Policy Documentation Center

#47,  20 December 1999
A publication of the International Centre for Policy Studies
ICPS newsletter
ICPS forecasts reform acceleration
and beginning  of economic growth
A new issue of ICPSs Quarterly Predictions journal will be
published this week. In this issue we present readers our
first forecast for economic development in 2001, and
improve our predictions for 19992000. Real GDP will
decline by only 0.8% in 1999. The main assumption on
which we based our forecast for 20002001 is a radical
acceleration of reforms and qualitative change of economic
policy. Thanks to these two factors, Ukraine will avoid
defaulting on its foreign debt. Major risks are the failure to
implement effective administrative reform, and slow and
non-transparent privatisation. For 2000 we forecast
gradual economic growth of 0.5%. In 2001, GDP will
increase by 2%
Figure 1. Real GDP, real consumption, and
investment
Annual % change
Source: State Statistics Committee.
Forecast by Quarterly Predictions.
-15
-10
-5
0
5
10
15
1996 1997 1998 1999 2000 2001
GDP
Consumption
Investment
GDP in Ukraine stopped declining in the second half of 1999. Over
the first ten months of 1999 GDP fell by 1.2% (compared to 3% in
H199). Industrial production outpaced the GDP dynamic and
increased by 3.1% in real terms. This positive change was
predetermined by the following factors:
· improvement of the trade balanceUkraine became a net
exporter of goods and services due to the real depreciation of the
hryvnia and better conditions in world markets;
· loosening monetary policyan increase in real money supply
allowed firms to meet their demand for money and accelerated
retail turnover; and
· low economic indicators in Q398.
At the same time, the improvement of production indicators was
accompanied by negative trends which cast future economic
growth into doubt:
· a decline in investment, particularly foreign investment;
· deterioration of financial disciplinebefore the presidential
elections the government subsidised firms with its ban on cutting
off non-paying clients from electricity supplies; and
· firms did not see any improvement in business conditions, as the
government continued to control activities of enterprises, delaying
the introduction of fair "rules of the game".
We retain our negative forecast for economic growth in 1999,
though GDP will decline by only 0.8%. An increase in industrial
production (3%) will not compensate a decline in construction
(-10%), agriculture (-3%), and services (-1%). This year, for the
first time Ukraine will export more goods and services than it will
import; meantime, investment will contract rapidly and
consumption will fall sharply.
Ukraines recovery after the "debt grip" of 20002001 will not be
possible without acceleration of economic reforms, particularly
administrative reform. To avoid financial crisis, the government must
launch reforms during the next three months. If it fails to accomplish
reforms, Ukraine will not receive foreign financing, so needed to
make debt repayments in Q100. In this case Ukraine will not avoid
the default, which will discredit the country in the eyes of its trading
partners, discourage investment, and, what is worst, hinder the
fundamental changes needed for economic growth.
Our forecast for Ukraines economic development in 20002001 is
based on the assumption that Ukraine will avoid defaulting its
foreign debt. This will be possible if economic policy is
substantially improved:
· The government should clearly determine the priorities of
economic policy. In contrast to its passive reaction to changes in
economic situation over the last few years, the government will
determine economic policy priorities directly after the presidential
elections. Conformity of economic development to these priorities
will favour long-term growth.
· Budget policy will be strict. The consolidated budget will be
implemented with a surplus. The government will reduce subsidies
to enterprises. This will drive domestic demand down, which,
however, will be offset by growth in the private sector, due to lower
demand of the government for financial resources.
· Privatisation will accelerate. We view cash privatisation,
particularly with the participation of foreign investors, as a tool for
increasing the effectiveness of firms operations, rather than simply
a means to repay debts.
· World economy will grow. In particular, Ukraines major trading
partners will develop dynamically. We do not forecast global or
regional financial crises.
If the assumptions given above are valid, real GDP will increase by
0.5% in 2000. Even though consumption will not recover next year,
investment will begin to grow. Foreign demand will remain high.
ICPS Newsletter is a weekly publication of the International Centre
for Policy Studies. To be included in the distribution list mail to:
marketing@icps.kiev.ua.
ICPS Publications director Hlib Vyshlinsky (hlib@icps.kiev.ua)
ICPS Newsletter editor Yevhenia Yehorova (ee@icps.kiev.ua)
English text editor D. (Ksenia) Ovcharenko
Major indicators
Last Week
Building institutional capacity of the government. Centre of
Policy Excellence. A closing ceremony of the Centre of Policy
Excellence (budget policy) project was held at ICPS on December
14. This project commenced in September 1998 with the financial
support of USAID. The Centre of Policy Excellence (CoPE) training
program on budget policy is an innovative form of technical
assistance. The structured program focuses on building the
