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Economic & Monetary Policy Overview

Ukraine did not receive any external financial assistance in the last quarter of 1999. The Extended Fund Facility (EFF) loan program has been postponed, at least, until late March 2000.

After presidential elections, the world community expects from the reelected President decisive steps aimed at real not cosmetic restructuring of economy. As an initial step, a presidential decree was signed in December1999 aimed at initiating a land market, and transforming collective farms either into private enterprises or cooperatives. The State Land Committee has been asked to draft a new Land Code by April 2000. This step is symbolic. If a pro-market Land Code, which enshrines the notions of land mortgage, market land appraisal, division among the state and municipal lands, etc. is passed, it will have a strong positive effect on the transformation of the Ukrainian economy. Ukraine adopted a Land Code in June 1992, which did little to introduce private property in agriculture. As a result, only about 5 percent of land is in private hand. There are numerous contradictions between the existing Land Code and the Constitution, adopted in June 1996.

Despite advice to the contrary, Ukrainian government continues to intervene significantly in the economy with the goal of “helping” agriculture, energy, and favored industries. The effect of such help has been disastrous. With all the government support, price controls, tax breaks agriculture continues to decline fast. In 1999, agricultural production was the lowest in many years. In fact, it is this kind of government support that leads to soft budget constraints in the agriculture sector and prevents this sector from becoming efficient.

The same is the case with industry. In 1997, the government granted a set up tax breaks and protection to Autozaz, Ukraine’s only car manufacturer. In 1999, despite government’s help, the company produced only 20,000 cars when its capacity is more than 100,000 cars. Only 60,000 cars were registered in Ukraine in 1999. Poland, with a smaller population produced and sold 600,000 cars, without government support. Examples like this are numerous. Unless the government allows the market to function, and stops “supporting” different sectors, its economy will continue to suffer.

The new government headed by the former NBU Chairman, Victor Yushchenko inherited an economy with declining output, a largely un-restructured industrial sector, large volumes of arrears and external debt, a weak banking system, and an unfavorable business environment. Among the first measures the government have been to:
· Draft and pass through the Parliament a realistic deficit-free budget;
· Reschedule external debt payments;
· Carry out an administrative reform;
· Approve the privatization program;
· Reduce the level of barter operations, which must be done by eliminating the causal factors, i.e., high taxation and administrative control over the business activity.
· Build market institutions that would support the reform effort.

These tasks require strong commitment from the government to change. A realistic budget will require willingness to take tough decisions to cut expenditure commitments. Three decrees on administrative reform, which reduces the number of central bodies of executive power from 89 to 35, were signed. This is a good first step. Administrative reforms will need preparedness to redefine the role of the government from being a controller of the economy to that of a facilitator for market institutions.