetary and exchange rate policy * Monetization. The current ratio of money to GDP is exceptionally low in Ukraine. This contributes directly to the dominance of barter in the economy, to the exceptionally high cost of capital, and thus to the lack of economic growth. The ratio needs to be increased to more normal levels by establishing a solid balance between monetary and fiscal policy. This should be accomplished largely by tightening fiscal policy, but also by allowing some growth of credit consistent with realistic inflation targets. External trade policy * Customs. Reduce customs delays, corruption, and losses of revenues to the Government. This could include contracting customs operations to an internationally recognized pre-shipment inspection agency as other countries such as Indonesia have done, * Import tariffs. Gradually reduce import duties to levels consistent with international agreements on tariff reductions under the WTO. Reduce high and variable tariff rates to levels more consistent with average tariffs. Remove most import tariff exemptions, and raise exceptionally low rates closer to the average level. 4 Export restraints. Ukraine badly needs foreign exchange from exports. Virtually all remaining barriers to export such as quotas, duties, advance deposits and forex surrender requirements should be abolished, the only exception being the unfortunate cases where the EU and other countries impose export quotas on Ukrainian industries to protect their own high-cost producers. * World Trade Organization. Complete process of accession to the WTO as quickly as possible, thus allowing Ukraine to participate fully on a stable basis in world trade and the privileges pertaining to WTO membership. Shadow Economy 4 Judicial reform and anti-corruption program. Implement judicial reform to strengthen courts, ensure effective and efficient enforcement of law, organize a witness protection program, stimulate strong public disapproval of corruption, introduce basic legal and anti-corruption courses at primary education schools, set up more channels of legal information to people, enable wider participation of general public in legislative drafting, etc. 4 Tax System Reform. Decrease the number of taxes and surcharges, reduce tax rates and pay for the cut by eliminating tax privileges, introduce a comprehensive basic tax law (Tax Code) instead of An Agenda for Structural Reform 105 myriad of contradictory laws and regulations, foster voluntary tax compliance, reduce tax evasion and broaden tax base, efficiently and equitably administer taxes, and promote a compliance-based revenue administration equipped with business processes, skills, management systems, and operational tools * Reduce regulatory burden. Reduce incentives to hide in shadow economy by reducing regulatory burden, especially the frequency of inspections. . Restrict the number of days that an enterprise can be visited by inspectors during a given year without an order based on cause from a court of law. Establish rules of engagement for inspections that clearly list the obligations that can be enforced and the rights of enterprises being inspected. Provide adequate right of appeal, including a small-claims window for appeals using simplified procedures. * Contract enforcement. The difficulty of enforcing contracts for delivery and for payment is one of the most frequent complaints of investors in Ukraine today. Major improvements are needed in the nation's economic court system to overcome this problem. Improving social conditions Health Care * Health-care programs and facilities. Shift focus of health system from tertiary to primary health care and from curative to preventative care. Retrain doctors so that more of them are general practitioners, not just narrow specialists. Improve access to modern medical equipment for diagnosis and treatment; this will allow more cases to be handled on an outpatient basis and to reduce average hospital stays. This, plus efforts to close under-utilized facilities, to establish non-medical shelters for the homeless, and to increase the energy efficiency of the remaining facilities will help Ukraine reduce the heavy financial burden of maintaining an exceptionally high ratio of hospital beds to population served. Improved equipment and facilities will also help make it possible to reduce the total number of medical staff to levels more consistent with international experience. * Health-care financing. Moving from the current implicit medical insurance program where the state in theory pays almost all costs to an explicit medical insurance program where the people are charged for services rendered and contribute a fraction of the cost through a co- payment scheme would reduce unnecessary use of medical services. It would also allow moving towards a more realistic program of cost recovery, helping reduce the corruption and side-payments that are now common. Education * Education programs and facilities. Gradually lower the ratio of education workers to students closer to international standards, thus reducing the high burden of staff costs in the sector. To reduce the high energy costs and other maintenance expenses that drive up the costs of education in Ukraine, gradually consolidate schools, limit the number of specialized institutions, invest in energy conservation measures, and remodel to increase the intensity of space utilization. * Education financing. Most countries provide access to essentially free education at the primary and secondary levels, an approach well-justified by the externalities to society of making certain that all citizens have a good basic education. Ukraine goes further and provides essentially free tertiary education. This education is very costly per student. In Ukraine, tertiary education is made even more expensive by the fact that the enrollment ratio at the tertiary level in Ukraine exceeds that in Western European countries. Since the cost of such education can usually be recovered through higher salaries in a market economy, the standard approach internationally is to have students and their families pay a significant part 106 Annex A of these costs directly. Introducing basic cost recovery at the tertiary level in Ukraine would help ease the direct burden on the budget. Also, it would bring enrollment ratios more into line with normal international experience and reduce the risk that a large group of university graduates will develop who can not find a job commensurate with their level of education, thus creating a socially volatile group of alienated youths as has happened in countries like Sri Lanka, for example. Social protection 4 Social Insurance Fund (SIF). Reduce payroll tax rates for SIF, as well as pensions and Chernobyl Fund, thus reducing incentives for employers to hide in the shadows, to avoid creating new jobs, and to deprive workers of their benefits. Shift responsibility for first two weeks of sick leave to enterprises, thus creating incentives for enterprises to watch more closely for abuse of sick leave privileges. 4 Social safety net. Consolidate fragmented social assistance program under the housing support program so that it becomes a comprehensive, means-tested social safety net that is better able to provide adequate protection for the poor because it limits the assistance given to the non-poor under current programs. Review justification for child allowances. * Pensions. Continue work to establish a three-tier pension system where the current pay-as- you-go "solidarity" pension, which provides a minimum defined-benefit pension, is augmented with a second-tier fully-funded mandatory system, and with a third-tier fully- funded voluntary system for those who want to set aside more of current income for future retirement. Carefully review financial implications of all proposals under active consideration to assure that the "transition" problem of moving from a pay-as-you-go system to a fully- funded system is resolved, and that any defined benefits are realistic given anticipated financial and demographic parameters. * Chernobyl Fund. Develop plan to incorporate most Chernobyl activities into normal health and social safety net programs. Special Chernobyl benefits should be granted only on the basis of demonstrated need, not categorical qualifications. Structural reforms Agriculture 4 Bread of Ukraine. Privatize 100 percent of all commercial grain storage capacity in Ukraine (current targets based on number of enterprises are not particularly meaningful because targets can be met while retaining a de facto monopoly in terms of total capacity). Intermediate targets in terms of capacity should be set if full privatization would be delayed for more than 12 months. Once facilities are privatized, Government can issue competitive tenders for storage capacity for state reserves if such are still deemed necessary. 4 Input supply and output marketing. Ban all "commodity credit" transactions. Instead extend credit for agricultural inputs on normal commercial terms with repayments to be made in cash. Allow free entry and operation of private sector businesses in supplying inputs- and marketing outputs in the agricultural sector, subject only to normal international rules of good business behavior. 4 Grain Movement and State Procurement. Eliminate all forms of government interference at all levels of government with the movement of grain. Place all state procurement on a competitive basis. 4 External trade policies in agriculture. Assure no further reversals, and remove tariff and non- tariff barriers to exports of agricultural products. An Agenda for Structural Reform 107 * Land. Move as quickly as possible to allow effective private ownership and control of agricultural land. If immediate freehold ownership of the kind universal throughout most of the rest of the world is not possible for insurmountable political reasons, at a minimum and on an urgent basis, establish alienable leasehold titles to identified plots with at least 50 year duration for all agricultural land in Ukraine. Establish mechanisms for transferring titles in the case of loan defaults so that the leasehold titles become a credible and acceptable form of collateral for banks. Manufacturing 4 Bankruptcy and hard budget constraints. The existence of a credible threat of bankruptcy is one of the most effective ways of assuring the enforcement of contracts (see point on bankruptcy above). 4 Contract enforcement. The difficulty of enforcing contracts for delivery and for payment is one of the most frequent complaints of investors in Ukraine today. Major improvements are needed in the nation's economic court system to overcome this problem. 4 Deregulation. As noted above under "Role of government," the scope of government intervention in the daily operations of enterprises should be sharply curtailed in line with the deregulation program developed for the Public Administration Reform Loan. 4 Demonopolization. Certain segments of the Ukrainian enterprise sectors are still dominated by state monopolies that operate at the national level. Where the current scale of operation is not demonstrably necessary for economies of scale, these enterprises should be broken up to encourage efficiency-stimulating competition. Where economies of scale are important, such as in the aerospace industry, ancillary units should be spun off to operate as independent suppliers to multiple buyers, and efficiency of the core monopolies should be encouraged by removing any artificial barriers to international competition. 4 Privatization. To help close the budget and BOP financing gap for 2000, and as a stimulus to creating a more favorable business climate, privatize large enterprises in the industrial sector (including energy and telecoms) sufficient to generate USD 1.0 billion by the end of 2000 through transparent processes consistent with international standards. * Privatization. Complete the privatization of virtually all medium and large enterprises-including the sale of "golden" shares and "blocking" minority positions in all areas including agro-industry. Encourage secondary market for privatization certificates and share holdings to facilitate the emergence of individuals or groups with controlling blocks of shares who can then provide strong corporate governance. * Tax legislation. Move as quickly as possible to a tax code that eliminates the current contradictions among fragmentary bits of legislation and provides a stable, transparent, equitable basis upon which businesses can make the investment and production decisions. If immediate introduction of such legislation is not possible, the Government should announce the intended direction of reform so that investors can plan in terms of the probable future tax environment. The environment should be as consistent as possible with the norms prevalent in Europe to help facilitate direct and portfolio foreign investment. Energy * Electricity. The financial viability of the electricity sector is a risk because of artificially low tariffs, low collection rates, and even lower cash payments. Without prospects for financial viability, the sector will be unable to obtain the resources needed to invest to increase the efficiency and reliability of the system, thus jeopardizing all areas of the economy and society. Total and cash collection rates should be increased-including through service cuts and bankruptcy procedures as required. A major acceleration of privatization of controlling 108 Annex A interests of both generation and distribution companies would provide incentives for imposing the hard budget discipline required to increase collection rates and would provide access to new investment resources and management skills. 4 Privatization. Sell controlling blocks of shares of at least seven oblenergos to strategic investors through competitive tenders with the assistance of internationally reputable privatization advisors. * Coal. The biggest challenge facing the coal industry in Ukraine today is to improve efficiency and safety. This will require closing at least 20 mines a year during the next 10 years. Somewhere between 500,000 and one million workers may be affected. To prevent massive unemployment, highly proactive programs to facilitate labor mobility and to create new jobs in partnership with the private sector will be required, as will adequate social safety nets. New investments in mining should be done with private sector resources on a concession basis, not with government resources. 4 Closures. Transfer at least 20 additional mines to UDKR for closure in the next 6 months and provide no less than UAH 25 million from the state budget every month to cover the costs of statutory benefits for laid-off miners and physical closure of mines. * Gas. Efforts to establish an auction market for transit fee and domestically produced gas have failed-largely because of the fatal flaws in the non-auction market. Consumers are unwilling to pay cash up front for gas on the auction market, regardless of any reasonable price, when they can get it for barter (and sometimes even for free) on the non-auction market. Hard budget constraints and payments discipline need to be introduced in that segment of the gas market by various means, including shutting off those who do not pay. Commercial consumers accounting for the largest overdue unpaid balances should be taken into bankruptcy for reorganization or liquidation. The attractiveness of gas auctions in the future will become a measure of the success of Ukraine's efforts to impose a hard budget discipline in the consumption of gas. Transmission Privatization. Award a long term concession for the operation and management of the entire gas transmission system to an international consortium of strategic investors through a competitive tender. * Gas - cost recovery. Other measures required in the gas sector include the widespread introduction of gas meters and strict limits on the ability of government organizations to commit to purchasing gas. Full cost recovery and full payment in cash are other objectives that should be accomplished as soon as possible. The Government should not accept residual payment responsibility for gas or other energy debts, other than those related to its own consumption. Privatization of all medium and large enterprises, coupled with the effective threat of bankruptcy, would make a major contribution to assuring the success of these efforts. Likewise, to assure a level playing field for all economic activity, the consumption of energy should be subject to the standard VAT rate just like any other commodity or service. * District heating. As with other parts of the energy sector, urgent measures are needed to improve the financial viability of district heating so that it can pay for its energy supplies and so that it can invest to improve the quality and efficiency of district heating services. Tariffs that allow full cost recovery are urgently needed, as are improved collection rates. Improvements in accounting standards, building code standards for energy efficiency, and the elimination of the privileges that allow concessional or free district heating to certain groups of people are also needed. An Agenda for Structural Reform 109 Banking system 4 Foreign exchange reserves. Central Bank should defend reserves, not the exchange rate. The rate should be allowed to move in a steady manner to preserve a competitive real rate that leads to a sustainable trade balance..) 4 Bank closures. Initiate the closure of any bank not showing any real prospects for recovery out of the seven large banks which signed Commitment Letters with the NBU. * Law on National Bank. This law should be implemented in a way which assures the Bank can continue to operate without political interference. * Law on Banks and Banking Activity. The law should be approved and implemented to provide clear, modern rules of the game for banking sector development. * Commercial bank independence. Government interference in lending decisions of commercial banks converts such banks into welfare and political arm of government, destroying their ability to function as a normal financial intermediary. Government should sell the shares of banks that it holds today and abstain from placing any political pressure on banks to lend to specific enterprises-or to the government through t-bill purchases or other instruments. * Kartoteka 2. Under this old soviet system, the government can take money out of private bank accounts without due process or effective right of appeal. This policy has had a seriously negative impact on the ability of enterprises to retain the working capital that they need to stay in operation and earn the money required to pay their bills. It has also tended to destroy confidence in the banking system, prevents enterprises from setting priorities among creditors, and drives enterprises into the shadow economy. At time of writing it appeared that Kartoteka 2 was being abolished. This is good news-especially if an alternative market- friendly means of enforcing contracts for payment such as bankruptcy and creditor-led workouts is put into place. * Commercial bank supervision and prudential regulation. Bring supervision of commercial banks up to international standards. Strictly enforce requirements regarding minimum capitalization, capital/asset ratios, and provisioning. Banks unable to meet the requirements should be subject to merger or closure. 110 Annex A ANNEX B: UKRAINE'S GROWTH PROSPECTS: A COMPARATIVE PERSPECTIVE A nation's ability to provide decent standards of living for its people depend crucially on the long-run rate of economic growth. Over long periods of time even a small difference in rates of growth can translate into a major difference in per capita levels of income-the most adequate measure of an economy's level of development and well-being'. However, even over time intervals short by historical standards significant changes in the prosperity of nations and their comparative economic strength. In 1991 Ukraine and Poland started the transition from command economy with very similar level of GNP per capita. Ukraine's GNP at 1,580 dollars per person was only 120 dollars lower that of Poland (Table 1). By 1998 situation has changed dramatically. In September 1989 the first non-communist government of Poland started to implement an ambitious and comprehensive Economic Transformation Program which harmoniously combined the goals of the short-term macroeconomic stabilization with structural reforms-financial system reform, public enterprise restructuring and privatization, modernization of social safety net. These decisive measures revitalized the economy-since 1992 GDP grew at an average rate of 5% creating jobs and raising prosperity. Poland's GNP per capita by the end of the decade is estimated at over 4,000 dollars. Table 1. Atlas GNP per Capita in Ukraine and Poland, 1991-19982 1991 1992 1993 1994 1995 1996 1997 1998 Poland 1,700 1,870 2,250 2,430 2,810 3,230 3,590 3,900 Ukraine 1,580 1,660 1,400 1,310 1,350 1,210 1,040 850 Source: World Development Indicators While Poland's reform was starting to bear fruit and the life of people has been improving, Ukraine's feeble attempts at restructuring the economy which showed little commitment brought about further decline of Ukrainian economy and living standards. By 1998 the gap in GNP per capita between Poland and Ukraine has widened to over 3,000 dollars and Ukraine is wavering on the brink of being included into the list of the poorest countries of the world'. The divergence of Ukraine's and Poland's growth paths in 1990s exemplifies the critical importance of the choice of development strategy and associated economic policies for the longer-term economic growth and improvement in the welfare of people. Despite the differing legacy of the command system in Ukraine and Poland, the countries have so many ethnical, historical, natural, and economic similarities that the claims of radically different cultures, mentality or natural resource endowment often cited to diminish comparisons of Ukraine with Japan or Thailand do not hold water in the case For example, in 1880, Norway was poorer than Argentina. By the late 1990's situation reversed. Due to higher growth rates in Norway compared to Argentina over the past 130 years, Norway's GNP per capita reached 36,000 dollars in 1998 exceeding Argentina's about 4 times. 2 To minimize effects of exchange rate fluctuations on per capita incomes in the cross-country comparisons, the World Bank calculates dollar GNP per capita using a special Atlas method. According to this method, local currency GNP per capita is converted into dollars at the average exchange rate for the current and two previous years adjusted for the difference in inflation rates in the country and G-5 countries (United States, United Kingdom, France, Germany, Japan). According to the World Bank definition which is revised annually, in 1998 a country was classified as poorest (IDA- eligible) if Atlas GNP per capita was below the 895 dollars operational cutoff. Ukraine's Growth Prospects: A Comparative Perspective 111 of Poland. There are no compelling reasons why Ukraine under a liberal macroeconomic and structural policy mix cannot achieve growth rates similar to those of Poland or other successful transition economies of Eastern Europe. Today Ukraine is at an economic crossroads again. The question now is not about choosing a set of short-run policy measure. At issue now is the economic strategy that will shape the future of the economy in 5-10 years from now and which must put Ukraine firmly on the path of the long-awaited economic growth and prosperity. This Memorandum has presented three macroeconomic scenarios modeled to reflect the two basic economic strategy options facing Ukrainian government at present- pushing ahead with an ambitious structural reform (Optimistic and Base Case Scenarios) or trying to restore economic growth through inflationary monetary policies, external borrowing, or a return to the central planning (Low Case Scenario)-and the pace of implementing reforms under reform scenario. The comparison of the results of the three scenarios convincingly demonstrate that the optimal choice for Ukraine is to quickly implement structural reforms that would help to build up its export perfonnance, attract foreign direct investment, and fix the state budget. The alternative to this policy of reforms is unsustainable and fraught with disastrous consequences. Attempts to restore economic growth without fiscal adjustment and implementation of proper structural measures is a road to nowhere. OPTIMISTIC AND BASE CASE SCENARIOS The failure of financial stabilization to bring about economic growth between 1995 and the first half of 1998 has clearly shown that the muddling-through course pursued by the successive government of Ukraine in the past five years has been a major cause of its current economic difficulties and forcefully argues in favor of another strategy-the export-oriented growth-strategy that has brought economic progress and higher living standards to many a developing and transition economy. Ukraine has long been dependent on trade across its borders (foreign turnover today is close to 80% of GDP). Improving export competitiveness, opening domestic economy to foreign investments, cutting-edge technology and know-how are Ukraine's pass to a prosperous future. The Optimistic and Base Case Scenarios are based on the assumption that a package of comprehensive second-generation macroeconomic and structural policies set out in the Memorandum is implemented. However, the term over which the measures are taken and the resolution with which the authorities approach them differ under the two scenarios. While Optimistic Scenario assumes that most of the policy measures are implemented over the 2000-2001 period in the optimum sequence and with due care, the Base Case shows the cost of wavering over the implementation of reform or choosing a sub-optimal reform order. These policies would help quickly overcome the aftereffects of the Russian crisis and develop resilience to the external shocks in the future. These reforms would also lay the foundations of the growth in the real sectors of the economy and would enhance the most important determinants of output growth-savings, investments, productivity. Table 2. Gross and Net Investment in Ukraine, 1990-1998 (% of GDP) 1992 1993 1994 1995 1996 1997 1998 Gross domestic fixed investment 27.1 24.3 23.5 23.3 20.7 19.8 19.3 Net domestic investment 8.3 4.3 4.5 5.0 2.7 1.3 0.5 Source: State Statistics Committee Like many other transition economies, Ukraine has large unutilized productive capacity. Labor is abundant in Ukraine as evidenced by low real wages and physical capital is not as scarce as in many 112 Annex B developing countries. With efficient use of existing stocks of capital and labor, the Ukrainian economy could generate output growth even with minimum of investments. However, due to high degree of capital stock depreciation (estimated at around 65% in industry), neglect during the depression years as well as technological obsolescence of capital, a good deal of investment, not least in capital repair and technological upgrading, will be needed for the output to reach and exceed the pre-transition level. Despite the high gross investment (19-20% of GDP in 1996-1998), net investment-an increase in the productive capital economy has at its disposal which determines the incremental production capacity of the economy has been steadily decreasing and in 1998 stood at just 0.5% of GDP. A return to economic growth will require gross domestic investments to rise from the current depressed level of about 19% of GDP to about 25% or more, which is more consistent with the levels observed in the fast growing transition economies. An important step towards increasing net investment and improving growth prospects is lowering the cost of private sector borrowing. The fiscal adjustment and monetary policies described in the Memorandum-including balancing of the budget by 2000-2001; banking system reform which builds confidence among depositors and promotes a smooth flow of savings from households to businesses; a slowly but steadily growing money supply that keeps inflation under control-are designed to bring down the cost of medium-term borrowing from the current highs of 60-70% per annum to a level more acceptable for business borrowers. Under the Optimistic Scenario, cheaper and more readily available investment financing is assumed to be forthcoming within one-two years after the second-generation reform push is initiated. However, the cost of borrowing cannot be brought by fiscal and monetary policies alone. Downward rigidity of interest rates in Ukraine is partly caused by high risk of doing business in Ukraine and by structural weaknesses of the Ukrainian economy. Improving bankruptcy procedures, eliminating vagueness of ownership rights that make collateral ineffective, development of efficient arbitration system capable of dealing with recovery and distribution of collateral among creditors, all of which have been recommended in the Memorandum, are indispensable in order to bring the cost of private sector borrowing down and expand investment. Equally important, the efficiency of investment needs to be dramatically improved. This will happen only if investment growth comes primarily from increases in private investment as is projected in the Optimistic and Base Case Scenarios. While public capital expenditures will also rise slightly as a percentage of GDP, for example through increased spending on market economy infrastructure, the role of the locomotive of growth firmly belongs to private investments. National savings, now at just Chart 1 18% of GDP, are insufficient to finance the Economic Growth in Poland (1991-1997) and economic recovery and Ukraine under Hign Case Scenario (1999-2005) growth. Under the 1% 7.0% 7.0 7.0 7.0 6.9% Optimistic Scenario the i Ukraine --High case 6.1% 6% SPoland Ukrainian authorities will - -- 3.s aim at increasing national 4 %: savings by creatmg a 2.