Den, Kiev, in Ukrainian 22 Jan 04, p 5
BBC Monitoring Service, UK, in English, UK, Jan 25, 2004

The following is the text of the article by Azarov, published in Den on 22 January; subheadings are as published:

If I had to choose the single most important indicator according to which a conclusion could be made that the Ukrainian economy had emerged from the many years of crisis and was gaining momentum, I would first of all talk about the state budget. In 2003 it was fulfilled by 100 per cent, and for 2004 a balanced budget was adopted on a new tax basis.

GUIDELINES

The budget is not only a tonne of paper (a solid tome several time over when read by each of the 450 people's deputies). It reflects the social standards that the state is capable of guaranteeing the population of the country at the current stage. Therefore, the budget, like the government's action programme, is aimed at raising people's prosperity. This is a pivotal task. And whatever the shortcomings in the work of the government and state management bodies that it heads, the record 8.5 per cent GDP growth over our year's work is a fact. Furthermore, I think that the final account will show an economic growth of about 9 per cent.

Economic development rates in Ukraine and the government's firm policy have been appropriately evaluated by international markets and organizations: Ukraine's investment ratings increased twice over the year; the placement of Eurobonds was recognized as the best state loan of the year, and the government's efforts have led to the lifting of FATF financial sanctions.

Economic growth also led to social shifts in Ukraine: the level of officially registered unemployment at the end of last year reached the lowest level in the years of economic growth and amounted to 3.6 per cent. So-called partial employment is also dropping. The number of people who were working at employers' initiative for part of a working day or week fell by 11 per cent. The number of staff laid off fell by over a third.

Thus, people have been working and earning. Real total incomes received by households in January-November 2003 increased by almost 8 per cent. The GDP increment rate was the same. This means that the economy was oriented precisely towards the person. Here real incomes of households from wages increased by 12 per cent. The average wage in November reached 498 hryvnyas and for the first time since independence exceeded the minimum living wage set for people capable of work by 36 per cent. The number of people receiving such wages is already almost half of all people occupied in areas of the economy. There has been a substantial improvement in the correlation of work payment.

Compared with the previous year, the proportion of people receiving the minimum wage dropped to 13 per cent (from 28 per cent). The number of people earning from 500 to 1,000 hryvnyas a month rose from 17 to 20 per cent, and the number of those earning over 1,000 doubled. There was a rise of almost 16 per cent of real incomes from social payments in kind - free or preferential services in the area of education, health care and culture.

Compensation for interest on loans from commercial banks to young families and single people for building and obtaining housing doubled, compared with the previous year. There was an increase in the amount of help for child care for children under three years. From 1 January 2004 the amount of one-off help on childbirth doubled. Meanwhile, we believe that inflation was fairly moderate, while the rate of the hryvnya, even at exchange points, virtually did not fall below 5.35 to the dollar. Are these measures effective?

One can reply in the affirmative, because there has been a rise in the birth rate. In January-November the childbirth rise was over 5 per cent against the same period in the previous year (the previous year's figure was 3 per cent). And this is the second most important integral indicator and, at the same time, a confirmation of society's confidence, especially of young people, in the policy of reform that the present coalition government is conducting with the support of the parliamentary majority.

INSTRUMENTS

There is a view that a good government is one that does not intervene in the economy at all. But I am not sure that such examples can be found in the civilized world. As for Ukraine, the government has to work daily and insistently, since we are still far from completing the reforms started and from the living standards in civilized countries. I will quote just one example: without correct regulation of the market by the state, would it have been possible to maintain the situation when procurement prices for grain increased as a result of the poor harvest five-fold (from 250 to 1,200 hryvnyas), but prices for bread only by 30 per cent? How catastrophic would the consequences have been for ordinary people without such intervention? Could the government really have thrown people to the wolves in a price disaster?

Therefore, first and foremost, we created conditions for an investment innovation model of economic development. Such a task is difficult to implement. For this it is important to have political stability in society, and also the possibility to adopt prompt legislation aimed at reforming the economy and social relations. We have achieved something here, having laid the foundation for joint coordinated actions of the Cabinet of Ministers and parliament, of the government and the National Bank. The results of economic development and a warming of the business climate have been positively perceived by agents of the market and by internal and external investors.

