Publication: Monitor Volume: 4 Issue: 68

The results of Ukraine’s March 29 parliamentary elections pose a number of questions for the Ukrainian economy. While the answers may await the formation of a new government and its economic program, some points seem clear already.

On the one hand, Ukraine’s long economic collapse seems to have ended: Industrial production at the end of February was 3.0 percent above year-earlier levels, and inflation has stayed low. (UNIAN, March 13) On the other hand, Ukraine has been slower to shake off the effects of last year’s East Asian financial collapse than Russia. The average yield on Ukrainian treasury bills as of late March was 47.9 percent, which was up on the 1997 average of 45.9 percent. These high rates, which produce real interest rates of 30-35 percent, reflect both the high-risk premium that domestic and foreign investors continue to attach to the Ukrainian financial system, and the effects of government borrowing to finance large fiscal deficits. According to National Bank of Ukraine (NBU) President Viktor Yushchenko, the budget deficit in late March was 6.6 percent of GDP. (UNIAN, March 24)

Although Prime Minister Valery Pustovoytenko’s government attempted to renew its commitment to economic reform prior to the elections, doubts about the strength of this commitment continue. An action program announced in January — calling for further liberalization, less corruption and attracting foreign investment — seemed to have gotten lost in the hoopla over the 1998-2007 Russo-Ukrainian economic cooperation treaty signed in Kyiv on February 20. Strong concerns about excessive, arbitrary, corrupt regulation have prevented significant increases in foreign investment and hastened the erosion of political support for Ukraine in Western capitals. The IMF has not issued credits to Ukraine since late January.

These problems also continue to keep much economic activity in the shadow economy. NBU President Yushchenko announced last month that some 50 percent of the Ukrainian economy was in the informal sector. More than half of all small business registered were shells, presumably used as tax dodges. (UNIAN, April 1)

According to many observers, the Ukrainian economy needs a strong effort to improve tax collection and reduce over-regulation and corruption, thereby lightening the burden on enterprises and promoting recovery. Whether the new government will be capable of such a push remains to be seen.

Lukashenka Said to Agree to Parliamentary Elections.