% conditions for shadow a 1999 savings to come back from 8 0% 1991 the unofficial economy and I 0n 2000 2001 2002 2003 2004 2005 1992 1993 1994 1995 1996 1997 offshore zones abroad. _-2 Wide-ranging deregulation 4 and liberalization, including possibly an amnesty for shadow capital of non- criminal origin, together -8% -7.0% with tax reform cutting the Ukraine's Growth Prospects: A Comparative Perspective 113 number of tax privileges and reducing tax burden on businesses will give a boost to national savings and improve domestic financing of investment. More realistic Base Case Scenario recognizes the Government's hesitance in dealing with tax privileges and tax reform. The Base Case Scenario also assumes that the measures are implemented more slowly reducing economic growth by several percentage points. The current composition of national savings in Ukraine is unsatisfactory. The single biggest economic player-the government-has big dissavings in the form of a budget deficit, which encroaches on the savings of the private sector and deprives the economy of credit resources -- and growth. Under the Optimistic Scenario the investment-savings gap would be closed through foreign savings of 2-3% of GDP and an improvement in the structure and magnitude of foreign savings is achieved by balancing the fiscal position of the government as early as 2000. The Base Case Scenario allows for a slower implementation of budget reform and more gradual fiscal adjustment. As a result, the consolidated government deficit, while lower than in 1996-1998, is not eliminated completely and continues to put pressure on national savings and to restrain economic growth. However, under both the Optimistic and Base Scenarios the importance of creating an attractive climate for foreign direct investments and restoring Ukraine's access to international capital market is hard to overestimate. To attract foreign savings Ukraine needs to distinguish itself among the many countries that are vying for foreign capital. Establishing its credibility both with foreign and domestic investors by pursuing tight but growth-oriented monetary and fiscal policies, creating a stable and transparent business environment is the first step in this direction. Under the Optimistic scenario, an estimated 1.7% GDP decline in 1998 will be followed by -1% GDP growth in 1999 as the effects of the Russian crisis persist. In the subsequent years Ukraine is projected to achieve an GDP average growth of up to 8% per year by 2010 with an average of 7.3% from 2002. Compared to Optimistic Scenario, the Base Case Scenario is more realistic concerning Ukraine's economic prospects. Under the Base Case Scenario an average GDP growth in 2000-2010 is projected at about 4%, which still produces a cumulative growth of about 50% over the decade. Per capita incomes in dollar terms may rise even more as the hryvnia appreciates in real terms due to good export performance. However, the very ambitious growth rate projected under the Optimistic Scenario is not unprecedented. A number of Eastern European transition economies achieved rates of growth as high or even higher, although admittedly not over such extended periods of time. As can be seen in Chart 1, Poland's economic growth path during 1990s was very similar to that projected for Ukraine under the Optimistic Scenario. If Ukrainian authorities learn from its neighbor's mistakes and demonstrate extraordinary commitment to, and persistence in, pursuing reforms, many of which are described in the Memorandum, Ukraine may very well become the next success story among transition economies. Low CASE SCENARIO The Low Case-an alternative scenario which is likely if reforms proposed in the Memorandum are not implemented-shows that the economic growth achieved through money supply expansion and external borrowing is nowhere as rapid and lasting as growth achieved through the resolute implementation of free market reforms. This Low Case scenario also demonstrates that even deviations from a reform path will lead to crisis and the loss of many previous achievements, in particular macroeconomic stability. This scenario demonstrates the negative consequences that a failure to implement policy reforms can have for the economy and people of Ukraine. Despite the unsustainability of this alternative, it reflects in some aspects policies often put forward by certain political circles in Ukraine. The Low Case Scenario assumes that Ukrainian authorities either change the economic strategy dramatically with a view to replace the regulatory functions of the market with a form of quasi- 114 Annex B command system of economic management or commit serious slippages in reform process losing control of the economic policies. In both cases the first result of the anti-market policies would be the destabilization of macroeconomic situation. Inflation will surge as the government tries to avoid addressing serious structural problems and instead keeps uncompetitive industrial enterprises afloat with directed loans from the Central Bank. Government will also support enterprises with direct and indirect subsidies from the State budget, boosting the budget deficit and causing further monetary emission. Attempts to enlist support of the poorer strata of population through generous subsidies from the state budget will further aggravate the state of public finances. As the inflation and budget deficit pick up, so will interest rates on bank loans to the private sector (assuming it still exists). Unless banks are nationalized and ordered to comply with government lending priorities, which would imply all but a transition to a command economy, the banks will virtually suspend the loss-making long-term lending to the economy depriving economy of credit resources needed to finance capital investment and production expansion. Public investments orchestrated by the government will only partly compensate for reduced commercial banking credit and the efficiency of such investment in public enterprises would be far lower than the efficiency of investment in private enterprises. Inflation which will soon turn into hyperinflationary spiral will eat up the working capital in most industries as only enterprises with the highest rates of working capital turnover will be able to safeguard their working capital against rapid depreciation. With nominal and real interest rates high (the latter reflecting the commercial banks' uncertainty about the extent of future inflation and exchange rate depreciation) enterprises will not be able to replenish the rapidly depreciating working capital and soon will have to switch to barter operations reducing the demand for money and further accelerating inflation. With little hope that the banking system will be able to maintain nominal interest rates above the inflation level and lacking the trust in the stability of the banking system in general, households will choose to consume more and invest the lower savings via purchases of foreign exchange and durables thereby reducing the depositor base of the banking system and thus resources available for onlending to enterprises. The foreign exchange and goods markets will come under pressure. As dem4nd for foreign exchange rises and the exchange rate of the national currency hits new lows, the government will introduce a multiple exchange rate regime to hold back the depreciation and imported inflation, to provide low-cost imports to privileged interest groups and to minimize the local currency cost of servicing foreign debt. Exporters will be required to surrender their currency earnings, normally at an unfavorable exchange rate, and a Chart 2 massive capital flight will start. Then the government will have to GDP Dynamics in Romania (1993-1999), Belarus (1995-2000), and takes over from the market the Ukraine under Low Case Scenario (1999-2005) 1%responsibility for foreign Ol)kraine-.-ocase 11.4% exchange allocation with all the Romania associated inefficiencies and .% &3%corruption. However, as foreign 99 . 4.0% exchange supply plummets, the 1999 2.8% government will face a problem of 1995 financing critical imports. International capital markets will -2.0 .obe closed for a country pursuing such a policy mix. Given the lack .6.6% -7.3% of foreign financing, country's 10.4% 2001 2002 2003 2004 2005 foreign exchange reserves will be 1993 1994 1995 1996 1997 1998 depleted even if the country 1996 1997 1998 1999 2000 2001 -15% 1 defaults on its external obligations Ukraine's Growth Prospects: A Comparative Perspective 115 and the authorities will be forced to introduce rationing of food, oil, electricity and other imported goods. As popular dissatisfaction with constantly rising prices increases the authorities will have to respond by introducing price controls for a wide range of consumer products, especially foodstuffs, causing mass shortages. As prices for many industrial products are likely to remain less regulated, agriculture-whose products will be purchased by the government at below-market prices-will fall into decay, unable to buy the required machinery and inputs. As excessive inventories accumulate, both agricultural and industrial production will declines and the country will be under risk of hunger. Population whose welfare has fallen as a result of the policies will replace the government that brought the country to the brink of economic collapse. The consequences of the reversal in the reform policies described above have been taken to an extreme. However, the stark choice facing Ukraine is obvious-either the country resolutely pursues market reforms to the end or resort to full-scale state planning whose results will be similar to the one described above, however they will take longer to become apparent. Despite their damaging consequences, many of these policies have been tried or are still being implemented by the countries in Eastern Europe, including Ukraine in early 1990s. The two prime examples of market reforms going awry and an attempt to return to a revised form of command economy in the Eastern Europe are, respectively, Romania whose policy errors in mid-1990 lead to a demise of the fledgling economic recovery and three consecutive years of economic decline, and Belarus whose administrative methods of economic management reached its limits less than three years after their adoption (Chart 2). With such examples close at hand, Ukraine would commit a gross mistake to follow in their footsteps to a few years of miserable growth followed by economic collapse. Out of the two generic policy alternatives facing Ukraine at present, only one-fundamental economic and structural reform projected in the Optimistic/Base Case Scenarios-will put Ukraine on a path of long-term, sustainable outward-oriented growth capable of raising the living standards of the people of Ukraine to the level they deserve. 116 Annex B ANNEX C:THE SHADOW ECONOMY IN UKRAINE. METHODS OF CALCULATING ITS SIZE This note reviews the methods used by Professor Borodiuk and MP Turchinov in their study of the shadow economy in Ukraine' for estimating its size. Discussed below are their methodologies, the probable errors of each in estimating the size of the shadow economy, and possible quick fixes that could improve the estimates. Methods Borodiuk and Turchinov (BT) analyzed three methods of calculating shadow economy in their article "Methods for calculating the size of shadow economy," (Economy of Ukraine, 1997, No 5, pp. 41-53). They empirically tried to measure the applicability of those methods for Ukraine (see box 1). Box.1 Problems with the basic methods of estimating the size of the shadow economy in Ukraine Electricity- Used by Kaufmann and Kaliberda in Ukraine, and by other researcher in other consumption countries, this method has proven its usefulness, providing overall estimates of size as method well as indications of trends. However, given a changing situation in electricity energy sector of Ukraine including sharply higher energy prices that should lead to at least some gains in energy efficiency, it is far from foolproof. Also, there may be problems in data collection, processing, and verification of electricity consumption Monetary In Ukraine, Russian and some other FSU countries, money in banks can directly feed method into informal sector transactions. Unstable legislation, weak financial sector, inefficient regulatory control of commercial banks by the central bank, ineffective (Monetary and management of public money, quasi money, growing unsecured budget arrears in money wages and pensions, netting-out operations, non-bank means of payment like barter velocity) and arrears, and writing off enterprise debts to the budget make accounts based on monetary and banking system indicators subject to a high degree of error. Cash in Tax legislation is cumbersome and does not foster implementation of compliance- circulation based tax system. Accounted taxes and fines/penalties, as well as property under and taxation execution, remain virtual (existing on paper only) in terms of not turning to cash budget revenues fully. Granting tax privileges, accepting tax payments in kind, and writing off tax arrears, make this method questionable. * Electricity consumption. The first method involves computing a real GDP based on GDP of a known date in the past and changes in electricity-consumption since that date. The result, which assumes that electricity consumption will reflect changes in real GDP, is then compared with official data on GDP and with the estimated share of GDP in the shadow economy in a base period (they used 14% in V.M. Borodiuk and O.V. Turchinov. "Shadow Economy Policy," Chpater 7 in Economic Growth with Equity: Ukrainian Perspectives (part of the Country Economic Memorandum project jointly sponsored by the Ministry of Economy of Ukraine, the World Bank, and the International Center for Policy Studies, 1999. The Shadow Economy in Ukraine. Methods of Calculating Its Size 117 1990). On this basis, they estimated the shadow economy at 38.1%, 50.1%, and 56.4% of the official Ukrainian GDP in 1993, 1994, and 1995, respectively. Shadow Economy,% of official GDP -*-Cash in Hands vs. 310.00 1994, and 1995,respectively Money Supply 350.00 * Monetary Method. The second approach, 300.00 ----Deps vs. Money the so-called monetary method, assumes 250.00 ------- Supply that the size of shadow economy depends 200.00 - on amount of cash in circulation outside 150.00 -- - - ----- -a-Cash in Hands vs. the banks. The size of shadow economy is 100.00 - -p-s-- . 50.00 -- - -- - then estimated by examining changes in . Electricity key monetary aggregates including (a) 0.0 sBorodiuk nd cash in circulation vs. money supply, (b) af Turchinov deposits vs. monetary supply, or (c) cash in hands vs. deposits. Using these Source: NBU data and Bank staff estimates. methods, the shadow economy was estimated at 101%, 32%, and 158% of the official Ukrainian GDP in 1995, respectively. As a modification of the second method (cash in hands vs. deposits), another approach takes into account the velocity of money in informal sector. Higher velocity means higher share of shadow economy. Mathematically, the formula is multiplied by a coefficient co, which reflects the increase of the velocity in shadow sector towards the velocity in official economy, On this basis, the shadow economy was estimated at 186% of the official Ukrainian GDP in 1995, which shows that 0 in 1995 was 1.18. Table I Shadow Economy Size Calculation Methods, 1993-1995 Basic Size of Shadow Size of Shadow Economy, No. Methods of calculations Year Economy, UAHmn. % of the official GDP Year Year 1993 1994 1995 1993 1994 1995 1 Monetary Method: Cash in Hands vs. Money Supply 1992 549 3 732 53 462 37 31 101 2 Monetary Method: Deposits vs. Money Supply 1992 133 -843 16 939 9 -7 32 3 Monetary Method: Cash in Hands vs. Deposits 1992 742 4454 83 634 50 37 158 4 Monetary Method: Cash in Hands vs. Deposits, taking 1992 98455 186 into account money velocity 5 Cash in Hands and Taxation 1992 446 6 619 40 912 30 55 77,3 6 Electricity Consumption: Input-output balance 1990 565 6031 29 854 38,1 50,1 56,4 7 Electricity Consumption: Data of Goscomstat of Ukraine 1990 526 6 163 371 179 35,4 51,2 68,2 8 Electricity Consumption: by the World Bank 1990 599 6440 31 231 40,4 53,5 59 Source: Based on Borodiuk and Turchinov, op. cit * Cash in circulation and taxation. The third method was suggested by the Institute of Russia to the National Academy of Science of Ukraine. It focuses on measuring influence of cash in hands and size of taxation on the size of shadow economy. The size of taxation reflects tax base, tax rate, and percent 118 Annex C of collected taxes towards the planned figures in the budget. The formula puts the size of shadow economy in direct proportion to the amount of cash in hands and in inverse proportion to the size of taxation. On this basis, the shadow economy was estimated at 30%, 55%, and 77.3% of the official Ukrainian GDP in 1995, respectively. This method was used by BT for contributing to the paper "Growth with Equity" (table 1). These methods have also been used to provide estimates of the size of the shadow economy for more recent years (figure 1). Deviations and errors BT note a variety of risks that can seriously undermine reliability of calculations and forecasts made by the above methods. * High risk of making a wrong assumption on shadow economy share in the basic year for calculation. This is clearly a problem for Ukraine, as well as for other countries of FSU, because of deliberately inaccurate data on economy inherited from the Soviet times. * Weak capacity of existing Ukrainian statistics system to ensure reliability and completeness of information. Data collection is inefficient and there is not enough data to compute without making too many presumptions. We would like to stress on the importance on dealing with the second risk of inefficient and ineffective statistics system. In addition to the shadowization of markets of products, financial resources, and factors, this weakness makes impossible to calculate basic economic aggregates correctly, monitor the situation and forecast future trends. Thus, it creates a vicious circle when results of government's, households', and companies' activities, being unmeasured2, to a certain extent contribute to the growth of shadow markets, which, in their turn, introduce more distortions to the functioning of those three players (see Figure 2). Quick Improvements First, reform the statistics system. Instead of collecting all possible data,3 move to a fully equipped, efficient system that coordinates information flows and provides reliable outputs based on internationally accepted conventions such as the System of National Accounts (SNA) and the system of Government Financial Statistics (GFS).4 Second, implement continuing work on measuring the shadow economy. The shadow economy continues to grow under current policies and will probably remain a most difficult issue for the government to deal. At modest costs, local researches with experience in the field can do modeling of informal sector data that keeps information up to date and gradually improves the methodology, reducing deviations and errors. Finally, and by far the most important, implement policies that will encourage otherwise legitimate shadow activity to move into the formal economy. Measuring the shadow economy does not solve the shadow economy problems such as low tax revenues and excessive tax pressure on legal firms. We already know that this is a serious problem. While measurements may help focus attention on the issue, a 2 Existing unmeasured part of GDP blocks accurate monitoring and forecasting of economic development. 'Unmeasured' may often means 'untaxed', e.g. it causes untaxed informal trade / smuggling and corruption at customs offices if custom declarations of individuals are collected by customs offices but remain unprocessed until destroyed upon expiration of limitation period. Experts of Goscomstat agree they force enterprises to submit many overlapping data, part of which, by the way, is never processed. Goscomstat sees the main problem in changing legislation and normative acts of statistics. However, one may think that this is just a kind of institutional fear to lose the significance by restructuring the agency, removing useless procedures and requirements, and, if needed, cutting off redundant staff. 4 Statistics System Reform is one of the firs-tier components of ID APL. The Shadow Economy in Ukraine. Methods of Calculating Its Size 119 much higher priority is to shrink the relative size of shadow activity so that its measurement ceases to be an important issue. Figure 2 Open Economy Turnover Model: Ukraine - unmeasured data and shadow markets Economies of Other Countries Export Underestimated H-ldden rent. crops gathered and consumed oa by household plots without going to 4 product market. vtrtuol privatization and morket of real estate (UAH10-20 vsc Factor Market market price of USD1,0001-20,000 tm case of privatzation)- cost of water volume lost --. Unmeasured data because of technical hitch in the municipal infrastructure hat charged to households to Shadow Marhets pay for. etc.ec Source: Bank staff 120 Annex C ANNEX D: LIST OF UKRAINIAN CEM PROJECT CONTRIBUTORS Preparation of this and the other documents generated by the participatory country economic memorandum project involved dozens of Ukrainian professionals from a wide range of backgrounds in a year-long process of discussing, researching, writing, and reviewing some of the key macroeconomic and sectoral issues facing Ukraine today. The members of the eight research groups that participated in this process and the experts who helped advise and review the work of these researchers are listed below. A great debt of gratitude is owed to these people. Their work contributed greatly to the quality of the discussions and the final products of this participatory process. AGRARIAN POLICY Ukrainian experts, who commented on Ukrainian research group the analytical materials P.T. Sablouk, P.I. Hajdutsky, Deputy Head, Presidential Administration Director, Agrarian Policy Institute, O.M. Golovanov, Chief, Department for Problems of the Ukrainian Academy ofAgrarian Economy of Agro-industrial Complex, R&D Institute of the Sciences Ministry of Economy Y.Y. Luzan, First Deputy Minister of the Economy of Agro- A.A. Fesina, industrial Complex of Ukraine Leading Research Fellow, Agrarian L.G. Shmorhun, Head, Chief Department for Agro- Policy Institute, Ukrainian Academy of industrial Policy, Ministry of Economy Agrarian Sciences O.M. Shpychak, Secretary, Academy of Agrarian Sciences V.V. Yurchyshyn, Head of Department, Agrarian Policy Institute, Ukrainian Academy of Agrarian Sciences V.V. Demjanchouk, Head, Secretariat for Agrarian Reform at the Vice Prime Minister EDUCATION Ukrainian experts, who commented on Ukrainian research group the analytical materials Y.M. Vitrenko, A.G. Bohomolov, Deputy Minister of Education of Ukraine Head of the Department for Economy I.P. Dryhus, Head of Secretariat, Verkhovna Rada Science of Education, Culture and Health and Education Committee Care, the Ministry of Health Care of 0.1. Kiliyevich, Assistant Professor, Chair of Economics and Ukraine Finance, State Administration Academy under the President of Ukraine K.V. Korsak, Expert in Education, International Staff Academy L.H. Kostyliov, Director, Kyiv School #155 Y.V. Lukovenko, Deputy Director for Projects, ICPS V.M. Matviychouk, Deputy Minster of Finance of Ukraine List of Ukrainian CEM Project Contributors 121 A.V. Furman, Professor, Chief of Chair for Pilot Systems in Education, and Deputy Editor of Education and Adminis- tration, Academy for Managerial Educational Personnel ENERGY POLICY Ukrainian experts, who commented on the analytical Ukrainian research group materials A.G. Vrublevsky, P.S. Ambrosevich, Head, Department of Fuel-power First Deputy Minister of Economy Complex, Antimonopoly Committee Y. Halynovsky, Chief of Sector, Research and Development Institute of Economics, the Ministry of Economy V.'. Kiriniachenko, O.L. Zolotariova, Head of the Board, Association of Head, Department of Fuel-power Independent Electric Power Suppliers Complex of the Ministry of Economy V.G. Nosov, Researcher, "Quarterly Predictions" Project, ICPS V.G. Skarshevsky, Expert, Prime Minister Service FISCAL POLICY Ukrainian experts, who commented on Ukrainian research group the analytical materials M.V. Chechetov, V.I. Lysytsky, Head, Group of Advisers to the NBU Deputy Minister of Economy Governor V.G. Skarshevsky, I.A. Shumylo, Deputy Minister of Economy Expert, Prime Minister Service A.A. Maksiuta, Head of Sector, Chief Budget Department of Ministry of Finance of Ukraine V.Y. Lomynoha, O.V. Mostovenko, Deputy Head, Chief Department of Tax Head, Department for Forecasting Enforcement of the State Tax Administration Revenues and Expenditures of the S.F. Obozny, Deputy Head, Department of Financial State Budget of Ukraine, Chief AF ozny, Deputead, D eMnt of in ncia Department of the State Treasury of ctivity of Business Structures of the Ministry of Economy Ukraine of Ukraine V.V. Soldatenko, H.O. Piatachenko, Director, R&D Financial Institute of the Ministry of Finance of Ukraine Head of Sector, Chief Department of 0.1. Soskin, Advisor to the President of Ukraine Economic Analysis of the State Tax Administration of Ukraine M.M. Shapovalova, Deputy Head, Chief Budget Department 0.1. Shytria, Deputy Head, State Tax Administration I.D. Yakushyk, Head, R&D Tax Policy Center of the State Tax Administration HEALTH CARE Ukrainian experts, who commented on Ukrainian research group the analytical materials Y.M.Vitrenko, R.V. Bogatyryova, Minister of Health Care of Ukraine 122 Annex D Head of the Dept. for Economy of Edu- T.F. Baranova, Head of the Main Department of Economy, cation, Culture and Health Care, the Minister Ministry of Health Care of Ukraine Ministry of Health Care of Ukraine L.S. Gryrovych., Deputy Head Committee on Health Care, Maternity and Childhood Protection, Parliament of Ukraine A.M.Nagorna, I. B.Demchenko, Advisor to the Minister of Health Care of Deputy Director of the Ukrainian Ukraine Institute for Public Health V.D.Zukhin, Member of the Association of Administrators of Private Medicine B.P. Kryshtopa, Honored Doctor of Ukraine, Ph.D., Head of the Department of Health Care, Kyiv Medical Post-graduate Academy O.M. Lukianova, Director of the Institute of Pediatrics, Obstetrics and Gynecology O.Ye. Poladko, Deputy Head of the Main Department for Medical and Preventive Treatment, the Ministry of Health Care of Ukraine V.M. Rudyi, Head of the Secretariat of the Committee for Health Care, Maternity and Childhood Protection, Parliament of Ukraine V.F. Sayenko., Director of the Institute of Clinic and Experimental Surgery 0. Smyrnova, Deputy Head of Kyiv Oblast State Administration for Education, Culture and Health Care Y.Subotin, Head of the Bureau of World Health Protection Organisation on Coordination and Relations with Ukraine M.K. Khobzey., Head of the Department for Health Care, Lviv Oblast State Administration INDUSTRIAL AND FOREIGN TRADE POLICY Ukrainian experts, who commented on Ukrainian research group the analytical materials A.G. Vrublevsky, Y.M. Bazhal, Chief of Department, Institute of Forecasting, First Deputy Minister of Economy National Academy of Sciences I.S. Byk, Deputy Head, Financial-economic Department, Ministry if Industrial Policy G.O. Tryneyev, O.S. Samodurov, Head, Department of Cooperation with Head, ChiefDepartment ofEconomy CIS Member States and Baltics, Ministry of Economy of Inter-sector Relations, Ministry of V.M. Horbachouk, Expert, Ukrainian Union of Industrialists Economy and Entrepreneurs S.H. Hrischenko, Deputy Minister of Industrial Policy Y.A. Zhalilo, Chief, Department of Policy Studies, National Institute for Policy Studies V.H. Sharshevsky, Expert, Prime Minister Service List of Ukrainian CEM Project Contributors 123 M.M. Yakuboysky, L.M. Sokolov, Chief of Sector, Institute for Broad Transport Deputy Director, R&D Institute of Problems Economics, Ministry ofEconomy T.M. Solianik, Deputy Head, National Agency of Ukraine for Development and European Integration Y.P. Shkarban, Deputy Head, Economic Department, Ministry of Foreign Economic Relations and Trade SHADOW ECONOMY Ukrainian experts, who commented on Ukrainian research group the analytical materials Y.M. Bazhal, Doctor of Economics, Head of Department, V.M. Borodiuk, Institute for Economic Forecasting, National Academy of Sciences Doctor of Economics, Professor A.V. Bazyliuk, Doctor of Economics, Head of Department, Corresponding Member of the Natieponal ng A em r of ne Research & Development Institute of Economics, Ministry of National Academy of Sciences, Eooyo kan Adviser, Accounting Chamber of Ukraine Y.B. Bazyliuk, Candidate of Economics, National Institute for Policy Studies O.V. Turchinov B.F. Besiedin, Doctor of Economics, Professor, Deputy Director, Research & Development Institute of Economics, Doctor of Economics, Parliament Ministry of Economy of Ukraine Member, Head of Subcommittee for G.M. Bilous, Head of Department, Ministry of Economy of State Budget Expenditures, Budget Ukraine Committee of Verkhovna Rada V.I. Golikov, Doctor of Economics, Professor, Corresponding Member of the National Academy of Sciences, Head of Department, Institute for Economic Forecasting, National Academy of Sciences B.A. Holovco, Deputy Head, State Committee for Statistics B.M. Horbansky, Head of Department, State Tax Administration of Ukraine V.M. Horbachouk, Doctor of Economics, Expert, Ukrainian Union of Industrialists and Entrepreneurs V.I. Lysytsky, Chief, Group of Advisers to the NBU Governor D.V. Liapin, Executive Director, Association for Promotion of Small and Medium Business Development, Yednannia 0.1. Paskhaver, Honorary Chairman, Association of Consulting Enterprises of Ukraine, UkrConsulting N.V. Prokopovych, Head of Department, State Committee for Business Development A.P. Revenco, Doctor of Economics, Head of Department, Institute for Economic Forecasting, National Academy of Sciences 124 Annex D 0.1. Soskin, Doctor of Economics, Adviser to the President of Ukraine V.I. Terekhov, Doctor of Economics, Professor, Senior Specialist, Accounting Chamber of Ukraine O.V. Tkachenco, Executive Director, Economic Reform Institute M.V. Chechetov, Deputy Minister of Economy of Ukraine V.T. Shlemco, Candidate of Economics, National Institute for Policy Studies I.A. Shumylo, Deputy Minister of Economy of Ukraine SOCIAL PROTECTION Ukrainian experts, who commented on Ukrainian research group the analytical materials 0. S.Yaremenko, N. E.Burkat, Director, Social Reforms Project, Institute for Deputy Minister of Economy Market Reforms V. P.Bevz, Head of the Social Policies Division of the Cabinet of Ministers of Ukraine M.O. Soldatenko, I. F.Hnybidenko, Head of the Main Department of complex Head of the Main Department of analysis and projections for social development and population income policies and information, Ministry of Labor and Social Policies of Ukraine employment, the Ministry of Economy E. M.Hrygorenko, Head of the Department of economic and social policies, Administration of President of Ukraine N. I. Zinkevych, V. M.Novikov, Advisor to President of Ukraine Deputy Head of the Main Department V. M.Ruddenko, Deputy Minister of Labor and Social of population income policies and Policies of Ukraine employment, the Ministry of Economy Y.I. Sayenko, Deputy Director, Institute of Sociology, NASU List of Ukrainian CEM Project Contributors 125 STATISTICAL APPENDIX STATISTICAL APPENDIX 1. POPULATION AND EMPLOYMENT 1.1 P O PU LATIO N , 199 1-199 8 ........................................................................................................................... 