The annual volume of direct foreign investments coming into Ukraine according to final estimates is due to reach a landmark sum - 1bn dollars, which is twice as high as in 2002. There has been a substantial rise in the population's confidence both in the state as a whole and the banking system. Ukrainians' deposits in banks increased by 70 per cent, reaching 31bn hryvnyas by the end of December. Almost half of the credit resources of commercial banks was created from those resources.

In January-November households spent 15 per cent more on acquiring consumer goods and services, thanks to which overall solvent demand and retail trade turnover increased by 20 per cent. Profitable work allowed an increase in savings and enterprises. Deposits by business entities increased by 60 per cent in 2003 (by 9mn hryvnyas), which was double the 2002 increment. As a result, credit investments in the economy increased last year by 60 per cent and by the same amount in areas servicing investment activity. The proportion of long-term credits rose from 26.6 to 42 per cent.

Government actions will continue to be directed at systemic structural changes in the economy, envisaging the establishment of favourable tax, monetary, currency and customs regimes and deregulation of entrepreneurial activity. Over the year of its activity, the government developed and tabled for consideration by the Supreme Council [parliament] a number of bills directed at deepening reforms, processes of democratization and protection of civil rights and liberties. Some of them were already passed at the fourth session. We have submitted over 200 bills for consideration at the fifth. These are all instruments of government policy, which should be constantly improved.

OPPONENTS

Unlike populist slogans, the government's activity proceeds from the fact that all problems cannot be solved immediately. We have to concentrate on some key problems and tackle them insistently and consistently. Evolutionary logic lies at the basis of our actions to reform society and the economy. But this, naturally, is no guarantee against mistakes or certain miscalculations. Opposition-minded politicians often point them out to us. But, as a rule, they view existing shortcomings exclusively as a result of bad work of the executive, and positive changes as things that the executive itself has nothing to do with. Moreover, our critics fairly freely or, more precisely unprofessionally, list reforms not carried out and laws not passed\y [ellipsis as published]

The authors of such exercises are little concerned by the limitations that time imposes on the government, the existence, or rather the absence of resources for addressing large-scale tasks and the attitude of various strata of the population to the proposed reforms. The same methods are also used by some politicians who come into the executive unprepared, to put it mildly, for practical work. This means that they use working time to build up their own political image rather than for practical responsible work. There is nothing personal in these assessments.

We can ignore the dubious morality of statements like "insufficiently high quality of state policy" and "insufficient understanding by the government of the importance of reform", but we do not have the right not to comment on an attempt to instil into society the idea of the possibility of carrying out reforms along the lines of a simplified, idealized scheme and, so to speak, on credit: at the expense of our children and grandchildren.

I would like to stress here and now that the discussion that was also held in the government does not concern the understanding of the actual content of market reforms. The point is in the details and subtleties - consistency, institutional preparation, cost and source of funding individual measures. The government is being "incriminated" for insufficient rates of reforming the state sector, as a result of which, it must be understood, there is a poor "clearing of the floor" for development of the private sector. We are being reproached for the fact that during tax and pension reform the system of paying insurance premiums to social funds, which is one of the causes of the shadow economy, remained unchanged.

The lack of an effective mechanism for returning VAT to exporters is equally criticized (incidentally, over last year 70 per cent more was returned than in 2002, and the Law on the State Budget of Ukraine for 2004 envisages covering the overdue budget debts for VAT that arose on 1 November 2003 and were not repaid by 1 January 2004 by means of processing them as internal state loan bonds paying an income of 120 per cent of the National Bank's discount rate). They cannot forgive us for failure in trying to reduce tax benefits. They recall that the government did not take measures for legislative protection of corporate and property rights. It did not prove possible to move from benefits to targeted monetary help to the poorest sections of the population and carry out reform of the municipal and housing system, power engineering and monopoly formations.

Government policy, in the opinion of the critics, often led to a strengthening of the influence of the state, which hampered the development of private initiative. It is a question of attempts to counter exports of petroleum products and creating restrictions on exports of coke coal and scrap metal. (Surely domestic producers need these products.) They reproach us for the fact that local administrations took a whole year to decide how to fix bread prices instead of paying attention to state reserves and signing contracts in advance to supply Ukraine with imported grain. (As if it was our government that squandered several huge harvests in a row!)

Quite a few complaints. And we listen to them carefully, although our own list of unresolved questions is much wider. But you cannot do everything for everyone at once. We believe that one of the government's biggest achievements is the fact that tax and pension reforms are being carried out under a balanced budget for the current year. The structure of state revenue now appropriately reflects the sources of the growth in the economy, formed, in particular, because of a favourable external situation. Payments from imports alone, which a few years ago virtually did not exist, amounted to about 12bn hryvnyas in the 2003 budget (11 months), almost a quarter of all revenue.

