KUCHMA SIGNS 2002 BUDGET THAT SHOULD PLEASE CREDITORS.

Following weeks of internal fighting and attempts to force the government to change its budget assumptions, Ukraine’s Verkhovna Rada (parliament) approved the 2002 state budget on December 13, 2001. The document projects a deficit of 1.7 percent of GDP in line with the requirements set by the IMF. In the final vote, 241 of 450 deputies backed the budget draft. President Kuchma signed the new budget on January 3, 2002, fulfilling one of the most important conditions for continued funding for Ukraine under the IMF Extended Fund Facility (Reuters, January 3).

The draft was rejected several times by deputies attempting to force the government to increase public spending ahead of the parliamentary elections, which are scheduled for a scant two months away (March 31). Parliament first rejected the draft 2002 budget in its first reading in early October. The government claimed then that it had reached an agreement with major political parties to ensure the successful passage of the document in the second reading on October 25. Rada deputies asked the government to raise revenues by 30 percent in order to increase spending on welfare, education, health and culture. Following some minor adjustments, including an increase in revenue and spending figures by 930 million hryvnyas, the government submitted the draft for a second reading, only to have it rejected once again when deputies voted 363-12 to postpone discussions on the draft until December 13. The delay was crucial, as the spending, revenue and deficit targets could not be changed in the third and fourth reading of the document. Prime Minister Anatoly Kinakh confirmed that the government will continue to resist calls from deputies in the Verkhovna Rada to raise revenue assumptions in the 2002 draft budget.

The adopted 2002 budget contains revenues of 45.2 billion hryvnyas and expenditures of 49.5 billion hryvnyas (US$9.3 billion). The resulting deficit of 4.3 billion hryvnyas, or 1.7 percent of GDP, is calculated based on revenues excluding those from privatization. As such, Ukraine’s 2002 budget is one of the first among the FSU countries to conform fully with IMF methodology. The completion of discussions on the budget should guarantee fiscal stability in the country. It also permitted the National Bank of Ukraine (NBU) to cut interest rates again as of December 10, this time by 250 basis points. The refinancing rate now stands at 12.5 percent. The central bank also lowered obligatory reserves for long-term individual deposits in hryvnyas from 9 percent to 6 percent. This NBU action constituted the continuation of a more accommodating monetary policy that the bank implemented at the beginning of 2001.

No major changes in economic policymaking in Ukraine should be expected until the formation of a new cabinet following the elections in March 2002. In the meantime, the Kinakh cabinet will try to avoid implementing any radical changes while keeping the IMF and other international financial institutions happy.

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