132 1.2 L ABO R F ORCE, 1993-1998 ......................................................................................................................... 132 1.3 AVERAGE EMPLOYMENT BY SECTOR, 1992-129997................................................................................ 133 1.4 LABOR PRODUCTIVITY INDEXES BY INDUSTRY, 1990-1997....................................................................... 134 2. NATIONAL ACCOUNTS 2.1 GROSS DOMESTIC PRODUCT BY INDUSTRY AND EXPENDITURE CATEGORY AT CURRENT PRICES, 19 89 -19 9 7 .......................................................................................................................................................13 5 2.2 STRUCTURE OF GROSS DOMESTIC PRODUCT BY INDUSTRY AND EXPENDITURE CATEGORY AT C URRENT PRICES, 1989-1997 .......................................................................................................................... 136 2.3 GROSS DOMESTIC PRODUCT BY INDUSTRY AND EXPENDITURE CATEGORY AT COMPARATIVE PRICES, 19 9 0 -19 9 7 .......................................................................................................................................................13 7 2.4 GROSS DOMESTIC PRODUCT INDEXES BY INDUSTRY AND EXPENDITURE CATEGORY, 1990-1997............. 138 2.5 ANNUAL GROSS DOMESTIC PRODUCT GROWTH RATES BY INDUSTRY AND EXPENDITURE CATEGORY, 19 9 1-19 9 7 ....................................................................................................................................................... 13 9 2.6 STRUCTURE OF GROSS DOMESTIC PRODUCT BY INDUSTRY AND EXPENDITURE CATEGORY AT C OM PARATIVE PRICES, 1991-1997 .................................................................................................................. 140 2.7 GROSS CAPITAL INVESTMENT BY INDUSTRY AT CURRENT PRICES, 1990-1996 ......................................... 141 2.8 GROSS CAPITAL INVESTMENT BY INDUSTRY AT CURRENT PRICES............................................................. 142 2.9 HOUSEHOLDS M ONETARY INCOME, 1992-1998 ........................................................................................ 143 3. BALANCE OF PAYMENTS AND INTERNATIONAL TRADE 3.1 BALANCE OF PAYM ENTS, 1991-1998......................................................................................................... 144 3.2 BALANCE OF PAYMENTS, QUARTERLY, 1994-1998.................................................................................... 145 3.3 GEOGRAPHIC STRUCTURE OF MERCHANDISE TRADE, 1994-1997.............................................................. 146 3.4 COMMODITY STRUCTURE OF FOREIGN TRADE, 1995-1997........................................................................147 3.5 COMMODITY STRUCTURE OF FOREIGN TRADE, TWO-DIGIT CLASSIFICATION, 19 9 4 -19 9 7 .......................................................................................................................................................14 9 3.6 COMMODITY STRUCTURE OF MERCHANDISE EXPORTS, 10 MAJOR PRODUCTS, 19 9 5 -19 9 7 ....................................................................................................................................................... 15 0 3.7 COMMODITY STRUCTURE OF MERCHANDISE IMPORTS, 10 MAJOR PRODUCTS, 19 9 5 -19 9 7 ....................................................................................................................................................... 15 0 3.8 GEOGRAPHIC STRUCTURE OF FOREIGN TRADE IN SERVICES, 1994-1997................................................... 151 3.9 FOREIGN TRADE IN SERVICES, 1994-1997 ................................................................................................. 152 3.10 BARTER IN FOREIGN TRADE, 1995-1997 ................................................................................................. 153 3.11 FOREIGN ECONOM IC POSITION, 1994-1998 ............................................................................................. 154 3.12 N B U INTERVENTIONS, 1995-1998........................................................................................................... 155 3.13 NOMINAL AND REAL EXCHANGE RATES, 1992-1999............................................................................... 156 3.14 A UCTION EXCHANGE R ATE, 1993-1998 .................................................................................................. 157 3.15 INTERNATIONAL RESERVES, 1992-1998 .................................................................................................. 158 4. DEBT 4.1 EXTERNAL DEBT OUTSTANDING, 1992-1998 ........................................................ .... 159 4.2 EXTERNAL DEBT STOCKS AND FLOWS, 1994-1997.................................................................................... 160 4.3 DIRECT FOREIGN INVESTMENTS IN UKRAINE BY INDUSTRY, 1994-1998 ...................................................163 4.4 DIRECT FOREIGN INVESTMENTS IN UKRAINE BY COUNTRY, 1994-1998....................................................164 4.5 UKRAINIAN DIRECT INVESTMENTS IN OTHER COUNTRIES, 1994-1998...................................................... 165 4.6 UKRAINIAN DIRECT INVESTMENTS TO OTHER COUNTRIES, 1994-1998 .....................................................165 4.7 DIRECT FOREIGN INVESTMENT INFLOWS TO UKRAINE, 1994-1998 ........................................................... 166 128 Statistical Appendix 4.8 UKRAINIAN DIRECT INVESTMENT FLOWS TO OTHER COUNTRIES, 1994-1998 .......................................... 167 4.9 INTERNATIONAL PRIVATE BORROW ING ..................................................................................................... 168 5. PUBLIC FINANCE 5.1 CONSOLIDATED BUDGET ON AN ACCRUAL BASIS, 1992-1998 .................................................................. 169 5.2 CONSOLIDATED BUDGET AS PERCENT OF GDP, 1992-1998 ...................................................................... 170 5.3 CONSOLIDATED BUDGET VOLUME INDEX, 1992-1998 .............................................................................. 171 5.4 PERCENTAGE STRUCTURE OF CONSOLIDATED BUDGET REVENUES AND EXPENDITURES, 1992-1998 ....... 172 5.5 BUDGET FINANCING BY TYPE OF DEBT INSTRUMENT, 1998 ...................................................................... 173 5.6 STATE AND LOCAL BUDGETS, 1990-1997 ................................................................................................. 174 5.7 PENSION FUND REVENUES AND EXPENDITURES, 1991-1997 ..................................................................... 177 5.8 TAX AND EXPENDITURE ARREARS, 1996-1998 ......................................................................................... 178 6. MONETARY SURVEY 6.1 SUMMARY BALANCE SHEET OF THE NATIONAL BANK, 1992-1998........................................................... 179 6.2 SUMMARY BALANCE SHEET OF COMMERCIAL BANKS, 1992-1998 ........................................................... 180 6.3 M ONETARY A GGREGATES, 1992-1998...................................................................................................... 181 6.4 V ELOCITY OF CIRCULATION, 1992-1998................................................................................................... 182 6.5 INTEREST R ATES, 1993-1998 .................................................................................................................... 183 6.6 TERM STRUCTURE OF COMMERCIAL BANKS' INTEREST RATES ON CREDITS IN FOREIGN CURRENCY, 19 9 8 ................................................................................................................................................................ 18 4 6.7 COMMERCIAL BANKS' CREDIT TO ECONOMIC ENTITIES IN UKRAINE AS OF NOVEMBER 1, 1998............... 185 6.8 INTER-ENTERPRISE A RREARS, 1992-1998................................................................................................. 186 7. AGRICULTURAL STATISTICS 7.1 A GRICULTURAL PRODUCTION, 1990-1998 ................................................................................................ 187 7.2 U SE OF A GRICULTURAL AREAS, 1985-1997.............................................................................................. 188 7.3 A REAS UNDER CULTIVATION, 1985-1997.................................................................................................. 189 7.4 C ROP Y IELDS, 1990-1997 .......................................................................................................................... 190 7.5 PRIVATE SECTOR IN AGRICULTURE, 1992-1997........................................................................................ 191 7.6 AGRICULTURAL PRODUCTION BY TYPE OF FARM, 1993-1997................................................................... 192 7.7 GROSS AGRICULTURAL OUTPUT BY FORM OF OWNERSHIP, 1990-1997 .................................................... 193 7.8 PROFITABILITY OF INDUSTRIAL & AGRICULTURAL PRODUCTION, 1992-1996 .......................................... 194 8. INDUSTRIAL STATISTICS 8.1 BRANCH COMPOSITION OF INDUSTRIAL PRODUCTION, 1996-1998............................................................ 195 8.2 INDUSTRIAL PRODUCTION INDEXES, 1996-1998 ....................................................................................... 196 8.3 INDUSTRIAL PRODUCTION GROWTH RATES (YEAR ON YEAR), 1996-1998................................................. 197 8.4 INDUSTRIAL PRODUCTION (MONTH ON MONTH), 1996-1998 ..................................................................... 198 8.5 POWER SECTOR FINANCIAL RECOVERY PLAN ........................................................................................... 199 9. PRICES 9.1 CONSUM ER PRICE INDEX, 1992-1998........................................................................................................ 200 9.2 CONSUMER PRICE INDEX BY COMPONENTS, 1992-1998............................................................................ 201 9.3 PRODUCER PRICE INDEX, 1991-1998......................................................................................................... 202 9.4 PRODUCER PRICE INDEX BY COMPONENTS, 1996-1998............................................................................. 203 10. TRANSITION INDICATORS 10.1 PRIVATIZATION , 1992-1997 .................................................................................................................... 205 10.2 PRIVATIZATION BY INDUSTRY, 1992-1997 .............................................................................................. 206 10.3 STATE HOUSING PRIVATIZATION BY REGIONS, 1994-1997 ..................................................................... 207 Statistical Appendix 129 STATISTICAL APPENDIX PREFACE This appendix provides statistical series Data coherence and methodological notes. describing Ukraine's economy and its sectors International organizations have done from different perspectives. In the majority of considerable work to improve the quality of cases, time series data back to 1991, the year Ukraine gained its independence. However, in .trainal standa a n bri of uM an some cases (e.g., balance of payments statistics Worlank statisA mso or n C, World Bank statistical missions worked in and foreign trade statistics) data series start C, Ukraine over the past four years to verify the later. Ukrainian statistics, just like the country itself, had to go through a transition. From being metodologies of m ay naning a source of data for the state planner who stitc,bane ofpyns, ainl accounts, consumer and producer price indices. needed a wide variety of physical indicators to In all those areas Ukrainian statistics were control the public production process, the j Ukrainian statistical system has turned into a judgedoo comply t e io supplier of information on prices and other market conditions for market participants to However, there are two areas of potential make educated decision on the efficient inconsistency in the foreign trade and public allocation of scarce economic resources to most finance data presented in the Annex which productive uses. deserve special mention. In Ukraine, preparation in of the balance of payments statistics (BOP) is Structure. The appendix contains 72 tables thinpniiiyo teNtoa ako 10 sctins cverng ppultion and the responsibility of the National Bank of Ukraine while the foreign trade balance (FTB) employment, national accounts, balance of payments and international trade, debt, public i me th es. NBU an Ce finances, monetary sector, agriculture and different methodologies. The BOP is prepared using the methodolog laid out in the 5h (1993) industry, prices, and pace of economic gg edition of IMF's Balance of Payments Manual. transition, in particular privatization. The FTB is compiled in accordance with the Data sources. The data presented in the methodological guidelines of the United appendix have been drawn from various official Nations' Statistical Commission. The main sources. The basic source of data is the State differences between the two include: Statistics Committee (SSC) which publishes Timing of goods' registration: For FTB Statistical Yearbook and monthly Statistical Bulletin as well as a number of specialized prpoe a t ioni ported publications like Ukraine: National Accounts oroted the moent t c and Foreign Direct Investments in Ukraine. crosses the border. Under BOP the time of Other important official publications containing import/eprtgis tantoet m valuable statistical data on various aspects of ' Ukrainian economic and social development are * Sources of information: FTB data are Presidential Administration's Ukraine and its based on customs statistics and on reports Regions, Ministry of Economy's of enterprises. BOP also draws on Macroeconomic Indicators, NBU's Monthly additional information about international Bulletin and Balance of Payments Quarterly. financial transactions collected by the NBU From among unofficial sources of statistical through commercial banks; data which were extensively used during the preparation of the Statistical Annex we would * Price bases used and geographical particularly like to note the publications of the caiseaton otransacon: In Fn Ukrainian-European Policy and Legal Advicee merchandise id orto Center, especially its monthly Ukrainian ber hIe merhn diseiports Economic Trends. A number of tables in the asd o CIF ter. an BO prs and imports are recorded at FOB prices. In Annex, in particular on external debt, are based on World Bank and IMF staff calculations. 130 Statistical Appendix FTB, geographical structure of exports and revenues. Second, on the expenditures side, the imports is amortization of foreign and domestic loans is also reclassified by the IMF as a financing item * determined by country of destination an rather than a current expenditure. Finally, cn ochanges in government deposits are subtracted BOP geographical breakdown of foreign by the IMF in calculating net revenues. In 1998, trade flows is based on the country-owner as a result of the partial switch to the GFS of merchandise; methodology, the Government of Ukraine moved the amortization of foreign and domestic whleroiiy FT data is release monrte ithy a loans below the line, thus eliminating one of the while BOP data is released quarterly with a dfeecs 90 day lag. The IMF is calculating the accrual deficit by The second source of data inconsistency lies in adding budget expenditure arrears to cash difference between consolidated budget data deficit but not adding tax collection arrears to calculated in accordance with IMF's 1986 revenues. This treatment is based on the Government Financial Statistics methodology assumption that tax arrears will not be paid, and official Ukrainian numbers. Budget tables while expenditure arrears will eventually be 5.1 - 5.4 in the Annex are based on the IMF paid. This asymmetric treatment is probably methodology. According to IMF calculations justified given that the government has a moral consolidated budget deficits were much higher obligation to pay for its consumption sooner or in the early years of independence than later while, on the other hand, a major share of officially reported by Ukrainian authorities. The taxes are owed by enterprises that are higher IMF deficit numbers reflect primarily the effectively bankrupt and unlikely ever to repay inclusion of the quasi-fiscal expenditures- their tax arrears. directed bank lending at government's request. It needs mentioning that due to high inflation Since 1995, the government has sharply reduced during the first years of independence State directed lending, which reduced the difference Statistics Committee has used moving base year between the two public finance data sources. for constant price GDP calculations rather than Three key differences between IMF-GFS a single fixed year. As a result, when GDP methodology and the official Ukrainian components were rebased to 1990 in Table 3.4 numbers remain. First, on the revenue side, in order to produce chain indices of GDP privatization proceeds are classified by the IMF growth, additivity of components has been lost. as below-the-line financing, not current Statistical Appendix 131 SECTION 1 Table 1.1 - Population, 1991-1998 (at the beginning of the year) 1991 1992 1993 1994 1995 1996 1997 1998 Population, mun persons 51.9 52.1 52.2 52.1 51.7 51.3 50.9 50.5 including mn persons urban population 35.1 35.3 35.4 35.4 35.1 34.8 34.5 34.3 rural population 16.8 16.8 16.8 16.7 16.6 16.5 16.4 16.2 males 24.1 24.2 24.2 24.2 24.1 23.9 23.7 23.5 females 27.8 27.9 28 27.9 27.6 27.4 27.2 27 % of total urban population 68 68 68 68 68 68 68 68 rural population 32 32 32 32 32 32 32 32 males 46 46 46 46 47 47 47 47 females 54 54 54 54 53 53 53 53 Memo: Birth-rate (per thous. persons) 12.1 11.4 10.7 10 9.6 9.1 8.7 8.3 Death-rate (per thous. persons) 12.9 13.4 14.2 14.7 15.4 15.2 14.9 14.3 Children before year death-rate (per thous. born) 13.9 14 14.9 14.5 14.7 14.4 14.0 12.8 Natural increase in population, thous. persons -36.2 -100.6 -179.3 -242.8 -299.8 -309.5 -311.5 -300.7 including in rural area -76.7 -86.6 -106.6 -121 -131.7 -139.8 -143.4 -133.9 per thous. persons -0.8 -2 -3.5 -4.7 -5.8 -6.1 -6.2 -6.0 Source: State Statistics Committee Table 1.2 - Labor Force (thousand persons, unless otherwise indicated) 1993 1994 1995 1996 1997 1998** Employment* 23,945 23,025 23,726 23,232 22,598 22300 Job leavers (quits - dismissals), total 165.1 227.7 218.4 363.8 426.7 273.3 Including women 110.9 145.7 145.8 239.8 273.4 171.6 persons under 28 years old -- 29.9 25.9 46.4 55.2 32.4 As of the end of the period: Unemployed: 83.9 82.2 126.9 351.1 637.1 1003.2 Officially registered Including 62.7 59.8 92.2 235.8 416.5 620.4 women 35.3 29.6 47.4 118.8 197.2 319.1 persons under 28 years old Of which: 40.0 47.7 74.4 214.6 361.6 532.8 Benefit recipients 1.00 6.29 22.54 40.63 40.13 38.51 Average amount of benefit (Hm.) Memorandum items: 131.6 136.6 86.4 35.2 34.8 34.6 Vacancies Officially registered unemployed *** (% of labor force) 0.3 0.3 0.5 1.3 2.3 3.7 Of which: Benefit recipients (%) 47.6 58.0 58.6 61.1 56.8 53.1 * Data are presented as an annual average. ** Preliminary data * Unemployment level is calculated as a ratio of number of official registered unemployed to labor force Source: Ministry of Economy, State Statistics Committee 132 Statistical Appendix Table 1.3 - Average Employment by Sector, 1992-199 7 1992 1993 1994 1995 1996 1997 Total employment (million): 24.5 23.9 23.0 23.7 23.2 22.6 Industry 7.4 7.0 6.3 5.8 5.3 4.9 Agriculture and forestry* 4.9 4.9 4.8 5.3 5.1 5.0 Construction 1.9 1.8 1.6 1.5 1.4 1.2 Transport and communications 1.6 1.6 1.5 1.5 1.4 1.3 Trade** 1.8 1.7 1.6 1.6 1.5 1.5 Municipal services*** 0.9 0.8 0.8 0.8 0.8 0.8 Health care**** 1.5 1.5 1.5 1.5 1.5 1.4 Education and culture***** 2.8 2.7 2.7 2.6 2.5 2.3 Finance and insurance****** 0.1 0.2 0.2 0.2 0.2 0.2 General administration and defense, public non-orofit organizations 0.6 0.6 0.7 0.7 0.7 0.8 Other industries 0.5 0.6 0.5 0.5 0.5 0.4 Other spheres of economic activity 0.5 0.5 0.8 1.7 2.3 2.8 Total emolovment (nercentaee of total): 100.0 100.0 100.0 100.0 100.0 100.0 Industry 30.2 29.3 27.1 24.3 23.0 21.6 Agriculture and forestry 20.4 20.7 20.9 22.5 21.8 22.0 Construction 7.8 7.4 7.1 6.3 5.9 5.3 Transport and communications 6.6 6.7 6.5 6.3 6.0 5.8 Trade 7.1 7.1 7.1 6.9 6.7 6.7 Municipal services 3.7 3.5 3.6 3.4 3.3 3.6 Health care 6.2 6.4 6.5 6.3 6.4 6.4 Education and culture 11.6 11.4 11.6 11.0 10.7 10.3 Finance and insurance 0.6 0.7 0.8 0.8 0.8 0.8 General administration and defense, public non-orofit organizations 2.3 2.6 3.0 3.0 3.2 3.4 Other industries 1.5 2.0 2.1 1.8 2.0 1.9 Other spheres of economic activity 2.1 2.2 3.6 7.4 10.2 12.2 Total employment (percentage change on Drevious vear): .. -2.3 -3.8 3.0 -2.1 -2.7 Industry .. -5.2 -10.9 -7.8 -7.4 -8.5 Agriculture and forestry .. -0.9 -2.5 10.5 -4.8 -2.1 Construction .. -7.2 -7.4 -9.4 -8.0 -12.6 Transport and communications .. -1.1 -7.0 -2.8 -3.5 -6.5 Trade .. -2.3 -4.8 -0.9 -3.9 -1.9 Municipal services .. -6.5 -2.4 0.0 -6.1 6.1 Health care .. 0.7 -1.6 0.5 -2.2 -2.6 Education and culture .. -3.6 -2.5 -2.3 -4.6 -6.7 Finance and insurance .. 12.4 9.0 2.8 -0.4 -1.2 General administration and defense, public non-orofit organizations .. 10.9 9.4 6.0 4.2 1.1 Other industries .. 39.9 1.8 -3.9 -1.0 -6.9 Other spheres of economic activity .. -0.4 63.3 108.5 34.0 16.9 * Including working at household plots ** Including catering, procurement and material supply *** Public utilities and personal services **** Including physical culture and social security ***** Education, culture, art, science and science service ****** Including insurance Source: Ministrv of Economy, State Statistics Committee, World Bank staff calculations Statistical Appendix 133 Table 1.4 - Labor Productivity Indexes by Industry 1985=100 1990=100 1990 1992 1993 1994 1995 1996 1997 1991 1992 1993 1994 1995 1996 1997 Manufacturing 121 113 110 87 83 86 92 98 94 91 72 69 71 76 including Fuel Industry 100 75 58 51 50 51 58 90 75 58 51 50 51 58 Ferrous Metallurgy 115 90 71 53 51 56 60 91 78 62 46 44 49 52 Chemical & Petrochemical Industry 123 101 87 71 66 66 71 95 82 71 58 54 54 58 Machine Building & Metal-Working 134 149 172 117 101 85 93 108 112 129 88 76 64 70 Pulp & Paper Industry 129 146 151 108 93 84 86 107 113 117 83 72 65 66 Construction Materials Industry 120 113 102 71 56 42 42 99.3 94 85 60 47 35 35 Light Industry 119 131 116 71 54 47 51 102 110 97 59 45 39 43 Food Industry 117 89 80 67 59 58 52 88 76 68 57 51 50 45 Source: State Statistics Committee SECTION 2 Table 2.1 - Gross Domestic Product by Industry and Expenditure Category at Current Price, (million hryvnias) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998* By Industry Agriculture and Forestry 0.342 0.409 0.737 10.49 319.4 1,754 7,507 9,969 11,685 12,842 Agriculture 0.340 0.407 0.733 10.47 318.2 1,731 7,337 9,654 11,385 12,432 Forestry 0.002 0.001 0.004 0.02 1.2 23 170 315 300 410 Industry and Construction 0.720 0.712 1.633 26.25 543.2 5,110 20,626 27,196 27,819 30,619 Industry 0.585 0.576 1.367 22.45 440.4 4,215 16,873 22.381 22,995 25,525 Construction 0.136 0.136 0.266 3.80 102.8 895 3,753 4,815 4,824 5,094 Other 0.429 0.480 0.927 16.93 512.8 4,619 21,853 36,011 42,593 47,353 Transport 0.098 0.097 0.161 3.72 158.1 760 5,478 8,880 8,843 11,037 Road maintenance 0.004 0.007 0.015 0.20 7.5 93 302 409 576 J Communication 0.017 0.018 0.029 0.31 8.6 119 766 1,433 2,334 2,843 Retail trade and catering 0.053 0.072 0.135 2.48 113.2 619 2,888 4,570 7,387 8,271 Material supply 0.009 0.009 0.025 0.48 56.3 165 625 809 791 859 Procurement 0.006 0.007 0.016 0.32 13.2 92 264 342 380 288 Information and computing services 0.001 0.003 0.007 0.06 0.9 8 44 65 103 112 Other sectors of material production 0.010 0.012 0.017 0.34 14.1 41 242 443 778 802 Housing 0.026 0.025 0.042 0.28 27.3 173 1,279 1,578 1,745 4,975 Public utilities and personal services 0.020 0.021 0.045 0.38 13.0 154 721 2,789 2,870 J Health care, social security, etc. 0.033 0.038 0.088 1.45 40.0 355 2,301 3,786 4,072 4,407 Education 0.045 0.052 0.111 1.85 51.3 407 2,764 4.303 4,598 5,107 Culture and art 0.009 0.011 0.019 0.33 9.4 63 385 726 787 888 Science and research 0.033 0.034 0.049 0.70 14.7 217 581 853 1,094 1,111 Finance, credit and insurance 0.008 0.010 0.065 2.25 150.7 889 1,567 2,011 2,252 General administration and defense 0.054 0.063 0.101 1.75 53.0 453 1,609 2,879 3,747 6,653 Private non-profit organizations 0.002 0.002 0.004 0.04 1.4 12 37 135 236 Total gross value added 1.491 1.601 3.297 53.67 1,595.3 11,483 49,986 73,176 82,097 90,814 Financial intermediaries, imp. chrg. -0.002 -0.003 -0.062 -2.12 -121.4 -684 -1,243 -1,087 -1,030 -1,784 Total GDP at factor cost 1.489 1.598 3.235 51.56 1,473.9 10,799 48,743 72,089 81,067 89,030 Taxes on production 0.236 0.282 0.306 5.55 215.8 2,165 8,608 11,877 14,373 16,703 Subsidies on production -0.191 -0.209 -0.547 -6.78 -207.0 -927 -2,835 -2,447 -2,075 -1,864 Total GDP at market prices 1.534 1.671 2.994 50.33 1,482.7 12,038 54,516 81,519 93,365 103,869 By Expenditure Category Gross Domestic Expenditures 1.534 1.671 2.994 50.33 1,482.7 12,038 54,516 81,519 93,365 103,869 Consumption 1.092 1.230 2.140 31.99 949.3 8,166 41,651 65,119 76,198 85,479 Private consumption 0.792 0.915 1.558 21.12 653.5 5,331 27,094 43,469 50,617 58,409 Non-profits 0.034 0.039 0.061 2.03 58.8 504 2,961 3,912 3,252 3,426 Government consumption 0.266 0.276 0.521 8.84 237.0 2,331 11,595 17,738 22,329 23,644 Gross domestic investment 0.443 0.459 0.789 17.34 538.1 4,253 14,547 18,481 20,023 21,539 Gross fixed investment 0.389 0.385 0.600 13.66 360.2 2,833 12,692 16,891 18,517 20,048 Change in stocks 0.044 0.057 0.148 3.54 174.6 1,395 1,787 1,467 