Ukraine's economic indicators point to robust growth in January-February (03/30/03)

Ukraine's economic indicators point to robust growth in January-February

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Newly released indicators show that Ukraine's economy has returned to robust growth in the first two months of this year, after an economic slowdown in 2002 had caused concern that a contraction may be imminent.

Numbers released by the government on March 25 show that in the January-February time period the gross domestic product (GDP) increased by 7.2 percent, with 7.7 percent growth in January, followed by a 6.7 percent increase in February.

President Leonid Kuchma, speaking at a regular monthly press briefing, praised the government of Prime Minister Viktor Yanukovych for smoothing out the economic bumps that had threatened continued economic expansion, but said that reforms needed to be completed to assure longer-term growth, which would put the country at a level of development comparable to other European countries.

"The performance of the last two months has shown that the negative tendencies of last year have been dealt with," said President Kuchma.

He noted that he remaines concerned about the continued large debt carried by factories in some industries, particulary to electricity providers.

In 2002 Ukraine's economic expansion slowed to an annual rate of 4.1 percent after hitting 9.1 percent growth in 2001. Last year's slowdown was precipitated by a growth rate of only 3.6 percent for January-February. The strong initial figures for this year have led Ukraine's Ministry of the Economy to raise its outlook for the year from 4 percent annual GDP growth to 6 percent.

President Kuchma said he was particularly pleased with a sharp upturn in machine building, which he said has historically been the cornerstone of a strong Ukrainian economy. In the first two months of 2003 the sector showed a production increase of 12 percent over 2002. Industrial Policy Minister Anatolii Mialytsia predicted on March 13 that the sector could see growth of up to 15 percent by year's end.

The construction sector experienced the strongest growth in the first two months of this year, with a 19 percent increase in activity over the same time period in 2002. Light manufacturing came second, with a 12 percent increase, followed by 10.7 percent growth in the energy sector.

Heavy manufacturing, another key industry, also had a strong showing, with a 10.8 percent increase. Agricultural sector expansion, however, was less robust, with growth reaching merely 4.3 percent for the industry as a whole. While agricultural processors saw relatively stronger growth, at 6.8 percent, farmers achieved barely a 3 percent increase in production.

Analyst believe that the Ukrainian economy will continue to expand, although a question remains whether the new 6 percent forecast offered by the Ministry of Economy is realistic. The ministry's long-term goal is for growth of 8 to 10 percent for the combined 2003-2004 time frame, which they expect to attain by spurring small and medium-sized business development, bringing companies out of the shadow economy and bringing in foreign investment.

Oksana Novoseletska, assistant executive director of the Center for Social and Economic Research, predicted during a roundtable at the Ministry of Economy on March 25 that Ukraine would experience only around 4 percent growth for the year. She explained that second half growth should slow, caused in part by the repayment of a large amount of government foreign debt.

Ms. Novoseletska added that a bad spring harvest could cause a return to inflationary tendencies after deflation of 0.6 percent last year. The inflation rate for the first two months is already at 2.6 percent, with the 2003 target set at a total of 6 percent.

Ms. Novoseletska explained that fewer Ukrainian agricultural goods, along with world oil price increases, a post-Iraq War devaluation of the euro and planned increases of up to 15 percent in government worker salaries in Ukraine could easily spur inflation beyond 6 percent. She noted that the price increases could deplete consumer demand, which has been the overriding factor in economic growth over the last three years.

Marek Dombrowski, director of the center, said the government must bring more businesses out of the shadows if it expects economic development to continue. He said that to do this, it must soon introduce long-awaited tax reforms, which must include an across-the-board tax comparable to Russia's 13 percent tax rate. He also explained that the government must complete reforms in the energy, agriculture, communications and transportation sectors - including privatization of government facilities.

Privatization, along with the development of a sound government investment policy and properly run lending institutions that would make loans more easily available to a wider spectrum of the Ukrainian population, are the keys to sustained economic growth, according to Mr. Dombrowski.

"We believe the highest priority for further economic reform must be in educating on investment policy, in the development of lending institutions and in continued privatization," said Mr. Dombrowski.

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