Monthly Economic Monitor Ukraine, 2001

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No. 14
December, 2001

• The Tax Code draft was approved in second reading. It envisages significant reductions in major tax rates.

• The Civil and Commercial Codes, finally adopted by Parliament, are awaiting the President's signature.

• The Cabinet of Ministers extended the subscription period for the privileged sale of Ukrtelecom shares by two months.

• The National Electricity Regulation Commission increased tariffs for the transmission and distribution of electricity for four out of six newly privatised regional distribution companies.

• According to the State Tax Administration, nearly UAH 20 bn of tax debt was written off and restructured as of November 1.

• The interest rate of percentage domestic state bonds (POVDP) will decrease from the present 17% to between 7 and 9% p.a. in 2002.

• Moody's, the influential credit-rating agency, upgraded its ratings for Ukrainian financial instruments.

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No. 13
November, 2001

• Parliament passed the new Land Code, which permits agricultural land trading starting from 2005.

• Ukraine restructured a USD 1.4 bn gas debt for consumed Russian gas. Key terms of the agreement are a 12 years restructuring period, a 3-year grace period and a LIBOR +1% interest rate.

• Real GDP growth reached 9.3% yoy for the first nine month of 2001. The fact that the GDP in September grew at a lower rate than in previous months is explained by changing a distribution of harvest collection this year.

• U.S. and Poland terminated a number of anti-dumping procedures against Ukrainian metallurgical companies, which is likely to improve export outlook. Meanwhile, exact share of metallurgical exports, released from investigations is still not clear.

• Due to negative expectations by traders concerning bankruptcy processes against energy companies, the PFTS stock market index in October fell to the lowest level for the whole year, contrary to expectations for a long-hoped rally.

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No. 12
October, 2001

• Both the IMF and the World Bank resumed their financing programmes to Ukraine, thereby opening the way for Ukraine's debt restructuring process with other countries.

• The official forecast of real GDP growth for 2001 was revised upward to 7.3% yoy, supported by a 10.8% yoy GDP growth for the first eight month of 2001.

• The recently adopted "Ukrainian Coal" programme envisages increased state financing for the coal sector and privatisation of coal mines.

• A draft of the 2002 Budget Law was submitted to Parliament.

• The NBU introduced a 5% limit on foreign currency exchange rate fluctuations for cash transactions.

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No. 11
September, 2001

• In August, real GDP growth reached its highest level - 10.5% yoy cum. - since the beginning of the economic recovery in Ukraine. This is mainly due to a boost in value added in agriculture.

• From January to July 2001, state budget revenues from privatisation reached only 58% of the targeted level for this period.

• Due to higher than foreseen tax and non-tax revenues, the consolidated budget was in surplus.

• Despite economic growth, the net FDI inflow in the first half of the year was 20% lower than during the same period in 2000.

• Decreases in the spread between the average credit and deposit rates of commercial banks may indicate a growing efficiency of financial intermediation.

• The decline in the risk premium of Ukrainian Eurobonds signifies a reduction in the perceived default risk on the sovereign debt of Ukraine.

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No. 10
August, 2001

• The formation of the Cabinet of Ministers was completed with the appointment of Oleksandr Shlapak as Minister of Economy.

• The real GDP grew by 9.1% yoy cum. (9.2% yoy in June) during the first half of 2001 with the highest growth of value-added occurring in the manufacturing industry, in construction, and in the wholesale and retail trades.

• The President vetoed a new law on the Ukrainian electricity market that could replace existing pool-model by a system of 'bilateral contracts'.

• The real revaluation of the hryvna has not seriously affected the growth of exports despite the misgivings of exporting companies.

• Ukraine successfully restructured USD 580 m debt to the Paris Club of creditors.

• The National Bank of Ukraine revoked the license of Bank "Ukraina" and initiated its liquidation.

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No. 9
July, 2001

• The formation of the new Cabinet was almost completed after several other appointments in June.

• Over the January to May 2001 period the real GDP growth reached 9.0% yoy cum. supported by an impressive 18.8% growth of industrial production. Internal factors, first of all domestic consumption, are at the core of this continuing tendency.

• During the first four months of 2001 the merchandise trade expanded by 8.7% yoy. However, new trade regulations may soon cause different results.

• Parliament passed the resolution "On Major Budget Policy Directions for 2002" as well as a new edition of the Budget Code including the President's amendments. Still, the implementation of tax reform remains an unsolved problem.

• The NBU cut the discount rate again (from 21% to 19%) raising concerns among commercial bankers. The new reserve requirements mechanism is claimed to have caused a sudden hike in inter-bank rates.

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No. 8
June, 2001

• Parliament approved Anatoliy Kinakh as the new Prime Minister of Ukraine.

