INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING MONTHLY MONITOR Monthly Economic Monitor

• Svyatoslav Piskun, the former Deputy Head of the State Tax No.8 (22) Administration was appointed as the new chief public August prosecutor. 2002 • The Ministry of Economy and European Integration revised the GDP forecast for 2002. If previously the Ministry anticipated a 6.0% growth, two scenarios are now proposed. • The signed the law “On Grain and the Grain Market in Ukraine” envisaging state regulation of this market. • Ukraine introduced several new anti-dumping rules and special measures against imports from Russia. Population: 48.4 m • During the first half of 2002 tax arrears (VAT and enterprise Industry/GDP: 30.9% profit tax non-payments mainly) increased by more than 50%. Agriculture/GDP: 14.7% • The NBU increased the period for commercial bank refinancing Investment/GDP: 20.4% and lowered the discount and reserve requirement rates. Exports destination: Russia 22%, EU 17% Imports origin: Russia 34%, EU 20% Politics: Svyatoslav Piskun was appointed to be the new chief public prosecutor A new chief public prosecutor was appointed. Parliament approved the nomination of Svyatoslav Piskun, the former Deputy Head of the State Tax Administration and Head of the Investigations Department of the Tax Police. Parliament approved the major policy directions for the 2003 budget (Budget Resolution) on the condition that the suggestions by the deputies will be taken into account when the budget is prepared. One of the most important suggestions was a reorientation of Real Growth of GDP and revenues of the budget organisations from special to general funds. Industrial Output This measure should increase the transparency and accountability of 21 % yoy, cum. the state's financial situation. In addition, the declared the implementation of the 2001 Budget unsatisfactory. 18 Ukraine and France signed a bilateral agreement on restructuring 15 Ukraine’s state debt to France (EUR 18.96 m). This was the fourth 12 agreement Ukraine signed within Paris Club, following the debt 9 restructuring with Germany, the United States, and Italy. A similar agreement has still to be signed with Japan. 6 Parliament ratified an agreement with the IMF that foresees an 3 increase in Ukraine’s access to IMF loans. Ukraine’s quota will grow 0 by 29%. According to current arrangements under the Extended Fund Facility Program, Ukraine’s non-drawn balance, which expires Jul-01 Jan-01 Jan-02 Mar-01 Mar-02 Sep-01 Nov-01 May-01 on September 3, 2002, constitutes USD 978 m. A successful May-02 conclusion of the Program is doubtful due to unresolved fiscal real GDP growth questions including the VAT refund. Future co-operation with the IMF may include a stand-by program or non-lending collaboration. real growth of industrial output

Real economy: The Ministry of Economy revised its S ource: Derzhkomstat macroeconomic forecast The Ministry of Economy and European Integration revised the GDP forecast for 2002. If previously the Ministry anticipated a 6.0% growth, two scenarios are now being proposed. According to the target scenario, the real GDP will reach 6.0% in 2002, while the conservative scenario envisages only a 4.8% increase. The present growth dynamics are quite uneven. Although the real GDP grew by 4.3% yoy from January to June, the value-added declined for several types of economic activity including construction, the Institute for Economic Research extractive industry, as well as generation and distribution of and Policy Consulting electricity, gas and water. The GDP growth was based on three Reytarska St. 8/5-A, 01034 sectors: manufacturing, the wholesale and retail trade, and Tel. (+38044) 228-6342 agriculture. Fax (+38044) 228-6336 For January to June the industrial output increased by 5.8% yoy, E-mail: [email protected] compared to 3.1% yoy for the first five months. This rise could be http://www.ier.kiev.ua