1,346 1,278 Net acquisition of valuables 0.010 0.017 0.041 0.15 3.3 25 68 123 160 213 Resource balance (net export GNFS) -0.001 -0.018 0.065 1.00 -4.6 -381 -1,681 -2,081 -2,856 -3,149 Export of goods and NFS 0.492 0.462 0.782 12.07 383.7 4,260 25,663 37,215 37,898 41,355 Import of goods and NFS -0.493 -0.480 -0.717 -11.07 -388.3 -4,641 -27,344 -39,296 -40,754 -44,504 Memo items: Gross National Income 1.559 1.709 3.056 50.28 1,446.9 11,960 53,639 80,472 92,166 . Net factor income from abroad 0.025 0.038 0.062 -0.05 -35.8 -78 -877 -1,047 -1,199 * Preliminary data Source. State Statistics Comnittee Statistical Appendix 135 Table 2.2 - Structure of Gross Domestic Product by Industry and Expenditure Category at Current Prices (percentage distribution) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998* By Industry Agriculture and Forestry 22.3% 24.4% 24.6% 20.9% 21.5% 14.6% 13.8% 12.2% 12.5% 12.4% Agriculture 22.2% 24.4% 24.5% 20.8% 21.5% 14.4% 13.5% 11.8% 12.2% 12.0% Forestry 0.1% 0.1% 0.1% 0.0% 0.1% 0.2% 0.3% 0.4% 0.3% 0.4% Industry and Construction 47.0% 42.6% 54.5% 52.2% 36.6% 42.4% 37.8% 33.4% 29.8% 29.5% Industry 38.1% 34.5% 45.7% 44.6% 29.7% 35.0% 31.0% 27.5% 24.6% 24.6% Construction 8.9% 8.1% 8.9% 7.6% 6.9% 7.4% 6.9% 5.9% 5.2% 4.9% Other 28.0% 28.7% 31.0% 33.6% 34.6% 38.4% 40.1% 44.2% 45.6% 45.6% Transport 6.4% 5.8% 5.4% 7.4% 10.7% 6.3% 10.0% 10.9% 9.5% 10.6% Road maintenance 0.3% 0.4% 0.5% 0.4% 0.5% 0.8% 0.6% 0.5% 0.6% 1 Communication 1.1% 1.1% 1.0% 0.6% 0.6% 1.0% 1.4% 1.8% 2.5% 2.7% Retail trade and catering 3.4% 4.3% 4.5% 4.9% 7.6% 5.1% 5.3% 5.6% 7.9% 8.0% Material supply 0.6% 0.6% 0.8% 1.0% 3.8% 1.4% 1.1% 1.0% 0.8% 0.8% Procurement 0.4% 0.4% 0.5% 0.6% 0.9% 0.8% 0.5% 0.4% 0.4% 0.3% Information and computing scrvices 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Other sectors of material production 0.7% 0.7% 0.6% 0.7% 0.9% 0.3% 0.4% 0.5% 0.8% 0.8% Housing 1.7% 1.5% 1.4% 0.6% 1.8% 1.4% 2.3% 1.9% 1.9% 4.8% Public utilhties and personal services 1.3% 1.3% 1.5% 0.8% 0.9% 1.3% 1.3% 3.4% 3.1% ] Health care, social security, etc. 2.1% 2.3% 2.9% 2.9% 2.7% 2.9% 4.2% 4.6% 4.4% 4.2% Education 3.0% 3.1% 3.7% 3.7% 3.5% 3.4% 5.1% 5.3% 4.9% 4.9% Culture and art 0.6% 0.7% 0.6% 0.6% 0.6% 0.5% 0.7% 0.9% 0.8% 0.9% Science and research 2.1% 2.1% 1.6% 1.4% 1.0% 1.8% 1.1% 1.0% 1.2% 1.1% Finance, credit and insurance 0.5% 0.6% 2.2% 4.5% 10.2% 7.4% 2.9% 2.5% 2.4% General administration and defense 3.5% 3.8% 3.4% 3.5% 3.6% 3.8% 3.0% 3.5% 4.0% 6.4% Private non-profit organizations 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.2% 0.3% Total gross value added 97.2% 95.8% 110.1% 106.7% 107.6% 95.4% 91.7% 89.8% 87.9% 87.4% Financial intermediaries, imp. chrg. -0.1% -0.2% -2.1% -4.2% -8.2% -5.7% -2.3% -1.3% -1.1% -1.7% Total GDP at factor cost 97.1% 95.6% 108.0% 102.4% 99.4% 89.7% 89.4% 88.4% 86.8% 85.7% Taxes on production 15.4% 16.9% 10.2% 11.0% 14.6% 18.0% 15.8% 14.6% 15.4% 16.1% Subsidies on production -12.5% -12.5% -18.3% -13.5% -14.0% -7.7% -5.2% -3.0% -2.2% -1.8% Total GDP at market prices 100% 100% 100% 100% 100% 100% 100% 100% 100.0% 100.0% By Expenditure Category Gross DomesticExpenditures 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Consumption 71.2% 73.6% 71.5% 63.6% 64.0% 67.8% 76.4% 79.9% 81.6% 82.3% Private consumption 51.6% 54.8% 52.0% 42.0% 44.1% 44.3% 49.7% 53.3% 54.2% 56.2% Non-profits 2.2% 2.3% 2.0% 4.0% 4.0% 4.2% 5.4% 4.8% 3.5% 3.3% Government consumption 17.3% 16.5% 17.4% 17.6% 16.0% 19.4% 21.3% 21.8% 23.9% 22.8% Gross domestic investment 28.9% 27.5% 26.4% 34.5% 36.3% 35.3% 26.7% 22.7% 21.4% 20.7% Gross fixed investment 25.4% 23.0% 20.0% 27.1% 24.3% 23.5% 23.3% 20.7% 19.8% 19.3% Change in stocks 2.9% 3.4% 4.9% 7.0% 11.8% 11.6% 3.3% 1.8% 1.4% 1.2% Net acquisition ofvaluablcs 0.7% 1.0% 1.4% 0.3% 0.2% 0.2% 0.1% 0.2% 0.2% 0.2% Resource balance (net export GNFS) -0.1% -1.1% 2.2% 2.0% -0.3% -3.2% -3.1% -2.6% -3.1% -3.0% Export of goods and NFS 32.1% 27.6% 26.1% 24.0% 25.9% 35.4% 47.1% 45.7% 40.6% 39.8% Import of goods and NFS -32.1% -28.7% -23.9% -22.0% -26.2% -38.6% -50.2% -48.2% -43.7% 42.8% * Preliminary data Source: State Statistics Committee 136 Statistical Appendix Table 2.3 - Gross Domestic Product by Industry and Expenditure Category at Comparative Prices (million hryvnias) 1990 1991 1992 1993 1994 1995 1996 1997 1998* actual 1990 actual 1991 actual 1992 actual 1993 actual 1994 actual actual 1996 actual 1997 actual prices prices pnces prices prices prices prices prces prices prices prices [995 pices prces prices pri ces prices prices By Industry Agriculture and Forestry 0.409 0.338 0.737 0.663 10.49 11.07 319.4 288.82 1,754 1,676.8 7,507 6,766.0 9,969 9,875 11,685 11,403 12,842 Agriculture 0.407 0.337 0.733 0660 10.47 11 06 318.2 286.53 1,731 1,654.8 7,337 6,589.0 9,654 9.583 11.385 11,017 12,432 Forestry 0.001 0001 0.004 0.003 0.02 0.01 1.2 2.29 23 220 170 177.0 315 292 300 386 41C Industry and Construction 0.712 0.641 1.633 1.355 26.25 20,40 543.2 354.12 5,110 4,352.4 20,626 18,664.0 27,196 26,046 27,819 27,774 30,619 Industry 0576 0.514 1.367 1 205 22.45 1740 440.4 275 19 4,215 2.742 7 16.873 16194.0 22,391 21,714 22,995 22,824 25,52f Construction 0.136 0127 0.266 0,150 3.80 2.92 102.8 78.93 895 609.7 3,753 2,4700 4,815 4,332 4,824 4.950 5.094 Other 0.480 0.509 0.927 1.048 16.93 14.88 512.8 625.0 4,619 4,146.6 21,853 19,690.0 36,011 34,158 42,593 41,477 47,353 Transport 0.097 0.076 0.161 0.151 3.72 224 158. 136.68 760 7242 5,478 4,779.0 8,800 8.572 8,843 9,179 11,03- Road maintenance 0.007 0.007 0015 0.015 0.20 0.15 7.5 93 302 409 576 ] Communication 0018 0.017 0.029 0023 0.31 0.23 8.6 8.04 119 625 766 500.0 1.433 1,361 2,334 2,297 2,842 Retal trade and catering 0072 0070 0.135 0.105 2.48 1.56 I 13.2 94.96 619 507,7 2,88 2,848.0 4,570 4.609 7.387 7,030 S,271 Matertal supply 0.009 0005 0025 0.015 048 0.44 563 40.65 165 140.4 625 593.0 809 790 791 772 855 Procumcent 0.007 0005 0.016 0011 0.32 027 13.2 9.99 92 57.5 264 194.0 342 229 380 235 285 Information and computing services 00003 0.003 0.007 0.006 0.06 005 0.9 0.96 8 69 44 34 0 65 50 103 92 112 Other sectors orrmnatenal production 0.012 0.010 0.017 0.014 0.34 0.18 14.1 3.17 41 34.8 242 233(0 443 514 778 661 802 Housmng 0025 0.025 0.042 0.053 0.28 0.28 27.3 26.15 173 167.2 1,279 917,0 1,578 1.360 1.745 4,641 4.975 Public utilities and personal services 0.021 0 020 0.045 0.036 0.38 0.35 130 15 154 113 7 721 651.0 2,789 2,596 2,870 ] I Health care, social security, etc 0038 0.048 0.088 0 049 1.45 1.57 40.0 34.69 355 3376 2,301 2.191.0 3,786 3,600 4,072 4,064 4.40, Education 0.052 0.053 0.111 0.068 1.85 2,00 51.3 43.72 407 393.6 2.764 2,6110 4,303 4,028 4,598 4.552 5,107 Culture and art 0.011 0009 0019 0013 0.33 0.13 9.4 799 63 59.4 385 359.0 726 702 787 758 885 Scienceandresearch 0034 0.029 0.049 0.046 0.70 0.62 14.7 13.19 217 198.5 581 5360 853 739 1.094 1,014 1,111 Finance, credit and insurance 0.010 0.030 0.065 0.167 2.25 2.53 150.7 140 20 889 916.8 1,567 1.503 2,011 2.101 2,252 General administratton and defense 0.063 0098 0.101 0.268 1.75 2.23 53 0 47.97 453 .. 1,609 1,699 2,879 2.774 3,747 6,182 6,653 Private non-profit organizations 0002 0.003 0.004 0.008 0.04 0.05 1.4 I 29 12 425.7 37 34 135 133 236 Total gross value added 1.601 1.487 3.297 3.066 53.67 46.35 1,595.3 1,267.9 11,483 10,176 49,986 45,120 73,176 70,079 82,097 80,654 90,814 Financial intermediaries, imp. chrg. -0.003 -0 030 -0.062 -0.145 -2.12 -2,30 -121.37 -1323 -684 -698 -1.243 -1.290 -1.087 -1.057 -1,030 -999.0 -1,784 Total GDP at factor cost 1.598 1.457 3.235 2.921 51.56 44.05 1,473.9 1,135.7 10,799 9,478 48,743 43,830 72,089 69,023 81,067 79,655 89,03C Net indirect taxes 0.073 0.069 -0.241 -0224 -1.23 -0.88 8.83 7.02 1,2382 1.097 5,773 5,211 9,430 1.060 12.298 12,077 14,83S Total GDP at market prices 1.671 1.526 2.994 2.697 50.33 43.17 1,482.7 1,142.7 12,030 10,575 54,516 49,041 81,519 79,083 93,365 91,732 103,069 By Expenditure Category Gross Domestic Expenditures 1.671 1.526 2.994 2.697 50.33 43.17 1,482.7 1,142.7 12,038 10,575 54,516 49,041 81,519 79,083 93,365 91,732 103,869 consumption 1.230 1.164 2.140 2.006 31.99 25.99 949.25 857.32 8,165.8 7,869.4 41,651 38,163 65,119 63,941 76,198 .. 85,479 Pvate consumption 0.954 0.678 1.619 1.471 23.15 17 t4 712.26 64914 5,835 1 5,723.8 30,055 27.199 47,381 46,605 53,869 . 58,40 Govenment consumption 0276 0.286 0521 0.535 884 8.85 23699 208.18 2,330.7 2,145.6 11,595 10,964 17.738 17.336 22,329 . 3.42( Gross domestic investment 0.459 0.363 0.789 0.652 17.34 13.07 538.12 392.11 4,253.1 2,279.2 14,547 10,805 18,481 18,528 20,023 .. 23,644 Gross fixed investment 0385 0305 0600 0.510 13.66 9,49 360.17 21237 2,833.1 1.960.6 12,692 9.813 16,891 17,240 18,517 .. 21,539 Changein stocks 0.057 0.036 0.148 0.128 3.54 3.51 174.63 177.07 1,3949 302.1 1.787 898 1.467 1,135 1,346 . 20.04 Net acquisition of valuables 0.017 0022 0.041 0.014 0.15 0.07 3.32 267 25 1 16.5 68 94 123 153 160 .. 1,276 Resource balance (net export GNFS) -0.018 0.027 0.065 0.033 t.00 3.54 .4.64 -104.28 -381.2 -119.9 -1,681 -1,677 -2,081 -2,294 -2,856 .. 213 ExportofgoodsandNFS 0.462 0.302 0702 0.412 1207 10.77 383 70 423.54 4.260.0 4,309.0 25,663 29,994 37,215 35.214 37.898 .. -3,149 Import ofgoods andNFS -0.480 -0.355 -0.717 -0.379 -11.07 -7,23 -388.34 -527.82 -4,641 2 -4.428.9 -27,344 -31,671 -39,296 -37,508 -40,754 . 41.355 Statistical disciepancy 0.000 -01028 0 0.006 0 0.57 0 -2.47 0 546.4 0 1,750 0 -1,092 0 . -44,504 PrInliminay data ,ad World Bank c,ti,tes So,rce State Statistics Caornnittee Table 2.4 - Gross Domestic Product by Industry and Expenditure Category (index, 1990=100) 1990 1991 1992 1993 1994 1995 1996 1997 1998* By Industry Agriculture and Forestry 100 83 74 78 71 68 61 61 59 Agriculture 100 83 74 79 71 68 61 60 Forestry 100 91 89 37 74 71 73 68 Industry and Construction 100 90 75 58 38 32 29 28 28 Industry 100 89 79 61 38 34 33 32 31 Construction 100 93 52 40 31 21 14 12 13 Other 100 106 120 105 128 115 104 98 96 Transport 100 78 73 44 38 36 32 31 Road maintenance 100 100 102 75 65 62 54 54 Communication 100 95 77 57 53 28 24 23 Retail trade and catering 100 97 76 48 40 33 32 33 Material supply 100 56 33 30 22 19 18 17 Procurement 100 73 50 43 32 20 15 10 Information and computing services 100 133 121 104 115 94 73 56 Other sectors of material production 100 87 75 40 9 8 7 8 Housing 100 103 130 129 124 120 86 74 Public utilities and personal services 100 96 78 71 83 61 55 51 Health care, social security, etc. 100 127 71 77 67 63 60 57 Education 100 101 62 67 58 56 53 49 Culture and art 100 79 54 22 18 17 16 16 Science and research 100 85 80 71 64 59 54 47 Finance, credit and insurance 100 313 798 899 836 863 827 864 General administration and defense 100 156 413 527 477 Private non-profit organizations 100 115 228 304 275 Total gross value added 100 93 86 75 59 53 47 45 45 Financial intermediaries. imo. chre. 100 937 2.182 2.368 2.581 2.633 2.732 2.656 - Total GDP at factor cost 100 91 82 70 54 48 43 41 Net indirect taxes 100 94 88 63 50 44 40 43 Total GDP at market prices 100 91 82 71 54 48 43 42 41 By Expenditure Category Gross Domestic Expenditures 100 91 82 71 54 48 43 42 41 Consumption 100 95 89 72 65 63 57 56 Private consumption 100 92 84 62 56 55 50 49 Government consumption 100 104 106 107 94 86 81 80 Gross domestic investment 100 79 65 49 36 19 14 14 Gross fixed investment 100 79 67 47 28 19 15 15 Change in stocks 100 63 55 54 55 12 6 5 Net acquisition of valuables 100 129 44 21 17 11 15 19 Resource balance (net export GNFS) Export of goods and NFS 100 83 44 39 43 43 51 48 ImoortofeoodsandNFS 100 74 39 26 35 35 40 38 Preliminary data and estimates Source: State Statistics Committee,the World Bankstaffcalculatfons 138 Statistical Appendix Table 2.5 - Gross Domestic Product by Industry and Expenditure Category at Comparative Prices (annual growth rates) 1991 1992 1993 1994 1995 1996 1997 1998* By Industry Agriculture and Forestry -17.4% -10.0% 5.5% -9.6% -4.4% -9.9% -0.9% -2.4% Agriculture -17.4% -10.0% 5.6% -10,0% -4.4% -10.2% -0.7% -3.2% Forestry -9.5% -2.0% -58.2% 99.1% -4.6% 4.0% -7.3% 28.7% Industry and Construction -10.0% -17.0% -22.3% -34.8% -14.8% -9.5% -4.2% -0.2% Industry -10.8% -11.8% -22.1% -37.5% -11.2% -4.0% -3.0% -0.7% Construction -6.7% -43.7% -23.2% -23.2% -31.9% -34.2% -10.0% 2.6% Other 5.9% 13.0% -12.1% 219% -10.2% -9.9% -5.1% 2.6% Transport -22.1% -6.1% -39.7% -13.6% -4.7% -12.8% -3.5% 3.8% Road maintenance 0.0% 2.1% -26.6% 1 1 1 Communication -5.1% -19.0% -26.3% -6.8% -47.6% -33.7% -5.0% -1.6% Retail trade and catering -2.8% -22.1% -37.2% -16.1% -18.0% -1.4% 0.9% -4.8% Material supply -43.6% -41.2% -8.5% -27.7% -14.8% -5.1% -2.3% -2.4% Procurement -27.2% -30.8% -15.6% -24.4% -37.4% -26.4% -33.0% -38.2% Information and computing services 32.7% -8.7% -13.9% 10.3% -18.4% -22.8% -23.1% -10.7% Other sectors of material production -12.5% -14.8% -46.8% -77.5% -15.5% -3.5% 16.0% -15.0% Housing 2.6% 26.7% -0.8% -4.1% -3.1% -28.3% -13.8% 166.0% Public utilities and personal services -4.0% -19.2% -9.1% 17.7% -26.3% -9.7% -6.9% Health care, social security, etc. 26.9% -44.4% 8.6% -13.2% -4.9% -4.8% -4.9% -0.2% Education 1.4% -38.5% 8.0% -14.7% -3.2% -5.5% -6.4% -1.0% Culture and art -20.5% -32.1% -60.0% -15.4% -5.1% -6.8% -3.3% -3.7% Science and research -14.6% -6.6% -10.8% -10.1% -8.5% -7.7% -13.4% -7.3% Finance, credit and insurance 212.7% 155.4% 12.5% -7.0% 3.2% -4.1% 4.5% General administration and defense 55.7% 165.5% 27.6% -9.6% .. 5.6% -3.6% 174.5% Private non-profit organizations 14.9% 98.5% 33.4% -9.8% 3566.3% -8.7% -1.5% Total gross value added -7.1% -7.0% -13.6% -20.5% -11.4% -9.7% -4.2% -1.8% Financial intermediaries. ime. chre. 837.3% 132.8% 8.5% 9.0% 2.0% 3.8% -2.8% -3.0% Total GDP at factor cost -8.8% -9.7% -14.6% -22.9% -12.2% -10.1% -4.3% -1.7% Net indirect taxes -5.6% -6.8% -28.3% -20.5% -11.4% -9.7% 6.7% -1.8% Total GDP at market prices -8.7% -9.9% -14.2% -22.9% -12.2% -10.0% -3.0% -1.7% By Expenditure Category Gross Domestic Expenditures -8.7% -9.9% -14.2% -22.9% -12.2% -10.0% -3.0% -1.7% Consumption -5.4% -6.3% -18.7% -9.7% -3.6% -8.4% -1.8% Private consumption -8.0% -9.1% -26.0% -8.9% -1.9% -9.5% -1.6% . Govemment consumption 3.6% 2.7% 0.1% -12.2% -7.9% -5.4% -2.3% Gross domestic investment -20.9% -17.4% -24.6% -27.1% -46.4% -25.7% 0.3% Gross fixed investment -20.8% -15.0% -30.5% -41.0% -30.8% -22.7% 2.1% Change in stocks -36.8% -13.5% -0.7% 1.4% -78.3% -49.7% -22.6% Net acquisition of valuables 29.4% -65.9% -52.1% -19.6% -34.2% 38.2% 24.4% Resource balance (net export GNFS) -250.0% -49.2% 253.3% 2147.4% -68.5% -0.2% 10.2% Export of goods and NFS -17.3% -47.3% -10.8% 10.4% 1.1% 16.9% -5.4% Import of 2oods and NFS -26.0% -47.1% -34.7% 35.9% 0.0% 15.8% -4.6% * Preliminary data and World Bank estimates Source: State Statistics Committee Statistical Appendix 139 Table 2.6 - Structure of Gross Domestic Product by Industry and Expenditure Category at Comparative Prices (percentage distribution) 1991 1992 1993 1994 1995 1996 1997 1998* By Industry Agriculture and Forestry 22.1% 24.6% 25.6% 25.3% 15.9% 13.8% 12.5% 12.4% Agriculture 22.1% 24.5% 25.6% 25.1% 15.6% 13.4% 12.1% 12.0% Forestry 0.1% 0.1% 0.0% 0.2% 0.2% 0.4% 0.4% 0.4% Industry and Construction 42.0% 50.2% 47.3% 31.0% 41.2% 38.1% 32.9% 30.3% Industry 33.7% 44.7% 40.5% 24.1% 35.4% 33.0% 27.5% 24.9% Construction 8.3% 5.5% 6.8% 6.9% 5.8% 5.0% 5.5% 5.4% Other 33.3% 38.9% 34.5% 54.7% 39.2% 40.2% 43.2% 45.2% Transport 5.0% 5.6% 5.2% 12.0% 6.8% 9.7% 10.8% 10.0% Road maintenance 0.5% 0.6% 0.3% 1 Communication 1.1% 0.9% 0.5% 0.7% 0.6% 1.0% 1.7% 2.5% Retail trade and catering 4.6% 3.9% 3.6% 8.3% 4.8% 5.8% 5.8% 7.7% Material supply 0.3% 0.6% 1.0% 3.6% 1.3% 1.2% 1.0% 0.8% Procurement 0.3% 0.4% 0.6% 0.9% 0.5% 0.4% 0.3% 0.3% Information and computing services 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Other sectors of material production 0.7% 0.5% 0.4% 0.3% 0.3% 0.5% 0.6% 0.7% Housing 1.7% 2.0% 0.7% 2.3% 1.6% 1.9% 1.7% 5.1% Public utilities and personal services 1.3% 1.4% 0.8% 1.3% 1.1% 1.3% 3.3% Health care, social security, etc. 3.1% 1.8% 3.6% 3.0% 3.2% 4.5% 4.6% 4.4% Education 3.5% 2.5% 4.6% 3.8% 3.7% 5.3% 5.1% 5.0% Culture and art 0.6% 0.5% 0.3% 0.7% 0.6% 0.8% 0.9% 0.8% Science and research 1.9% 1.7% 1.4% 1.2% 1.9% 1.1% 0.9% 1.1% Finance, credit and insurance 2.0% 6.2% 5.9% 12.3% 8.7% 3.1% 2.7% General administration and defense 6.4% 9.9% 5.2% 4.2% .. 3.5% 3.5% 6.7% Private non-profit organizations 0.2% 0.3% 0.1% 0.1% 4.0% 0.1% 0.2% Total gross value added 97.5% 113.7% 107.4% 111.0% 96.2% 92.0% 88.6% 87.9% Financial intermediaries, imp. chrg. -2.0% -5.4% -5.3% -11.6% -6.6% -2.6% -1.3% -1.1% Total GDP at factor cost 95.5% 108.3% 102.0% 99.4% 89.6% 89.4% 87.3% 86.8% Net indirect taxes 4.5% -8.3% -2.0% 0.6% 10.4% 10.6% 12.7% 13.2% Total GDP at market prices 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% By Expenditure Category Gross Domestic Expenditures 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Consumption 76.3% 74.4% 60.2% 75.0% 74.5% 77.8% 80.8% Private consumption 57.5% 54.5% 39.7% 56.8% 54.2% 55.5% 58.9% Government consumption 18.7% 19.8% 20.5% 18.2% 20.3% 22.4% 21.9% Gross domestic investment 23.8% 24.2% 30.3% 34.3% 21.6% 22.0% 23.5% Gross fixed investment 20.0% 18.9% 22.0% 18.6% 18.5% 20.0% 21.8% Change in stocks 2.4% 4.7% 8.1% 15.5% 2.9% 1.8% 1.5% Net acquisition of valuables 1.4% 0.5% 0.2% 0.2% 0.2% 0.2% 0.2% Resource balance (net export GNFS) 1.8% 1.2% 8.2% -9.1% -1.1% -3.4% -2.9% Export of goods and NFS 25.0% 15.3% 24.9% 37.1% 40.7% 61.2% 44.5% Import of goods and NFS -23.3% -14.1% -16.7% -46.2% -41.9% -64.6% -47.4% Statistical discrepancy -1.8% 0.2% 1.3% -0.2% 5.1% 3.6% -1.4% * Preliminary data and World Bank estimates Source: State Statistic, Commttee 140 Statistical Appendix Table 2.7 - Gross Capital Investment by Industry CD (million current hryvnias) 1990 1991 1992 1993 1994 1995 1996 1997 By Industry Agriculture and Forestry 0.072 0.115 2.65 67.81 280.49 1,065.44 1,194 1,179 Agriculture, including fishing 0.072 0.1147 2.65 67.75 265.69 1,032.3 1,165 1141 Forestry 0.0001 0.0004 0.004 0.06 14.80 33.11 29 38 Industry and Construction 0.151 0.231 6.62 151.59 988.13 4,579.51 7,219 7,933 Industry 0.133 0.202 5.74 136.18 934.54 4,408.25 6,971 7727 Construction 0.018 0.029 0.88 15.41 53.59 171.26 248 206 Other 0.162 0.253 4.39 140.77 1,564.44 7,046.59 8,478 9,405 Transport 0.028 0.036 0.97 24.89 195.97 993.67 1,860 1789 Road maintenance 0.010 0.022 0.34 12.96 157.58 821.58 604 360 Communication 0.004 0.006 0.11 2.61 34.26 191.23 448 891 Retail trade and catering 0.009 0.011 0.19 11.13 38.21 74.00 120 157 Material supply 0.002 -0.0004 0.12 5.22 23.88 43.39 50 101 Procurement 0.002 0.002 0.05 0.86 5.84 31.98 50 45 Information and computing services 0.001 0.001 0.02 0.29 3.15 1.13 7 6 Other sectors of material production 0.003 0.007 0.29 6.38 56.72 151.44 218 304 Housing 0.051 0.083 1.11 31.12 455.67 2,074.35 2,666 3036 Public utilities and personal services 0.011 0.026 0.29 8.58 161.60 568.59 788 848 Health care, social security, etc. 0.010 0.021 0.26 10.53 149.26 689.23 513 527 Education 0.018 0.026 0.37 9.79 132.82 657.75 335 304 Culture and art 0.003 0.006 0.08 2.46 22.54 70.05 118 132 Science and research 0.005 0.004 0.07 1.68 6.28 18.46 9 15 Finance, credit, insurance, pensions 0.002 0.002 0.06 5.22 99.13 186.14 409 439 General commercial activity .. .. .. .. .. 0.10 9 424 Real estate transactions .. .. .. 0.10 0.27 .. .. 14 Administration and defense 0.002 0.001 0.08 6.82 20.71 469.75 265 4 Private non-profit organizations 0.001 0.0003 0.001 0.13 0.55 3.75 9 9 Total gross capital investment 0.385 0.600 13.65 360.17 2,833.06 12,691.54 16,891 18,517 Memo: Gross Capital Investment as a share of GDP -184.6% -109.7% -201.4% -174.0% -305.7% -447.7% -690.3% 19.8% Source: State Statistics Committee Table 2.8 - Gross Capital Investment by Industry at Current Prices (%1 of total) 1990 1991 1992 1993 1994 1995 1996 1997 By Industry Agriculture and Forestry 18.7% 19.2% 19.4% 18.8% 9.9% 8.4% 7.1% 6.4% Agriculture, including fishing 18.7% 19.1% 19.4% 18.8% 9.4% 8.1% 6.9% 6.2% Forestry 0.0% 0.1% 0.0% 0.0% 0.5% 0.3% 0.2% 0.2% Industry and Construction 39.2% 38.6% 48.4% 42.1% 34.9% 36.1% 42.7% 42.8% Industry 34.5% 33.7% 42.0% 37.8% 33.0% 34.7% 41.3% 41.7% Construction 4.7% 4.9% 6.4% 4.3% 1.9% 1.3% 1.5% 1.1% Other 42.1% 42.2% 32.2% 39.1% 55.2% 55.5% 50.2% 50.8% Transport 7.3% 6.0% 7.2% 6.9% 6.9% 7,8% 11.0% 9.7% Road maintenance 2.7% 3.6% 2.5% 3.6% 5.6% 6.5% 3.6% 1.9% Communication 1.0% 1.0% 0.8% 0.7% 1.2% 1.5% 2.7% 4.8% Retail trade and catering 2.4% 1.9% 1.4% 3.1% 1.3% 0.6% 0.7% 0.9% Material supply 0.5% -0.1% 0.9% 1.4% 0.9% 0.3% 0.3% 0.5% Procurement 0.4% 0.4% 0.4% 0.2% 0.2% 0.3% 0.3% 0.2% Information and computing services 0.2% 0.2% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% Other sectors of material production 0.8% 1.2% 2.2% 1.8% 2.0% 1.2% 1.3% 1.6% Housing 13.3% 13.8% 8.1% 8.6% 16.1% 16.3% 15.8% 16.4% Public utilities and personal services 2.9% 4.4% 2.1% 2.4% 5.7% 4.5% 4.6% 4.6% Health care, social security, etc. 2.6% 3.5% 1.9% 2.9% 5.3% 5.4% 3.0% 2.9% Education 4.8% 4.4% 2.7% 2.7% 4.7% 5.2% 2.0% 1.6% Culture and art 0.8% 0.9% 0.6% 0.7% 0.8% 0.6% 0.7% 0.7% Science and research 1.2% 0.6% 0.5% 0.5% 0.2% 0.2% 0.1% 0.1% Finance, credit, insurance, pensions 0.5% 0.3% 0.4% 1.4% 3.5% 1.5% 2.4% 2.4% General commercial activity .. .. .. .. .. .. 0.1% Real estate transactions .. .. .. .. .. .. .. 0.1% Administration and defensc 0.5% 0.1% 0.6% 1.9% 0.7% 3.7% 1.6% 2.3% Private non-profit organizations 0.2% 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% Total eross capital investment 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: State Statistics Committee 0T Table 2.9 - Households' Monetary Income (min UAH) Wages in state Pensions & sector and co- Pensions and Total Wages others Real income operatives, other transfer monetary (% of total (bn constant bonuses and incomes income income) 1990 roubles)* travel fees 1992 15.2 6.5 23.7 64.4 27.3 70.0 1993 331.0 247.5 628.5 52.7 39.4 45.8 1994 3,118 1,876 5,389 57.9 34.8 30.7 1995 15,178 10,186 26,498 57.3 38.5 28.9 1996 23,257 15,507 40,311 57.7 38.5 26.8 1997 25,210 22,973 50,069 50.9 45.9 30.3 1992 Ql 1.2 0.3 1.6 73.2 18.9 14.1 1995 Q2 3,202 2,235 5,622 57.0 39.8 7.1 1995 Q3 4,538 2,847 7,809 58.1 36.5 8.2 1995 Q4 5,434 3,540 9,385 57.9 37.7 7.7 1996 QI 5,326 2,911 8,514 62.6 34.2 6.3 1996 Q2 5,651 3,554 9,549 59.2 37.3 6.5 1996 Q3 6,047 4,134 10,629 56.9 38.9 6.9 1996 Q4 6,233 4,908 11,619 53.7 42.2 7.1 1997 Q1 5,504 4,749 10,598 51.9 44.9 6.5 1997 Q2 6,258 5,354 11,978 52.2 44.7 7.3 1997 Q3 6,986 6,763 14,329 48.8 47.2 8.7 1997 Q4 6,462 6,107 13,164 49.1 46.4 7.8 1998 Q1* 6,047 5,596 12,054 50.2 46.4 6.8 1998 Q2* 6,253 6,204 12,921 48.4 48.0 7.2 Oct-95 1,584 822 2,560 61.9 32.1 2.5 Feb-97 1,796 1,497 3,411 52.6 43.9 2.1 Mar-97 2,011 1,787 3,911 51.4 45.7 2.4 Apr-97 2,172 1,774 4,066 53.4 43.6 2.5 May-97 1,972 1,749 3,835 51.4 45.6 2.3 Jun-97 2,114 18,331 4,077 51.8 44.9 2.5 Jul-97 2,272 2,340 4,788 47.4 48.9 2.8 Aug-97 2,502 2,253 4,949 50.6 45.5 3.0 Sep.-97 2,212 2,170 4,592 48.2 47.3 2.8 Oct-97 2,103 1,993 4,307 48.8 46.2 2.6 Nov-97 1,828 1,763 3,764 48.6 46.8 2.2 Dec-97 2,531 2,351 5,093 49.7 46.2 3.0 Jan - 98* 1,628 1,525 3,279 49.6 46.5 1.9 Feb - 98* 1,911 1,828 3,871 49.4 47.2 2.2 Mar - 98* 2,508 2,243 4,904 51.2 45.7 2.8 Apr - 98* 2,131 2,082 4,365 48.8 47.7 2.4 May - 98* 1,907 1,912 3,965 48.1 48.3 2.2 Jun - 98* 2,215 2,210 4,591 48.3 48.2 2.6 Jul - 98* 2,231 2,605 5,009 44.6 52.0 2.8 Aug - 98* 1,991 2,362 4,514 44.1 52.3 2.5 Sep - 98* 1,970 2,359 4,628 42.6 51.0 2.5 Oct - 98* 2,205 2,498 5,025 43.9 49.7 2.6 Nov - 98* 2,088 2,556 4,930 42.4 51.8 2.4 Dec - 98* 2,771 3,079 6,241 44.4 49.3 3.0 * Preliminary data ** excluding wages of physical persons - entrepreneurs, agricultural workers and receipts from sales of agricultural products Source: TACIS' Ukrainian Economic Trends based on State Statistics Committee data Statistical Appendix 143 SECTION 3 Table 3.1- Balance of Payments. 1990-1998 (mln. USD) 1991 1992 1993 1994 1995 1996 1997 1998 CURRENT ACCOUNT: -2,928 -621 -854 -1,163 -1,152 -1,185 -1,335 -1,296 Net trade in Goods & Services 2,509 -606 -905 -1,366 -1,190 -1,122 -1,536 -1,207 Trade balance 1,994 -622 -2,519 -2,575 -2,702 -4,296 -4,205 -2,584 Exports of Goods & Services & Income Receipts 24,671 11,356 15,876 16,697 17,337 20,449 20,513 17,743 Exports of Goods & Services 24,671 11,355 15,850 16,641 17,090 20,346 20,355 17,621 Exports of Goods 23,988 11,308 12,796 13,894 14,244 15,547 15,418 13,699 Exports of Services 683 47 3,054 2,747 2,846 4,799 4,937 3,922 Imports of Goods & Services & Income Payments -22,162 -11,977 -16,850 -18,407 -18,961 -22,143 -22,693 -19,821 Imports of Goods & Services -22,162 -11,961 -16,755 -18,007 -18,280 -21,468 -21,891 -18,828 Imports of Goods, f.o.b. -21,994 -11,930 -15,315 -16,469 -16,946 -19,843 -19,623 -16,283 Imports of Services -168 -31 -1,440 -1,538 -1,334 -1,625 -2,268 -2,545 Net income receipts .. -15 -69 -344 -434 -572 -644 -871 Income receipts 1 26 56 247 103 158 122 Income payments -16 -95 -400 -681 -675 -802 -993 Net total current transfers .. 0 120 547 472 509 845 782 Total current transfer receipts .. .. 583 557 619 942 868 Total current transfer payments .. .. -36 -85 -110 -97 -86 CAPITAL & FINANCIAL ACCOUNT: .. -2,141 -423 1,281 1,366 1,819 2,503 782 Net official capital grants .. 0 0 97 6 5 0 -3 Net total private investment inflows 170 200 151 261 724 2,184 794 Netdirectinvestmentinflows .. 170 200 151 257 526 581 747 Inflows .. .. 267 521 623 743 Outflows .. .. .. -10 5 -42 4 Net portfolio investment inflows 0.. 4 198 1,603 47 Inflows .. 16 199 1,605 49 Outflows .. .. -12 -1 -2 -2 Net long- and medium-term borrowing .. 361 603 21 3,506 1,140 1,025 130 Disbursements 415 627 1,586 4,561 1,951 1,950 1,791 Guaranteed loans .. .. 4,491 1,745 1,635 1,161 Non-guaranteed loans .. .. .. 70 206 315 630 Repayments due .. 0 -114 -1,565 -1,055 -811 -925 -1,661 Guaranteed loans .. .. .. .. -1017 -708 -869 -1224 Non-guaranteed loans .. .. .. .. -38 -103 -56 -437 Other LT inflows, net .. -54 90 .. Adjustments to scheduled debt service 0 0 0 0 0 0 0 0 Debt service not paid 0 0 0 0 0 0 0 0 of which Arrears Accumulation 0 0 0 0 0 0 0 0 Reduction in arrears/prepayments (-) 0 0 0 0 0 0 0 0 Other capital flows, net -2,672 -1,226 1,012 -2,407 -50 -706 -139 Net short-term capital .. 1,012 -2,571 -673 13 -14 Capital flows n.e.i. .. 0 164 623 -719 -125 FINANCING: .. -96 37 -546 -488 -873 -383 1,324 Reserves, net change (includes IMF & LCFAR) .. -96 37 -546 -488 -873 -383 1,324 Foreign exchange & deposits .. .. .. -446 -916 -507 1432 SDR .. .. .. .. 17 94 -5 -108 Securities .. .. .. -59 -51 129 0 ERRORS AND OMISSIONS: 94 -29 14 428 274 239 -785 -810 Memo Items: Gross reserves (incl. gold) 469 166 664 1,069 1,953 2,345 686 International reserves excl. gold .. 469 162 651 1,051 1,941 2,327 654 Gold reserves . 0 4 14 18 12 18 32 Balance ofPayments complying with IMFstandards has been publ,shed ,n Ukrai, since 1994 The only pre-1994 BoP data available are IMFstaffesimaes. Source: National Bank of Ukraine, IMF staffestimates 144 Statistical Appendix _ ---- -- -_ -- --_ - _ �- , . _ , _ - „� �.-.�,,,...т ,_r, , , . � - . . - • -_ � --. �х � � ° т Т- :�-.,. �=т�,.,. -_' -- - _�,_ - ; � - ы р , . , -с �.. и , , . . . . , . . . . � . - r � � ^ - _ _ - _ _ _ _ .- ' - а , , р . . 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' . - - • - � - � �_ `�' � ' е - -, , " - - .,. _ � � � . � -* : . .. - , , - - . � . - - - - ^ - � �, - - ` ^1 ' ' _ - - - _ п rv _ - - �� т ,. .�. - - � � _ -� и .у - " ' - _ _ - � . . � , . � � . . . , � Н � � � , е т �, :j � � ., �� _ .. .. .; - х .- 3. , , - - . � - . = - " . = - I ^ м М с � - � „ - _ .q . � �, �, _ ,- , , � - � r. �. , - , - - , - , . . , _ - " - 'V fV ц_ - О _ _ - ~�" 'J' � • с � � -� , г �� ti - �� .� г 'q - v. v� � � . . - . . . . , - - '+' - " - � �J � 'л ' п� м .о г� ci _ - - ц �� г и� га - . . - . . ' . . � � г' - � _ _ !" - � -., ` � _ � н � . . . . . . . . . . . . . . . . . . v. v. и к � _ п _ у О' _ ы _ к, q й г- . , . . . . . . . � . . . . . . . . . . - _ . - _ ц м .' _ Р 'J' - , ,� - '4 �: .i м х . . . . . . . . . � . . . . . . . . . . � - , ,-. - ' �J < <. � q м г . . . . . . . . . . . . . . . . . . . _ ' Л _ - _ О � � �' Т • ^, ' rv , " т . . . . . . . . . . - . . . . . � . . . � � � '_ - _ 'J а" °'� � J / v,� � О г'а с^ �! � � ' ' �`--' С�о� `с � � � _ � = - � � ` � � ` � у . � �У � _ _ й ц - � ' V., л (L �- r. 1г .. �У С х О ��`�� С � � F г и � �' � z с ��"�г С . з' L7 С � С � С < S � гг,' F = с :_ _ _ е =_ й �'гл-,' = _ :_ - с _ � - ,� 'v' r 'f ., _ О г� Е" �` 5 и; ^ ц �. ._ v - _ - � �. � v, с _ -.�, '.. � 7 г с Л U � с � �у д U С п � LL � � F � 5 а .., _ � � � С - _ i � ,. �� � � � s ; ., - _ Е.�. ..�-�. ц Ei С i - k � .. � - � _ :.. _ ? � � Е- ^ ,� � г - . �,,, � G,j г S Т у Х> -., i� �, С�> h:.