Policy Documentation Center

#11 (270), 28 March 2005
ICPS newsletter
A publication of the International Centre for Policy Studies
®
Results for 2004 and forecast
According to preliminary data from
Derzhkomstat, the state statistics
committee, real GDP grew a record!high
12.1% in 2004. Such speedy growth was
due to a very good grain crop (+110%),
construction boom (+18.4%), and an
industrial upswing (+12.5%)—in
particular, in metalworking, machine!
building and chemicals. Economic growth
slowed down late in the year.
The election of a new president and the
peaceful settlement of the country’s most
heated socio!political confrontation will
help stabilize the political situation in
2005. However, the economic upturn will
be slower than in 2004, hampered by
accelerating inflation and slower growth
in export prices. ICPS economists have
left the forecast for real GDP growth
unchanged, at 7% in 2005 and 7.5% in
2006.
Maintaining a three!way balance among
social benefits, the State Budget and
inflation will be the key challenge for the
new government. According to ICPS
analysts, it will be impossible to
simultaneously fulfill all tasks that the
president has set before the Government:
significantly raising social benefits while
preventing a Budget deficit and double!
digit inflation. Most likely, the
Government will carry out a good part of
the social commitments made President
Yushchenko during his election campaign.
However, this will mean a Budget deficit
around 3% of GDP, and inflation will likely
reach 11%. 
In H1’05, the Consumer Price Index will
grow 16% pa as food prices continue to
grow and the Government decides to raise
regulated rates and prices, a move that
was deliberately postponed throughout
2004. The most felt changes will be
growing transit fares and higher rates for
residential services.
During the forecast period, the value of
Ukrainian imports will grow faster than
exports. At the same time, the current
account balance will continue to be high,
which will help the National Bank to
support a stable UAH/USD exchange rate
and even start a slight nominal hryvnia
appreciation, especially as the US dollar
continues to slip worldwide.
ICPS economists base their forecast on
the assumption that the new Government
will not start a mass increase of social
minimums and that it will first take care
to fill Budget revenues, not reallocate its
resources. If the new Government raises
salaries, pensions and other social
benefits in the amounts that were
promised during the election campaign,
the Budget deficit will reach UAH 27bn or
about 6.5% of GDP, according to ICPS
calculations. If this happens, ICPS
2004 was the year the Ukrainian government’s policies served shortterm
interests: raising social benefits and curbing inflation. Following suit, the
Verkhovna Rada also adopted mainly shortterm resolutions. The rare longterm
decisions included amendments to the Constitution and a new version of the
Civil Procedural Code. ICPS expects the new government to lay the groundwork
for serious transformations throughout 2005 and to launch largescale reforms
in spring 2006, after the Verkhovna Rada elections. The situation will continue
to favor reforms during 2005–2006 as the economy grows, on average, 7% pa
ICPS summarizes economic 
results for 2004
Таble 1. Key macroeconomic indicators
Years 2003 2004 2005 2006
Indicators (e s t. ) ( f o r e c a s t )
GDP, mn UAH 264.2 345.9 418.5 472.4
GDP, rcc, % 9.4 12.1 7.0 7.5 
Real industrial output, rcc, % 15.8 12.5 9.5 8.0
Real agricultural output, rcc, % !9.9 19.1 2.0 2.5
Gross investment, % GDP 20.3 20.8 21.7 23.2 
Real gross fixed investment, apc 15.8 11.0 10.0 12.0
Real consumption, apc 12.8 13.5 7.3 8.,3
Net FDI, mn USD 1,411 1,500 1,600 2,000
Real disposable household income, apc 7.8 16.8 8.0 10.0 
Real retail trade, apc 19.4 20.0 12.0 12.0 
Consumer price index, apc 8.2 12.3 11.0 6.0
Producer price index, apc 11.1 24.1 12.0 6.0 
Population, mn 47.7 47.3 47.1 46.9 
Real wages, aapc 15.2 23.8 18.0 15.0
Unemployment rate (ILO methodology), % 9.1 8.5 8.2 8.0
Exports of goods and services, apc 24.0 37.0 10.0 7.0
Imports of goods and services, apc 28.7 25.0 18.0 12.0
Current account balance, % GDP 5.8 10.8 7.0 4.0
Consolidated Budget balance, % GDP !0.2 !3.4 !3.0 !1.0
Official exchange rate (average annual), 
UAH/USD 5.33 5.32 5.29 5.22
apc = annual percentage change   aapc = average annual percentage change 
rcc = real cumulative change
Sources: Derzhkomstat (State Statistics Committee), National Bank of Ukraine, Ministry of
Finance; calculations and forecast by Quarterly Predictions
expects the CPI to hit at least 19% by
year!end.
ICPS also bases its forecast on the
assumption that there will be no sudden
changes on world markets for oil, metals
and chemicals. 
Changes in legislation
The policy!making process did not much
change in 2004: a slew of adopted laws
contradicted existing legislation or had
no fiscal support, while much!needed
changes to legislation were not
instituted. Meanwhile, the presidential
election had a noticeable impact on
decision!making. In addition to populist
steps in the social sphere, the
Government resorted to price controls and
provided more support for domestic
producers compared to 2003. These
decisions violated the rules of
competition, helping some businesses
benefit at the expense of others. They
also pushed up the Budget deficit, which
passed the 3% mark, according to ICPS