In this way, through the state budget, there is a redistribution of temporary revenue in favour of long-term structural balanced economic growth. Under different conditions, reforms could have been a fiasco. I remind you that in 2004 the budget bears an enormous financial weight: we have to pay out 2.6bn hryvnyas on foreign debt alone. But we are still raising the level of the minimum wage: from 1 January to 205 hryvnyas and from 1 November to 237 hryvnyas. From 1 March inter-duty correlation in wage payments will be restored for staff paid from the budget. Arrears in paying compensation and assistance to citizens affected by the Chernobyl disaster will be eliminated this year. There will be a substantial reduction in wage arrears and disability payments to miners.

Despite all this, we are being asked to reduce the tax burden additionally and immediately, and to reduce the norms of social payments by covering the deficit in the state budget at the expense of foreign loans. Our opponents are launching such proposals on to society, but are not explaining to people that the state sector of Ukraine is forced to bear the weight of subsidies for individual areas of the economy, so far poorly effective, but very important for the state's economic security.

First of all, we are talking about the agrarian sector, which employs a quarter of the country's workforce - three times as much as in some other states with a transitional economy, and six to seven times higher than in developed countries. To tackle financial problems in the coal industry that have built up over previous years, the 2004 state budget allocates over 4bn hryvnyas. The point is that only provision of state support can ensure minimum competitive advantages of certain industries.

Furthermore, the country has to find a justified balance between internal and external sources of funding problem sectors of the economy. It should also be borne in mind that the size of foreign credits that can be allocated for projects far from always corresponds to the strictness of conditions for providing them, and so the path of driving on the economy by new debt obligations is unacceptable for us.

PRICES AND POLICY

One of the government's biggest failures is that parliament, despite the existence of a coalition majority there, did not pass bills aimed at eliminating tax benefits. Such reform entails a redistribution of resources of pricing competitiveness and means a clash of interests of influential capital. The government is not abandoning its intention to cancel benefits, and is working in that direction with the corps of deputies. However, we are aware that time is needed for a final decision of the problem. A cardinal decision of many problems of society, in particular regarding property rights, requires a powerful institutional strengthening of the court system, which, dating back from Soviet times, was not inclined to execute complicated civil legal functions, especially with big expensive facilities.

As is known, complex natural conditions and mismanagement by previous governments led last year to a critical reduction in food resources. But we managed to do everything possible to stabilize the situation. Altogether, 3m tonnes of grain were imported in 2003. There was an allocation of 400m hryvnyas to form stocks of grain, other agricultural raw materials and foodstuffs in the state reserve, where about 1m tonnes of grain have already been stockpiled.

In regional reserves 4m tonnes (60 per cent of the target) have already been laid in. Subsidy mechanisms have been introduced to compensate for spending on prices rises for bread for socially vulnerable groups, and funds have been allocated from the state budget to compensate agricultural producers for damage caused as a result of natural disasters. Credits for them to buy fuel and lubricants and fodder grain for feeding livestock and poultry have been made cheaper. The 2004 state budget envisages 2.9bn hryvnyas for the development of agriculture. This is 90 per cent more than in 2003.

Speaking of obstacles to private initiative in pricing questions, our opponents quote examples that in fact show only the use by certain economic structures of lobbying influence to pursue their own business interests. Moreover, at the expense of the state or the population. Thus it cannot be a question here of excessive influence of the state in price formation, but of insufficiency of state policy, primarily in anti-monopoly regulation. When conflicts started on the food market, the state simply could not let vulnerable sections of the population fend for themselves, and was forced to resort to administrative price restrictions on bread and bakery products, flour and groats.

At the same time, the deficit could have been avoided if our predecessors had created the appropriate emergency stocks in the state reserve. We are told that the appropriate financial resources were not earmarked for that. But they forget that exporters' profits to a significant extent came from redistribution in their favour of numerous benefits and preferences intended by the state purely for agricultural producers. For that reason, in 2003 we had to resort to importing grain, but now at prices twice a high as export prices.

The state had to find budget resources, first to fill the emergency stock in the state reserve and, second to compensate for price rises for bread products for vulnerable sections of the population. But here, too, grain traders received an opportunity to obtain extra profit because of the introduction of a preferential regime - freeing import operations from VAT and import duties.