э .... i. .., .4^'z J с. г Ё- - w С С С l � � '� s : ;сс г г' г v х Statistical Appendix 145 Table 3.3 - Geographic Structure of Foreign Trade in Goods Wn. USD) Exuort* lmoort* 1994 1995 1996 1997 1998 1994 _ 1995 1996 1997 1998 Total 10272.1 13166.8 14400.8 14231.9 12637.4 10745.3 16052.3 17603.4 17128.0 14675.6 Former USSR 5924.9 7225.6 7668.6 5810.2 4433.1 8003.2 10802.1 11463.3 10277.5 8279.0 Azerbaijan 79.0 41.5 88.3 87.6 89.9 40.7 53.2 30.8 47.0 27.7 Beloruss 542.3 545.9 722.5 925.5 549.0 339.9 526.4 394.5 391.4 352.9 Armenia 5.5 6.3 25.2 10.7 8.4 1.3 6.0 4.0 8.1 4.5 Georgia 8.8 18.0 183.2 49.4 31.5 3.3 4.9 3.8 7.7 7.8 Kazakhstan 119.2 94.4 90.9 93.7 89.7 164.9 323.3 2.43.6 403.7 345.7 Kyrgyzstan 10.0 8.3 8.1 4.3 12.3 16.1 8.9 9.6 8.7 10.6 Moldova 489.3 151.9 237.8 294.4 180.4 171.9 61.1 72.6 73.8 51.1 Russia 4065.4 5697.9 5577.4 3723.0 2905.5 6349.4 8249.1 8816.6 7837.9 7064.3 Tadjikistan 4.3 11.3 19.1 84.5 76.0 7.1 9.1 8.4 2.5 1.4 Turkmenia 222.0 270.2 274.0 176.7 121A 687.9 680.5 1541.2 972.3 1.3 Uzbekistan 73.3 114.1 178.7 235.9 139.5 55.0 73.4 60.8 126.4 29.7 Estonia 18.7 36.0 53.9 43.4 51.1 27.4 26.6 38.7 72.8 96.4 Latvia 94.0 63.9 77.9 78.9 78.0 70.3 81.8 92.4 82.9 45.7 Lithuania 193.1 127.3 131.6 102.3 101.7 68.0 129.5 156.3 242.4 239.9 Rest of the World 4347.2 5941.2 6732.2 8421.7 8204.3 2742.1 5250.2 6140.1 6850.5 6396.5 Austria 1703 77.3 101.5 107.7 135.2 99.1 132.6 175.5 224.7 193.8 Belgium 46.0 68.7 78.3 83.2 86.0 21.3 111.3 124.8 152.7 138.5 Bulgaria 129.8 179.2 137.4 154.7 205.4 68-8 128.4 126.1 142.9 100.5 Brazil 2.6 20.1 36.7 40.4 57.9 9.2 137.5 111.6 49.0 64.2 Great Bri tai n 77.0 176.0 135.9 87.4 108.0 58.9 142.5 201.5 232.4 204.7 Virginia IsL 2.2 36.8 92.2 150.6 56.5 2.2 0.7 1.7 11.5 1.5 Greece ... 39.7 96.9 80.4 59.9 ... 84.5 59.6 64.8 34.1 Egypt 58.2 106.3 96.8 184.7 186.9 9.9 9.8 12.2 4.7 7.1 Israel ... 59.9 67.2 72.1 134.1 ... 39.9 49.9 51.2 49.2 India 54.2 231.4 82.3 225.3 137.6 24.3 74.3 91.0 82.4 79.3 Italy 200.2 424.6 344.6 395.0 550.2 126.8 271.8 341.8 400.4 408-6 Iran - 34.9 116.5 199.6 118.5 ... 4.2 7.0 9.3 5.5 Ireland 63.6 9.3 64.4 29.9 82.3 22.3 33.9 52.5 48.1 37.3 Spain ... 64.1 90.2 117.5 131.3 ... 46.5 57.0 85.1 80.3 Canada 33.7 9.2 14.4 13.9 33.3 23.3 29.0 46.6 37.7 28.2 China 506.1 755.4 768.1 1100.9 737.4 33.0 83.7 90.2 125.6 123.1 Liven ... 141.6 155.9 153.1 72.8 ... 1.6 1.5 3.3 1.3 Holland ... 113.3 99.7 121.3 117.7 ... 149.2 197-8 192.9 161.5 Germany 282.6 338.7 421.9 568.6 638.7 655.0 958.3 1068.7 1308.9 1263.6 South Korea 67.4 79.3 63.2 51.9 75.3 4.7 27.5 48.0 113.1 196.4 Poland 150.0 274.5 362.7 380.3 313.1 12 3.22 476.7 510.7 549.9 486.2 Rumania ... 167.3 157.3 149.0 160.9 ... 151.5 80.3 86.9 47.8 Syria 17.4 83.8 197.6 260.9 204.1 1.7 11.6 12 4.5 8.4 Slovakia 125.4 216.4 230.6 279.3 245.2 75.3 152.8 183.1 204.5 170.4 USA 358.7 273-1 376.3 300.4 502.0 220.2 419.3 569.8 650.9 590.3 Thailand 113.2 124.8 329.3 99.6 15.0 0.5 4.9 16.2 3.2 5.4 Taiwan 87.1 80.2 84.2 303.7 193.1 0.5 6.7 8.6 12.2 18.1 Turkey 116.3 453.0 408.7 670.9 696.3 8.9 67.6 109.8 162.0 135.7 Hungary 170.4 298.1 3.9 318.9 263.1 99.9 169.6 238.3 197.3 193.9 Finland ... 22.9 22.1 37.8 26.2 ... 88.4 96.3 120.5 114.9 France 36.7 43.7 111.1 96.7 118.9 64.9 195.3 245.1 307.6 300.2 Check Republic 125.7 118.1 143.0 173.9 171.5 127.5 157.1 239.1 219.7 208.8 Switzerland 326.4 50.3 85.3 71.4 75.6 334.3 131.8 101.3 148.8 120.4 Swiss ... 7.9 11.7 3.7 7.4 ... 46.9 66.9 136.7 148.9 Japan 26.2 65.6 81.3 92.8 57.5 30.3 106.9 114.9 150.0 113.8 Other countri es 999.3 695.7_J 1058.0 1254.5 1429.4 496.1 2L9 J 691.6 556.0 554.8 In 1996-98 data were obtainedfrom the Custorm statistics. For 1994 - 95, data are based on reports of enterprises, and it is not comparable with data in subsequent years. Sou?ce: State Conirratteeof Statistics 146 Statistical Appendix Table 3.4 - Commodity Structure of Foreign Trade (mln. USD) S ~ Export Import 1995 1996 1997 1998 1995 1996 1997 1998 Total 11566.5 14400.8 14231.9 12637.4 11335.5 17603.4 17128.0 14675.6 I. Live animals 485.6 593.6 438.7 272.8 75.5 316.1 190.8 221.0 01 Live animals 50.3 41.5 10.2 0.5 1.8 14.9 11.6 9.3 02 Meat and subproducts 194.8 297.6 260.2 159.6 17.2 156.4 83.6 67.7 03 Fish, etc. 64.4 59.7 58.7 44.7 40.2 117.2 79.6 129.5 04 Dairy products, eggs 174.2 191.7 106.4 65.9 12.7 21.9 13,9 13.0 05 Products of animal origin 1.9 3.1 3.2 2.1 3.6 5.7 2.1 1.4 II. Products from plants 142.7 867.6 553.6 642.9 103.2 246.9 167.1 184.7 06 Flowers, live plants 0.1 0.6 0.8 0.6 1.5 2.2 3.5 3.5 07 Vegetables and roots 23.8 23.0 29.4 22.8 3 11.3 2.5 3.7 08 Fruits and nuts 2.7 7.5 6.9 7.8 13.5 80.1 401 38.9 09 Coffee, tea, mate 1.5 2.1 3.3 2.3 11.5 36.4 34.1 43.0 10 Cereals 47.2 375.7 127.8 313.8 20.3 27.3 19.7 19.1 11 Flour products 50.2 217.5 104,0 51.8 1.9 8.9 16.2 11.8 12 Oil seeds, industrial plants 16 236.4 278.4 241.9 45.7 64.3 44,6 57.3 13 Extracts from plants 1.2 4.8 2.9 1.9 5.7 15.8 6.2 7.4 14 Materials of vegetal origin for threading 0 0.0 0.0 0.0 0.1 0.6 0.2 0.0 Ill. Fats and oils of aninal and vegetal origin 91.7 185.6 121.8 131.9 19.4 36.9 39.8 93.6 IV. Food products 979.4 1402.0 686.7 331.8 273.5 848.3 500.3 551.9 16 Fish/meat preparations 63.6 85.9 131.9 53.6 6.1 48.8 19.7 34.1 17 Sugar & confectionery 544.8 675.9 314.6 108.6 162.9 309.9 16.3 43.0 18 Cacao products 2.3 10.5 21.2 22.7 25.9 55.8 72.6 83.1 19 Products from flour, cereals 11.3 16.6 14.4 12.4 8.2 47.2 53.7 17.8 20 Vegetable and fruit preparations 36.4 46.9 37.1 30.1 6.9 26.3 25.5 27.3 21 Mixed food products 4.5 15.1 5.7 2.7 12.4 107.6 56.5 40.8 22 Alcoholic beverages and soft drinks 268.5 445.8 112.6 52.4 17.3 90.5 69.7 88.2 23 Wastes (food industry) and animal feed 15.3 66.7 20.9 18.8 2.3 7.2 10.8 11.8 24 Tobacco 32.7 38.6 28.3 30.5 31.5 155.0 175.4 205.9 V. Mineral products 1220.9 1244.6 1282.9 1163.6 6281.1 8781.4 8152.9 6320.8 25 Salt, cement etc.. 106.2 123.2 140.9 140.5 99.9 162.3 184.4 151.1 26 Iron ore, ash, slags 603.5 495.4 538.9 502.4 193.3 212.4 161.1 229.1 27 Petroleum products 511.2 626.0 603.1 5207 5987.9 8406.7 7807.4 5940.7 VI. Chemicals 1125 1674.7 1504.4 1278.8 614.3 1025.9 1241.8 995.1 28 Inorganic chemicals 284.5 597.7 537.9 508.2 88 121.1 87.2 67.6 29 Organic chemicals 305.6 168.8 217.9 159.6 148.6 159.2 144.8 131.8 30 Pharmaceutical products 29.3 72.5 90.4 60.2 110 255.5 423.5 305.9 31 Fertilizers 301.8 572.3 432.7 328.7 2.5 4.5 7.8 4.7 32 Coloring materials, pigments, ink 90.7 87.2 68.9 68.8 70.1 89.6 111.5 105.7 33 Oils, essence, perfumes 2.8 15.4 18.9 20.7 31.4 70.7 109.8 84.1 34 Soap and detergents 39.1 48.0 20.0 8.7 16.3 39.0 44.0 49.7 35 Glues, albumin 36.9 64.0 57.2 68.4 9.1 14.6 19.0 17.9 36 Explosives, matches 3.5 4.5 8.5 2.5 18.2 13.0 12.1 12.7 37 Photographic materials 0.8 5.0 3.5 2.0 6.8 16.0 18.3 11.3 38 Other chemical products 30 39.3 48.5 50.9 113.3 242.7 263.8 203.7 VII. Plastic goods 322,4 402.0 369.4 316.3 412 768.5 724.9 674.8 39 Plastic goods 69.8 91.5 67.5 74.0 159.6 288.1 366.6 354.5 40 Rubber 252.6 310.5 301.9 242.3 252.4 480.4 358.3 320.3 VIII. Skins, hides, etc. 67.3 121.2 141.8 979 35.1 51.6 51.8 52.0 41 Skins and hides 60.7 107.5 129.9 86.3 23.7 29.9 34.6 35.9 42 Products of skin, travel goods, bags 0.6 2.1 2.3 3.8 2.9 7.3 6.5 6.5 43 Furs 6 11.6 9.6 7.8 8.5 14.4 10.7 9.6 IX. Wood and wood products 31.1 55.2 61.1 100.2 79 119.8 904 75.7 44 Wood and wood products 31 55.2 61.0 100.2 77.6 118.2 88.5 73.5 45 Cork and cork products 0 0.0 0.0 0.0 1.3 1.5 1.8 2.0 46 Straw products 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.2 X. Paper, products fron paper 79.8 138.8 147.7 137.9 206.5 392.2 409.7 3974 47 Pulp 1.3 0.4 0.2 0.1 43.1 50.2 38.6 38.7 48 Paper, carton 72.3 100.7 106.0 106.3 154.5 305.3 327.2 307.9 49 Printedmaterials 6.2 37.7 41.5 31.5 8.9 36.7 43.9 50.8 * In 1996-98 data were obtained from the Customs statistics. For 1995, data are based on reports of enterprises, and it is not comparable with data in subsequent years. Statistical Appendix 147 Table 3.4 - Commodity Structure of Foreign Trade (continued) (mln. USD) Exp_ rt iport 1995 1996 1997 1998 1995 1996 1997 XI. Textiles 314.8 382.8 449.7 501.6 352.3 495.9 497.6 541.7 50 Silk 0.1 0.3 0.1 0.5 1 0.6 0.5 0.5 51 Wood, animal hair 21.4 13.7 14.2 7.9 36.7 45.2 59.2 65.5 52 Cotton 16.3 12.7 8.1 10.0 73.7 96.0 66.5 69.0 53 Other fibers 16.7 8.5 7.7 6.3 6.5 10.5 7.0 6.2 54 Chemical fibers 38.1 30.7 60.9 64.6 56.7 67.5 59.1 70.8 55 Chemical staple-fibers 11.1 5.0 4.5 3.4 54.8 70.0 91.6 105.8 56 Coton wool 7.8 11.5 18.6 17.4 18.8 31.9 36.9 30.2 57 Carpets, floor covenngs 1 0.5 1.9 2.1 2.4 5.0 7.1 7.7 58 Special materials (decorative materials) 0.6 0.4 0.2 0.5 10.4 11.3 12.6 13.6 59 Textile materials (printed) 18.5 24.1 16.5 12.6 26.4 51.0 46.8 54.5 60 Knitted fabrics 0.8 0.6 1.1 0.5 8 9.4 17.5 22.7 61 Clothes of knitted fabrics 13 18.5 19.6 23.6 12.6 15.8 17.0 18.6 62 Clothes (not knitted) 164.5 244.5 286.4 342.1 26.1 27.7 30.9 36.2 63 Other ready-made textile goods 4.9 11.8 9.9 9.8 18.2 54.0 38.9 40.4 XI. Shoes, hats, unbrellas 53.1 70.2 59.3 61.9 36.1 69.2 50.4 39.4 64 Shoes, boots 51.5 68.9 57.7 60.4 35.4 67.3 48.0 36.0 65 Hats, caps 1.5 1.3 1.6 1.4 0.2 0.5 0.7 1.6 66 Umbrellas, canes 0 0.0 0.0 0.0 0.1 0.8 1.3 1.5 67 Artificial flowers 0.1 0.0 0.0 0.0 0.4 0.6 0.4 0.3 XIII. Productsfromn stone, cement, asbestos 171.5 172.8 133.7 108.5 92.8 159,6 202.6 161.3 68 Goods from stone, cement, asbestos 49.8 60.6 52.0 36.8 29.8 42.4 59.8 50.8 69 Ceramics 67.3 56.0 45.4 42.5 35.9 61.1 78.3 58.9 70 Glass and glass products 54.4 56.2 36.3 29.2 27.1 56.1 64.5 51.6 XIV. Natural pearls 72.2 0.0 0.0 0.0 69.7 0.0 0.0 0.0 XV. Ferrous and other non precious metals 4189.9 4763.2 5904.2 5335.7 539.3 791.9 665.4 628.8 72 Ferrous materials 3112.6 3417.0 4495.7 4204.4 224.7 279.0 213.9 207.6 73 Goods from ferrous materials 786.3 1008.3 957.9 644.9 99.1 162.1 174.3 141.8 74 Copper and copper products 25.6 69.3 145.8 131.3 51.1 73.1 54.4 54.0 75 Nickel and nickel products 0.4 0.5 0.4 9.0 34.8 39.4 32.7 24.5 76 Aluminum and products of aluminum 159.7 161.9 221.6 282.0 59.7 93.3 91.6 93.8 78 Lead and lead products 2.6 7.3 4.3 2.9 1.3 2.6 2.6 3.5 79 Zinc and zinc products 0 0.0 0.4 0.5 13.9 16.1 13.9 18.5 80 Tin and tin products 0 0.0 0.0 0.0 3 2.6 1.8 0.5 81 Other non-precious metals 72 53.4 38.3 30.7 11.9 10.8 8.8 8.2 82 Instruments from non-precious metals 11.9 16.8 9.8 13.1 20.3 35.2 48.7 48.4 83 Other goods from non-precious metals 188 28.7 30.0 16.9 19.5 77.7 22.7 28.0 XVI. Machinery 1360.1 1406.7 1370.0 1104.7 1689.2 2407.9 2594.9 2284.7 84 Non-electrical machinery, reactors 905.6 936.7 909.4 761.4 1266.8 1781.1 1961.0 1614.3 85 Electrical machinery 454.5 470.0 460.6 343.4 422.4 626.8 633.9 670.4 XVII. Transport 743.7 635.4 540.4 617.0 286.6 570.4 861.0 887.3 86 Locomotives 204.1 210.8 142.8 134.6 51.2 108.5 109.6 110.6 87 Transport except railway 411.4 234.5 193.0 130.2 221.6 448.5 639.3 752.7 88 Aircraft 25.6 51.5 113.2 153.1 6.4 9.7 109.9 12.9 89 Ships 102.6 138.6 91.4 198.9 7.4 3.7 2.2 11.1 XVIII Equipment 62.3 61.7 62.1 64.1 104.2 207.3 237.8 242.0 90 Optical, photografical, control, medical equip. 59.5 60.9 59.1 63.6 98.5 200.2 231.3 236.4 91 Watches, clocks 0.2 0.0 1.6 0.1 4.9 5.1 4.7 4.3 92 Musical instruments 2.6 0.8 1.4 0.4 0.8 2.0 1.8 1.3 XIX. Other goods 52.9 55.0 55.2 44.4 65.6 152.3 157.6 112.8 94 Furniture 41.5 43.9 42.4 31.7 43.1 101.0 121.2 81.0 95 Toys 10 9.2 11.2 11.3 11.7 29.5 12.5 9.8 96 Other 1.4 1.9 1.6 1.4 10.8 21.8 23.9 22.0 XX. Collectors' items, antiques 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.2 XXI. Other .. 167.6 345.7 319.7 .. 116.5 122.0 77.3 XXII. Goods purchased in Vorts .. 0.1 3.5 5.7 . 44.7 175.1 133.1 * In 1996-98 data were obtained from the Customs statistics. For 1995, data are based on reports of enterprises, and it is not comparable with data in subsequent years. 148 Statistical Appendix Table 3.5 - CommoditV Structure of Foreian Trade (mn. USD) Frnorf* Imnm)rl 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998 Total 9708.2 11566.5 14400.8 14231.9 12637.4 9989.2 11335.5 17603.4 17128.0 14675.6 1. Live animals 340.1 485.6 593.6 438.7 272.8 61.1 75.5 316.1 190.8 221.0 11. Products from plants 81.9 142.7 867.6 553.6 642.9 94.9 103.2 246.9 167.1 184.7 Ill. Fats and oils of animal and vegetal origin 55.6 91,7 185.6 121.8 131.9 5.0 19.4 36.9 39.8 93.6 IV. Food products 560.4 979.4 1402.0 686.7 331.8 164.6 273.5 848.3 500.3 551.9 V. Mineral products 1015.0 1220.9 1244.6 1282.9 1163.6 5495.8 6281.1 8781.4 8152.9 6320.8 VI. Chemicals 1024.0 1125 1674.7 1504.4 1278.8 555.4 614.3 1025.9 1241.8 995.1 VII. Plastic goods 304.4 322.4 402.0 369.4 316.3 384.7 412 768.5 724.9 674.8 VIII. Skins, hides, etc. 47.0 67.3 121.2 141.8 97.9 52.4 35.1 51.6 51.8 52.0 IX. Wood and wood products 15.9 31.1 55.2 61.1 100.2 265.4 79 119.8 90.4 75.7 X. Paper, products from paper 129.6 79.8 138.8 147.7 137.9 84.1 206.5 392.2 409.7 397.4 X1. Textiles 159.4 314.8 382.8 449.7 501.6 265.4 352.3 495.9 491.6 541.7 XIL. Shoes, hats, umbrellas 25.3 53.1 70.2 59.3 61.9 38.9 36.1 69.2 50.4 39.4 XII. Products from stone, cement, asbestos 170.7 171.5 172.8 133.7 108.5 65.5 92.8 159.6 202.6 161.3 XIV. Natural pearls 5.9 72.2 0.0 0.0 0.0 9.2 69.7 0.0 0.0 0.0 XV. Ferrous and other non-precious metals 3513.4 4189.9 4763.2 5904.2 5335.7 410.9 539.3 791.9 665.4 628.8 XVL. Machinery 1372.0 1360.1 1406.7 1370.0 1104.7 1417.9 1689.2 2407.9 2594.9 2284.7 XVlI. Transport 705.5 743.7 635.4 540.4 617.0 410.7 286.6 570.4 861.0 887.3 XVIII Equipment 52.1 62.3 61.7 62.1 64.1 123.2 104.2 207.3 237.8 242.0 XIX. Other goods 130.0 52.9 55.0 55.2 44.4 84.1 65.6 152.3 157.6 112.8 XX. Collection, antique 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 XX1. Other 167.6 345.7 319.7 116.5 122.0 77.3 XYTI loods nurhased in norts () 1 3.5 5.7 44m7 175.1 133.1 * In 1996-98 data were obtained fron the Customs statistics. For 1994 - 95. data are based on reports of enterprises, and it is not comparable with data in subsequent years. Source: State Committee ofStatistics Table 3.6 - Commodity Structure of Exvort, 10 maior products (mln. USD)* 1996 1997 1998 Total 14400.8 Total 14231.9 Total 12637.4 72 Ferrous materials 3417.0 72 Ferrous materials 4495.7 72 Ferrous materials 4204.4 73 Goods from ferrous materials 1008.3 73 Goods from ferrous materials 957.9 84 Non-electrical machinery, reactors 761.4 84 Non-electrical machinery, reactors 936.7 84 Non-electrical machinery, reactors 909.4 73 Goods from ferrous materials 644.9 17 Sugar & confectionery 675.9 27 Petroleum products 603.2 27 Petroleum products 520.7 27 Petroleum products 626.0 26 Iron ore, ash, slags 538.9 28 Inorganic chemicals 508.2 28 Inorganic chemicals 597.7 28 Inorganic chemicals 537.9 26 Iron ore, ash, slags 502.4 31 Fertilizers 573.3 85 Electrical machinery 460.6 85 Electrical machinery 343.4 26 Iron ore, ash, slags 495.4 31 Fertilizers 432.7 62 Clothes (not knitted) 342.1 85 Electrical machinery 470.1 17 Sugar & confectionery 314.6 31 Fertilizers 328.7 22 Alcoholie beveraies and soft drinks 445 40 Rubber 301.9 10 Cereals 313 8 * Daa is based on the Custom statistics Table 3.7 - Commodity Structure of Import, 10 major products (mln. USD)* 1996 1997 1998 Total 17603.4 Total 17,128.0 Total 14675.6 27 Petroleum products 8406.7 27 Petroleum products 7,807.4 27 Petroleum products 5940.7 84 Non-electrical machinery, reactors 1781.1 84 Non-electrical machinery, reactors 1,961,0 84 Non-electrical machinery, reactors 1614.3 85 Electrical machinery 626.8 87 Transport except railway 639.3 87 Transport except railway 752.7 40 Rubber 480.4 85 Electrical machinery 633.9 85 Electrical machinery 670.4 87 Transport except railway 448.5 30 Pharmaceutical products 423.5 39 Plastic goods 354.5 48 Paper, carton 305.3 39 Plastic goods 366.6 40 Rubber 320.3 17 Sugar& confectionery 309.9 40 Rubber 358.3 48 Paper, carton 307.9 39 Plastic goods 288.1 48 Paper, carton 327.2 30 Pharmaceutical products 305.9 72 Ferrous materials 279.1 38 Other chemical products 263.8 90 Optic., photo., control, med. equip. 236.4 10 Pharmaceutical nroducts 155 5 90 Ontic photo. control rned- in 1L 1 26 Irmn ore ash- slws 229.1 * Data is based on the Custom statistics Source: State Commitiee olSatistics m7 Table 3.8 - Geographic Structure of Foreign Trade in Services (min. USD) Export Import 1994 1995 1996 1997 1994 1995 1996 1997 Total 2118.35 2621.52 4746.40 4738.39 309.37 631.11 1204.54 1418.34 Former USSR 1114.55 1642.30 3490.83 3351.21 90.42 271.03 367.07 422.38 Azerbaijan 2.36 2.06 4.05 5.95 0.47 0.16 0.87 0.65 Beloruss 10.50 21.01 57.82 38.76 6.23 9.39 14.06 19.05 Armenia 0.38 1.57 1.84 1.28 0.15 0.41 0.31 0.17 Georgia 2.91 2.80 1.87 4.56 0.64 1.28 0.96 0.55 Kazakhstan 16.15 20.98 15.93 20.10 3.13 4.39 3.56 7.36 Kyrgyzstan 0.01 0.07 0.45 0.36 0.10 0.02 0.11 0.71 Moldova 5.63 21.78 34.67 31.10 1.88 5.80 12.43 20.31 Russia 1062.31 1540.90 3333.46 3213.64 71.04 236.11 310.13 344.99 Tadjikistan 0.09 0.45 0.72 0.32 0.01 0.01 0.08 0.18 Turkmenia 1.22 1.08 2.28 3.81 0.01 0.00 0.34 0.30 Uzbekistan 5.04 14.17 23.65 13.39 1.23 2.91 1.95 3.25 Estonia 2.20 6.39 3.11 2.76 1.90 1.70 2.69 2.98 Latvia 3.14 4.61 5.27 8.89 1.97 5.66 8.79 12.71 Lithuania 2.61 4.43 5.71 6.29 1.66 3.19 10.79 9.17 Rest of the World 1003.80 979.22 1255.81 1387.18 218.95 360.08 837.47 995.96 Austria 20.25 38.76 83.60 75.49 3.69 10.77 7.76 7.20 Belgium 3.54 7.70 14.62 39.44 0.88 4.62 6.15 5.11 Bulgaria 33.92 27.67 38.69 36.88 7.65 8.30 9.46 9.68 Great Britain 27.66 40.00 93.26 108.62 12.72 33.46 34.94 82.45 Greece 18.81 34.47 42.56 48.63 11.03 15.63 22,14 11.30 Egypt 11.51 12.70 14.23 16.14 7.19 2.61 3.91 1.07 Israel 18.82 16.42 27.92 28.28 2.60 6.16 6.64 15.45 India 31.39 25.05 16.99 30.23 18.19 4.45 3.08 2.49 Italy 30.00 37.88 42.25 48.96 18.84 41.99 20.75 14.12 Iran 11.61 4.58 26.26 14.62 0.01 0.23 0.74 0.66 Spain 2.91 5.07 7.03 10.83 5.47 4.03 8.66 9.98 China 16.35 4.77 11.99 24.99 0.09 4.42 2.65 2.65 Cyrpus 9.62 12.10 34.45 54.61 5.84 7.30 14.33 11.15 Liven 9.31 9.12 11.14 4.50 1.01 1.15 0.59 0.10 Holland 10.52 21.46 29.82 29.11 5.48 4.12 4.13 16.15 Germany 70.85 79.50 88.10 118.52 23.87 22.18 33.11 77.89 Poland 31.55 18.60 28.73 37.78 9.87 11.52 14.71 17.33 Rumania 41.71 4.37 11.66 12.54 2.42 1.48 2.37 2.01 Slovenia 0.71 4.09 5.68 4.37 1.11 0.20 2.78 2.78 Slovakia 1.31 8.66 8.24 22.99 2.53 5.59 19.38 21.59 USA 32.31 52.19 88.39 142.92 13.21 29.61 253.78 283.26 Turkey 32.37 30.29 52.28 57.21 5.32 22.36 33.77 22.31 Hungary 26.18 24.15 33.13 43.81 4.96 4.23 5.34 7.41 France 10.90 16.79 19.44 28.13 3.28 2.83 15.14 16.67 Check Republic 4.37 5.83 10.70 15.01 4.33 2.77 5.30 9.52 Switzerland 17.42 22.78 51.30 68.54 2.43 7.77 15.33 15.40 UAE 9.60 5.41 13.33 10.78 1.92 15.58 18.99 8.07 Vietnam 11.55 3.81 2.76 3.17 0.21 1.36 0.15 0.03 Other countries 456.76 405.01 347.26 250.08 42.80 83.37 271.39 322.13 Source: State Statistics Conittee Statistical Appendix 151 Table 3.9 - Foreign Trade in Services (mln. USD) Ex2ort Import 1994 1995 1996 1997 1994 1995 1996 1997 Total 2118.4 2621.5 4746.6 4738.4 309.4 631.1 1024.5 1418.3 Transportation services 1748.4 2110.5 4065.8 3983.6 144.9 106.5 241.7 328.3 including marine transport 684.4 616.4 598.7 510.3 118.9 72.9 76.8 65.6 air transport 129.5 115.0 140.1 188.3 6.1 13.6 21.4 57.8 car transport 99.3 104.1 111.3 142.5 5.8 4.4 9.1 11.6 rail transport 38.4 127.9 337.9 361.0 12.5 8.8 132.5 184.9 pipelines 785.1 1112.7 2817.0 2685.8 0.0 6.4 0.2 0.1 other transport 11.7 34.4 60.8 95.7 1.6 0.4 1.7 8.3 Repair of fixed assets 84.6 49.2 47.1 35.7 5.1 60.5 37.6 33.8 Communication services 78.2 176.3 137.6 109.3 83.0 211.4 119.2 121.3 Construction services 15.2 30.1 40.6 50.6 33.6 35.9 48.5 44.2 Assembly & repair services 107.2 78.4 100.7 139.3 12.4 9.4 17.3 36.4 Insurance services 0.6 2.5 1.3 2.5 1.7 10.8 25.0 20.5 Financial services (excluding insurance & pensions) 14.6 22.7 10.8 27.4 7.1 17.1 10.7 76.5 Rresearch & development 4.6 19.0 93.2 60.2 2.8 29.2 14.5 12.2 Legal, accounting & management consulting services, engineering & other technical services 15.5 42.6 67.1 74.2 6.1 22.4 35.7 64.4 Non-material non-financial assets (patents, licenses, know - how, etc.) 1.4 2.1 1.7 5.8 1.7 1.2 3.9 12.8 Hotel & restaurant services 13.6 28.8 38.9 54.2 0.8 1.0 2.8 2.1 Tourism 11.3 3.1 6.1 8.7 3.3 42.0 63.2 22.5 Other business services 5.4 41.2 113.6 152.3 3.5 78.4 578.3 630.0 Other private services 17.8 15.0 22.1 34.6 3.4 5.3 6.1 13.3 Other services (total) 23.2 56.2 135.7 186.9 6.9 83.7 584.4 643.3 Source: State Statistics Committee Table 3.10 - Barter in Foreign Trade in Goods (mln. USD) Exoort (FOB) Imoort (CIF) 1995 1996 1997 1998.0 1995 1996 1997 1998 Total 4356.7 3132.6 1477.4 941.7 3191.1 2095.0 1615.5 1042.5 Former USSR 2942.2 2354.5 1138.5 727.5 2219.3 1516.1 1319.7 886.1 Azerbaijan 27.5 37.1 21.5 12.6 37.3 23.0 17.2 10.1 Beloruss 272.2 246.3 228.5 147.5 231.7 183.5 166.5 125.2 Armenia 4.0 3.4 1.7 1.3 2.0 1.6 2.1 2.2 Georgia 9.1 8.7 10.8 4.1 3.1 2.3 2.6 1.4 Kazakhstan 32.0 18.0 6.8 2.7 42.0 10.9 9.3 3.5 Kyrgyzstan 2.0 1.5 0.8 0.5 2.4 0.6 0.3 0 Moldova 38.5 36.1 92.6 66.0 28.3 19.7 17.0 8.8 Russia 2366.6 1730.1 614.2 436.8 1754.0 1201.5 597.8 717.1 Tadjikistan 4.4 5.3 20.7 1.4 5.6 2.8 0.4 0.1 Turkmenia 82.2 177.0 89.9 24.2 22.0 7.9 469.8 0.5 Uzbekistan 29.3 30.4 17.4 11.7 16.9 10.4 7.3 3.5 Estonia 12.6 10.8 5.8 2.9 10.2 8.2 6.8 3.6 Latvia 19.0 17.8 12.7 5.9 24.6 15.2 7.5 2.6 Lithuania 42.8 32.4 15.1 9.9 39.2 28.5 15.1 7.5 Rest of the World 1414.6 778.1 338.9 214.2 971.8 578.9 295.8 156.4 Austria 6.8 11.8 9.6 1.0 18.2 9.6 9.8 2.4 Australia 2.0 0.1 0.0 0.1 16.2 21.0 0.0 0 Belgium 7.2 1.7 1.4 0.7 28.5 8.7 6.0 3.5 Bulgaria 53.3 21.6 12.2 9.5 39.9 20.5 6.5 6.6 Brazil 0.9 ... ... 0.3 54.8 17.1 2.0 0 Great Britain 4.8 4.5 1.1 0.5 9.6 6.1 5.8 1.5 Greece 8.6 1.5 1.2 0.8 5.5 0.4 0.5 0.5 Egypt 16.5 9.4 3.4 1.2 3.1 0.6 0.3 0 India 5.7 4.7 2.0 0.0 15.4 14.2 1.6 0.7 Italy 124.9 12.8 4.5 4.0 42.7 11.5 4.3 4.1 Indonesia 11.2 9.4 3.3 1.0 7.1 11.7 12.5 19.8 Iran 6.7 9.8 5.9 3.3 2.3 3.1 0.6 0.1 Spain 18.0 6.5 7.9 1.3 11.1 4.2 2.2 0.6 China 307.4 131.4 19.2 4.7 33.9 12.8 5.4 3.6 Liven 59.5 33.2 4.8 2.9 0.1 0.1 0.0 0 Holland 10.9 7.1 7.0 2.8 18.3 4.8 6.1 0.6 Germany 36.3 15.6 18.3 13.7 91.7 48.8 28.0 13.6 Poland 70.2 56.7 38.2 34.0 185.5 87.9 58.4 47.7 Rumania 63.2 27.6 18.0 11.9 36.8 12.0 6.2 3.3 Slovakia 60.4 72.7 66.9 41.7 45.9 44.2 23.3 11.6 USA 38.2 3.2 3.9 1.0 18.8 17.3 38.0 2.1 Thailand 25.6 28.0 1.2 0.0 0.1 1.0 0.0 0 Taiwan 17.7 0.5 1.8 0.3 0.4 0.0 0.0 0 Turkey 121.0 41.8 8.5 4.6 9.3 6.8 2.5 0.7 Hungary 115.7 84.2 46.0 34.0 44.3 69.6 11.4 5.9 France 3.5 1.3 0.6 1.1 21.5 23.6 9.3 2.2 Check Republic 36.3 40.7 19.4 16.7 33.9 59.7 18.4 6.4 Switzerland 14.0 5.2 3.2 0.5 21.5 6.9 2.6 0.7 Japan 3.5 12.4 0.0 0.0 11.1 5.3 1.5 1.7 * In 1996-98 data were obtained from the Customs statistics. For 1995, data are based on reports of enterprises, and it is not comparable with data in subsequent years. Source: State Statistics Commitee Statistical Appendix 153 Table 3.11 - Ukraine: Foreign Economic Position (nn USD unless other stated) Merchandise Creticeeto treandie Current CUrrent Increment of Gross international Gross foreign Gross Debt service trade and account NtFI Portfolio gross rsre trd.n co account Net FDI . Prflo gss reserves in weeks of debt, end of foreign debt ratio in % of services balance balance as% investments international inpwes o e,ed of o GDP ratonto balnc boflDarceresimports period as % of GDP exports balance of GDP reserves 1994 -1365 -1163 -3.1 151 1.8 7,167 18.9 1[.2 1995 -1190 -1152 -3.1 257 16 488 3.2 8,217 22.2 8.0 1996 -1122 -1185 -2.7 526 199 873 4,8 8,840 19.8 6.6 1997 -1536 -1335 -2.7 581 605 383 5.3 9,555 19.2 7.5 1998 -1207 -1296 -3.1 747 49 -1324 2.7 11,483 27.1 1995 Q1 -381 -325 -5.0 42 2 -64 2.2 1995 Q2 -274 -240 -3.2 75 12 986 4.6 1995 Q3 -230 -188 -1.9 65 2 -415 3.2 1995 Q4 -305 -399 -3.3 75 0 -19 2.7 1996 Q) -702 -709 -8.8 129 26 -361 1.6 8,090 21.6 1996 Q2 65 105 1.1 78 24 216 2.0 8,300 21.1 1996 Q3 -22 -53 -0.5 122 36 373 2,9 8,350 20.7 1996 Q4 -463 -528 -3.4 197 113 835 4.6 8,840 20.1 1997 Q1 -741 -748 -7.3 96 336 87 4.9 8,79() 19.2 8.4 1997 Q2 -354 -274 -2.5 109 410 257 5.6 8,890 19.0 6.7 1997 Q3 -249 -159 -1.3 139 391 189 5.9 9,270 19.5 7.1 1997 Q4 -192 -154 -1.0 237 468 -150 5.5 9,555 19.3 7.2 1998 Q] -722 -714 -6.7 153 651 139 6.3 10,547 20.9 6.2 1998 Q2 -261 -305 -2.6 276 -205 -748 4.5 10,656 21.0 10.4 1998 Q3 -364 -448 -3.7 155 -368 -692 2.6 10,966 22.3 21.5 1998 04 140 171 1.9 163 -29 -23 2.7 11,483 26.5 215 Source: TACIS Ukraittian Economic Trends bused on Derhkomstat duta Table 3.12 - NBU interventions Satisfied demand = NBU interventions NBU NBU interventions Ministry of Total volume of at UICE and inter- interventions at Finance USD sales bank inter-bank 1995 Jan 332,083 30,960 30,960 Feb 377,543 -10,350 -10,350 Mar 489,826 -28,310 -28,310 ApI 413,590 -52,100 -52,100 May 535,794 4,550 4,550 Jun 871,510 -13,290 -13,290 Jul 901,035 2,390 2,390 Aug 1,010,515 -40,860 -40,860 Sep 1,042,022 76,820 76,820 Oct 1,135,325 -14,860 -14,860 Nov 1,009,800 -19,340 -19,340 Dec 1,098,353 -72,790 -72,790 1996 Jan 1,080,386 64,180 69,252 5,072 Feb 1,419,807 -88,920 -95,927 -7,007 Mar 1,577,602 -130,660 -48,695 81,965 ApI 1,746,398 -103,200 17,974 121,174 May 1,508,352 -64,800 -10,420 54,380 Jun 1,734,522 -243,980 -138,902 105,078 Jul 2,051,792 -85,510 14,989 100,499 Aug 2,294,292 7,740 136,633 128,893 Sep 1,654,626 87,900 30,304 -57,596 Oct 1,992,884 151,990 -78,490 -230,480 Nov 1,789,216 120,880 -1,613 -122,493 Dec 2,208,701 -14,240 -129,631 -115,391 1997 Jan 1,915,613 -152,170 -152,170 0 Feb 2,114,989 -62,560 -62,560 20,900 Mar 1,953,342 -630 -1,070 -440 116,500 Apl 2,049,901 -47,970 -47,970 24,900 May 2,268,602 -94,390 -94,390 10,100 Jun 2,569,843 -253,330 -194,720 58,610 94,700 Jul 2,881,809 -181,580 -160,240 21,340 55,900 Aug 2,542,801 -211,470 -153,800 57,670 -197,205 Sep 3,713,002 297,180 334,700 37,520 -66,364 Oct 3,838,999 95,160 52,428 -42,732 -30,000 Nov 2,941,693 247,370 274,636 27,266 0 Dec 3,602,178 158,720 158,720 1998 Jan 2,353,890 249,850 249,850 0 65,360 Feb 2,844,357 275,510 248,310 -27,200 -167,600 Mar 2,968,376 99,590 85,709 -13,881 -470,226 Apl 3,045,924 146,360 140,060 -6,300 22,393 May 2,797,174 227,650 195,878 -31,772 -120,994 Jun 3,238,059 169,640 199,170 29,530 68,054 Jul 3,368,006 196,240 175,940 -20,300 106,057 Aug 2,641,720 265,610 199,264 -66,346 458,830 Sep 962,291 26,490 26,490 0 0 Oct 780,356 -78,660 -78,660 0 19,667 Statistical Appendix 155 Table 3.13 - Exchange Rates, Nominal and Real (average for the period) Official Official Official Non-commercial Realexchange Real rate of cash exchange rate exchange rate exchange rate inter-bank (ie exchange rate (UAH/USD) (UAH/DEM) (UAH/ECU) exchange rate index June'92=100) 1992 Q3 0.002 0.003 99.3 20.6 1992 Q4 0.006 0.008 142.9 14.3 1993 Q1 0.014 0.019 121.4 16.9 1993 Q2 0.033 0.031 98.2 20.9 1993 Q3 0.059 0.062 0.084 66.3 30.9 1993 Q4 0.086 0.094 0.267 63.5 32.3 1994 QI 0.126 0.073 0.142 0.356 41.3 49.6 1994 Q2 0.141 0.090 0.164 0.435 42.1 48.7 1994 Q3 0.214 0.137 0.263 0.467 41.2 49.8 1994 Q4 0.786 0.515 0.971 1.102 46.4 44.2 1995 Q1 1,207 0.814 1.531 1.428 30.6 67.0 1995 Q2 1.347 0.964 1.792 1.514 25.6 80.1 1995 Q3 1.567 1.094 2.054 1.656 23.5 87.2 1995 Q4 1.771 1.245 2.333 1.839 20.5 100.0 1996 Q1 1.866 1.271 2.402 1.911 17.8 115.2 1996 Q2 1.845 1.213 2.316 1.869 16.3 125.8 1996 Q3 1.767 1.167 2.226 1.785 14.9 137.6 1996 Q4 1.839 1.202 2.320 1.840 14.7 139.5 1997 Q1 1.857 1.125 2.194 1.861 14.5 141.4 1997 Q2 1.849 1.079 2.114 1.841 14.3 143.4 1997 Q3 1,858 1.030 2.034 1.851 14.4 142.4 1997 Q4 1.882 1.071 2.113 1.886 14.4 142.4 1998 Q1 1.967 1.082 2.139 1.967 14.7 139.5 1998 Q2 2.049 1.142 2.247 2.045 15.3 134.0 1998 Q3 2.357 1.342 2.642 2.642 17.9 114.5 1998 Q4 3.426 2.066 4.042 4.043 23.8 86.1 Jan-97 1.891 1.186 2.313 1.891 14.8 138.5 Feb-97 1.844 1.104 2.155 1.856 14.4 142.4 Mar-97 1.837 1.083 2.113 1.837 14.3 143.4 Apr-97 1.848 1.082 2.118 1.842 14.3 143.4 May-97 1.843 1.079 2.113 1.839 14.2 144.4 Jun-97 1.858 1.076 2.112 1.841 14.3 143.4 Jul-97 1.857 1.039 2.056 1.836 14.3 143.4 Aug-97 1.856 1.011 2.000 1.847 14.4 142.4 Sep-97 1.861 1.039 2.045 1.869 14.4 142.4 Oct-97 1.871 1.063 2.091 1.877 14.4 142.4 Nov-97 1.879 1.083 2.137 1.886 14.4 142.4 Dec-97 1.895 1.068 2.111 1.895 14.3 143.4 Jan-98 1.909 1.053 2.082 1.911 14.3 143.4 Feb-98 1.957 1.078 2.130 1.958 14.7 139.5 Mar-98 2.034 1.114 2.205 2.031 15.2 134.9 Apr-98 2.040 1.122 2.199 2.038 15.2 134.9 May-98 2.049 1.153 2.272 2.045 15.3 134.0 Jun-98 2.059 1.150 2.269 2.051 15.4 133.1 Jul-98 2.103 1.168 2.306 2.082 15.8 129.7 Aug-98 2.183 1.221 2.405 2.196 16.5 124.2 Sep-98 2,785 1.637 3.216 2.809 21.3 96.2 Oct-98 3.423 2.090 4.090 3.539 24.7 83.0 Nov-98 3.427 2.054 4.019 3.545 23.5 87.2 Dec-98 3.427 2.054 4.020 3.547 23.2 88.4 Jan-99 3.427 3.982 3.559 3.427 23.0 89.1 Feb-99 3.471 3.891 3.471 23.1 88.7 Source TACIS 156 Statistical Appendix Table 3.14 - Auction Exchange Rate (average for the period) US Dollar Deutsche Mark Russian Rouble Volume Volume Volume Hrn/USD U Hrn/DM Hrn/RUR Vm e (mnn USD) (inn DM) (inn RUR) 1993 0.089 1994 0.522 909.7 0.357 88.8 0.238 326.2 1995 1.503 3007.9 1.037 237.7 0.319 2905.7 1996 1.838 2147.8 1.225 196.9 0.361 1433.7 1997 1.861 2990.4 1.088 132.6 0.321 476.2 1998 2.679 3896.6 1.481 313.3 - - 1995 Q1 1.213 700.8 0.806 53.3 0.285 603.7 1995 Q2 1.349 888.6 0.990 54.4 0.265 827.4 1995 Q3 1.568 927.3 1.099 76.3 0.344 940.8 1995 Q4 1.774 491.2 1.254 53.8 0.382 533.8 1996 Q1 1.867 495.1 1.277 56.1 0.389 458.2 1996 Q2 1.845 630.1 1.215 44.6 0.365 372.3 1996 Q3 1.767 367.5 1.187 38.7 0.332 344.0 1996 Q4 1.842 474.8 1.215 42.9 0.340 211.2 1997 Q1 1.850 558.6 1.123 37.9 0.327 146.2 1997 Q2 1.848 699.3 1.085 43.7 0.317 123.7 1997 Q3 1.858 799.4 1.032 30.8 0.319 88.3 1997 Q4 1.883 933.1 1.079 20.2 0.319 118.0 1998 Q1 1.973 815.5 1.088 27.3 0.326 104.1 1998 Q2 2.051 622.1 1.153 18.9 0.333 73.9 1998 Q3 2.417 935.1 1.525 75.1 - 1998 Q4 3.426 1524.0 2.158 192.1 - - Jan-97 1.890 180.3 1.176 14.7 0.335 47.9 Feb-97 1.820 226.5 1.109 9.9 0.325 52.7 Mar-97 1.840 151.8 1.084 13.3 0.321 45.7 Apr-97 1.849 168.0 1.168 20.4 0.321 46.4 May-97 1.836 247.0 1.083 14.6 0.318 34.8 Jun-97 1.857 267.6 1.078 8.8 0.321 42.5 Jul-97 1.857 192.2 1.044 14.3 0.320 23.6 Aug-97 1.856 293.2 1.009 7.2 0.318 29.6 Sep-97 1.862 314.0 1.043 9.3 0.318 35.0 Oct-97 1.872 390.1 1.069 7.2 0.319 35.0 Nov-97 1.882 277.7 1.094 5.9 0.319 39.0 Dec-97 1.895 265.3 1.072 7.2 0.319 44.1 Jan-98 1.917 270.6 1.057 9.8 0.317 41.4 Feb-98 1.966 308.5 1.085 8.9 0.326 28.5 Mar-98 2.034 236.4 1.121 8.5 0.335 34.2 Apr-98 2.041 167.6 1.134 8.3 0.333 29.3 May-98 2.051 227.3 1.164 5.7 0.333 24.2 Jun-98 2.061 227.2 1.162 4.9 0.332 20.4 Jul-98 2.100 273.0 1.175 7.6 3.378 34.7 Aug-98 2.218 252.3 1.353 11.8 3.050 17.700 Sep-98 2.933 409.9 2.048 55.6 - - Oct-98 3.423 502.2 2.177 61.2 - Nov-98 3.427 504.8 2.147 68.5 - Dec-98 3.427 517.0 2.151 62.4 - Source: TACIS Statistical Appendix 157 Table 3.15 - External Reserves (nin. USD). 