STRONG GROWTH IN UKRAINE CAUSES GOVERNMENT TO RAISE GDP AND INFLATION FORECASTS.
Publication: Monitor Volume: 6 Issue: 139
Ukraine has essentially doubled the figures in its forecasts for economic growth and inflation for 2000, according to an interview the Deputy Prime Minister Yury Yekhanurov gave Reuters on July 12. The government now expects GDP to grow 2.5-3.0 percent this year, in contrast to its previous forecast of 1.0-1.5 percent. At the same time, Kyiv conceded that consumer price inflation is likely to be running close to 30 percent by the end of the year, almost double the previous forecast of 17 percent.
These adjustments reflect the economic recovery Ukraine has experienced so far this year. This recovery, which began in the last few months of 1999, has picked up steam. GDP was reported up 5.0 in the first half of the year, with growth slowing only slightly from the 5.6 percent increase in the first quarter. Industrial output rose nearly 11 percent in the first six months, with production growth in ferrous and non-ferrous metallurgy at 17 and 24 percent, respectively. Machine building reported 10 percent sales growth during the same period, with the production of cars and other vehicles more than doubling. Output in wood and wood processing was up 36 percent. Ukraine is also experiencing an export boom, with industrial exports were up 24 percent between January and May. Due to cuts in Russian oil supplies, however, the fuel and energy sector is not sharing in the industrial recovery: Output at Ukraine’s main refineries dropped 53.5 percent in January-April. Following precipitous declines in 1999, retail sales rose 10 percent in the first four months of 2000, while fixed investment grew a stunning 26 percent in the first quarter.
In many respects, Ukraine’s recovery mirrors the economic expansion in Russia, where 8.4 percent GDP growth was reported during the first quarter. In both countries industrial output is surging due to strong growth in exports and domestic spending. In terms of the exchange rate and inflation, however, Ukrainian and Russian economic trends are diverging sharply. The exchange rate in Ukraine, which stood at US$1=3.95 hryvnya in June 1999, has since lost more than half of its value in nominal terms, falling to US$1=5.5 hryvnya in early July. The weaker hryvnya is fueling inflation: Consumer prices rose 3.7 percent in June alone, following a 2.1 percent increase in May. These increases boosted year-on-year inflation to 30.3 percent in June, up from 18.3 percent in November 1999. By contrast, year-on-year inflation in Russia has fallen from triple-digit levels during the third quarter of 1999 to around 20 percent. This in turn results from a much firmer ruble: The US$1=27.8 ruble exchange rate set on July 14 was almost unchanged on the US$1=27.0 ruble rate registered at the end of last year. The different exchange rate and inflation trends reflect Russia’s energy windfall. Thanks to surging energy and commodity exports, the Central Bank of Russia reported US$21.0 billion in foreign exchange reserves at the end of June.
By contrast, Ukraine is a net energy importer, and though export growth has improved this year, reserves held by the National Bank of Ukraine (NBU) are estimated at less than US$1.5 billion. The NBU is therefore printing fresh hryvnya in order to purchase the dollars necessary to service Ukraine’s foreign debt, as well as to reduce wage and pension arrears. Ukraine’s money supply is therefore growing rapidly: The monetary base during the first half of the year grew by 19 percent, more than was planned for the full year. If this monetary growth continues, the government may find it difficult to keep inflation from rising well above its revised 30 percent forecast by the end of the year.
UKRAINE-NATO COOPERATION IN FULL SWING.