estimates.
The key challenge is to reform
public administration
The policies of the new Government will
be primarily affected by the need to win
the VR elections in spring 2006. The
election campaign, which in fact has
already begun, makes it hard for the new
team to launch large!scale reforms that
might get mixed reviews from voters and
will not yield quick positive results.
According to ICPS, it is worth using the
time until the Verkhovna Rada elections
to prepare for these reforms, namely: to
expand public debate on the problems
targeted by reforms, to adopt action plans,
and to set up “reform teams.” If the
preparations for “painful reforms” are
public, public support for the Government
will get a boost and make it easier to
make sound decisions during the reform
process.
Once the 2006 VR campaign is over, the
Government should launch reforms in the
key social sectors that have long stayed
unreformed. Changes in these areas will
provide a much!need impact on the
quality of life, as these services are among
the most important for human lives.
According to ICPS economists, the new
government should be able to implement
successful reforms in any area—but only
if it changes the public administration
system. The current system makes it
impossible to develop and implement
effective policies. Excessive
centralization is the key drawback of the
current system. As a result, central bodies
function mostly in an administrative
capacity, while developing strategies and
government policy become, for them,
secondary tasks.
Analysts at the International Centre for
Policy Studies have been producing regular
forecasts for Ukraine’s economic
development since 1997. These are updated
regularly and published in the “Quarterly
Predictions” journal. If you wish to
subscribe to this publication, please
contact Andriy Starynskiy at telephone: 
(380744) 23675464 or e7mail:
marketing@icps.kiev.ua. You may also
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or purchase them via the ICPS’s website. 
For additional information about ICPS
economic forecasts, contact 
Yevhenia Akhtyrko by telephone 
at (380744) 23671292, or via e7mail 
at eakhtyrko@icps.kiev.ua.
UkrZaliznytsia’s rates
policy gets negative marks
ICPS economists have given the
Ministry of Transport and
Communication’s recent announcements
about rate hikes in the national railway
system negative marks. The Ministry
intends to raise freight rates more than
double and raise ticket prices for first
and second!class sleeping cars, called
SV/Luxe and Coupe, by 50%. Such a
sharp rise freight rates is likely to push
the Producer Price Index by 3–6% over
2005. Higher rates for passenger traffic,
which UkrZaliznytsia data shows is
unprofitable, will mostly affect the
middle class and wealthier travellers.
For industrial customers, higher rates
will mean a cut in the high profits of
export!oriented companies in the
mining, metalworking and chemical
industries.
Still, the Government needs to
gradually relieve UkrZaliznytsia of the
need to carry out certain “social”
functions on behalf of the state.
Keeping passenger rates low by raising
freight rates is not an efficient social
security mechanism, says ICPS
economist Ildar Gazizullin. “Too high a
level of cross!subsidies distorts
economic incentives, both for the
general public and for other categories
of customers. Prices and rates for all
rail services need to reflect real costs
as much as possible.”
According to ICPS analysts, the
transport sector’s regulatory policy has
been long due for serious revision. The
fact that the Ministry combines the
functions of running and regulating
transportation is a classic conflict of
interests. These functions need to be
separated by setting up an independent
regulatory body which could improve
rate!setting and ensure better
protection for the customers of a
national monopoly like UkrZaliznytsia.
The national railway’s opaque
management has led to distrust, among
both the general public and railway
customers, in its declarations about
production costs and profitability for
specific activities. Although everybody
understands the need to modernize
infrastructure and rolling stock, any
moves to raise rates or attract
investment will not be well received
until Ukrzaliznytsia has been
thoroughly audited.
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policy concepts and practices in Ukraine. This is achieved by
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Business!friendly changes 
Involving stakeholders in the regulatory
policy!making process
Introducing mortgage mechanisms 
Setting up a consolidated title 
registration system for parcels of land
and other real estate
Adopting a program to reform the 
residential services sector
Compensating some of the costs for 
sowing spring crops and buying mineral 
fertilizers
Business!unfriendly changes
Adopting Civil and Commercial Codes
with mutually contradictory provisions
Postponing the date the Civil Procedural
Code comes into force
Changing tax legislation inconsistently,
failing to properly prepare technically 
to introduce changes long in the 
planning
Providing selective support to certain 
car makers
Extending the ban on the sale and 
purchase of farmland 
Таble 2. Impact of legislative changes on business in 2004


ICPS Newsletter. 270 (March 28) ICPS summarizes economic results for 2004

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