04-92 01-93 02-93 03-93 04-93 01-94 02-94 03-94 04-94 01-95 02-95 03-95 04-95 Gross International Reserves minus Gold 468.8 119.6 128.9 311.5 161.6 46.9 43.8 61.6 650.7 642.6 1,584.7 1,149.7 1,050.6 Net International Reserves 9.3 182.6 -149.9 -114.7 -3.1 17.8 589.1 -8.1 942.1 -435.0 -99.1 Total Foreign Rorrowing (LMT loanP<US T-bills) 0.0 180.0 200.0 300.0 210.0 160.0 160,0 160.0 400.0 2,409.0 1,156.0 281.0 661.0 Net Portfilio Invest-ment Inflow -- Debt Securitics 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 12.0 2.0 0.0 Long- and Medium-Term Loans -- Disbursemnts 180 200 300 210 160.0 160,0 160.0 400.0 2.407,0 L144.0 279,0 661L0 01-96 02-96 03-96 04-96 01-97 02-97 03-97 04-97 01-98 02-98 03-9 4-98 Gross International Reserves milnus Gold 618.2 812.9 1,109.7 1,960.0 2,045.0 2,299.1 2.468.3 2,341.1 2,493.2 1,743.7 938.0 1,240.0 Net International Reserves -432.4 194.7 296.8 850.3 85.0 254.1 169.2 -127.2 152.1 -749.5 -805.7 302.0 Total Foreign Borrowing (LMT loanPlus T-bills) 69.0 445.0 677.0 707.0 525.0 586.0 1,040.0 841.0 599.0 189.0 330.0 250.0 Net Portfolio Invest-ment inflow -- Debt Securities 8.0 11.0 28.0 106.0 305.0 366.0 352.0 334.0 479.0 139.0 -100.0 0.0 Long- and Medium-Terin Loans -- Disbursernents 61.0 434.0 649.0 601,0 220,0 220.0 688,0 507.0 120,0 50.0 430.0 250,0 .Soure: 1.5F Sz,austives, WtB staffcalctaions Table 4.1 - External Debt Outstanding, 1992-1998 (mrn- IISD. end of ne?riod) 1992 1993 1994 1995 1996 1997 8/31/98 Total Debt Outstanding 3,691 4,474 5,667 8,691 9,463 1. Public and publicly guaranteed 396 3,624 4,828 8,217 8,839 9,555 10,243 A. Official creditors i) Multilateral 29 157 600 2,215 3,444 4,025 4,043 IMF 0 0 371 1,565 2,263 2,392 2,417 World Bank 0 0 101 503 905 1,215 1,231 EBRD 0 0 5 33 35 66 83 Other (EC) 29 157 123 114 241 352 312 ii) Bilateral 370 3,467 4,228 4,528 4,127 3,760 3,573 FSU 0 2,733 3,445 3,787 3,085 2,600 2,389 Russia 0 2,704 2,704 3,060 2,381 2,001 1,896 Turkmenistan 0 0 713 708 704 599 493 Other 0 29 28 19 0 0 0 Non-FSU Japan 0 0 0 0 182 187 144 Germany 196 401 645 670 597 463 463 USA 174 333 123 71 215 448 453 Other 0 0 15 0 48 62 124 iii) Other 0 0 0 274 148 91 189 B. Private creditors 0 0 0 0 0 559 1,213 C. "Gazprom" Bonds 0 0 0 1,200 1,120 1,120 1,225 3. National Bank of Ukraine 2,398.5 279.9 7.3 22.1 36.6 2. Private non-guaranteed 896.3 570.4 831.8 452.0 587.4 464.0 Memo: External Public Debt Service, paid out of budget 144.8 344.3 1,420.5 1,112.3 1,276.8 1,531.9 External Public Debt/GDP(%) 1.4% 21.7% 20.9% 22.7% 19.9% 19.2% 34.3% Source: Ministry ofjFinance Table 4.2 - Ukraine - External Debt Stocks and Flows (UjS$ millions at current prices) Rase-case (m?s lkelv) mooicton Actual" Estimate" Projection 1994 1995 1996 1997 1998 1999 2000 2001 2002 20t)3 7004 2005 A. (ross disbursements Public & publicly guaranteed 431.0 732.0 954.0 1221.0 255.0 481.0 140.0 103.0 69.0 45.0 25.0 13.0 Official multilateral creditors. of which 113.0 525.0 552.0 452.0 172.0 417.0 110.0 90.0 64.0 43.0 24.0 13.0 IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRD 102.0 401.0 406.0 306.0 117.0 358.0 78.0 73.0 59.0 40.0 24.0 13.0 Official bilateral creditors 39.0 25.0 202.0 56.0 23.0 27.0 16.0 9.0 4.0 2.0 1.0 0.0 Private creditors, of which 279.0 182.0 200.0 713.0 60.0 37.0 14.0 4.0 1.0 0.0 0.0 0.0 Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Private creditors nonguaranteed 94.0 69.0 120.0 268.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TMtT IT kan dishuremeonte S7 R 1 0 1074 0 14PO 0 755 0 4R 0 1400 101 0 6) 0 45 0 7 0 1 0 Not .RT1' crei1 060 65 11 () R1 ( 0 0 -14XR 0 -550 0 -577 0 -647 0 -557 0 -S14 t -5101 -510 0 Drawings from IMF 357.0 1196.0 778.0 285.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total disbursements (LT-ISTIMF) 1188.0 2162.0 2135.0 2577.0 -1233.0 -69.0 -437.0 -544.1 -488.( -489.0 -485.( -497.0 13. Amortizations Public & publicly guaranteed 158.0 595.0 723.0 637.0 1592.0 991.0 648.0 702.0 612.0 557.0 533.0 519.0 ciffliil mniltilsteral creiinorq ofxvhirh 39.0 127.0 1.0 1.0 9.0 19.0 48.0 119.0 214.0 238.0 250.0 250.0 IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRI) 0.0 0.0 0.0 0.0 0.0 2.0 25.0 73.0 155.0 155.0 155.0 155.0 Official bilateral creditors 15.0 38.0 515.0 502.0 746.0 636.0 284.0 288.0 144.0 140.0 131,0 131.0 Private creditors, of which 104.0 430.0 207.0 134.0 837.0 336.0 316.0 295.0 254,0 179.0 152.0 138.0 Bonds 0.0 200.0 80.0 0.0 121.0 121.0 121.0 121.0 121.0 121.0 121.0 121.0 Private creditors nonguaranteed 60.0 40.0 68.0 52.0 150.0 39.0 69.0 47.0 15.0 22.0 2.0 3.0 Total LT loan amortization 218.0 635.0 791.0 689.0 1742.0 1030.0 717.0 749.0 627.0 579.0 535.0 522.0 Repayments to lMF 0.0 0.0 0.0 0.0 104.0 549.0 770.0 512.0 214.0 112.0 112.0 28.0 Total amortization (LT+1MF) 218.0 635.0 791.0 689.0 1846.0 1579.0 1487.0 1261.0 841.0 691.0 647.0 550.0 C. Net disbursements Public & publicly guaranteed 273.0 137.0 231.0 584.0 -1337.0 -510.0 -508.0 -599.0 -543.0 -512.0 -508.0 -506.0 Offirji mnltinml crpeditors of wh;rh 74.0 398.0 551.0 451.0 163.0 398.0 62.0 -29.0 -150.0 -195.0 -226.0 -237.0 IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 I8RD 102.0 401.0 406.0 306.0 117.0 356.0 53.0 0.0 -96,0 -115.0 -131.0 -142.0 Official bilateral creditors 24.0 -13.0 -313.0 -446.0 -723.0 -609.0 -268.0 -279.0 -140.0 -138.0 -130.0 -131.0 Private creditors, of which 175.0 -248.0 -7.0 579.0 -777.0 -299,0 -302.0 -291.0 -253,0 -179.0 -152.0 -138.0 Bonds 0.0 -200.0 -80.0 0.0 -121.0 -121.0 -121.0 -121.0 -121.0 -121.0 -121.0 -121.0 Private creditors non"uaranteed 34 0 29.0 52.0 216.0 -150.0 -39..0 -69.0 -47 0 -15 0 -22.0 -2.0 -310 ―기 〕方 Table 4.3 - Direct Foreien Investments in Ukraine Ov Mdustrv) > As at the end of-period- niln. USI-) Share oftotal. % 1994 1995 1996 1997 1998 ..1994 1995 1996 1997 1998 Total 366.7 750.1 1,355.9 2,053.9 2,781.8 100.0 100.0 100.0 100.0 100.0 Domestic trade 36.2 168.2 3 9 5.2 337.6 418.7 9.9 22.4 29.1 16.4 15.8 Food processing industry 52.1 108.4 166.6 422.1 584.6 14.2 14.5 12.3 20.6 21.0 Machine building & metal working 85.6 96.3 138.9 168.7 353.1 2 3. 3 12.8 10.2 8.2 12.7 Health care, physical culture & social security 74.7 114.9 111.8 5.5 5.6 4.0 Finance, credit, insurance & pension funds 11-4 55.2 70.7 174.1 197 2 3.1 7-4 5.2 9.5 7.1 Construction & construction materials: 20.4 28,0 69.1 148.9 1723 5.6 3.7 5.1 7.2 6.2 construction materials 5.5 3.0 58.3 57.3 1.5 0.4 2.0 2.8 2.1 construction t 4.9 25.1 90.6 115.0 4.1 .3. 1 4.4 4.1 External trade 27.4 33.1 49.9 28.0 21.1 7.5 4.4 3.7 1.4 0.8 Transportation & communication 18.9 31.0 44.5 59.7 148.4 5.2 4.1 13 2.9 5.3 General commercial activity 4, ) 29.1 42.7 35.1 50.3) 1.2 3.9 3.1 1.7 1.8 Chemical & petrochemical industries: 21.1 3 1. 2 41.4 141.2 125.3 5.7 4,2 3.2 6,9 4.5 Ferrous & non-ferrous metallurgy: 17.8 37.8 33.4 40.9 80.7 4.8 5.0 2.5 2.0 2.9 Light industry 23.5 30.1 31.6 32.5 43.6 6.4 4,0 2. 3 1.6 1.6 Science 9.2 10.8 21 O 16 9 1.5 2.5 1.4 1.5 0.8 (). I Wood & paper industry 5.1 12.0 19.8 44.6 51.9 1.4 1.6 1.5 2.2 1.9 Public services 47.4 35.6 39.5 5.6 1.7 1.4 Agriculture 5.6 18.5 17.2 45.9 59.5 1.5 2.5 2.2 11 Coal industry 6.0 6.5 0.8 0.5 Fuel industry 5.0 23.7 78.6 0.4 0.4 1.2 2.8 Municipal services 18.4 14.5 0.9 0.5 CatcriDg 17.9 0.9 Pharmaceuticals 16.9 15.6 0.8 0.6 Other industries T9 2 3. 3 80.3 13U 213 2.1 3.2 5.9 6. 3 0.8 Source: States Committee of,9alisdc 〕不一 Table 4.5 - Ukrainian Direct -investments in Other Countries (bv indusirv) Asattheendol*pcri,,d.,,)Iti.USD Share ortotal, % 94 1995 1996 1997 Jun-981 1994 1995 1996 1997 JLID-981 Total 16.8 29.5 82.7 133.8 97.6 100 100 100 100 too Domestic trade L7 3.8 3.6 0.9 0.7 10.40 13.00 4.38 0.64 0.71 Machine building & metal working 4.6 6.5 6.1 7.1 6.8 27.49 22.15 7.36 5.29 6.98 Health care, physical culture & social security 39.8 26.4 6.4 48.20 19.73 6.51 Finance. credit. insurance & nension funds 0.2 0.3 .1.8 3. 2 0.74 0.32 2.91 3-30 Construction & construction materiah, 0.0 12.6 11.8 4.9 0.04 15.26 R. 94 5.10 External trade O 8 0,8 0.7 0.3 0.4 4.69 2.69 0.90 0,24 0.39 Transportation & communication 1.0 4.0 67.0 6L8 3.34 4.88 50.08 63.31 General commercial activity 1.3 1.0 1.0 7.70 3.39 1.21 Chemical & petrochemical industries 2.8 10,0 5.3 4.2 3.7 16.77 33.77 6.47 3.11 3.83 Black & ferrous metallurgy 0.6 0.1 4.6 5.5 3.6 3.86 0.35 5.60 4.14 3.71 Science 0.0 0.3 0.6 0.04 0.19 0.59 Coal industry - 0.4 0.4 - 0.45 0.26 Fuel industry 3.7 3.7 3.7 3.7 3.9 2237 12.54 4.46 2.75 3.95 Municipal services 0.5 0 5 0.38 0.47 Geologv. exr)loration, rneteorologv 0.5 1 0.2 1 3.02 0.38 0.11 0-12 0.11 Fisherv 2.0 - 6.79 Other industries 0.6 0.2 0.3 1.9 1.0 3,71 0.81 0.41 1.39 1.04 source: .5tates CommitteeoiStatalic Table 4.6 - Ukrainian Direct Investments to Other Countries (bv countrv) As at the heL4mina of neriod. min, USD Share of total- % 1994 1995 1996 1997 199X 1994 1995 1996 1997 1998 Total 11.4 20.3 84.1 97.4 127.5 100 too 100 too 100 Austria 1.7 0.9 1.6 1.4 1.2 15.3 4.7 1.9 1.4 0.9 Georgia 0.0 0.0 6.1 3.8 4.2 0.0 0.0 7.3 3.9 3.3 Cyprus 0.0 2.4 2.4 2.4 0.0 ... 2.8 2A 1.9 Poland 0.2 0.4 0.3 0.3 0.3 1.4 1.9 0.3 0.3 0.2 Russia 2.1 4.2 52.1 47.6 38.2 18.5 20.7 61.9 48.8 30.0 USA 1.3 1.6 1.4 5.3 1.5 11.0 7.9 1.7 5.4 1.2 Hungary 1.9 2.1 7.1 1.7 1.4 16.6 10.2 8.5 1.7 1.1 Switzerland 2.2 8.0 8.1 7.9 7.4 19.0 39.7 9.6 9.1 5.8 Other countries 2.1 3.0 5.0 27.2 70.9 18.3 15.0 6.0 27.9 55.6 Sourcc: Siafe CoininiiteeofStafistics Table 4.7 - Foreien Direct Investment to Ukraine, stock and flows (MIn. USD) Totäl From CIS ind Raltic cnuniries 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998 Total capital stock of non-residents In Ukraine (at the heginnin£y of the neriodì 219.4 483.5 896.9 1438.2 2063.6 7.2 21.4 59.9 167.2 221.6 Flows: Inerease in the canifal ofrnon-residents 176.7 281.5 531.4 759.2 922.4 10.5 22.5 113.0 67.7 57.5 includinv cash contributions 37.5 52.9 170.5 300.8 575.0 5.2 3.8 14.6 24.8 42.8 securities contributions 0.1 36.4 .. 35.6 1.9 0.6 .. 0.0 0.1 contributions of tanible & iniangahle assets 122.3 171.4 .. 392.9 335.0 4.5 18.0 .. 38.3 14.3 inicludin p, denosits in taniible assets .. 170.4 330.8 380.0 298.8 .. 18.0 80.4 38.3 14.3 denosits in intangible assets .. 1.0 .. 12.9 35.2 .. 0.0 .. 0.0 0.0 revaluation of canital 0.6 5.2 18.8 14.2 1.9 0.6 0.0 17.9 2.1 0.1 other forms of investments 16.2 15.6 11.3 15.7 8.6 0.2 0.1 0.1 2.5 0.2 )ecrease in the canital of non-residents 29.2 14.9 55.4 124.9 179.6 0.2 0.8 8.8 15.1 11.6 includine withdrawals of money, property or other contributions 24.5 9.3 39.1 80.0 143.8 0.1 0.6 8.4 10.9 3.9 other fornis of canital withdrawals 4.7 5.6 16.3 44.9 35.8 0.1 0.2 0.4 4.2 7.7 Forejin exchanie gains (losses) .. .- 17.1 18.8 24.7 .. .. 3.9 0.3 25.1 Total capital stock of non-residents in Ukraine (w the end of the neriod) 366.9 750.1 1355.8 2053.8 2781.7 17.5 43.1 160.2 219.5 242.4 Net direct investment inflows 147.5 266.6 458.9 615.5 718.1 10.3 21.7 100.3 52.3 20.8 Soure. Stute Comnmittee ofStatistic.s of Ukraiw /0 Table 4.8 - Ukrainian Direct Investment to Other Countries. stock and flows (min. USD) Total To CIS & Baltic countries 1994 1995 1996 1997 1998,1 half 1994 1995 1 1996 1 1997 1998, 1 half Total capital staock of residents abroad 1994 1996 997 1998 1994 1995 1996 997 1998 (at the beginning of the period) 1995 [ [717] Flows: 11.4 20.3 84.1 97.4 127.5 2.2 5.8 59.9 53.0 43.9 Increase in the capital of residents including 8.4 10.8 23.2 49.8 4.6 5.1 0.2 12.5 3.8 1.8 cash contributions contributions of tangible assets* 3.2 10.2 7.6 4.4 0.8 0.2 0.2 0.3 0.2 0.7 revaluation of capital 3.3 0.6 4.5 41.7 1.6 3.2 0.0 1.2 1.4 0.0 other forms of investment activity 0.8 .. 11.1 0.7 0.8 0.7 .. 11.0 0.7 0.8 Decrease in the capital of residents 1.1 0.0 0.0 3.0 1.1 1.0 0.0 0.0 1.5 0.0 including 3.0 1.6 13.6 7.6 8.8 1.2 0.5 0.6 1.2 0.1 withdrawals of money, property or other contributions otherformsofcapitalwithdrawals 0.9 1.4 13.2 1.1 0.9 0.1 0.5 0.2 0.6 0.0 Foreign exchange gains (losses) 2.1 0.2 0.4 6.5 7.9 1.1 0.0 0.4 0.6 0.1 Total capital stock of residents abroad (at the end of the period) 16.8 29.5 82.7 133.8 97.6 6.1 5.5 62.0 50.6 19.7 Net direct investment flows 5.4 9.2 -1.4 36.4 -29.9 3.9 -0.3 2.1 -2.4 -24.2 * in 1994 investments in tangible & intangible assets Source: State Committee ofStaiistics Table 4.9 - Borrowing in the International Capital Market Amount Placement [)ata of Issue Nominal AActually Nominal Actual Interest Months to Repayment Price (per Notcs In currency In US$ Received Interest Rate Rate Maturity Profile bond of 100 of issue equivalent (mn.) units) USD Nomnura Fiduciary 11-Aug-97 USD 450 USD 450 12% 13.45% 11-Aug-98 12 - 396.9 International Loan 17-Oct-97 USD 109 USD 109 USD Chase - 10.21% 20-Oct-98 12 Fiduciary- 98.9 Manhattan Loan 46.09% UAH 375 US 197 Merrill Lynch 44.00% (at least 21.125% 22-Sep-98 9 T-bills - a) (1st tranche) 278.9 in I 1) 45.84% 23-Dec-1997 UAH (2ndtrachc)UAH 375 USD 197 257.4 Merrill Lynch 44.00% (at least 21.125% 22-Dec-98 12 T-bills - a) in USD) DM Merrill Lynch, 1 1-Feb-98 DM 750 USD 421 ' Mer n 16% 16.20% 26-Feb-01 36 Eurobond 99.50% 746.3 Kommerzbank 17-Apr-1998 Merrill Lynch, (additional DM 250 USD 139 DM 255 Kommerzbank 16% 14.99% 26-Feb-01 34 Eurobond 102.00% issue) 17-Mar-98 ECU 500 USD 540 ECU SBC Warburg 15% 15.94% 17-Mar-00 24 Eurobond 97.60% 488 (17.5% in USS) 55% 6-Aug-98 UAI 332 USD 155 155 ING Barings 55.00% (at least 17.5% in 6-Jun-99 10 T-bills 100.00% b) US$) Notes: a) Interest is payable in UAH tbit annual return is guaraneed to be not less than 21.125% in USD b) Coupn is payable semiannually and annual return is guaranteed it be not less than 175% in USD Source: Ministry u/Finance :07 SECTION 5 Table 5.1 - Consolidated Budget, 1992-1998 (million hryvnias) 1992 1993 1994 1995 1996 1997 1998 1 Revenue /1 17 635 5,040 20,618 29,943 35,476 36,960 Tax Revenue 16 550 4,485 18,956 28,266 33,237 35,304 VAT 5 172 1,300 4,517 6,293 7,602 7,238 Enterprise Tax 3 145 1,426 4,834 5,451 5,689 5,620 Personal Income Tax 2 29 340 1,601 2,639 3,293 3,561 Land Tax ... ... 635 802 1,002 1,105 Excises 1 25 169 401 652 1,158 1,249 Royalties on Gas and Oil ... ... 385 1,873 932 62 Foreigh Trade Receipts ... 20 87 429 444 704 972 Pension Fund Receipts 5 134 922 4,160 6,988 8,455 8,930 Chernobyl Fund Receipts 1 25 241 1,026 1,488 1,698 1,416 Other Special Funds /2 ... 42 292 1,048 1,968 Other Tax Revenues ... ... 926 1,344 1,655 3,182 Other Revenues 1 85 555 1,662 1,677 2,239 1,656 owl NBU Profite ... ... 32 0 21 93 375 Total Expenditure 14 29 1,052 6,087 23,280 32,550 40,665 39,714 Current Expenditure 27 1,012 5,657 21,897 31,492 40,129 39,015 Social Protection 4 181 700 3,500 4,066 5,504 4,111 Benefits 2 65 200 866 2,640 2,931 3,011 Subsidies 2 116 500 2,634 1,426 2,573 1,100 Social and Cultural Spending 5 134 1,289 6,021 7,718 9,633 8,715 Education 2 65 622 2,932 3,961 4,959 4,483 Health Care 2 57 555 2,536 3,126 3,912 3,569 Other 1 12 112 553 631 762 663 National Economy 12 226 1,750 2,551 3,453 2,830 2,270 ow/ Directed Credits 7 110 284 89 0 1 0 owl Agriculture ... ..... 559 48 306 owl State Reserve Fund ... ... ... ... 1,485 1,386 115 Administration and Justice 1 30 296 1,417 2,267 2,975 2,915 Defense 1 27 212 1,033 1,377 1,525 1,338 Pension Fund 4 123 892 4,119 7,025 8,394 8,801 Chernobyl Fund 1 19 227 949 1,524 1,717 1,420 Interest Payments 0 3 131 830 1,281 1,689 2,424 ow/ domestic 0 0 59 620 445 930 1,663 ow/ foreign 0 3 72 210 836 759 761 Other Current Expenditures 1 269 160 1,477 2,782 5,863 7,020 Capital Ex penitur.s.............. .............. 2 .........40 ........430 1....... ,.383 .........1,05.8 .........536 ......699 Cash Deficit -12 -417 -1,047 -2,662 -2,607 -5,189 -2,754 Memo: Accrual Deficit -12 -417 -1,047 -4,491 -4,946 -4,822 -3,862 Budget Arrears (flow) 0 0 0 641 2,339 -367 1,108 Tax Arrears (end of period stock) ... 1,205 1,741 2,012 5,985 GDP 50 1,483 12,038 54,516 81,519 93,365 103,869 11 1993 - 1996 data was revised by IIF. 2/ Includes the Road Fund, Industrial Development Fund and Innovation Fund 4/ Ukraine moved to GFS classification on Jan. 1, 1998. 5/ Preliminary data Statistical Appendix 169 Table 5.2 - Consolidated Budget, 1992-1998 (percentage of GDP) 1992 1993 1994 1995 1996 1997 1998 ' Revenue /1 34.2 42.8 41.9 37.8 36.7 38.0 35.6 Tax Revenue 32.0 37.1 37.3 34.8 34.7 35.6 34.0 VAT 9.7 11.6 10.8 8.3 7.7 8.1 7.0 Enterprise Tax 5.6 9.8 11.8 8.9 6.7 6.1 5.4 Personal Income Tax 3.0 2.0 2.8 2.9 3.2 3.5 3.4 Land Tax ... ... ... 1.2 1.0 1.1 1.1 Excises 1.2 1.7 1.4 0.7 0.8 1.2 1.2 Royalties on Gas and Oil ... .,. ... 0.7 2.3 1.0 0.1 Foreigh Trade Receipts ... 1.3 0.7 0.8 0.5 0.8 0.9 Pension Fund Receipts 10.1 9.0 7.7 7.6 8.6 9.1 8.6 Chernobyl Fund Receipts 2.4 1.7 2.0 1.9 1.8 1.8 1.4 Other Special Funds /2 ... ... ... 0.1 0.4 1.1 1.9 Other Tax Revenues ... ... ... 1.7 1.6 1.8 3.1 Other Revenues 2.2 5.7 4.6 3.0 2.1 2.4 1.6 ow/ NBU Profits ... ... 0.3 0.0 0.0 0.1 0.4 Total Expenditure /4 58.4 70.9 50.6 42.7 39.9 43.6 38.2 Current Expenditure 54.2 68.3 47.0 40.2 38.6 43.0 37.6 Social Protection 7.2 12.2 5.8 6.4 5.0 5.9 4.0 Benefits 3.2 4.4 1.7 1.6 3.2 3.1 2.9 Subsidies 4.0 7.8 4.2 4.8 1.7 2.8 1.1 Social and Cultural Spending 9.3 9.0 10.7 11.0 9.5 10.3 8.4 Education 4.6 4.4 5.2 5.4 4.9 5.3 4.3 Health Care 3.6 3.8 4.6 4.7 3.8 4.2 3.4 Other 1.2 0.8 0.9 1.0 0.8 0.8 0.6 National Economy 23.6 15.2 14.5 4.7 4.2 3.0 2.2 owl Directed Credits 13.1 7.4 2.4 0.2 0.0 0.0 0.0 owl Agriculture ... ... ... ... 0.7 0.1 0.3 owl State Reserve Fund ... ... ... ... 1.8 1.5 0.1 Administration and Justice 1.4 2.0 2.5 2.6 2.8 3.2 2.8 Defense 2.2 1.8 1.8 1.9 1.7 1.6 1.3 Pension Fund 7.2 8.3 7.4 7.6 8.6 9.0 8.5 Chernobyl Fund 2.2 1.3 1.9 1.7 1.9 1.8 1.4 Interest Payments 0.0 0.2 1.1 1.5 1.6 1.8 2.3 owl domestic 0.0 0.0 0.5 1.1 0.5 1.0 1.6 ow/ foreign 0.0 0.2 0.6 0.4 1.0 0.8 0.7 Other Current Expenditures 1.2 18.1 1.3 2.7 3.4 6.3 6.8 ............... ..... ................. 4.2 .........2.7 .........3..6 .........2. ....... 1.3. 0..... ..6. 0.7 Cash Deficit -24.2 -28.1 -8.7 -4.9 -3.2 -5.6 -2.7 Memo: Accrual Deficit -24.2 -28.1 -8.7 -8.2 -6.1 -5.2 -3.7 Budget Arrears (flow) 0.0 0.0 0.0 1.2 2.9 -0.4 1.1 Tax Arrears (end of period stock) ... ... ... 2.2 2.1 2.2 5.8 GDP 50 1,483 12,038 54,516 81t519 93,365 103,869 1/ 1991 and 1992 data do not take into account recent IMF revisions. 2/ Includes the Road Fund, industrial Development Fund and Innovation Fund 4/Ukraine moved to GFS classification on Jan. 1, 1998. 5/ Preliminary data 170 Statistical Appendix Table 5.3 - Consolidated Budget, 1992-1998 (constant 1990 hryvnias) 1992 1993 1994 1995 1996 1997 19981 Revenue /1 45.3 44.9 28.2 22.7 20.2 21.4 19.7 Tax Revenue 42.4 38.9 25.1 20.9 19.0 20.0 18.8 VAT 12.8 12.2 7.3 5.0 4.2 4.6 3.9 Enterprise Tax 7.4 10.3 8.0 5.3 3.7 3.4 3.0 Personal Income Tax 4.0 2.1 1.9 1.8 1.8 2.0 1.9 Land Tax ... ... ... 0.7 0.5 0.6 0.6 Excises 1.6 1.8 0.9 0.4 0.4 0.7 0.7 Royalties on Gas and Oil ... ... ... 0.4 1.3 0.6 0.0 Foreigh Trade Receipts ... 1.4 0.5 0.5 0.3 0.4 0.5 Pension Fund Receipts 13.4 9.5 5.2 4.6 4.7 5.1 4.8 Chernobyl Fund Receipts 3.2 1.8 1.3 1.1 1.0 1.0 0.8 Other Special Funds /2 ... ... ... 0.0 0.2 0.6 1.1 Other Tax Revenues ... ... ... 1.0 0.9 1.0 1.7 Other Revenues 2.9 6.0 3.1 1.8 1.1 1.3 0.9 ow/ NBU Profits ... ... 0.2 0.0 0.0 0.1 0.2 .ov! State Reserve Fund ... 1.4 0.4 0.2 0.2 0.2 0.0 Total Expenditure 14 77.4 74.4 34.0 25.6 21.9 24.5 21.2 Current Expenditure 71.8 71.6 31.6 24.1 21.2 24.2 20.8 Social Protection 9.5 12.8 3.9 3.9 2.7 3.3 2.2 Benefits 4.2 4.6 1.1 1.0 1.8 1.8 1.6 Subsidies 5.3 8.2 2.8 2.9 1.0 1.5 0.6 Social and Cultural Spending 12.4 9.5 7.2 6.6 5.2 5.8 4.7 Education 6.1 4.6 3.5 3.2 2.7 3.0 2.4 Health Care 4.7 4.0 3.1 2.8 2.1 2.4 1.9 Other 1.6 0.8 0.6 0.6 0.4 0.5 0.4 National Economy 31.3 16.0 9.8 2.8 2.3 1.7 1.2 ow/ Directed Credits 17.4 7.8 1.6 0.1 0.0 0.0 0.0 ow/ Agriculture ... ... ... ... 0.4 0.0 0.2 ow/ State Reserve Fund ... ... ... ... 1.0 0.8 0.1 Administration and Justice 1.8 2.1 1.7 1.6 1.5 1.8 1.6 Defense 2.9 1.9 1.2 1.1 0.9 0.9 0.7 Pension Fund 9.5 8.7 5.0 4.5 4.7 5.1 4.7 Chernobyl Fund 2.9 1.3 1.3 1.0 1.0 1.0 0.8 Interest Payments 0.0 0.2 0.7 0.9 0.9 1.0 1.3 ow/ domestic 0.0 0.0 0.3 0.7 0.3 0.6 0.9 ow/ foreign 0.0 0.2 0.4 0.2 0.6 0.5 0.4 Other Current Expenditures 1.6 19.0 0.9 1.6 1.9 3.5 3.7 .. Capital.Expenditures 5.5 2.8 2.4 1.5 0.7 0.3 0.4 Cash Deficit -32.0 -29.5 -5.8 -2.9 -1.8 -3.1 -1.5 Memo: GDP Deflator (19901) 38 1,413 17,902 90,820 148,581 166,124 187,296 1/ 1991 and 1992 data do not take into account recent LMF revisions. 2/ Includes the Road Fund, Industrial Developiment Fund and Innovation Fund 4/ Ukraine moved to GFS classification on Jan. 1, 1998. 51 Preliminary data Statistical Appendix 171 Table 5.4 - Consolidated Budget, 1992-1998 (percentaRe of revenue & expenditures) 1992 1993 1994 1995 1996 1997 Revenue /1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Tax Revenue 93.6 86.6 89.0 91.9 94.4 93.7 95.5 VAT 28.3 27.1 25.8 21.9 21.0 21.4 19.6 Enterprise Tax 16.4 22.8 28.3 23.4 18.2 16.0 15.2 Personal Income Tax 8.8 4.6 6.7 7.8 8.8 9.3 9.6 Land Tax ... ... ... 3.1 2.7 2.8 3.0 Excises 3.5 3.9 3.4 1.9 2.2 3.3 3.4 Royalties on Gas and Oil ... ... ... 1.9 6.3 2.6 0.2 Foreigh Trade Receipts ... 3.1 1.7 2.1 1.5 2.0 2.6 Pension Fund Receipts 29.6 21.1 18.3 20.2 23.3 23.8 24.2 Chernobyl Fund Receipts 7.0 3.9 4.8 5.0 5.0 4.8 3.8 Other Special Funds /2 ... ... ... 0.2 1.0 3.0 5.3 Other Tax Revenues ... ... ... 4.5 4.5 4.7 8.6 Other Revenues 6.4 13.4 11.0 8.1 5.6 6.3 4.5 ow/ NBU Profite ... ... 0.6 0.0 0.1 0.3 1.0 owl State Reserve Fund ... 3.1 1.5 0.9 0.9 0.8 0.1 Total Expenditure /4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Current Expenditure 92.9 96.2 92.9 94.1 96.7 98.7 98.2 Social Protection 12.2 17.2 11.5 15.0 12.5 13.5 10.4 Benefits 5.4 6.2 3.3 3.7 8.1 7.2 7.6 Subsidies 6.8 11.0 8.2 11.3 4.4 6.3 2.8 Social and Cultural Spending 16.0 12.7 21.2 25.9 23.7 23.7 21.9 Education 7.8 6.2 10.2 12.6 12.2 12.2 11.3 Health Care 6.1 5.4 9.1 10.9 9.6 9.6 9.0 Other 2.0 1.1 1.8 2.4 1.9 1.9 1.7 National Economy 40.5 21.5 28.7 11.0 10.6 7.0 5.7 ow/ Directed Credits 22.4 10.5 4.7 0.4 0.0 0.0 0.0 ow/ Agriculture ... ... ... ... 1.7 0.1 0.8 ow/ State Reserve Fund ... ... ... ... 4.6 3.4 0.3 Administration and Justice 2.4 2.9 4.9 6.1 7.0 7.3 7.3 Defense 3.7 2.6 3.5 4.4 4.2 3.8 3.4 Pension Fund 12.2 11.7 14.7 17.7 21.6 20.6 22.2 Chernobyl Fund 3.7 1.8 3.7 4.1 4.7 4.2 3.6 Interest Payments 0.0 0.3 2.2 3.6 3.9 4.2 6.1 ow/ domestic 0.0 0.0 1.0 2.7 1.4 2.3 4.2 ow/ foreign 0.0 0.3 1.2 0.9 2.6 1.9 1.9 Other Current Expenditures 2.0 25.6 2.6 6.3 8.5 14.4 17.7 Capital Expenditures 7.1 3.8 7.1 5.9 3.3 1.3 1.8 1/ 1993 - 1996 data was revised by IMF. 2/ Includes the Road Fund, Industrial Development F 4/ Ukraine moved to GFS classification on Jan. 1, 1998. 5/ Preliminary data 172 Statistical Appendix Table 5.5 - Buduet FinancinL by Tve ofDebt Instrument 1998 (mn UAH) Approved Performed Porformod 1998 1998 Jan-98 Feb-98 Mar-98 ADr-98 May-98 Jun-98 Jul-98 Au-98 Se -98 Oct-98 Nov-98 Dec-98 General Financing I. (II+IIII 3.38 2.16 .. 0.63 1.60 1.42 1.60 1.85 2.00 2.11 2.70 2.07 2.01 2.16 II. Domestic financine 1.13 1.34 0.09 0.12 0.06 0.08 0.00 0.35 0.59 1.52 1.31 1.15 1.00 1.34 Medium term bonds 3.37 0.29 0.07 0.30 0.50 0.37 0.26 -0.08 -0.38 0.23 0.06 -0.03 0.09 0.29 Issue 3.37 3.36 0.24 0.65 1.01 1.23 1.37 1.66 1.97 2.86 3.00 3.00 3.14 3.36 Amortization 3.06 0.17 0.35 0.51 0.86 1.10 1.74 2.36 2.62 2.93 3.03 3.05 3.06 Short term bonds and T-bills -2.24 1.05 0.03 -0.18 -0.44 -0.29 -0.26 0.43 0.97 1.29 1.25 1.18 0.91 1.05 Issue 5.06 4.80 0.40 0.74 1.08 1.54 1.93 2.85 3.51 4.40 4.55 4.55 4.60 4.80 Amortization 7.29 3.75 0.37 0.91 1.52 1.83 2.20 2.42 2.54 3.11 3.31 3.37 3.69 3.75 111. External financine 2.25 0.82 -0.09 0.51 1.54 1.34 1.60 1.49 1.41 0.59 1.39 0.92 1.01 0.82 LonL term bonds 2.85 -0.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.17 Issue 2.85 Amortization 0.17 0.17 Loans not classified bv other cateeories -0.60 0.99 0.51 1.54 1.34 1.60 1.49 1.41 0.59 1.39 0.92 1.01 0.99 Loans received 3.00 3.24 0.81 1.90 1.90 2.20 2.20 2.20 2.20 3.00 3.00 3.24 3.24 Loans repaid 3.60 2.26 0.31 0.36 0.56 0.59 0.70 0.78 1.61 1.61 2.08 2.23 2.26 Source. State Treasuy Table 5.6 - State and Local Budgets in Ukraine. 