1 INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING MONTHLY MONITOR attributed to reduce of uncertainty caused by the recent elections together with growing household and external demand. There is no single industry that can be seen as the growth engine. Growth of Value Added in Selected Sectors An analysis of the expenditure side of the GDP showed that final % yoy, cum. consumption during the first quarter of 2002 continued to dominate 30 in Ukraine. While it grew by 6.4% yoy, fixed capital accumulation 25 showed a 1.4% increase only. 20 Sectoral trends: A new system of grain pledge 15 purchases was introduced 10 Agriculture. The President of Ukraine signed the law “On Grain and 5 the Grain Market in Ukraine” that envisages a state regulation of this 0 market by purchasing grain at a pledge price. The aim of the law is -5 to smooth price volatility on the market. This kind of regulation has -10 proven to be expensive and inefficient in other countries, and it is doubtful whether Ukraine has the financial and administrative Jul-01 Jan-01 Jan-02

capacities to implement such a regulation at this time. In addition, Mar-01 Mar-02 Sep-01 Nov-01 May-01 May-02 the law is not written with enough clarity concerning its manufacturing industry implementation, and where the revenues required offsetting its retail and wholesale trade costs will come from. As a result, it is doubtful that grain producers will trust this new state regulation system. construction agric ulture & forestry The VAT refund problem again emerged rather sharply in connection S ource: Derzhkomstat with grain exporters who did not receive their VAT reimbursements from the state. The grain exporters threatened to lower the purchase price for grain by 20% if this issue is not resolved. On July 29 the State Tax Administration approved a VAT debt repayment schedule to exporters. The timing will depend on the amount owed and on the company-exporter, varying from three months to one Privatisation Revenues in 2002* year on average. UAH m 1000 Privatisation. The targeted level of privatisation receipts for the first half of the year was not met. According to the Ministry of 800 Finance, the total receipts from privatisation, directed to general 600 state revenues, did not reach even half of the UAH 836 m targeted 400 for this period. Vice Prime Minister Vasyl Rogoviy stated that privatisation of Ukrtelekom by the end of this year is completely 200 unrealistic. Thus, realising the UAH 5.8 bn annual privatisation plan 0 is very uncertain. Jan Feb Mar Apr May Jun Infrastructure. Tariffs for intercity telephone calls will increase by nearly 50% in an attempt to adjust prices to costs in the collected planned telecommunications sector. The tariffs for international calls will be Source: State Treasury reduced by 20% on average since the underlying costs decreased. * only general fund of the budget Although the government tries to bring the telecommunications sector into accord with market standards, it decided to maintain privileged tariffs for rural areas, which leads to cross-subsidisation and inefficiency. The number of privileged telecommunication subscribers, who pay 50% of the standard tariffs, remains constant at 1.6 million. Merchandise Trade Dynamics External Sector: Trade relations with Russia remained Exports quite strained 1600 USD m According to the Derzhkomstat, exports grew by 2.8% yoy and imports by 2.4% yoy during the first five months of the year. This 1200 positive dynamic resulted in a merchandise trade surplus of USD Imports 473.6 m. The growth of exports of food and agricultural products, mineral products and textiles overweighed the reduction in 800 chemicals and metal exports. Ukraine actively penetrates world markets, especially the Asian and 400 Balanc e African ones. However, trade relations with Russia, its major trade partner, remained quite strained. During January to May exports to 0 Russia dropped by 30%, while imports fell by 3%. In July Ukraine introduced several new anti-dumping and special measures against

imports from its neighbour. In particular, a quota on baking soda -400 Jul-01 Jan-01 Jan-02 Mar-01 Mar-02 Sep-01 Nov-01 was established, a tariff on railway switches, as well as a temporary May-01 May-02 tariff on selected types of passenger cars. In its turn, Russia S ource: Derzhkomstat introduced an anti-dumping tariff against Ukrainian concrete

2 INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING MONTHLY MONITOR reinforcement bars and a temporary tariff on zinc-coated rolled stock. Negotiations on a new free trade agreement came to a deadlock. Primary State Debt Market Fiscal policy: Tax arrears increased by a half in the first UAH m % six months 700 16 After the first half of 2002 the consolidated fiscal surplus was 1.5% 600 14 of GDP. However, both revenues and expenditures remained behind 500 12 10 budget, emphasising the continuing fiscal problems in the country. 400 8 As of July 1, the tax arrears, mainly VAT and enterprise profit tax 300 6 non-payments, amounted to UAH 9.9 bn, having increased by more 200 4 than half since the start of the year. The energy sector has 100 2 accumulated the largest amount of arrears. The increase in VAT 0 0 arrears by this sector casts doubts on the effectiveness of the Jan Feb Mar Apr May June July measures the government undertook to improve the VAT administration system. Amount of government bonds sold In July the Ministry of Finance received around UAH 597 m from Yield to maturity (monthly average) government bond sales, mostly short-term ones. That constitutes Source: NBU 44% of the total amount of government bonds sold since the start of the year. This boom in sales could partially be attributed to their rising yields. The low revenues compared to budget and the difficulties with privatisation receipts made this internal borrowing an important source for securing state debt payments.