Ukrainian governments institutional capacity for sound,
sustainable, and judicious policymaking.
The Centre for Policy Excellence project is based on a partnership
between the Ukrainian government, the American research
organisation RAND, and ICPS. 13 representatives of the Ministry of
Economy, the Ministry of Finance, and the National Bank of
Ukraine took part in the training.
Project fellows attention was focused on the process of policy
analysis and developing capacity to perform policy analysis. The
program had two primary components, i.e., (i) a fellowship program
coordinated by Ms. Diana Cook (RAND), combining weekly seminars
with individual study and work on a research project, and (ii)
seminar series that brought together top policy analysts from
around the world to discuss Ukrainian budget issues.
Mr. Ihor Shumylo, Deputy Minister of Economy of Ukraine, noted
that CoPE is an effective investment for Ukraines development,
leading to the improvement of the quality of human resources in
the Ukrainian government. Ms. Vira Nanivska, director of ICPS,
believes that through implementation of similar projects in other
ministries the development of public policy analysis in Ukraine
will be qualitatively changed.
Publication of Country Economic Memorandum. A document
titled "Participatory Country Economic Memorandum" was
presented at the Kyiv World Bank Office on December 16. The
Country Economic Memorandum (CEM) project is a joint activity of
the World Bank, the Ministry of Economy of Ukraine, and ICPS. ICPS
provided the research groups with organisational and
methodological support and was the document publisher.
Traditionally, the World Banks periodic economic studies on
borrowing member countries, known as "Country Economic
Memorandums," were written almost entirely by WB staff, using the
countrys government only as an information source. Clearly, under
such conditions government officials would not be inclined to
interpret a Memorandum as its own action plan. Last year the Bank
decided to try a distinctly different approach in preparing a CEM
for Ukraine. For the first time, a non-government organisation
participated in the development of the document, and Ukrainian
experts with the help of the Banks advisors carried out the
analytical research.
The CEM research team involved 350 experts working with standard
methodology of policy analysis, i.e., determining strategic goals,
problems and their causes, alternative solutions and their
consequences, and strategy.
The Country Economic Memorandum includes three volumes:
· Ukraine. Restoring Growth with Equity: A Participatory Country
Economic Memorandum, prepared by the World Bank staff;
· Economic Growth with Equity: Ukrainian Perspectives, prepared by
Ukrainian experts;
· Economic Growth with Equity: Which Strategy for Ukraine?,
prepared by John Hansen, Diana Cook, and ICPS staff.
According to Mr. John Hansen, a World Bank economic advisor, the
analytical research conducted during drafting the CEM showed
that the major factor of economic development of Ukraine is the
role of the government. In the Soviet Union, the key function of
the government was control, but today it should be facilitation of
business activity.
Stable industrial production will favour growth in agriculture,
transport, and communications.
Accelerated structural changes in the economy will predetermine a
real economic growth of 2% in 2001. An increase in real consumption
will signal a decisive reversal of the declining trend.
1998 1999 2000 2001
      (forecast) (forecast) (forecast)
Economic activities
GDP, millions UAH 103869 130400 156100 177600
Real GDP, annual % change -1,7 -0,8 0,5 2,0
Real industrial production,
annual % change -1,5 3,0 0,5 1,5
Real agricultural production,
annual % change -8,3 -3,0 0,7 2,2
Gross investment, % GDP 20,7 18,5 19,6 21,0
Foreign direct investment,
millions USD (1) 747 450 700 900
Real household disposable
income, annual % change -5,8 1,0 -3,0 3,0
Real retail turnover,
annual % change -3,5 -7,0 -3,0 6,0
Prices
Consumer price index,
annual % change 20 18,2 16,3 11,3
Wholesale price index,
annual % change 35 17,7 13,0 10,8
Labour market
Population, million people 50,1 49,8 49,4 49,1
Real wage,
average annual % change -2,8 -4,2 1,2 1,5
Official unemployment, % 3,7 4,5 6,0 9,0
Foreign economic activities (1)
Exports of goods and services,
annual % change -13,4 -9,8 3,1 4,3
Imports of goods and services,
annual % change -17,0 -27,2 5,8 9,0
Current account balance,
% of GDP -3,0 5,4 4,3 2,4
Budget
Current deficit, % of GDP 2,0 1,0 -0,8 -1,1
Primary deficit, % GDP (2) -0,3 -1,7 -4,1 -4,3
Foreign debt, millions USD 10978 12100 11300 10500
Monetary indicators
Monetary base,
annual % change 22 29 19 15
M3, annual % change 25 32 21 17
NBU gross international
reserves, millions USD 793 1300 1400 1600
Official exchange rate
as of year end, UAH/USD 3,43 4,8 5,7 6,3
Weighted interest rate
on loans, yearly % 55 57 50 40
International
World output, annual % change 2,5 3,0 3,7 3,5
GDP growth rate in countries-
major trading partners of
Ukraine, annual % change 0,9 1,3 1,8 2,1
Notes:
(1) according to the NBU,
(2) calculated as current deficit minus foreign debt servicing
(3) commercial bank loans, in hryvnias
Source: State Statistics Committee, NBU, Finance Ministry.
Calculations by Quarterly Predictions.


ICPS Newsletter. No. 47 (December 20) ICPS forecasts reform acceleration and beginning of economic growth

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