1990 1991 1992 bl- krh b]h kr-b bln. krb consolidated state local consolidated state local consolidated state local Revenues 45.1 22.4 22.7 76.8 41.4 35.4 1,227.5 643.7 583.8 including 0.0 Enterprise profit tax 10.9 4.8 6.1 22.7 11.4 11.3 279.1 124.7 154.4 VAT 12.7 4.2 8.5 16.2 9.7 6.5 486.7 277.9 208.8 Excise taxes 59.7 28.0 31.7 louseholds income tax 4.0 1.1 2.9 9.3 0.0 9.3 143.0 0.0 143.0 Chernobyl tax - - - 2.7 2.7 124.2 124.2 0.0 Pension fund* - - - - - - Other 17.5 12.4 5.1 25.9 17.6 8.3 134.8 88.9 45.9 Expenditures 43.8 22.6 21.2 97.9 67.2 30.7 1,919.7 1,193.5 726.2 including National economy 21.6 13.0 8.6 44.8 37.4 7.4 714.0 599.9 114.1 Social protection, culture & science 20.3 10.0 10.3 41.1 19,6 21.5 865.7 281.6 584.1 Defense 108.7 107.9 0.8 Chernobyl 4.5 4.5 114.6 114.6 0.0 Pension fund Other 1.9 -0,3 2.2 7.5 5.7 1.8 116.7 89.5 27.2 Balance 1.3 -0.2 1.5 -21.1 -25.8 4.7 -692.2 -549.8 -142.4 * Pension find revenues & expenditues were included in the State Budget only three years, 1994-96 Sorce: Mwinistry ofFinance X) Table 5.6 - State and Local Budgets in Ukraine (continued) 1993 1994 1995 hin, Irh bn.hnin, krb/\AI coL olidated state Local consolidated state oal conso]idgic f stae 1ocal Revenues 49,621.8 25,865.8 23,756.0 523,092.6 342,806.7 180,285.9 20,689.9 12,047.6 8,642.3 including Enterprise profit tax 14,473.5 5,663.8 8,809.7 142,956.4 47,612.1 95,344.3 4,860.6 1,317.7 3,542.9 VAT 17,206.5 8,519.4 8,687.1 129,937.5 86,949.2 42,988.3 4,529.9 1,525.5 3,004.4 Excise taxes 2,513.8 1,144.8 1,369.0 16,817.7 11,559.2 5,258.5 406.2 304.4 101.8 Households income tax 2,883.4 0.0 2,883.4 33,995.0 11,200.9 22,794.1 1,595.3 736.4 858.9 Chernobyl tax 2,500.4 2,500.4 0.0 24,066.8 24,066.8 0.0 1,026.0 1,026.0 0.0 Pension fund* 94,311.6 94,311.6 0.0 4,189.2 4,189.2 0.0 Other 10,044.2 8,037.4 2,006.8 81,007.6 67,106.9 13,900.7 4,082.7 2,948.4 1,134.3 Expenditures 57,248.8 34,686.7 22,562.1 630,647.0 439,585.2 191,061.8 24,302.8 14,756.2 9,546.6 including National economy 11,039.8 10,097.2 942.6 209,117.3 181,832.6 27,284.7 2,336.9 1,683.8 653.1 Social protection, culture & science 32,395.6 15,350.7 17,044.9 209,360.4 60,595.9 148,764.5 9,580.8 1,965.7 7,615.1 Defense 2,765.7 2,743.8 21.9 23,355.7 23,142.5 213.2 1,032.5 1,022.1 10.4 Chernobyl 1,939.2 1,919.8 19.4 22,675.3 22,669.9 5.4 948.7 948.7 0.0 Pension fund 89,729.5 89,729.5 0.0 4,119.2 4,119.2 0.0 Other 9,108.5 4,575.2 4,533.3 76,408.8 61,614.8 14,794.0 6,284.7 5,016.7 1,268.0 Balance -7,627.0 -8,820.9 1,193.9 -107,554.4 -96,778.5 -10,775.9 -3,612.9 -2,708.6 -904.3 * Pension fund revenues & expenditues were included in the State Budget only three years, 1994-96 Source: Ministry of Finance Table 5.6 - State and Local Budgets in Ukraine (continued) 1996 1997 mnin UJAHI mn IJAHf consolidated state local consolidate state local Revenues 30,218.7 19,266.4 10,952.3 28,112.0 15,973.8 12,138.2 including Enterprise profit tax 5,496.6 1,449.1 4,047.5 5,792.1 - 5792.1 VAT 6,246.2 2,765.3 3,480.9 8,242.3 8,242.3 - Excise taxes 646.2 542.1 104.1 1,207.9 739.0 468.9 Households income tax 2,593,1 1,242.8 1,350.3 3,295.7 - 3295.7 Chernobyl tax 1,490.1 1,490.1 0.0 1,697.9 1,697.9 - Pension fund* 7,197.1 7,197.1 0.0 - - - Other 6,549.4 4,579.9 1,969.5 34,312.7 20,622.6 13,690.1 Expenditures 34,182.8 22,421.9 11,760.9 34,312.7 20,622.6 13,690.1 including National economy 3,450.6 2,584.7 865.9 4,423.6 3,714.8 708.8 Social protection, culture & science 12,404.7 2,870.4 9,534.3 15,949.3 4,332.3 11617 Defense 1,226.6 1,226.6 0.0 1,738.9 1,738.9 - Chernobyl 1,524.4 1,524.4 0.0 1,746.8 1,746.8 - Pension fund 7,233.6 7,233,6 0.0 - - - Other 8,342.9 6,982.2 1,360.7 10,454.1 9,089.8 1,364.3 Balance -3,964.1 -3,155.5 -808.6 -6,200.7 -4,648.8 -1,551.9 Pension fund revenues & expenditues were included in the State Budget only three years, 1994-96 Sorce: Ministry I /Finance ;7 Qd tz Table 5.7 - Pension Fund Revenues and Expenditures (mln. UAH) 1991 1992 1993* 1994 1995 1996 11 Revenues 0.30 5.08 133.62 998.93 4,400.42 7,415.73 9,467 Payroll contributions 0.25 4.77 94.52 943.12 4,181.36 7,072.53 8,483 Transferes from Chomobyl Fund 0.00 0.00 2.31 25.22 87.40 190.20 341 Transferes from State Budget 0.05 0.31 36.79 22.29 83.00 102.54 554 Transferes from Local Budget 0.00 0.00 0.00 8.30 48.66 50.46 88 Expenditures 0.29 3.69 123.22 892.82 4,312.00 7,569.80 9,530 Financed by insurance contributions 0.25 3.27 113.75 810.83 3,908.57 6,736.56 8,136 Financed by Chornobyl Fund (for pensions and allowances to Chornobyl victims) 0.00 0.10 4.20 28.34 124.88 251.45 316 Financed by State Budget (for pensions, allowances and compensation payments to servicemen) 0.03 0.28 5.28 40.84 210.19 499.17 650 Financed by Local Budget (for allowances for children of age 1.5 - 3) 0.00 0.00 0.00 12.82 67.58 82.22 77 Other expenditures 0.00 0.04 0.00 0.00 0.78 0.40 350 Pension Fund Balance 0.01 1.389 10.401 106.103 88.42 -154.07 -63.4( NBU loan 0.04 0.00 0.00 0.00 62.00 125.00 147 * 1993 transfers from the State budget include a UAH 33.65 mln. budget loan Source: Ministry of Finance oa Table 5.8 - Tax and Expenditure Arrears in Ukraine (inn Hrn) 199601 199602 199603 1996 04 1997 01 1997 02 1997 03 1997 04 199801 1998 02 199803 Total Tax Arrears: 5,201 6,161 7,644 8,383 9,823 11,402 11,369 13,736 16,555 23,583 31,978 Total 3,025 3.231 3.950 4,049 4,968 5,812 5,210 6,884 8,346 14,394 22,369 Value-Added Tax 1,266 1,469 1,711 1,695 2,398 2,804 2,422 2,481 3,323 5,561 7,749 Excise Tax 84 101 123 114 107 152 225 237 608 739 1,167 Enterprise Profit Tax 890 1,012 1,247 1,229 1,008 1,404 1,135 1,258 1,071 2,587 4,140 Entrepreneurship Activity Profit Tax 3 5 7 8 9 10 12 17 21 29 35 Personal Income Tax 21 62 97 Land payments 263 200 168 422 555 541 435 553 655 917 1,189 Other taxes and payments 520 444 694 582 891 902 980 2,337 2,647 4,500 7,992 Pension Arrears To: 2,176 2,930 3,694 4,334 4,855 5,591 6,159 6,852 8,209 9,188 9,609 Operational Budgetary Arrears of Ukraine State 2,187 3,012 3,606 4,021 3,927 4,466 4,636 3,662 3,364 2,560 3,292 Local 3.974 6,541 8,566 9,501 11,845 14,020 13,803 12,713 12,156 13,705 14,218 Consolidated 6.161 9,553 12,172 13,522 15,772 18,486 18,439 16,375 15,218 16,265 17,509 Pension Arrears From: 418 1,323 2,122 3,043 3,744 4,251 4,302 3,744 4,133 4,855 5,615 Total Operational Arrears 6.579 10.876 14,295 16,565 19,516 22,737 22,741 20,119 19,351 21,120 23,125 Sectoral Arrears: Wages and Salaries 1,183 2,020 2,721 3,228 3,670 3,540 3,106 2,282 2,348 2,473 2,834 Social Insurance 622 944 1,254 1,436 1,712 1,656 1,443 1,088 1,115 1,147 1,286 Stipends 124 184 219 274 286 258 281 278 282 250 250 Heating 1,576 2,573 2,758 2,577 2,901 3,693 3,595 3,018 2,480 2,569 2,805 Electricity 276 407 414 348 373 450 485 378 210 241 380 Catering 319 400 423 481 475 354 338 250 200 217 275 Medicine 128 171 224 241 258 267 256 209 187 172 178 Chernobvl 380 258 423 516 554 654 801 900 816 840 1.312 'T SECTION 6 Table 6.1 Summary Balance Sheet of the National Bank (mln UAH, end ofperiod) NBU Credit to Real cash Reserves of NBU Credit to Currency Foreign Currency in . NBU Credit to Commercial balances commercial Goenet Bns % change Assets circulation banks Government Banks per month (index (refinancing) 1992=100) 1992 9 5 17 17 2 25 81.0 1993 32 128 182 113 112 31 20.6 1994 683 793 763 1,244 105 16 25.4 1995 1,994 2,623 960 4,295 349 10 29.9 1996 3,769 4,041 849 5,995 474 4 33.0 1997 4,479 6,132 926 7,096 824 4 45.4 1998 6,172 7,158 1,454 13,479 505 1.3 44.2 1992 Q1 1 0 24 65.1 1992 Q2 2 5 36 100.0 1992 Q3 4 2 9 28 123.3 1992 Q4 9 5 17 17 2 12 81.0 1993Q1 13 9 32 22 11 22 54.3 1993 Q2 17 17 76 41 21 23 38.2 1993 Q3 30 52 158 69 91 45 38.9 1993 Q4 32 128 182 113 112 35 20.6 1994 Q1 18 230 229 313 117 22 26.8 1994 Q2 14 333 378 565 123 13 33.3 1994 Q3 22 520 752 1,043 150 16 45.7 1994 Q4 683 793 763 1,244 105 15 25.4 1995 Q1 848 1,134 878 1,719 69 13 22.8 1995 Q2 2,247 1,782 914 2,049 187 16 30.9 1995 Q3 1,960 2,235 990 3,271 286 8 30.9 1995 Q4 1,994 2,623 960 4,295 349 5 29.9 1996 Q1 1,397 2,800 964 5,384 243 2 26.4 1996 Q2 1,718 3,324 727 5,726 215 6 30.3 1996 Q3 2,384 3,330 962 5,694 345 0 28.1 1996 Q4 3,769 4,041 849 5,995 474 7 33.0 1997 Q1 3,852 4,306 882 5,856 581 2 33.9 1997 Q2 4,343 5,102 1,000 6,101 608 6 39.5 1997 Q3 4,722 6,031 805 6,403 856 6 46.1 1997 Q4 4,479 6,132 926 7,096 824 1 45.4 1998 Q1 7,816 6,365 806 7,755 528 1 46.4 1998 Q2 6,578 6,390 858 9,386 513 0.1 45.9 1998 Q3 6,158 6,310 1,168 13,238 598 -0.4 44.0 1998 04 6,172 7,158 1,454 13,479 505 4.3 44.2 Source: National Bank qf Ukraine, TACIS Statistical Appendix 179 Table 6.2 - Summary Balance Sheet of Commercial Banks (inin UAH, end of period) Commercial banks Share of credits to Credits in foreign Deposits (time credits to the private enterprises, and demand, in haeof Depositsein economy (in households and co- currncy anet domestic hosos in foren imternational assetsdeois() crny domestic currency) operatives (%) currency) 1992 24 21.0 5 18 14.4 2 1993 391 23.5 103 254 12.3 100 1994 1,202 42.0 1,333 1,401 16.3 1,021 1995 3,029 36.2 1.749 2,646 20.0 1,577 1996 4,103 36.1 2,475 3,265 30.9 1,718 1997 5,196 49.4 2,125 4,643 36.5 1,672 1998 5,102 82.2 5,122 5,017 36.4 3.257 1992 Q1 3 3 1992 Q2 7 5 1992 Q3 13 8 25.0 1992 Q4 24 21.0 5 18 14.4 2 1993 Q1 58 22.3 37 12.8 14 1993 Q2 101 19.5 62 12.6 27 1993 Q3 303 16.9 208 6.3 47 1993 Q4 391 23.5 103 254 12.3 100 1994 Q1 538 29.9 130 319 19.0 113 1994 Q2 792 37.8 208 600 18.8 146 1994 Q3 1,253 45.0 347 1,084 14.3 253 1994 Q4 1,202 42.0 1,333 1.401 16.3 1,021 1995 Q1 1,357 37.4 1,817 1,547 18.4 1,254 1995 Q2 2,176 34.7 2,371 2,072 16.7 1,442 1995 Q3 2,886 38.2 2,632 2,409 15.7 1,742 1995 Q4 3,029 36.2 1,749 2,646 20.0 1,577 1996 Q1 2,997 38.9 2,823 2,762 22.1 1,524 1996 Q2 3,060 40.1 2,387 2,753 25.0 1,446 1996 Q3 3,332 38.9 2,320 2,890 26.7 1,372 1996 Q4 4,103 36.1 2,475 3,265 30.9 1,718 1997 Q1 4,126 41.7 1,996 3,734 31.9 1,474 1997 Q2 4,487 46.9 2,095 4,177 32.3 1,692 1997 Q3 5,095 51.3 2,040 4,433 33.2 1,758 1997 Q4 5,196 49.4 2,125 4,643 36.5 1,672 1998 Q1 5,001 78.6 2,414 4,608 38.6 1,863 1998 Q2 5,104 81.0 2,777 4,879 42.4 1,987 1998 Q3 4,985 82.0 4,866 4,563 38.9 3,269 1998 Q4 5,102 82.2 5,122 5,017 36.4 3,257 Source: National Bank of Ukraine, TACIS 180 Statistical Appendix Table 6.3 - Monetary Aggregates (mln UAH, end of period) Total credits to Total credits oney M oeBae M(i 4(icuig Mgrwh businesses, (incl. credits Money Acul Monetization > Base ~~~growth (over domestic time deposits in (over prior hoshlsad i frin mlile reserve rai 'Clprior period) currency) foreign currency) period) ratio (%) CD government currency) 1992 15 23 25 42 46 1.51 56 0.50 1993 282 1,780 386 481 1,824 505 608 1.42 52 0.32 1994 1,606 470 2,163 3,216 569 2,446 3,706 1.44 49 0.27 1995 3,540 120 5,269 6,846 113 7,324 8,383 1.49 17 0.13 1996 4,882 38 7,306 9,024 32 10,098 11,490 1.50 13 0.11 1997 7,058 45 10,775 12,447 38 12,292 14,392 1.53 15 0.13 1998 8,604 22 12,175 15,432 24 18,581 22,333 1.42 18 1992 Q1 1 3 1992 Q2 2 100.0 7 1992 Q3 5 150.0 11 1992 Q4 15 200.0 23 25 42 46 1.51 56 1.47 1993 Q1 35 133.3 47 59 136.0 80 1.35 70 1.11 1993 Q2 77 120.0 79 111 88.1 142 1.03 96 0.87 1993 Q3 172 123.4 260 306 175.7 372 1.51 57 0.65 1993 Q4 282 64.0 386 481 57.2 505 608 1.42 52 0.58 1994 Q1 450 59,6 574 681 41.6 852 981 1.27 53 0.46 1994 Q2 693 54.0 927 1,082 58.9 1,358 1,565 1.34 49 0.53 1994 Q3 1,229 77.3 1,596 1,863 72.2 2,296 2,642 1.30 58 0.68 1994 Q4 1,606 30.7 2,163 3,216 72.6 2,446 3,706 1.44 49 0.55 1995 Q] 1,910 18.9 2,681 3,935 22.4 3,076 3,564 1.40 21 0.50 1995 Q2 2,679 40.3 3,850 5,309 34.9 4,225 4,873 1.44 20 0.53 1995 Q3 3,165 18.1 4,645 6,387 20.3 6,157 7,114 1.47 17 0.42 1995 Q4 3,540 11.8 5,269 6,846 7.2 7,324 8,383 1.49 17 0.32 1996 Ql 3,769 6.5 5,562 7,086 3.5 8,381 9,581 1.48 18 0.47 1996 Q2 4,074 8.1 6,077 7,522 6.2 8,786 10,066 1.49 14 0.43 1996 Q3 4,302 5.6 6,220 7,592 0.9 9,026 10,324 1.45 15 0.40 1996 Q4 4,882 13.5 7,306 9,024 18.9 10,098 11,490 1.50 13 0.31 1997 Q) 5,199 6.5 8,040 9,514 5.4 9,982 11,394 1.55 17 0.51 1997 Q2 6,122 17.8 9,279 10,971 15.3 10,588 12,230 1.52 17 0.52 1997 Q3 6,877 12.3 10,464 12,222 11.4 11,498 13,396 1.52 13 0.52 1997 Q4 7,058 2.6 10,775 12,447 1.8 12,292 14,392 1.53 15 0.42 1998 Q1 7,096 0.5 10,973 12,836 3.1 12,756 15,098 1.55 12 0.62 1998 Q2 7,269 2.4 11,269 13,256 3.3 14,490 17,020 1.55 12 1998 Q3 7,534 3.6 10,873 14,142 10.2 18,223 22,420 1.44 15 1998 Q4 8,604 14,2 12,175 15,432 16.4 18,581 22,333 1.42 18 Source: National Bank of Ukraine, TACIS Table 6.4 - Velocity of Circulation Currency Money M2 M2 . Velocity Base Velocity Velocity ration M+ages in (Ukraine) Velocity (Ukraine) (Russia) 1994 32.2 15.2 11.8 10.2 56 3.6 1995 32.5 20.7 14.8 11.1 38.4 3.5 1996 24.6 19.7 13.1 8.8 34.6 2.9 1997 17.1 14.4 9.6 8 26.5 2.4 1998 14.9 12.8 8.6 39.6 2.8 1994 Q1 33.8 17.1 13.3 9.2 48 3.6 1994 Q2 27.3 12.8 10.6 10.7 41.2 2.9 1994 Q3 22.5 9.9 7.7 9.9 32.7 2.5 1994 Q4 31.9 14.9 11.1 10.4 48.5 3.9 1995 Q1 36.8 20.8 14.6 10 47 4 1995 Q2 30.7 19 13.9 11.1 42.5 3 1995 Q3 28.8 19.3 13.4 11.3 42.7 3.1 1995 Q4 29 20.5 14 10.9 37.7 3.1 1996 Q1 27.2 20.5 13.9 8 35.8 2.9 1996 Q2 24.5 19.7 13.1 8.1 34.6 2.9 1996 Q3 23.8 19.5 12.9 8.7 32.3 2.9 1996 Q4 23.3 18.8 12.6 9.6 34.5 2.9 1997 Q1 18.3 15 10 7.9 28.3 2.3 1997 Q2 17.9 15 9.8 7.4 28.8 2.4 1997 Q3 16.1 13.7 9.2 8 28.4 2.4 1997 Q4 16 14 9.2 7.9 26.5 2.5 1998 Q1 13.6 11.9 7.8 6.2 28.8 2.6 1998 Q2 13.6 12.1 7.9 6.8 28.9 2.7 1998 Q3 14.7 12.7 8.4 7.6 42 3 1998 Q4 17.3 14.1 10.1 39.8 3 Source: TACIS 182 Statistical Appendix Table 6.5 - Interest Rates NBU NBU NBU NBU Commercial banks Real interest rate Commercial banks Real interest rate refinance refinance refinance refinance interest rates (weighted (weighted average, % per interest rates rate rate real rate real rate average, % per month) month) (% per year) (official, % (official, % (official, % (official, % per month) per year) per month) per year) on credits on deposits on credits on deposits on credits on deposits on credits on deposits 1993 15.3 13.2 -20.9 -22.2 452.0 342.7 -94.0 -95.1 1994 19 706.4 4.5 69.6 20.8 17.4 6.8 3.9 865.6 585.5 120.2 58.3 1995 10.7 238.7 1.4 18.2 10.5 5.5 1.4 -3.2 231.4 90.1 18.2 -32.3 1996 5.2 83.7 2.3 31.4 6.7 2.8 3.7 -0.03 117.8 39.3 54.6 -0.4 1997 2 26.8 1.2 15.4 4.1 1.5 3.3 0.7 62.0 19.6 47.6 8.7 1998 5.1 81.6 3.5 51.1 4.5 1.9 3 0.3 69.6 25.3 42.6 3.7 1993 Q1 7.1 6.6 -224 -22.7 127.8 115.3 -95.2 -95.4 1993 Q2 13.4 11.1 -18.2 -19.7 352.2 253.6 -91.0 -92.8 1993 Q3 20 791.6 -17 -89.3 18.1 17.7 -17.3 -17.5 636.2 606.8 -89.8 -90.1 1993 Q4 20 791.6 -27.9 -98.0 22.8 17.5 -25.8 -28.9 1075.9 592.6 -97.2 -98.3 1994 Q1 20 791.6 6.8 120.2 30.1 23.3 16 10 2251.4 1134.7 493.6 213.8 1994 Q2 20 791.6 14.3 397.2 24.5 22.9 18.5 17 1286.9 1087.5 666.7 558.0 1994 Q3 13.6 361.9 9.2 187.5 13.5 12.4 9.2 8.2 357.0 306.6 187.5 157.5 1994 Q4 24.1 1234.3 -10.4 -73.2 15.2 10.9 -16.6 -19.7 446.3 246.1 -88.7 -92.8 1995 Q1 20 791.6 2.7 37.7 17.3 10.7 0.4 -5.2 578.5 238.7 4.9 -47.3 1995 Q2 9.2 187.5 3.9 58.3 10.2 5.3 4.9 0.2 220.8 85.8 77.5 2.4 1995 Q3 5.6 92.3 -2.2 -23.4 6.5 2.5 -1.2 -4.9 112.9 34.5 -13.5 -45.3 1995 Q4 8.1 154.6 1.4 18.2 8.4 3.6 -1.7 -2.8 163.2 52.9 -18.6 -28.9 1996 Ql 8.6 169.1 1.8 23.9 9 4,1 2.3 -2.3 181.3 62.0 31.4 -24.4 1996 Q2 5.4 88.0 4.4 67.7 7 2.8 5.8 1.7 125.2 39.3 96.7 22.4 1996 Q3 3.3 47.6 0.7 8.7 5.4 2.2 2.7 -0.4 88.0 29.8 37.7 -4.7 1996 Q4 3.3 47.6 2.1 28.3 5.3 2.2 4.1 0.9 85.8 29.8 62.0 11.4 1997 Ql 2.7 37.7 1.6 21.0 5 1.9 3.8 0.7 79.6 25.3 56.4 8.7 1997 Q2 2 26.8 1.4 18.2 4.3 1.6 3.8 1 65.7 21.0 56.4 12.7 1997 Q3 1.4 18.2 1 12.7 3.6 1.3 3.2 0.8 52.9 16.8 45.9 10.0 1997 Q4 2.1 28.3 1 12.7 3.4 1.4 2.3 0.3 49.4 18.2 31.4 3.7 1998 Ql 3.3 47.6 2.8 39.3 3.9 1.6 3.3 1 58.3 21.0 47.6 12.7 1998 Q2 3.8 56.4 3.3 47.6 4 1.7 3.5 1.3 60.1 22.4 51.1 16.8 1998 Q3 6.7 117.8 5.6 92.3 4.8 2 3.8 1 75.5 26.8 56.4 12.7 1998 Q4 6.6 115.3 2.4 32.9 5.4 2.2 1.2 -1.9 88.0 29.8 15.4 -20.6 Source: National Bank of Ukraine, TACIS 00 00 Table 6.6 - Commercial Banks'Interest Rates on Credits in Foreien Currency. by term structure O annual) Hard Currency Weak Currency I lard Currency Weak Currency Jurid. person Phvs. oerson Juris. person Jurid. rcrson Phys. person Juris. person January, 1998 17.3 17.9 72.2 June, 1998 15.6 21.3 52.2 up to I month ... ... ... up to I month 22.4 21.5 29.1 1 - 3 months ... ... ... 1 - 3 months 12.3 23.9 43.9 3 - 6 months ... ... ... 3 - 6 months 13.2 15 48.3 6 - 12 months ... ... ... 6-12 months 24 19 44.5 more than 1 year ... ... ... more than 1 year 12.7 15.3 119.9 February, 1998 16.2 21 25.9 July, 1998 18.6 21.8 54.4 up to I month 16.8 26.2 20.5 up to 1 month 20.5 22.5 75.3 1 - 3 months 15.2 ... 50 1 - 3 months 18 26.6 31.5 3 - 6 months 13.9 ... 34.4 3 - 6 months 18.1 30.6 40.3 6 - 12 months 21.4 15.1 22.5 6 - 12 months 23.2 17 39.9 more than I year 13.9 18.5 ... more than I year 11.2 19 120 March, 1998 17.3 20.1 22.7 August, 1998 20.5 21.7 42.5 up to I month 17.9 22.9 32.5 up to I month 21.8 22 39.2 1 - 3 months 16.3 10 50 1 - 3 months 18.2 26.6 44.6 3 - 6 months 17.3 3.6 20.4 3 - 6 months 25.5 24.7 54 6 - 12 months 22 10.8 28.6 6 - 12 months 24.3 18.8 40 more than 1 year 12.8 17.8 16.2 more than 1 year 10.9 14.9 120 April, 1998 16.1 18.4 54.5 September, 1998 18.9 26.9 17.7 up to 1 month 15.4 22.6 52.6 up to I month 15.8 24.3 6 1 - 3 months 15 14.9 53.4 1 - 3 months 17.4 21.6 30.5 3 - 6 months 15.4 15.4 31.8 3 - 6 months 19.7 47.1 ... 6 - 12 months 22.3 10.6 48.5 6 - 12 months 25.5 19.8 ... more than I year 13.4 17.9 120 more than 1 year 13.4 10.7 ... May, 1998 15.6 21.1 47.6 October, 1998 21.9 20.3 81.1 up to I month 19.5 21.7 43.6 up to I month 16.1 2.7 40 1 - 3 months 14 25.1 49,2 1 - 3 months 30.7 30.6 87.5 3 - 6 months 12.2 14.8 45.7 3 - 6 months 27.8 48.4 ... 6 - 12 months 22.8 11 40 6 - 12 months 21.9 23.3 ... more than 1 year 1.9 20.1 7 more than 1 year 13.5 24. Source: National Bank Of Ukraine Table 6.7- Commercial banks'credits to economic entities in Ukraine as ofNovember 1, 1998 (bv industries: residual indebtness. inn Hrn) By types of Percentage in total credii Industries Total currency credit (maturity) short - term long - term short - term long - terr national foreign national foreign national foreign total currency currcncy total currency currency Total 8891 4761 4130 7406 4158 3248 1485 603 882 83.3 16.7 including 1. Credits to juridical persons 8442 4342 4101 7167 3948 3219 1276 394 881 84.9 15.1 Manufacturing - total 3572 1574 1998 3093 1468 1625 479 106 374 86.6 13.4 electric power industry 96 93 3 94 92 2 2 1 I 97.9 2.1 fuel industry 288 55 232 282 50 232 6 6 0 97.9 2.1 ferrous metallurgy 630 245 385 573 236 337 57 9 48 91.0 9.0 machine building 937 443 494 883 415 468 54 28 26 94.2 5.8 food industry 539 277 262 396 256 140 143 21 122 73.5 26.5 Agriculture 343 223 121 257 192 64 86 30 56 74.9 25.1 Transportation 241 87 155 162 69 93 79 17 62 67.2 32.8 Communication 75 25 50 36 16 20 39 9 30 48.0 52.0 Constructions 208 149 58 160 110 50 48 39 8 76.9 23.1 Trade & Catering 2500 1432 1068 2191 1312 879 309 119 189 87.6 12.4 Material - technique supply 162 119 43 122 92 31 40 27 12 75.3 24.7 General commercial activity 157 86 71 140 78 62 17 9 8 89.2 10.8 Municipal services 28 20 8 25 18 7 3 2 1 89.3 10.7 Health & Social protection, sport 52 27 25 42 23 19 10 4 6 80.8 19.2 Culture & Arts 46 26 20 39 26 13 7 0 6 84.8 15.2 Science 67 25 42 35 22 13 32 3 29 52.2 47.8 Financing, insurance, pensions 146 75 71 89 71 18 57 4 53 61.0 39.0 2. Credits to physical person 449 479 30 239 210 29 210 209 1 53.2 46.8 Source: National Bank of Ukraine OO Table 6.8 - Inter-Enterprise Arrears n(ml UAH) Indebtedness of Ukrain. enterprises registered on Arrears of Ukrainian enterprises Payables their balances reRistered bv banks (enterprise Ratio of credits Arrears with balances) in (granted by com. OverTdue payables banks banks) to oede real terms (Bn. pybe % Receivables Payables of enterprises (including 1990 payables (%) (cartotheque 2) overdue _ 1990_rb.) interests) 1992 18 19 4 12.6 125.3 1993 994 1,276 86 40 8.7 30.6 1994 4,904 6,834 1,545 440 8.4 17.6 1995 22,250 30,543 10,955 806 14.5 9.9 1996 48,018 73,168 1,003 28.1 5.6 1997 74,086 102,507 716 40.8 5.1 1998 102,976 137,614 40.5 3.7 1994 Q1 1,714 2,267 267 14 11.6 23.7 1994 Q2 2,470 3,351 527 19 14.8 23.6 1994 Q3 3,400 4,196 646 25 15.4 29.9 1994 Q4 4,904 6,834 1,545 440 8.4 17.6 1995 Q1 11,260 14,605 3,570 652 10.6 9.3 1995 Q2 16,097 20,477 6,514 790 12.7 10.6 1995 Q3 19,794 26,943 8,365 827 13.4 10.7 1995 Q4 22,250 30,543 10,955 806 14.5 9.9 1996 Q1 32,512 45,152 14,721 930 18.5 6.6 1996 Q2 37,340 55,583 18,222 1,002 22.2 5.5 1996 Q3 40,625 60,289 21,539 1,081 25.0 5.5 1996 Q4 48,018 73168 19,634 1,003 28.1 5.6 1997 Q1 59,312 84,968 20,780 1,033 32.8 4.9 1997 Q2 65,251 95,149 22,263 963 37.2 4.7 1997 Q3 70,219 98,428 1,008 39.2 5.2 1997 Q4 74,086 102,507 716 40.8 5.1 Jan-97 53,202 72,156 19,398 1,041 30.6 5.2 Feb-97 49,925 72,784 20,039 1,054 30.4 5.3 Mar-97 59,312 84,968 20,780 1,033 32.8 4.9 Apr-97 60,118 86,805 n.a. 1,034 35.5 4.9 May-97 60,117 86,134 n.a. 1,050 35.7 5.0 Jun-97 65,251 95,149 22,263 963 37.2 4.7 Jul-97 65,536 92,814 990 38.5 5.0 Aug-97 66,644 93,271 1,009 38.1 5.3 Sep-97 70,219 98,428 1,008 39.2 5.2 Oct-97 70,907 99,138 686 40.0 5.2 Nov-97 72,447 99,847 671 40.3 5.1 Dec-97 74,086 102,507 716 40.8 5.1 Jan-98 70,390 93,979 39.3 5.3 Feb-98 72,843 97,826 38.0 5.1 Mar-98 79,748 103,873 39.7 4.8 Apr-98 80,968 104,902 40.9 4.8 May-98 83,566 108,729 41.8 4.7 Jun-98 85,475 114,015 43.5 4.5 Jul-98 85,778 114,786 44.3 4.5 Aug-98 87,120 114,247 43.8 4.4 Sep-98 92,133 121,125 41.3 4.1 Oct-98 100,210 133,221 40.3 3.6 Nov-98 101,619 134,311 41.0 3.6 Dec-98 102,976 137,614 40.5 3.7 Source: Ukrainian Economic trends, TACIS 186 Statistical Appendix и и w TaЫe 7.1 - Ukrairre: AgricuCtural production С� �. � и �• '1'оtьl Пе1,lаwг о1' llсЛа(�»' of� Н �, Гиtд1 5hare о1' Share о1' Гоtа1 tihгдre оР productiдn аапсаl(шлl пgricultural 1'utal О � produetion аniпэаl ргп°ate sectлr pruductio» (тп 5hare о1'алiтяl privдte s�иtor (current пт production ($ ргодис[iиэ (rb. producŭon (mn Z � 1mnllSp) rnvduction(°/„� (^�„) Rh1984) nroductiлn(%) (%1 11rn( 1990) 1983) 1Эт1Ч96) � N � д, 1990 44.133 31.3 16.5 48,954 �5? 26.7 0.6 1 1 48629 � 1991 35,903 35.5 20S 42,493 57.2 30.3 1.1 2 2 42210 1992 34.t75 32.Z 2.5.7 38,96б 52.б 37.3 14.8 30 30 38707 1993 35,427 27.6 27.0 39,5;9 47.К 39.9 548.9 1,087 1,080 39287 f994 29.3;9 31.9 30.0 35,046 52.1 42.9 2,968.7 7;100 б,992 3280,5 1995 28.727 28.9 32? 33,217 д8.3 4G.3 19,374.1 47,320 47,317 31G34 1996 21,t83 3>.3 49.2 29,053 49.2 э2.3 Зб,74б.4 88,э92 72.20б 28643 1997 19.33� 34.3 45.0 28,295 45.6 57.Ч 29,182.1 105,896 80,2б8 28t12 1998 17,343 3G.2 д9.3 22,633 54.0 60.9 33,800.0 132,G97 112,791 25360 199з�)1 г.згs 98.о з4.2 4,з61 98.7 зя.з я.s гs8 1s2 1993 Q2 3.624 7G.з 351 6,i23 8SA 39.4 2д.2 469 308 1Ч93Q3 19,891 1?0 27.0 19.793 23.7 34.0 318.8 1.125 1,2�4 1993 Q4 9.5$$ 24.6 22.I 9,282 45.8 53.7 197.3 1,444 1,654 1994 Q1 2,030 97.9 40.4 3,бб7 98.6 44.9 267.5 9,246 �,67б 1994 С�2 з,612 7а.1 з7.1 >,76s s7.s as.б zs9.1 s,оз4 з,а9в 1994 Q3 15,829 15J 29.3 16,214 27.5 41? 1,726.9 7.6�4 $,289 1994 Q4 7,$69 29? 25.8 7,400 55.4 43.5 71$.3 6,378 7.523 1995 Q1 1,848 97.7 44.5 3,381 98.� 49.1 1,103.7 41,914 25,40б 1995 Q2 3.489 9>.3 50.3 5,010 9�.5 48.7 1,989.0 56,064 ЗО,К98 1995 Q3 18,094 10.2 27.8 17,175 21.0 4?.4 8,312.4 32,233 37,6б7 199э �4 б.296 34.1 34.7 6,651 �7.6 49.3 4.9б9.1 55,377 58.147 1996Q1 1,654 97.7 54.8 3,453 99.3 ?9.6 2,176.6 92,354 49,Об2 1996 Q2 2,072 9?.3 J3.6 4,493 98.1 55.0 3.598.1 121.833 62,329 1996 Q3 1 Q,749 17.7 53.4 12,493 2G? 45.9 12 �)69.г1 84,б55 К0,79S 199бQ4 б.708 37.8 3G.i 8,б14 38.4 ЗК.К 8,003., 83,704 72,298 1997 Q 1 1.517 97.9 60.2 2,933 99.8 6 L6 2,006.0 92,79б 53,417 2324 1997 Q2 1,792 95.2 61.6 3,519 95.7 G2.1 3,854.0 1 з0,903 85.246 3229 1997Q3 9.014 17.7 45.7 14,132 31.б 52.7 13,780.0 107,203 74,370 15235 1997 Q4 7,008 24.8 3G.1 7,810 42.б G1.1 9,542.0 9�.id0 9�.092 7324 1998Q1 1,323 98 66.9 2,55б 98.0 66.6 2.110.0 111,901 64,242 2279 1998Q2 1,7l5 95.1 65.3 3,365 95.3 65.1 4,990.0 20д,200 115,414 3431 1998 С)3 9.126 16.9 40.R I2,246 24.7 57.2 15,986.0 122,911 101,595 15452 I 99R O4 5 1 КО �? R i4 7 4 df,S Тi.� б4 5 9 714 0 1;1 5R? 1 б9-;ОR 419R 8г»ггси 7:4ГL47ikruiniгrп Есг» wмic Тrends haserl nrr С)ег_lakoгnslcV Лггпг � � J 00 00 Table 7.2 - Area cultivatedfor agricultural crops (by till type, ofj rms, thous. hectares) 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 Overall cultivated area 32656 32406 32021 31542 31264 31008 30963 30061 30304 28790 Grain crops 16077 14583 14671 13901) 14305 13526 14152 13248 15051 13718 inclutfing winter wheat 6651 7568 7013 6315 5749 4507 5324 5985 6486 5543 winter rye 652 518 491 499 510 490 609 636 710 736 spring barley 2897 2201 2557 2833 3467 4985 4130 3 3 6 7 3 5 16 .3677 corn 2581 1234 1462 1160 1343 668 1174 703 1678 1030 millet 302 205 188 207 200 212 167 213) 230 368 buckwheat 3 44 '50 .399 449 448 524 459 472 472 586 ri ce 34 28 2) 24 24 22 22 23) 2) 22 1egUMi110US crops 1626 1424 1376 1271 1239 1201 1103 865 750 631 Industrial crops 3669 3751 3611 3563 3507 3505 3748 3652 -3348 3770 inclwling Sugar beat 1641 1607 1558 1498 1530 1485 1475 1359 1104 1017 Sunflower 1480 1636 1601 1641 1637 1784 2020 2107 2065 2531 flax 211 172 159 156 136 85 98 65 40 31 Potatoes & Vegetables 2208 2073 2184 2369 2165 2096 2165 2135 2185 2066 including potatoes 1528 1429 1513 1702 1552 1532 1532 1547 1579 1513 vegetables (excluding seed stock) 499 456 477 500 474 457 503 476 480 459 Fodder cultures 10702 11999 11555 11707 11287 11881 10898 11026 9720 9236 including gravs(- annual 2188 2583 2604 2241 2353 2590 2879 2771 2505 2176 Cn perennial 4156 3986 3921 4132 4077 4101 3906 4079 3842 3752 Prea qfjMoiv ground 1656 1427 1425 1411 1355 1522 1570 2279 2084 30221 Sollive: Slate Commillee 0 'Sfolistics CIO Table 7.3 - Harvest area (by all types of farms, thous. hectare) 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 Grain crops 16064 14552 14571 13816 14224 13244 13963 12506 14502 12756 winter wheat 6644 7549 6977 6294 5726 4453 5299 5747 6328 5408 winterrye 649 517 487 498 498 476 604 627 695 700 winterbarley 249 526 630 613 770 192 373 263 382 216 spring wheat 15 9 10 13 22 54 108 145 181 233 springbarley 2893 2186 2511 2812 3445 4900 4040 3163 3322 3345 corn(forseeds) 2580 1223 1459 1137 1331 652 1161 671 1637 908 oats 632 486 489 492 510 604 560 482 554 550 millet 298 197 188 192 197 179 158 129 214 266 buckwheat 346 362 414 447 455 494 448 399 448 495 rice 34 28 23 24 23 22 22 23 23 21 leguminous crops 1638 1414 1361 1276 1237 1191 1085 840 691 577 Sugarbeat 1636 1605 1549 1485 1519 1467 1448 1260 1005 893 Sunflower(forseeds) 1487 1626 1585 1630 1629 1725 2008 2025 2001 2431 Flax (fibre) 208 169 156 155 127 79 96 55 32 26 Soy 70 88 101 97 70 43 23 16 14 31 Potatoes 1528 1433 1534 1705 1534 1527 1531 1549 1577 1513 Vegetables 499 447 464 482 464 446 489 452 452 446 Source: State Committee ofStatictics Table 7.4 - Yield for agricultural crops (by all types of farms, metric cenmner per harvested area hectare) 1990 1991 1992 1993 1994 1995 1996 1997 1998 Grain* 35.1 26.5 27.9 32.1 26.8 24.3 19.6 24.5 20.8 wheat: winter 40.2 30.3 30.9 38.0 30.8 30.1 23.2 28.5 26.9 spring 30.2 21.7 25.8 27.5 25.2 16.9 14.7 19.2 15.7 winter rye 24.3 20.1 23.2 23.7 19.8 20.0 17.4 19.4 16.2 barley: winter 37.2 32.0 30.1 32.8 22.7 26.5 15.6 27.7 22.1 spring 33.0 24.0 29.4 32.0 28.7 21.4 16.8 19.1 16.1 corn (for seeds) 38.7 32.6 25.1 28.4 23.6 29.2 27.4 32.6 25.3 oats 26.8 19.3 25.3 29.0 22.9 19.9 15.2 19.2 13.5 millet 17.2 18.0 11.8 14,9 8.8 17.0 8.9 14.6 9.3 buckwheat 11.6 9.0 7.8 11.6 6.9 7.6 7.5 9.0 6.9 rice 42.5 44.3 37.7 28.9 35.5 36.4 35.7 29.0 34.6 leguminous crops 23.1 14.4 23.4 23.4 22.1 14.5 13.4 15.6 13.4 Sugar beat 276 234 194 222 192 205 183 176 174 Sunflower (for seeds) 15.8 14.6 13.0 12.7 9.1 14.2 10.5 11.5 93 Flax (fibre) 6.4 6.8 6.8 5.7 6.3 5.0 3.3 2,9 3.6 Soy 11.3 13.4 7.8 8,8 7.2 9.7 9.5 13.6 11.4 Potatoes 117 95 119 137 105 96 119 106 102 Vegetables 149 128 110 130 115 120 112 114 123 * weiht after processing Source: Stale Committee ofSiativtics Table 7.5 - Private farm cultivated area and basic agricultural crops gross harvest and yield 1992 1993 1994 1995 1996 1997 1998 Harvested area, thous. hectares Grain crops 65.0 243.8 339.3 344.5 283.4 437.5 385.2 Sugar beat 3.5 16.0 20.7 27.9 28.4 19.1 18.9 Sunflower (for seeds) 17.3 44.7 59.0 89.3 88.9 90.0 141.6 Potatoes 1.6 4.6 2.5 2.3 2.7 3.4 2.6 Vegetables 1.7 3.3 2.4 4.3 3.8 5.2 4.6 Gourds 2.2 5.3 1.5 6.6 6.5 7.8 4.7 Gross harvest, thous. tons Grain crops 116 572 595 508 329 685 506 Sugar beat 69 390 453 652 565 394 380 Sunflower (for seeds) 19 52 39 86 61 75 91 Potatoes 15 50 20 16 28 25 21 Vegetables 14 31 18 27 24 34 30 Gourds 9 22 5 27 24 18 12 Yield, metric centner per hectare Grain crops 17.8 23.5 17.5 14.7 11.6 15.7 13.1 Sugar beat 196 244 219 234 199 206 201 Sunflower (for seeds) 10.8 11.6 6.6 9.7 6.8 8.3 6.1 Potatoes 96 108 80 70 107 73 80 Vegetables 80 92 76 64 63 65 66 Gourds 41 43 33 42 37 23 26 Source: State Committee of Statistics Statistical Appendix 191 Table 7.6 - Basis agricultural product output structure, by unit categories (% of total output) State farms I lousehold Dlots Private farms 1993 1995 1996 1997 1998 1993 1995 1996 1997 1998 1993 1995 1996 1997 1998 Grain (weight after processing) 93.0 90.4 88.4 88.6 87.9 5.7 8.1 10.3 9.5 10.2 1.3 1.5 1.3 1.9 1.9 Sugar beats 98.3 95.2 93.1 93.4 90.8 0.5 2.6 4.5 4.4 6.7 1.2 2.2 2.4 2.2 2.5 Sunflower seeds 92.6 92.6 92.3 91.6 90.9 4.9 4.4 4.9 5.1 5.1 2.5 3.0 2.8 3.3 4.0 Potatoes 14.5 4.1 4.5 2.8 2.4 85.3 95.8 95.3 97.0 97.5 0.2 0.1 0.2 0.2 0.1 Vegetables 43.0 26.9 18.0 17.3 15.5 56.5 72.7 81.5 82.0 83.9 0.5 0.4 0.5 0.7 0.6 Meat 59.4 48.0 41.6 34.9 .. 40.4 51.7 58.1 64.8 .. 0.2 0.3 0.3 0.3 Milk 63.6 54.4 48.1 39.1 .. 36.3 45.3 51.6 60.5 .. 0.1 0.3 0.3 0.4 Eggs 51.7 44.2 41.8 37.2 .. 48.3 55.7 58.1 62.6 .. 