Monetary policy: The NBU further reduces the discount CPI and Monetary Base and reserve requirement rates 50 %, yoy In order to stimulate long-term crediting, including investment projects, the NBU increased the period of commercial bank 40 refinancing from 180 to 270 days. Moreover, on July 5 the discount 30 rate was further reduced from 10% to 8% p.a. These measures Monetary base stimulated a demand for NBU refinancing funds, and in July the total 20 CPI amount of commercial bank refinancing through quantity tenders reached UAH 315.1 m compared to UAH 7.1 m in June. However, 10 the quantitative significance of this instrument of monetary policy 0 remains low. On July 8 the reserve requirements were further reduced. The NBU -10 Jul-01 Jul-02 Jan-01 Jan-02 Mar-01 Mar-02 Sep-01 Nov-01 set the reserve rate for demand deposits in national currency to May-01 May-02

10% and to 12% for foreign ones. The NBU also reduced the S ource: Derzhkomstat, NB U requirements on time deposits in foreign currency to 8-10%. Still, the reserve requirements on national currency deposits are much lower, creating for these deposits more favourable conditions. Currently the share of deposits in foreign currency constitutes approximately one third of total deposits, having steadily reduced from the maximum of 45% in January 2000. The July consumer prices maintained a downward-sloping dynamic: inflation was –0.9% yoy, despite a fairly high growth of the Structure of Ukrainian Commercial monetary base (47.2% yoy). The Ministry of Economy and European Banks Credit Portfolio Integration revised its inflation forecast from 9.8% down to 3.5 to 40 % 6.5% yoy depending on the municipal tariff policy during the rest of 35 the year. 30 Financial markets: Although the amount of bad credits 25 20 has decreased, it is still quite high 15 Banking sector. During the first half of 2002 the Ukrainian 10 commercial banks reduced the share of bad credits from 5.8% to 5 5.6%. According to NBU Chairman Volodymyr Stelmakh, the total 0 share of bad, suspicious and prolonged loans amounts to 15% of the credit portfolio, significantly higher than internationally accepted. Jul-01 Jul-00 Jan-02 Apr-02 Jan-01 Apr-01 Jan-00 Apr-00 Oct-01 Although the NBU actively tries to involve the banks into sharing Oct-00 information through its database of bad debtors, they are reluctant Prolonged Overdue Suspic iuos to do so and only 60% of all banks became members of this system.

According to the Association of Ukrainian Banks, the majority of the Source: NBU big banks is not willing to disclose information to the state and hence did not join the database. A possible solution could be the creation of an independent non-state database.

3 INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING MONTHLY MONITOR

Economic Trends Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Apr May Jun Jul GDP growth (real) % yoy 7.8 10.8 10.7 5.7 3.8 5.0 2.6 6.7 … GDP growth (real) % yoy cum. 7.8 9.4 10.0 9.1 3.8 4.1 3.8 4.3 … Industrial production (real) % yoy cum. 17.4 18.5 16.6 14.2 3.1 3.5 3.1 5.8 … Agricultural production (real) % yoy cum. 6.1 5.8 8.6 9.9 11.1 11.0 10.6 9.2 … CPI % yoy eop 17.3 11.6 7.3 6.1 2.2 2.1 1.4 -1.1 -0.9 PPI % yoy eop 12.8 9.4 5.9 0.9 -0.5 0.5 2.0 4.0 5.0 Exports (USD)* % yoy cum. 15.1 16.0 11.3 9.5 … 3.0'' 2.8'' … … Imports (USD)* % yoy cum. 3.1 12.3 14.4 14.1 … 3.7'' 2.4'' … … Merchandise trade balance USD bn cum 0.16 0.44 0.40 0.20 0.14 0.38'' 0.44'' … … Current account USD bn cum 0.28 0.85 1.24 1.40 0.72 x x x x Current account % GDP 3.5 5.0 4.4 3.7 9.0 x x x x International reserves USD bn eop 1.52 1.86 2.72 3.09 3.11 3.14 3.21 3.41 … Monetary Base % yoy eop 33.1 35.4 37.2 37.4 49.9 45.2 46.8 38.0 47.2 Lending rate on UAH credits ** % pa, eop 33.8 32.1 30.7 29.6 27.7 27.0 26.2 25.0 24.9 Exchange rate (official) USD aop 5.43 5.41 5.35 5.30 5.32 5.33 5.33 5.33 5.33 Exchange rate (official) EUR aop 5.02 4.73 4.76 4.74 4.66 4.71 4.87 5.06 5.28