• The GDP grew by 8.5% yoy cum. during January-April with record results in industrial production. The first half-year growth prospects are quite promising.

• The first quarter trade surplus came to USD 816 m. Pressure on the Ukrainian exporters on the major markets is increasing.

• Government expenditure reductions for fiscal 2001 are very likely, due to the continuing shortfall in revenues.

• The inflation in May declined to 15.1% yoy but difficulties with stimulating the domestic debt market raise concerns about effective control over money supply in the future.

• The first quarter of 2001 appears to have been successful for the banking sector with UAH 155 m of profits. Reforms at the Bank "Ukraina" have begun.

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No. 7
May, 2001

• At the end of April the reformist government of Viktor Yuschenko was dismissed after a year-long service.

• High GDP growth of 7.7% yoy cum. for the first quarter is likely to continue. Qualitative changes in the growth structure are evident.

• Six regional power distribution companies (oblenergos) were privatised in April 2001. The state received around USD 150 m out of planned USD 250 m.

• January-February trade performance is a source of optimism, while new restrictions on metallurgy exports raise serious concerns about the persistence of this trend.

• Increased budget receipts from the tax and customs authorities made up for the fall in privatisation receipts in the first quarter. But April's revenue target will not be met.

• Further decrease of the NBU rates and part of the reserve requirements signal desire to ease monetary policy

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No. 6
April, 2001

• The first step in Victor Yushchenko's cabinet reshuffle was the replacement of the Fuel and Energy Minister Serhii Yermilov. Re-introduction of the Industrial Policy Ministry and the subordination of State Property Fund to Cabmin (Cabinet of Ministers) are still undefined.

• Cabmin has approved its 'Priority tasks for 2001' to advance the reform agenda announced the President's recent address to Parliament. Social and growth-sustainability priorities are the core of the program.

• In March Parliament approved the Budget Code. It defines the principles and foundations of the budget system in Ukraine.

• Ukrtelekom bought out all shares of Utel owned by AT&T and Deutsche Telecom, thereby consolidating 90% of Utel's shares.

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No. 5
March, 2001

• The Cabinet reorganisation by Prime Minister Viktor Yuschenko remains the issue of political debate among top state officials.

• The power systems of Ukraine and Russia may be unified, if the Cabinet approves a recently signed memorandum. This would improve the stability of Ukrainian energy system but might lead to a greater dependence on Russian power supply.

• In February industrial output growth slowed to 12.6% yoy due to a higher February 2000 base, resulting in lower GDP growth. However, good performance by the major industries is expected to continue in the first quarter.

• The February 2001 CPI growth rate declined to 0.6% mom from 1.5% mom in January. This is the first sign that inflation is being kept under control.

• Both the Ministry of Finance and the NBU are trying to revive the domestic debt market by offering their own instruments. So far, the private sector has expressed little interest.

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No. 4
February, 2001

• In January industrial output grew strongly at 19.5% yoy boosting the GDP to 9.1% yoy. However political instability coupled with unfavourable conditions in the international metals markets continue to present major impediments to further growth.

• The State Property Fund issued a 'for sale' list of enterprises, for each of which a 25% minimum stake is to be offered for sale in 2001. The Fund also announced a tender to select a consultant for the sale of twelve more Oblenergos.

• Six foreign investors, among them the EBRD and the German-Ukrainian Fund, have founded the Micro Finance Bank, a potentially important source for SME financing.

• FDI in 2000 was up by 20% yoy and reached USD 584 m. The merchandise trade balance showed a surplus of USD 616 m in 2000.

• The NBU started pursuing a tight monetary policy in 2001 to combat inflation. The first success was the sterilisation of UAH 948 m in January, more than in all of the year 2000.

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No. 3
January, 2001

• In late December, the IMF, in recognition of the Government reform efforts, disbursed a credit tranche of USD 246 m to Ukraine according to the EFF program.

• 6% yoy GDP increase in 2000 presents the first positive growth record since Ukraine gained independence in 1991. Industrial production grew by 12.9% yoy and agricultural output by 7.6% yoy.

• The law “On Banks and Banking Activity”, which foresees a differentiated approach to a bank capital, was enacted.

• Due to favourable world market conditions, the three quarter current account showed a surplus of USD 1.6 bn. A worsening world market situation might hurt Ukrainian exporters.

• During 11 months of 2000, a Consolidated budget of about 1.5% of GDP was achieved. Social expenditures were higher than in the previous years, state management expenditures remain considerable.

• During 2000 Hryvnia devalued only by 4.5%. The risk of higher than forecast inflation in 2001 requires to look more closely at real currency appreciation.

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