0.0 0.1 0.1 0.2 Source: Siate Commitice of Staistics (D2 Xs Table 7.7 - Gross output of agriculture by form of ownership (bin UAH) Collective agricultural enterprises, inter- Personal self-supporting enterprises, including X enterprise service centers, state agricultural peasants' and leaseholders' farms Year enterorises includina includin2 gross output of gross output of plant- output of plant- agricultural agricultural g output of agricultural prduts growing agricultural prdcs growing productsproducts products products products 1990 34.3 18.3 16.0 14.3 6.0 8.3 1991 28.4 14.4 13.9 13.8 5.8 8.0 1992 23.4 12.6 10.8 15.3 7.8 7.5 1993 22.8 13.6 9.2 16.5 9.0 7.5 1994 18.1 10.2 7.9 14.7 7.3 7.4 1995 16.4 9.8 6.6 15.2 8.1 7.1 1996 13.0 7.9 5.1 15.6 8.5 7.1 1997 12.4 8.8 3.6 15.7 8.6 7.1 Source: ICPS Analitycal report 'Agricultural policy in Ukraine" Table 7.8 - Profitability of industrial & agricultural production (by sectors) 1992* 1995 1996 Industry -- total 30.3 16.6 8.9 Including: Electric power production 27.5 9.9 12.9 Fuel industry 22.3 20.4 18.3 Ferrous metallurgy 37.1 13 2.3 Chemical and oil-chemical industry 54 19.5 7.4 Machine building and metal works 32.6 24.3 10.4 Timber and pulp-and-paper industry 27.8 18.7 7.7 Construction materials production 22.4 15.4 3.7 Light industry 36.2 17.5 1.6 Food industry 25.3 22.6 12.2 Agriculture** 99.3 10.6 -11.2 Plant-growing 206.5 55.5 29.7 grain crops and leguminous plants 346 85.6 64.6 sunflower 541.6 170.9 53 sugar beet 142.9 31.2 3.8 potato 233.8 34.3 6.4 vegetables 72.8 12.8 -26.5 Stock-breeding 76.1 -16.5 -39.7 meat of all kinds (live weight) 114.3 -19.3 -42.2 beef 131.2 -19.8 -43.1 pork 95.4 -16.7 -42.1 poultry 32 -18.4 -32.8 mutton 119 -31.9 -51.8 eggs 67.8 36.5 -2.4 wool 108 -61.3 -77.8 * Joint ventures exclusive. All kinds of activity. Presented is ratio of profit to production costs of sold goods. ** Data cover collective agricultural enterprises Source: ICPS Analitycal report "Agricultural policy in Ukraine" 194 Statistical Appendix SECTION 8 Table 8.1 - Branch Composition of Industrial Production* (current prices, %) Ferrous Non-Ferrous Machme Wood & onstruction Light ood Electricity Fuel Metallurgy Metallurgy Chemicals Building Paper Materials Industry Industry Others 1995 12.3 14 23.4 1.6 7.6 15.1 2 3.1 2.7 14.5 3.7 1996 13.8 12.8 23.6 1.5 7.7 13.8 1.9 2.5 2 15.5 4.9 1997 14.1 11.8 25.3 1.5 6.9 14.2 1.7 2.5 1.6 16.2 4.2 1995 I 14.3 15 22.4 1.5 7.6 15.4 2.1 3.5 3.1 13.4 1.5 II 12.4 14.3 25.9 1.5 7.6 14.2 1,8 3.7 2.2 14.8 1.5 III 10.9 13.9 23.8 1.9 7.9 15.3 2 4.1 2.5 16.1 1.5 IV 12.4 12.6 21.3 1.6 7.8 14.8 2 3.3 2.8 19.7 1.6 1996 I 18.5 13.2 22 1.5 7.7 13.8 2.2 2.5 2.2 14.6 1.9 II 11.4 13 25 1.6 8.5 15 1.9 3.4 2.1 16.3 1.8 III 10.4 13.1 25 1.6 7.6 14.3 1.9 3.9 1.8 18.3 1.9 IV 14.4 12 22.6 1.4 6.9 12.7 1.6 3.1 1.9 21.7 1.7 1997 1 18.7 11.5 24.4 1.6 7.5 14 1.8 2.5 1.6 14.5 1.8 II 12.2 11.7 27.2 1.6 7.6 15.4 1.8 3.4 1.7 15.7 1.7 III 10.8 12.3 27.6 1.4 7.3 13.6 1.9 3.9 1.7 17.9 1.7 IV 14.8 11.8 22.5 1.5 6.1 13 1.5 3 1.6 22.9 1.4 1998 1 18.5 13.1 25.1 1.5 6.8 13.2 1.4 2.8 1.4 13.1 3.1 11 11.8 12.3 26.5 1.5 7.5 14.7 1.4 3.9 1.5 15.5 3.4 1996 Jan 19.5 13.5 22.5 1.4 7.6 13 1.9 2.4 2.1 14.3 1.7 Feb 19.9 12.8 20.4 1.3 7.7 14.1 2.3 2.4 2.3 14.8 2 Mar 16.2 13.3 22.9 1.6 7.7 14.2 2.3 2.7 2.3 14.7 1.9 Apr 13.3 12.7 24.9 1.5 8.9 14.6 1.9 3.1 2.4 14.8 1.9 May 10.1 13.1 25.2 1.7 8.6 16 1.7 3.4 1.9 16.3 1.9 Jun 10.6 13.1 24.9 1.7 7.8 14.5 2 3.8 1.9 18 1.7 Jul 10.4 12.5 25.9 1.7 7.7 13.6 2 4 1.7 18.6 1.9 Aug 10.6 13.5 25.3 1.5 7.2 14.4 1.9 3.9 1.9 18 2 Sep 10.3 13.5 23.9 1.6 7.9 15.1 1.9 3.8 1.9 18.4 1.9 Oct 11.9 11.9 21.8 1.3 6.6 13.2 1.7 3.4 2.1 24.4 1.7 Nov 14.2 12.1 22.6 1.3 6.8 11.9 1.5 3.1 1.9 23 1.7 Dec 16.9 11.9 23.4 1.5 7.1 13.1 1.7 2.9 1.9 17.9 1.7 1997 Jan 21 11 23.9 1.6 7.2 13.3 1.5 2.1 1.3 15.1 1.8 Feb 18.8 11.2 24 1.6 7.5 14.1 1.9 2.5 1.8 14.7 1.9 Mar 16.6 12.4 25.3 1.6 7.7 14.5 2 2.8 1.7 13.8 1.7 Apr 14.4 11.7 26.6 1.5 7.9 15.3 1.7 3.2 1.7 14.4 1.7 May 11.2 11.8 27.6 1.7 7.5 16 1.7 3.4 1.7 15.7 1.8 Jun 11 11.7 27.5 1.6 7.4 14.8 1.8 3.8 1.6 17.1 1.7 Jul 10.9 12 27.7 1.4 7.4 13.3 1.9 3.8 1.7 18.2 1.7 Aug 10.8 12.5 27.6 1.4 7.1 13.8 1.9 4 1.6 17.7 1.7 Sep 10.6 11.4 26.7 1.8 6.9 15.2 1.8 3.8 1.8 18.6 1.6 Oct 11.6 10.8 22 1.6 6.3 12.6 1.5 3.2 1.6 27.5 1.6 Nov 14.7 12 22.6 1.4 5.8 12.3 1.5 3 1.4 23.8 1.4 Dec 18.3 12.6 22.9 1.4 6.1 14.3 1.7 2.7 1.7 16.7 1.6 1998 Jan 20.2 12.7 24.9 1.5 6.7 12 1.2 2.4 1.3 13.4 3.6 Feb 19 12.9 24.7 1.5 6.9 13.4 1.5 2.9 1.4 13 2.7 Apr 13.5 12.4 26.6 1.4 7.5 14.2 1.5 3.6 1.5 14.3 3.3 May 10.8 12.7 27.6 1.5 7.8 14.1 1.4 3.8 1.4 15.2 3.6 Jun 11 11.8 25.2 1.5 7.2 15.9 1.4 4.1 1.5 17 3.4 * Excluding small businesses, collective and cooperative enterprises Source. Derzhkonsta, calculations of the Ministry of Ecounom Statistical Appendix 195 Table 8.2 - Industrial Production* (1995=100) Ferrous Non-Ferrous Machine Wood & Construction Light Food Electricity Fuel Metallurgy Metallurgy Chemicals Building Paper Materials Industry Industry Total 1995 100 100 100 100 100 100 100 100 100 100 100 1996 90.6 90.6 108.9 110.2 101.6 74.5 79.6 64.7 73.2 93.4 94.3 1997 87.6 96 119.4 112.5 98.1 70.1 75.1 61 68.2 80.8 93 1995 1 123.8 99.7 93.9 97 96.2 111.3 114 100.5 116.7 80.4 100.4 II 90 103.6 111.7 98.4 98.3 93.2 89.5 98.3 86.2 80.5 96 III 78.6 95.6 98.4 102.6 100.8 97.2 99.6 112 91.1 93.4 95 IV 107.6 101.1 96 101.9 104.7 98.2 96.9 89.2 106.1 145.8 108.6 1996 I 120.4 91.5 99.5 100.3 100.8 79.9 92.4 50.3 77 77.5 94.9 11 78.1 88.4 114.3 115.9 112.5 77.5 78.3 71.5 74.9 83.5 92.6 III 69.2 91.7 111.9 112.3 98.9 72.1 77.3 75.7 66.8 79.6 88.6 IV 94.8 91 109.8 112.5 94.2 68.5 70.3 61.3 74 133.2 100.9 1997 1 110.5 93.3 109.4 110.1 95.6 67.6 73.5 40.1 61.2 64.3 89.7 II 75.8 94.9 126.2 109.3 98.4 73.2 72.1 63.1 69.3 66.9 90.1 Ill 65.7 96.4 124.5 111.2 101.8 68.8 79.6 74.5 72.9 77.3 90.5 IV 98.4 99.1 117 119.5 96.9 70.7 75 66 69.5 114.5 101.4 19981 100.9 102.7 114.4 122.1 91.7 68.9 63.4 58.3 64.3 64.3 90.6 II 70.2 96.3 127.9 126.6 110.1 70.9 79.5 68.5 73.5 72.6 91.9 1996 Jan 130.8 94.8 94 108,4 98.4 73.5 80.6 46.5 67.9 74.6 93.7 Feb 113.4 84.2 94.6 84.3 99 80.3 93.2 46.3 77.7 75.4 90.9 Mar 117 95.6 110.1 108.1 105 86 103.4 58 85.5 82.4 100.1 Apr 91.6 89.2 115.9 111.9 115.2 84.2 85.6 68.4 86 85.4 96.8 May 72.7 88.6 118.8 118.2 105.5 74.1 72.9 71.9 70.4 81.1 91.3 Jun 70.1 87.2 108.3 117.6 116.6 74.3 76.5 74.1 68.3 83.9 89.8 Jul 70.5 88.9 114.3 114.5 98.5 69.3 79 81.8 67.6 84 89.7 Aug 67.6 97.4 113.6 111.3 100.4 67.6 77.8 73.9 68.3 77.3 88.6 Sep 69.6 88.7 107.8 111.3 97.9 79.5 75.1 71.5 64.6 77.4 87.5 Oct 81.2 87.3 106 103.4 92.1 72.3 73.9 67.3 80.5 159.6 102.9 Nov 91.1 93.1 107.6 116.9 91.7 63.2 61.1 59.9 69.6 148.1 101.5 Dec 112.1 92.5 115.8 117.1 98.7 70 75.9 56.6 71.7 91.9 98.2 1997 Jan 122.3 83.1 101 109.3 86.7 62.9 59.6 31.2 52.4 65.9 86.7 Feb 104.2 87.1 100.9 104.4 92.4 65 75.4 39 64.2 62.4 85.1 Mar 104.9 109.7 126.4 116.8 107.7 75.1 85.7 50.2 66.8 64.5 97.2 Apr 91.8 96.1 126.1 114.5 104.3 73.5 74.3 56.8 68.5 64.2 92.7 May 69.9 99 128.1 110.2 95.4 75.5 70.9 62.2 67.8 64.8 89.8 Jun 65.7 89.6 124.3 103.2 95.6 70.4 71.1 70.2 71.5 71.7 87.8 Jul 65.9 97.9 126 100.2 105 66.3 80.5 72.2 80.5 76.6 90.7 Aug 63.8 97.2 122.1 106.9 102.6 65.4 77.8 73.4 68 73.6 88.3 Sep 67.7 92.9 125.2 129 100.3 77.3 80.1 75.3 69 82.6 92.7 Oct 84.5 99.1 119.9 129.9 96 72.5 79.2 72.2 70.2 133.4 103.6 Nov 97.3 95.6 113.6 118.6 98.2 67.7 73.7 61.1 63.1 127.1 101.2 Dec 114 98.7 109.4 116.1 102.5 73 77.1 49.3 73.8 85.2 96.2 1998 Jan 113.4 85 106.4 127.1 104.9 59.1 67.8 43.5 56.5 64.1 86.5 Feb 104.2 96.7 104.7 121.2 103.4 64.9 81.9 48.3 63.6 60.9 87.2 Apr 82.9 100.2 127.6 123.8 114.4 70.9 85 65.1 72.1 68.2 93.6 May 65.8 95.6 129.5 128.5 113.1 68.1 76.2 68.5 71.4 71.6 90.9 Jun 61.8 95 124.3 127.6 102.6 73.7 77.3 71.7 76.5 78.2 91 * Excluding small businesses, collective and cooperative enterprises Source: State Statistics Committee, Ministry of Economy 196 Statistical Appendix Table 8.3 - Industrial Production* (% change on previous period) Ferrous Non-Ferrous Miaclune Wood & .onstruction Light Pood Electricity Fuel Metallurgy Metallurgy Chemicals Building Paper Materials Industry Industry Total 1995 1996 -6.9 -6.7 11.9 8 -3.4 -26.1 -18.6 -34.2 -24.6 -7.2 -5.1 1997 -2.6 4.5 7.7 2.7 -0.6 -3.6 -5.1 -7.9 -7.9 -14.6 -1.8 1995 1 II -25.9 0.3 21 -6.3 -4.1 -14.3 -22.6 -0.9 -24.9 6.4 -3.5 III -8.9 -0.5 4.1 4.1 3.3 2 17.5 17.4 11.7 20.5 -0.1 IV 36.8 -2.5 -0.6 -0.6 3.8 0.9 -2.7 -20.3 16.4 51 14.2 19961 11.9 -9.4 3.7 -1.6 -4.6 -18.7 -4.7 -43.8 -27.4 -49.9 -12.6 II -35.1 -3.5 15 15.6 4 -3.2 -15.2 42.4 -2.9 10.9 -2.5 III -11.5 3.7 -2.1 -3.1 -7.5 -7 -1.3 6 -10.8 -4 -4.3 IV 36.5 -0.8 -2 0.1 -4.8 -5.2 -9.1 -19.1 10.5 76.9 13.8 1997 1 17.5 1.6 -1.5 -2 2.4 0.2 4.6 -34.4 -16.7 -55.7 -11.4 II -31.4 1.9 15.4 -0.8 3.3 8.2 -2 57.2 13.3 6 0.6 III -13.2 1.3 -1.4 2.5 4.3 -4.7 10.2 16.8 4.8 15.3 0.5 IV 49.8 1.9 -8.2 8.5 -3.7 2 -3.5 -17.3 -4.8 54.8 10.8 1998 I 12.5 -1.4 -0.4 4.4 7.9 -8.5 2.8 -24.3 -7.6 -50 -9.6 II -35.6 0.7 3.7 0.1 0.7 7.3 0.4 50.1 14.3 18.3 -1.3 1996 Jan 5.8 -4.1 -6 19.3 -3.6 -25.7 -17.3 -37.2 -23.7 -24.2 -9.5 Feb -13.3 -11.2 0.6 -22.2 0 9.3 15.6 -0.4 14.5 -0.9 -3 Mar 3.1 13.5 16.4 28.2 6.8 7 11 25.2 10 11.5 10.1 Apr -21.7 -6.6 5.3 3.6 9.1 -2.1 -17.2 18 0.6 4.6 -3.3 May -20.6 -0.7 2.5 5.6 -8.2 -12 -14.8 5.1 -18.2 -4.1 -5.7 Jun -3.6 -1.6 -8.8 -0.5 -10.6 0.3 4.8 3.1 -3 5.3 -1.7 Jul 0.6 1.9 5.6 -2.7 2.4 -6.8 3.3 10.3 -1 0.9 -0.1 Aug -4.1 9.6 -0.6 -2.8 2 -2.4 -1.5 -9.6 1 -9.8 -1.2 Sep 2.9 -9 -5.2 0 -2.6 17.6 -3.4 -3.3 -5.5 -0.9 -1.2 Oct 16.6 -1.5 -1.7 -7.1 -5.9 -9.1 -1.7 -5.9 24.7 122.7 17.5 Nov 12.2 6.6 1.5 13 -0.4 -12.6 -17.3 -10.9 -13.6 -6.7 -1.3 Dec 23.1 -0.7 7.7 0.2 7.6 10.7 24.2 -5.6 3.1 -40.8 -3.3 1997 Jan 9.1 -10.2 -12.8 -6.7 -12.1 -10.2 -21.5 -44.8 -26.9 -32.1 -11.7 Feb -14.8 5.1 1.3 -4.5 7.9 3.6 26.6 24.8 22.5 -4.9 -1.8 Mar 0.7 25.9 24.8 11.9 16.6 15.5 13.6 28.8 4 3.2 14.2 Apr -12.5 -12.4 -0.3 -2 -3.2 -2.1 -13.3 13.2 2.5 -1.4 -4.6 May -23.9 3 1.6 -3.7 -8.5 2.8 -4.5 9.4 -1 5.1 -3.2 Jun -6 -9.5 -3 -6.4 0.2 -6.8 0.2 13 5.5 10.6 -2.2 Jul 0.4 9.3 1.4 -2.9 9.8 -5.8 13.3 2.8 12.6 7.4 3.3 Aug -3.3 -0.7 -3.1 6.7 -2.2 -1.4 -3.4 1.6 -15.5 -7.3 -2.6 Sep 6.2 -4.4 2.5 20.7 -2.3 18.1 3 2.6 1.4 12.2 5 Oct 24.8 6.6 -4.2 0.7 -4.3 -6.1 -1.1 -4.1 1.7 73.2 11.7 Nov 15.1 -3.5 -5.3 -8.7 2.3 -6.7 -6.9 -15.4 -10.1 -4.5 -2.3 Dec 17.2 3.2 -3.7 -2.1 4.4 7.9 4.5 -19.2 17 -37.7 -5 1998 Jan 1.1 -14.5 -1.5 9.9 1.5 -19.4 -12.5 -23.1 -22.8 -23.8 -9.9 Feb -8 13.2 -0.3 -4.6 -2.1 8.7 20 16.7 12.5 -5 0.8 M 4.9 14.8 17.7 7.8 11.9 13 8.6 26.5 9.7 11.8 12.5 Apr -24.1 -9 -5.7 -5.4 -1.9 -3.5 -3.8 14.1 2.2 2.6 -7.1 May -20.7 -4.5 1.5 3.8 -1.1 -3.9 -10.4 8 -0.9 7.6 -2.7 Jun -6.2 1.5 -5.7 -0.7 -9.6 8.1 1.4 8.1 6.4 10.6 -0.2 Excfuding sall - size enteiprises and ancillary industry ** Including medical in,dstty Source: State Statistics Committee, Ministry of Economy Statistical Appendix 197 Table 8.4 - Industrial Production* (% change on a year earlier) Electricity Fuel Ferrous Non-Ferrous Chemicals Machine Wood & Construction Light Food Total Metallurgy Metallurgy * Building ** Paper Materials Industry Industry 1996 -6.9 -6.7 11.9 8 -3.4 -26.1 -18.6 -34.2 -24.6 -7.2 -5.1 1997 -2.6 4.5 7.7 2.7 -0.6 -3.6 -5.1 -7.9 -7.9 -14.6 -1.8 1996 I 3.5 -4.3 12.8 -4.7 -1.9 -28.3 -15.7 -47.9 -29.1 -3 -3.6 11 -9.4 -7.9 7.2 17.6 6.4 -19 -7.6 -25.1 -8.4 1.1 -2.5 III -12 -4.1 13.9 9.5 -4.7 -26.1 -22.4 -32.4 -26.8 -19.5 -6.7 IV -12.2 -10.1 14.5 10.3 -12.6 -30.6 -27.6 -31.3 -30.5 -5.6 -7.2 1997 I -7.5 0.9 8.6 9.9 -6.1 -13.8 -20.3 -20 -17.3 -16.5 -6 II -2.3 6.4 9.2 -5.8 -6.8 -3.7 -7.9 -11.6 -5.8 -20.2 -3.1 III -4.3 3.9 9.9 -0.4 5.1 -0.9 2.8 -2.5 9.4 -4.1 2.1 IV 4.8 6.7 2.9 8.1 6.3 5.3 9.1 -0.4 -5.8 -16.1 -0.6 1998 I 0.4 3.4 4.1 15.2 12 -3.8 25.7 14.9 4.4 -3.3 1.7 II -5.8 2.4 -6.5 16.2 9.2 -4.7 17.8 9.6 5.2 7.4 -0.4 1996 Jan 3.8 3.2 11.5 -2.8 2.1 -29.8 -26.1 -46.8 -38.7 -7.4 -3.6 Feb 3.7 -12.7 15.8 -12.5 -1 -23.3 -15.7 -49.5 -28 -3.5 -3.4 Mar 3 -3.9 11.2 -0.1 -6 -30.9 -5.2 -47.2 -22 1.8 -3.8 Apr -5.6 -6.3 11.6 5.6 11.4 -19.7 4.3 -26.7 -1.5 14.7 0.6 May -12.7 -12.5 8.5 19.9 5.2 -15.2 -13.3 -19.9 -7.6 -3 -4.2 Jun -10.9 -5.1 0.8 28.9 2.5 -21 -13.4 -28 -15.9 -6.5 -4.3 Jul -11.6 -13.4 9.5 8.8 4.4 -27.7 -19.2 -26.7 -13.8 -6.4 -5.7 Aug -13.7 3 15.4 11.9 -1.4 -28.7 -19.9 -35.5 -16.1 -18.2 -5.5 Sep -10.8 -1 17.3 8 -8 -21.7 -27.5 -3.5 -43.1 -31.7 -9 Oct -10.9 -16.6 9.4 -3.4 -18.9 -28.6 -27.6 -36.6 -36.7 -9.4 -9.5 Nov -15.7 -6.5 18.5 8.1 -13.1 -33.2 -33.2 -31.7 -32.4 -3.8 -6.7 Dec -9.4 -6.5 15.9 28.9 -5.3 -29.4 -22 -23.6 -19.5 -1.8 -5.1 1997 Jan -6.5 -12.5 7.5 0.8 -13.8 -14.6 -26.2 -32.2 -22.7 -12.1 -7.5 Feb -7.6 2.5 6.1 23.6 -7 -16.6 -19 -15.8 -14.1 -15.5 -6.7 Mar -9.5 13.7 13.6 8 1.8 -11.5 -17.3 -13.3 -18.5 -21.8 -3.3 Apr 0.8 7 7.5 2.1 -9.6 -10.4 -13.2 -16.9 -17.2 -26.2 -4.6 May -3.3 10.7 6.7 -6.9 -10.1 3.9 -2.7 -13.6 -2.5 -19.3 -1.8 Jun -5.6 1.8 13.4 -12.5 0.6 4.1 -7.1 -5.4 5.6 -15.2 -2.6 Jul -5.8 9.3 8.8 -12.6 8 -3.4 2.1 -11.9 20.1 -9.6 0.8 Aug -5 -1.1 6.2 -3.9 3.5 -2.3 0.1 -0.6 0.4 -7.2 -0.5 Sep -2 3.9 15 16 3.8 2.5 6.7 5.4 7.5 5 6.2 Oct 4.8 12.5 11.7 25.5 5.7 3 7.3 7.1 -12.1 -18.4 0.6 Nov 7.7 1.9 4.5 1.4 8.4 8 20.8 1.9 -8.8 -16.4 -0.5 Dec 2.2 5.9 -6.6 -0.8 5.2 5.3 1.7 -12.8 3.4 -11.8 -2.2 1998 Jan -5.8 1.8 7.7 16.8 21.6 -6.3 35.8 21.6 8.6 -5.5 0.8 Feb 1.8 9.6 6.4 16.6 10.3 -1.6 26.6 13.6 -0.3 -6.1 3 Mar 6 -0.2 -0.1 12.4 5.8 -3.8 18.4 11.6 5.3 1.8 1.5 Apr -8 3.7 -5.5 8.4 7.2 -5.1 21.3 12.4 4.9 5.9 -1.3 May -4.1 -3.9 -5.6 16.9 15.9 -11.3 16.5 11 5 7.8 -0.9 Jun -4.4 7.8 -8.3 24 4.5 2.8 15.4 6.2 5.9 7.9 1.1 * Excluding small - size enterprises and ancillary industry ** Including medical indrtry Source: State Statistics Committee, Minstry ofEconomy 198 Statistical Appendix Table 8.5 - Ukraine: Power Sector Financial Recoverv Plan .Ianuari y25. 1999 97Q3 Dec 97Q4 Jan Feb March 98Q1 April May June 98Q2 Jul Aug Sept 98Q3 Oct Nov Dec 98Q4 99Q1 99Q2 t.11 19 , 11 9821 Ju 1 1 11Sept PerformanceIndicators Actual 1997 Actual 1998 1998 1998 Actual 1998 1998 1998 Actual 1998 1998 1998 Actua 1998 1998 1998 Target Target Targect Actua etuf l Actual Actual Actual Actual Acton A etuai Actual Acutu a Actual 1. Oblenergo electricity collection rjte to sl,0 accoums. eXct kievenergo 1% of -aout billedl 1.1 Total 93.9 108.2 100.4 43.2 84.0 72.9 66.1 88.4 101.0 122.8 103,0 87.2 99.0 79.6 88.2 41.2 44.2 99.8 104 106 106 L.2 C-h 10.2 12.6 10.6 9.4 11.6 10.3 10.4 12.3 13.2 11.1 12.2 1.3 9.2 10.0 10.2 7.0 6.3 6.1 22 25 30 2. EneIrgoatom collection rdte [%X, olamtaut hilledl 2.1 Total 106.5 122.1 89.7 43.9 65.4 79.1 79.1 110.0 91.0 134.0 110.5 99.2 98.3 119.7 107.0 55.1 73.2 134.1 104 106 106 2.2 Cash 9.3 7.5 7.2 5.8 5.7 7.9 7.9 8.4 8.3 6.0 7.7 6.3 3.6 4.5 4.6 4.5 4.3 3.6 22 25 30 3 Four itssil generotors collection toa 1% of amount billedl 3.1 Total 87.9 112.1 88.2 61 138.3 78.2 90.6 116.1 95.1 94.5 101.2 76.8 88.6 95.6 86.8 27.2 27.9 65.1 104 106 106 3.2 Cash 7.9 8.7 8.2 7 5.6 6.3 6.3 7.2 9.6 6.5 7.7 5.7 5.7 5.7 5,7 3.9 3.5 4 22 25 30 4. Retailt anff dhecace [actual taiffa % 100 100 100 of market tarill] 5. FuColst, 4 Fosil (eaerto s 24 24 22 1l 997V/MWi sld 6. reaxptof4sgeneators 5 -7 -6 2.5 30 50 50 [19975/quarter. millioni 7a. Oblenergodehb to Energomarket [19975 1,368 1347 1,347 1,450 1,484 1,580 1,580 1604 1.555 1508 1,508 1,486 1,412 959 959 1.117 1,292 1,290 1,227 1,120 1,006 miillionl 7b. Oblenergodebito nergomarket [lIx 2.506 2,506 2,872 2,967 3,160 3,160 3,208 3.203 3,112 3112 3,171 3,177 3.262 3,262 3,828 4,426 4,421 millionj 8. OIlenergo debt to Energotarket [days. 120 120 129 132 141 141 143 139 134 134 132 126 85 85 100 115 115 112 102 92 annualj 9. Elergomtarketdebttogenerato,rs[19975 1,321 1.338 1,338 1,438 1,416 1,498 1,498 L463 1.444 1.403 1,403 1,394 1,348 872 872 1.061 1251 1.291 1,227 1,120 1,006 ilfionl 9b. Energomarketdebitogeneators[Is 2.488 2,488 2,696 2,832 2,996 2,996 2.926 2.974 2,896 2,896 2,975 3.033 2.964 2,964 3.635 4,287 4,425 millioni Information Indicators 10. Wholesalc 1-hse Prie(fom Fossil 3.22 3.15 3.18 3.15 3.00 3.24 3.13 3.21 3.39 3.37 3.32 3.48 3.34 3.30 3.38 3.62 3.41 3.25 Generators) [US centskWflt l1. Energatoma SalePricc[UISccnts,'kWhll 2.4 2.4 2.4 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.54 12. IlydroSalePricc([UScents'ckWhil 0.96 0.96 0.96 0.96 0,96 0.96 0.96 0.96 0.96 0.96 0.96 0.96 0.96 0.92 0.94 0.51 0.28 0,32 13. WholesalePricc(toSapplier.s) 2.93 2.93 2.93 2,89 2.89 2.96 2.90 2.91 2.67 2.66 2.75 2.90 2.79 2.68 2.80 2.84 2.78 2.65 JUS centskWhI 14. Averäge retail LarifT (NERC planned) 3.76 3.76 3.76 3.82 3.85 4.12 3.91 3.95 4.15 4.38 4.14 4.23 4.26 3.78 4.08 3.84 3.76 3.79 1 iS centskWhl Nao. The paynats colion bencmarks or guaom ure to be lnhalilzd follovig ~BRD, Owprsion Coission evew oe proposed KhoelrniLk 2/Roo 4 m,rcar ompletion pojeu S,ac ti. Wtn-ld B,mk SECTION 9 Table 9.1 - Consumer Price Index (December 1991=100) 1992 1993 1994 1995 1996 1997 1998 January 385 3,638 256,770 1,308,311 3,326,109 4,341,496 4,738,637 February 444 4,686 289,123 1,545,115 3,572,241 4,393,593 4,748,114 March 498 5,722 305,603 1,721,258 3,679,408 4,397.987 4,757,610 April 536 7,072 323,939 1,821,091 3,767,714 4,433,171 4,819,459 May 613 9,024 340,784 1,904,862 3,794,088 4,468,636 4,819,459 June 775 15,494 354,075 1,996,295 3,797882 4,473,105 4,819,459 July 947 21,319 361,510 2,100,102 3,801,680 4,477,578 4,776,084 August 1,025 25,945 370,909 2,196,707 4,018,376 4,477,578 4,785,636 September 1,134 46,779 397,986 2,508,639 4,098,744 4,531,309 4,967,490 October 1,274 77,701 487,931 2,736,925 4,160,225 4,572,091 5,275,475 November 1,555 112,899 840,704 2,906,615 4,210,147 4,613,240 5,433,739 December 2101 215.411 1.079.464 3.040.319 4.248.039 4.677.825 5.613.052 nercentae change onsame month of the previous year 1992 1993 1994 1995 1996 1997 1998 January ... 844.5 6957.7 409.5 154.2 30.5 9.1 February ... 955.1 6070.0 434.4 131.2 23.0 8.1 March ... 1049.2 5241.3 463.2 113.8 19.5 8.2 April ... 1220.1 4480.7 462.2 106.9 17.7 8.7 May ... 1372.4 3676.6 459.0 99.2 17.8 7.9 June ... 1898.5 2185.3 463.8 90.2 17.8 7.7 July ... 2152.2 1595.7 480.9 81.0 17.8 6.7 August ... 2430.8 1329.6 492.2 82.9 11.4 6.9 September ... 4025.8 750.8 530.3 63.4 10.6 9.6 October ... 5996.9 528.0 460.9 52.0 9.9 15.4 November ... 7161.3 644.7 245.7 44.8 9.6 17.8 December ... 10156.0 401.1 181.7 39.7 10.1 20.0 nerentace chanoe on the nreviouj month 1992 1993 1994 199,5 1996 1997 1998 January 285.2 73.2 19.2 21.2 9.4 2.2 1.3 February 15.3 28.8 12.6 18.1 7.4 1.2 0.2 March 12.1 22.1 5.7 11.4 3.0 0.1 0.2 April 7.6 23.6 6.0 5.8 2.4 0.8 1.3 May 14.4 27.6 5.2 4.6 0.7 0.8 0.0 June 26.5 71.7 3.9 4.8 0.1 0.1 0.0 July 22.1 37.6 2.1 5.2 0.1 0.1 -0.9 August 8.3 21.7 2.6 4.6 5.7 0.0 0.2 September 10.6 80.3 7.3 14.2 2.0 1.2 3.8 October 12.4 66.1 22.6 9.1 1.5 0.9 6.2 November 22.0 45.3 72.3 6.2 1.2 0.9 3.0 December 35.1 90.8 28.4 4.6 0.9 1.4 3.3 Source: Presidential Administration 200 Statistical Appendix Table 9.2 - Consumer Price Index by Components (%) Month-on-month change Cumulative change since December of the previous year Year Month food non-food paid food non-food composite products products services composite products products paid services 1991 290.0 331.0 248.0 265.0 1992 2,000.0 1,692.0 2,013.0 3,489.0 1993 10,156.0 12,078.0 11,101.0 9,106.0 1994 401.0 373.2 373.1 781.4 1995 January 21.2 23.2 18.8 21.0 21.2 23.2 18.8 21.0 February 18.1 11.9 10.3 70.0 43.1 37.9 31.0 105.7 March 11.4 10.0 9.7 18.6 59.5 51.6 43.7 144.0 April 5.8 4.8 4.9 10.2 68.7 58.9 50.8 168.8 May 4.6 4.6 3.2 7.1 76.5 66.2 55.6 187.9 June 4.8 1.0 3.4 16.9 84.9 67.9 60.9 236.6 July 5.2 -0.1 3.6 19.5 94.6 67.7 66.7 302.2 August 4.6 4.3 6.5 3.4 103.5 74.9 77.5 315.9 September 14.2 11.3 8.4 24.6 132.4 94.7 92.4 418.2 October 9.1 12.0 5.8 6.1 153.5 118.1 103.6 449.8 November 6.2 7.9 4.7 4.1 169.3 135.3 113.2 472.4 December 4.6 6.3 3.2 2.1 181.7 150.1 120.0 484.4 1996 January 9.4 6.8 3.1 19.3 9.4 6.8 3.1 19.3 February 7.4 4.4 3.1 15.7 17.5 11.5 6.3 38.0 March 3.0 2.3 2.4 4.5 21.0 14.1 8.8 44.2 April 2.4 1.4 1.5 4.4 23.9 15.7 10.5 50.6 May 0.7 -0.2 1.1 2.4 24.8 15.4 11.7 54.2 June 0.1 -1.0 1.0 1.4 24.9 14.3 12.8 56.4 July 0.1 -2.5 0.8 4.7 25.0 11.4 13.7 63.7 August 5.7 -1.7 0.8 24.0 32.2 9.5 14.6 103.0 September 2.0 2.4 1.1 2.0 34.8 12.2 15.9 107.1 October 1.5 2.0 1.1 1.1 36.8 14.4 17.2 109.3 November 1.2 1.6 0.8 0.8 38.5 16.2 18.1 111.0 December 0.9 1.0 0.6 0.8 39.7 17.4 18.8 112.7 1997 January 2.2 3.4 0.5 1.5 2.2 3.4 0.5 1.5 February 1.2 1.8 0.4 0.7 3.4 5.3 0.9 2.2 March 0.1 -0.4 0.3 0.6 3.5 4.8 1.2 2.8 April 0.8 1.1 0.2 0.6 4.4 6.0 1.4 3.4 May 0.8 1.3 0.1 0.4 5.2 7.4 1.5 3.9 June 0.1 -0.2 0.1 0.6 5.3 7.2 1.6 4.5 July 0.1 -0.2 0.1 0.7 5.4 6.9 1.7 5.2 August 0.0 -0.3 0.1 0.3 5.4 6.6 1.8 5.5 September 1.2 2.1 0.2 0.3 6.7 8.9 2.0 5.8 October 0.9 1.2 0.3 0.7 7.6 10.2 2.3 6.6 November 0.9 1.3 0.5 0.3 8.6 11.6 2.8 6.9 December 1.4 2.2 0.1 0.9 10.1 14.1 2.9 7.9 1998 January 1.3 1.9 0.1 1.0 1.3 1.9 0.1 1.0 February 0.2 0.3 0.0 0.1 1.5 2.2 0.1 1.1 March 0.2 0.3 0.0 0.1 1.7 2.5 0.1 1.2 April 1.3 1.9 0.1 1.1 3.0 4.5 0.2 2.3 May 0.0 -1.2 0.0 2.1 3.0 3.2 0.2 4.5 June 0.0 -1.2 0.0 2.1 3.0 2.0 0.2 6.7 July -0.9 -2.3 0.1 0.8 2.1 -0.4 0.3 7.5 August 0.2 -0.1 0.3 0.6 2.3 -0.5 0.6 8.2 September 3.8 4.0 6.1 1.9 6.2 3.5 6.7 10.2 October 6.2 6.7 12.0 1.4 12.8 10.4 19.5 11.8 November 3.0 4.3 2.9 0.9 16.2 15.2 23.0 12.8 December 3.3 6.0 0.9 0.2 20.0 22.1 24.1 13.0 Source: Presidential Administration Statistical Appendix 201 Table 9.3 - Producer Price Index (December 1993=100) 1991* 1992* 1993* 1994 1995 1996 1997 1998 January ... ... ... 134.1 1,129.2 2,458.5 2,799.4 2,951.3 February ... ... ... 162.7 1,257.9 2,529.8 2,810.6 2,977.9 March ... ... ... 176.2 1,374.9 2,603.2 2,827.5 2,998.7 April ... ... ... 185.7 1,445.0 2,642.2 2,852.9 3,013.7 May ... ... ... 190.1 1,547.6 2,663.3 2,861.5 3,013.7 June ... ... ... 195.8 1,680.7 2,674.0 2,872.9 3,019.7 July ... ... ... 204.5 1,753.0 2,690.0 2,884.4 3,037.8 August ... ... ... 228.8 1,866.9 2,700.8 2,884.4 3,074.3 September ... ... ... 258.1 2,051.7 2,727.8 2,887.3 3,363.3 October ... ... ... 310.7 2,224.0 2,730.5 2,919.1 3,723.2 November ... ... ... 650.3 2,317.4 2,763.3 2,913.3 3,853.5 December ... ... ... 874.0 2,377.7 2,788.2 2,927.9 3,965.3 vercenta e chanee on same month of the orevious year 1991* 1992* 1993* 1994 1995 1996 1997 1998 January ... ... ... 5902.3 742.1 117.7 13.9 5.4 February ... ... ... 5927.4 673.1 101.1 11.1 6.0 March ... ... ... 5749.1 680.3 89.3 8.6 5.9 April ... ... ... 5120.1 678.1 82.8 8.0 5.5 May ... ... ... 3412.1 714.1 72.1 7.4 5.2 June ... ... ... 1802.9 758.4 59.1 7.4 5.1 July ... ... ... 1416.5 757.2 53.4 7.2 5.1 August ... ... ... 1175.9 716.0 44.6 6.8 6.4 September ... ... ... 715.4 694.9 33.0 5.8 16.3 October ... ... ... 631.6 615.8 22.8 6.9 27.3 November ... ... ... 1050.4 256.4 19.2 5.4 32.1 December ... ... ... 774.0 172.0 17.3 5.0 35.1 oercenta2e chanke on the orevious month 1991 1992 1993 1994 1995 1996 1997 1998 January 61.8 752.3 118.2 34.1 29.2 3.4 0.4 0.8 February 6.3 29.4 20.8 21.3 11.4 2.9 0.4 0.9 March 4.3 14.9 11.6 8.3 9.3 2.9 0.6 0.7 April 7.6 19.3 18.1 5.4 5.1 1.5 0.9 0.5 May 3.8 8.4 52.2 2.4 7.1 0.8 0.3 0.0 June 1.8 17.4 90.1 3.0 8.6 0.4 0.4 0.2 July 4.5 -0.8 31.0 4.4 4.3 0.6 0.4 0.6 August 3.3 9.0 33.0 11.9 6.5 0.4 0.0 1.2 September 3.1 8.6 76.5 12.8 9.9 1.0 0.1 9.4 October 4.5 25.1 34.2 20.4 8.4 0.1 1.1 10.7 November 9.1 17.8 33.1 109.3 4.2 1.2 -0.2 3.5 December 1.6 27.2 76.9 34.4 2.6 0.9 0.5 2.9 percentage change in quarterly average on the previous quarter Q1 105.0 9.7 1.9 1.9 Q2 17.0 52.0 142.5 20.9 24.2 5.1 1.8 1.3 Q3 6.4 11.3 227.4 20.9 21.4 1.7 0.8 4.7 Q4 18.6 44.1 215.6 165.5 22.0 2.0 1.2 21.8 Annual average(%) 2491.7 4698.3 1134.5 488.9 52.0 7.7 13.0 * Before 1994, PPI was calculated by Zaurbeck - Carly formula Source: Presidential Administration 202 Statistical Appendix Table 9.4 - Producer Price Index by Components vercentat-e chanve on the previous month Total 7 Energy industry Fuel industry - Ferrous metallury Chemical industry Petrochemical industry 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 0 January 3.4 0.4 0.8 3.6 0.4 3.2 -0.2 0.6 2.1 3.6 0.5 0.6 4.6 -0.1 -0.2 0.0 0.6 -0.1 February 2.9 0.4 0.9 4.4 -2.4 0.3 1.7 -1.9 1.6 3.3 -0.2 2.2 5.0 -0.1 1.4 3.1 2.9 -12.6 March 2.9 0.6 0.7 1.1 1.6 0.0 4.0 1.3 0.3 1.8 -0.9 2.0 2.9 -0.3 2.2 1.7 -0.4 0.1 April 1.5 0.9 0.5 2.1 3.1 0.8 0.1 1.0 0.2 0.7 1.1 -0.1 1.2 -2.1 0.8 0.4 0.7 2.4 May 0.8 0.3 0.0 -1.1 0.2 -0.4 0.9 2.1 -0.5 0.8 -0.4 -0.4 1.4 -0.6 0.4 0.7 -0.1 -0.1 June 0.4 0.4 0.2 3.0 -0.3 1.3 -1.0 -0.3 0.0 0.3 -1.2 0.1 0.0 0.2 0.0 4.4 0.2 0.2 July 0.6 0.4 0.6 -0.1 0.8 1.8 0.2 -0.3 0.3 -0.2 -0.1 1.0 1.1 0.3 1.0 5.3 4.5 0.0 August 0.4 0.0 1.2 2.6 -2.2 3.3 -1.1 -0.4 0.9 -0.4 0.7 1.2 0.3 -0.3 1.6 0.0 0.0 0.3 September 1.0 0.1 9.4 1.7 -0.3 20.4 1.2 0.6 11.6 0.1 -0.7 13.9 0.6 -0.1 12.6 -0.1 0.2 0.7 October 0.1 1.2 10.7 -3.3 2.1 19.5 3.1 0.2 8.8 -1.0 0.4 17.0 0.2 0.2 8.5 0.4 0.0 10.0 November 1.2 -0.2 3.5 8.1 -0.9 4.3 -0.9 1.0 3.4 0.3 -0.4 1.3 1.3 -2.0 3.7 -0.1 0.0 -1.7 December 0.9 0.5 2.9 1.9 0.0 0.2 0.0 0.6 2.7 2.0 0.9 4.6 0.4 0.6 4.4 -0.6 0.0 -0.2 nerYtagp change onth nrIvin mnnth Macin bildn7-T Wood & paper industry Construction materials Light industry 7 7 Food industry' CP1 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 January 6.6 0.7 0.3 6.2 0.8 0.1 4.1 0.2 0.0 2.5 0.8 -0.2 0.2 -1.1 -0.3 9.4 2.2 1.3 February 3.5 3.4 0.8 3.3 0.5 0.2 2.5 0.2 0.2 1.6 0.8 0.0 -1.0 1.1 0.2 7.4 1.2 0.2 March 5.3 1.3 0.4 2.9 0.4 -0.3 4.3 0.1 0.4 3.5 0.4 0.3 0.2 0.3 0.1 3.0 0.1 0.2 April 3.0 1.0 0.5 3.5 1.0 0.0 1.6 0.3 -0.1 2.1 -0.9 1.2 1.3 0.2 0.8 2.4 0.8 1.3 May 1.1 0.8 0.6 1.5 -0.1 0.4 3.6 0.4 0.2 0.5 -1.2 1.4 0.1 0.3 0.7 0.7 0.8 0.0 June -1.0 -0.2 0.2 -0.4 1.0 0.3 0.7 0.1 0.3 0.6 -0.7 0.1 0.3 1.1 0.7 0.1 0.1 0.0 July 1.1 0.6 -0.3 1.3 0.3 -0.1 1.2 -1.1 0.6 1.6 0.1 -0.1 0.7 2.3 0.0 0.1 0.1 -0.9 August 1.4 0.5 1.3 -0.3 0.1 0.8 0.6 1.1 0.3 0.0 0.2 0.3 0.5 0.7 0.6 5.7 0.0 0,2 September 1.2 1.2 3.9 2.0 -0.3 2.2 1.8 -0.3 2.3 1.0 0.8 2.3 1.2 -0.4 3.8 2.0 1.2 3.8 October 1.0 0.5 6.8 2.1 -0.2 6.9 -1.5 0.5 11.9 0.7 0.5 10.1 -0.6 5.9 2.4 1.5 0.9 6.2 November 0.9 0.7 4.5 -0.2 0.0 3.8 1.2 -0.3 4.8 2.3 0.4 7.8 -1.5 -0.7 0.6 1.2 0.9 3.0 December 0.9 0.6 2.7 0.2 0.1 3.1 0.1 0.4 3.2 -0.1 0.5 1.2 -1.5 -0.4 1.5 0.9 1.4 3.3 Excluding fiAsh, cat, oil & dairy industries Source: Presidential Administration Table 9.4 - Producer Price Index by Components (continued) nercentate chanwe on December of the revious vear Total Fnervy industry Fuel industry Ferrous metallurgy Chemical industry Petrochernical industry 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 January 3.4 0.4 0.8 3.6 0.4 3.2 -0.2 0.6 2.1 3.6 0.5 0.6 4.6 -0.1 -0.2 0.0 0.6 -0.1 February 6.4 0.8 1.7 8.2 -2.0 3.5 1.5 -1.3 3.7 7.0 0.3 2.8 9.8 -0.2 1.2 3.1 3.5 -12.7 March 9.5 1.4 2.4 9.3 -0.4 3.5 5.6 0.0 4.0 8.9 -0.6 4.9 13.0 -0.5 3.4 4.9 3.1 -12.6 April 11.1 2.3 2.9 11.6 2.6 4.4 5.7 1.0 4.2 9.7 0.5 4.8 14.4 -2.6 4.2 5.3 3.8 -10.5 May 12.0 2,6 2.9 10.4 2.8 4.0 6.6 3.1 3.7 10.6 0.1 4.4 16.0 -3.2 4.6 6.0 3.7 -10.6 June 12.5 3.0 3.1 13.7 2.5 5.3 5.5 2.7 3.7 10.9 1.3 4.5 16.0 -2.9 4.6 10.7 4.0 -10.4 July 13.1 3.4 3.7 13.6 3.4 7.2 5.8 2.4 4.0 10.7 1.2 5.5 17.2 -2.7 5.6 16.5 8.7 -10.4 August 13.6 3.4 4.9 16.6 1.1 10.7 4.6 2.0 4.9 10.3 1.9 6.8 17.6 -3.0 7.3 16.5 8.6 -10.1 September 14.7 3.5 14.8 18.6 0.8 33.3 5.8 2.6 17.1 10.4 1.2 21.6 18.3 -3.0 20.8 16.4 8.8 -9.5 October 14.8 4.6 27.1 14.6 2.9 59.3 9.1 2.8 27.4 9.3 1.6 42.3 18.5 -2.8 31.1 16.9 8.8 -0.4 Novemscr 16.2 4.4 31.5 23.9 2.0 66.1 8.1 3.9 31.7 9.6 1.2 44.1 20.1 -4.8 36.0 16.8 8.7 -2.1 December 17.3 5.0 35.3 26.3 2.0 66.4 8.1 4.5 35.3 11.8 2.0 50.7 20.6 -4.3 42.0 16.1 8.7 -2.3 percenta2e change on December of the previous year Machine building Wood & paper industry Construction materials Light industry Food industry CPI 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 January 6.6 0.7 0.3 6.2 0.8 0.1 4.1 0.2 0.0 2.5 0.8 -0.2 0.2 -2.5 -0.3 9.4 2.2 1.3 February 10.3 4.1 1.1 9.7 1.3 0.3 6.7 0.4 0.1 4.1 1.6 -0.1 -0.8 0.0 -0.2 17.5 3.4 1.5 March 16.2 5.5 1.5 12.9 1.7 0.0 11.3 0.5 0.5 7.8 2.0 0.2 -0.6 0.3 -0.1 21.0 3.5 1.7 April 19.7 6.5 2.1 16.8 2.7 0.0 13.1 0.8 0.4 10.0 1.1 1.4 0.7 0.5 0.8 23.9 4.4 3.0 May 21.0 7.4 2.7 18.6 2.6 0.4 17.1 1.2 0.6 10.6 -0.1 2.7 0.8 0.8 1.5 24.8 5.2 3.0 June 19.8 7.1 2.8 18.1 3.8 0.7 18.0 1.3 1.0 11.3 -0.7 2.8 1.1 2.0 2.2 24.9 5.3 3.0 July 21.1 7.7 2.5 19.7 4.2 0.6 19.4 0.2 1.6 13.0 -0.6 2.7 1.8 4.3 2.2 25.0 5.4 2.1 August 22.8 8.2 3.8 19.3 4.1 1.4 20.1 1.3 1.9 13.0 -0.4 3.0 2.3 5.1 2.8 32.2 5.4 2.3 September 24.3 9.6 7.8 21.7 3.8 3.6 22.3 1.0 4.2 14.2 0.4 5.4 1.7 4.6 6.7 34.8 6.7 6.2 October 25.5 10.1 15.1 24.1 3.5 10.7 20.4 1.5 16.6 15.0 0.9 16.0 2.9 10.8 9.3 36.8 7.6 12.8 Novemser 26.6 10.9 20.3 23.9 3.5 14.9 21.9 1.2 22.2 17.6 1.3 25.0 1.4 10.0 10.0 38.5 8.6 16.2 December 27.8 11.5 23.5 24.1 3.6 18.5 22.0 1.5 26.1 17.5 1.8 26.5 -0.1 9.6 11.7 39.7 10.1 20.0 Excluding fish, meat, oil & dairv industries S(D rce Presidential Administration Table 10.1 - Privatization in Ukraine, 1992 -1997 Number of obiects privatized Small-scale rivatization Larme- and medium-scale 1rivatizaticn Other State Municipal State Municipal State Municioal State Municipal 0 Total Total Total Total Z property proverty propcrty Property property Property proverty Property 1992-94 11,852 4,332 7.520 9,061 2,041 7,081 2,720 2,290 414 71 11 34 1995 16.227 4,114 12,113 13,040 1,770 11.461 3,139 2,334 779 48 21 36 1996 19,487 4,526 14,961 16,197 2,387 14,175 2,995 2,014 1,049 295 204 124 1st Quater 6,144 1,211 4,933 5,188 605 4,583 934 599 335 22 7 15 2nd Quater 6,610 1,443 5,167 5,749 893 4,856 832 541 291 29 9 20 3rd Quater 3,972 987 2,985 3,286 550 2,736 642 422 220 44 15 29 4th Quater 2,761 885 1,876 1,974 339 2,000 587 452 203 200 173 60 1997 8,574 1,899 6,675 7,000 783 6,320 1,170 868 303 404 268 158 1st Quater 2,322 591 1,731 1,879 306 1,573 356 237 119 87 48 39 2nd Quater 2,194 452 1,742 1,805 181 1,624 280 212 68 109 59 50 3rd Ouatcr 2,173 429 1,744 1,793 157 1,636 263 187 76 117 85 32 4th Quater 1,885 427 1,458 1,523 139 1,487 271 232 40 91 76 37 Total for 1992-97 56,140 14,871 41,269 45,298 6,981 39,037 10,024 7,506 2,545 818 504 352 So urce: Presidential Administration Table 10.2 - Number of Privatized units in Ukraine in 1992 - 1997. by industries 1992 -1995 1996 1997 1992 - 1997 1992 - 1995 1996 1997 I992 - 1997 1 ~ in units Iin percentage Total 28079 19487 8574 56140 100 100 100 100 Manufacturing 4142 1679 532 6353 14.8 8.6 6,2 11.3 Agriculture 930 1343 496 2769 3.3 6.9 5.8 4.9 Transportation & Communication 589 422 239 1250 2.1 2.2 2.8 2.2 Construction 1878 871 293 3042 6.7 4.5 3.4 5.4 Trade & Catering 12622 9137 3693 25452 45.0 46.9 43.1 45.3 Material - Technique Supply & Sales 588 361 111 1060 2.1 1.9 1.3 1.9 Purchasing/Reserves 39 69 53 161 0.1 0.4 0.6 0.3 Municipal Services 425 1048 667 2140 1.5 5.4 7.8 3.8 Services 6214 3512 1058 10784 22.1 18.0 12.3 19.2 Science & Science Services 163 100 53 316 0.6 0.5 0.6 0.6 Other Industries 489 945 1379 2813 1.7 4.8 16.1 5.0 * The data exclude the obiects with which the nurchase apreenents were terminated as of January 1. 1999 according to the Center Office of'the SPF, its regional branches and representations in the districts and cities Source: State Committee ofStatistics of Ukraine Table 10.3 - State housing stock privatization by regions, in 1994 - 1997 Number of privatized apartments Including free privatization & & one-family houses privatization with compensation Total area of privatized stocl . % of total state % of total thous. sq. m thous. uts thous. units housing stock* privatized stock 1994 909.5 13.0 847.0 93 44931. 1995 548.5 7.8 499.1 91 27149. 1996 566.4 8.1 512.0 90 28800. 1997 519.6 7.4 467.7 90 26737. for 1997: Crimea 20.3 6.3 18.3 90 1015. Vinnytsya 9.1 7.3 8.7 95 462. Volyn 4.9 5.6 4.4 91 240. Dnipropetrovsk 62.0 8.3 54.5 88 3271. Donetsk 52.3 5 45.7 87 2600. Zhytomyr 8.1 5.9 7.6 94 434. Zakarpattya 4.2 6.6 3.8 90 226. Zaporizhzhya 18.1 5.6 16.1 89 936. Ivano-Frankivsk 8.3 7.3 7.6 92 427. Kiev region 20.0 10.1 18.8 94 1038. Kirovohrad 10.3 8.7 9.6 93 516. Luhansk 21.5 4.1 19.1 89 1095. Lviv 39.1 11.5 36.2 93 2055. Mykolaiv 13.0 7.6 12.0 93 642. Odessa 27.8 8.7 23.7 85 1603. Poltava 22.6 11.2 20.8 92 1149. Rivne 6.3 6.3 5.8 93 309. Sumy 11.2 6.9 10.5 94 515. Ternopil 10.7 16.3 10.1 94 535. Kharkiv 34.8 6.6 30.2 87 1744. Kherson 8.7 6 7.6 87 449. Khmelnytski 15.5 13.9 15.0 97 794. Cherkasy 15.3 11.2 14.2 92 789. Chernivtsi 6.5 9.1 6.0 92 327. Chernihiv 6.1 5.4 5.7 94 33 Kiev city 57.9 8.7 51.3 89 2975. Sevastopol 5.1 6.5 4.6 91 249. * Referred to a total apartment stock of state housing stock as of January 1, 1993 Source: State Committee of Statistics Statistical Appendix 207 THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433 USA Telephone: 202-477-1234 Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK Cable Address: INTBAFRAD W4SHINGTONDC World Wide Web: http://www.worldbank.org/ E-mail: books@ worldbank.org 14328 I I 9 780821 343289 ISBN 0-8213-4382-3