SOURCES: Derzhkomstat, Ministry of Finance, NBU, IFS, own calculations " Monthly figures are only for merchandise exports and imports (source: Derzhkomstat). Quarterly figures are for trade in goods and services (source: NBU). * Growth rate in dollar terms. ** Weighted average for different maturities (source: NBU)

Key Economic Indicators 1995 1996 1997 1998 1999 2000 2001 Nominal GDP UAH bn 54.5 81.5 93.4 102.6 130.4 173.0 201.9 Nominal GDP USD bn 37.0 44.6 50.2 41.9 31.6 31.8 37.4 GDP growth (real) % yoy -12.2 -10.0 -3.0 -1.9 -0.2 5.9 9.1 Industrial production % yoy -12.0 -5.1 -0.3 -1.0 4.0 12.4 14.2 Agricultural production % yoy -3.6 -9.5 -1.9 -9.8 -6.9 9.8 9.9 CPI % yoy aop 376.4 80.2 15.9 10.6 22.7 28.2 12.0 CPI % yoy eop 181.7 39.7 10.1 20.0 19.2 25.8 6.1 PPI % yoy aop 488.9 52.1 7.7 13.2 31.5 20.9 8.6 PPI % yoy eop 172.1 17.3 5.0 35.4 16.0 20.8 0.9 Exports (gs, USD) % yoy 2.6 19.1 0.0 -13.4 -7.9 17.9 9.5 Imports (gs, USD) % yoy 1.5 17.4 2.0 -14.0 -19.1 18.9 14.1 Current account USD bn -1.2 -1.2 -1.3 -1.3 0.9 ° 1.2 °° 1.4 Current account % GDP -3.1 -2.7 -2.7 -3.1 2.9 3.8 3.7 FDI (net) USD bn 0.3 0.5 0.6 0.7 0.5 0.6 0.8 International reserves USD bn 1.1 2.0 2.4 0.8 1.1 1.5 3.1 Fiscal balance*** % GDP -6.9 -5.1 -6.8 -2.7 -2.1 -0.7 -1.9 Total public debt % GDP eop 40.9 25.0 30.3 49.4 61.4 44.5 37.4 External debt (total) % GDP eop 26.3 20.5 19.4 38.4 50.0 32.5 26.8 Monetary base % yoy eop 132.3 38.0 44.6 21.9 39.3 39.9 37.4 Exchange rate USD aop 1.5 1.8 1.9 2.4 4.1 5.4 5.4 Exchange rate USD eop 1.8 1.9 1.9 3.4 5.1 5.4 5.3 Exchange rate EUR aop 1.9 2.3 2.1 2.8 4.4 5.0 4.8 Exchange rate EUR eop 2.3 2.4 2.1 4.0 5.2 5.1 4.7 SOURCES: Derzhkomstat, NBU, IFS, Ministry of Finance, own calculations *** Fiscal balance is calculated in line with new methodology introduced in 2002. "Minus" means budget deficit ° The value of goods transferred to Russia according to the inter-governmental agreement reached in May 1997 on the Black Sea Fleet division totaling USD 726 m is not included °° The value of aircraft complexes transferred to Russia as repayment of a gas debts according to inter-governmental agreement reached in October 1999 totaling USD 274 m is not included. Notes: aop average of period p.a. per annum avg average eop end of period bp basis points gs goods and services cum. cumulative yoy year-on-year change mom month-on-month change ytd year-to-date

4