In this situation, to talk about limiting business rights - those of grain traders in this case - means, in my opinion, simply promoting lack of confidence in the government. Incidentally, the introduction where necessary of restrictions on exports of agricultural products is also practised by the European Union, and the lifting of restrictions is preceded by measures to prevent deficit and supplement stocks. I already noted that the government is not closing its eyes to the problems existing in society. In accordance with this, the first task is to organize feedback with the public, and correct plans in accordance with people's expectations and vital priorities.

We are most of all concerned by the quality of economic growth, especially in the long-term aspect and the course of structural reforms. This is a considerable proportion of raw material and energy intensive industries and natural monopolies that constantly create a threat of destroying the positive results achieved. The process of creating our GDP is linked to a considerable extent with foreign trade turnover. Such disproportion complicates the development of the internal market.

In significant volumes we import products of precisely those industries that in Ukraine were traditionally considered structure-forming, but today the level of use of production capacities there is extremely low. Suffice it to say that the proportion of products of machine building and light industry in the overall volume of the country's industrial output is three to six times lower than in developed countries and the world as a whole. In particular, we have lost competitive advantages in production of lorries and buses. Because of that, for example, the Kiev mayor's office was forced to buy big city buses from Belarus, although they are also manufactured in Ukraine.

Our consumer market to a considerable degree, and completely without a fight, has been given over to foreign producers, and so even a rise in the population's purchasing power has not affected the situation in light industry. It is the same situation with production of domestic appliances (with the possible exception of refrigerators). It is hard to list all the problems in agriculture, which, on such fertile soil has been unable to provide the country with its own bread.

FOREIGN POLICY AND TRADE

Despite criticism in parliament and beyond, in accordance with the instructions of the president [Leonid Kuchma], we are placing the emphasis on activating foreign economic relations in the framework of the Single Economic Space [SES] with Russia, Belarus and Kazakhstan. We are seriously worried by the current situation, especially in trade with Russia. Exports to the Russian Federation compared with 2000, when we had the best indicators, increased by only 10 per cent, and its proportion in our overall exports dropped from 24 per cent to 18.7 per cent. At the same time, imports increased by a third. The negative balance of payments amounts to 3.9bn dollars, and increased by 70 per cent. Everyone knows the reason - imports of energy sources from Russia.

What is more, it must be borne in mind that as the economy grows, requirements for energy sources will grow. Therefore, the SES may become a systemic economic I-spy. The creation of the SES and Ukraine's accession to it, in my opinion, does not impede the implementation of the government's intention to accelerate membership of the EU and the WTO, and Ukraine's European choice as a whole. Nobody in the European Union was shocked by the concept of regional economic integration under the SES title.

Pragmatists in Europe perfectly understand that this is not an alternative to Ukraine's European choice, but an instrument for speeding up our country's emergence to higher economic standards. And if that happens, then it will only be to the benefit of our European partners too. After all, in particular, there will be an increase in the absolute weight of the type of profit that investors will able to get in Ukraine. In the WTO, as far as I know, the question of the SES is not at all regarded as a factor influencing Ukraine's entry into that organization.

FINANCES

We also cannot close out eyes to problems that negatively affect the financial position of enterprises and state finances. The government's measures directed at banning payments to the budget in non-money form, reduction in the level of barter operations, and strengthening of payment discipline have had a positive influence on supplementing the circulating assets of enterprises and payments to the state budget. Money payments are covering an increasingly wide spectrum of economic relations, which is an important prerequisite for effective structural moves.

The level of barter operations in industry and agriculture now amount to only 2 per cent. The level of payments for use of energy sources has reached a level of 85-95 per cent. This has favourably affected the reduction in volumes of overdue accounts receivable and payable. Compared with the beginning of 2003, they fell by 8.7 and 4.8 per cent respectively.

On the eve of the visit of a FATF mission, the prime minister [Viktor Yanukovych] set the task of starting a struggle against the shadow economy in the country. The task was posed of developing and introducing a scientifically grounded and practically balanced programme of bringing the economy out of the shadow. Its "enforcement" element is the disclosure and prevention of shadow turnover, in particular illegal manufacture of fraudulent products (liquor and tobacco goods and food products).

Incidentally, the rise in Ukraine's investment attractiveness, improvement of our sovereign ratings and headlong growth of internal and external investments are obvious evidence that we are on the right path.