Last Friday the National Security and Defense Council dealt with economic issues. Opening the session, President Yushchenko said that the meeting would discuss measures to boost the protection of ownership rights in Ukraine. As the Ukrainian leader put it, the way in which this problem is resolved will send investors a signal “to work or not to work with Ukraine.” Members of the NSDC were also expected to discuss the president’s draft decree on priority measures to counter corruption and bring the nation’s economy out of the shadows, as well as measures to ensure Ukraine’s accession to the World Trade Organization.
Did the session’s busy agenda cover a fundamental issue underlying the domestic and foreign economic problems that are slowing down the country’s development? That problem is the progressive movement of the economy into the shadows. It appears that Friday’s session focused attention on this very question.
During the first six months of 2005 the size of Ukraine’s unofficial economy increased to 32 percent of GDP, whereas in the first quarter it declined to 28-29 percent from 35 percent of GDP in the first quarter of 2004. This follows from an analytical report prepared by experts at the Ministry of Economy as part of their consensus forecast of macroeconomic indicators for 2005-2006. “The presence of unresolved problems in the economy did not facilitate the reinforcement of reduction trends in the shadow sector,” the experts concluded. They attribute this to the deteriorating business environment in the wake of major legislative amendments that preceded the adoption of the 2005 budget. This also slowed down the growth of foreign investment in the Ukrainian economy and increased the tax burden on the economy. This is the first time that a government agency has openly admitted this. The volume of overdue VAT refunds has hit UAH 2.6 billion. The experts believe that “social disbursements in the current year are being made by divesting enterprises of their funds, increasing the government’s liabilities, and reducing spending under important budget items that are intended to maintain important infrastructure units in proper condition.” Analysts also point to a significant slowdown in the growth rate of fixed capital investments: from 32.2 percent in the first half of 2004 down to 8.5 percent in January-June 2005. The economy has suffered heavily from the revaluation of the hryvnia’s real exchange rate, which the National Bank of Ukraine carried out last spring. As a result of this move, the cost competitiveness of Ukrainian enterprises has declined by 14.1 percent over the past eight months, leading to negative changes in the structure of exports and significantly reducing the surplus of the nation’s balance of payments.
In these conditions the question of Ukraine’s earliest possible accession to the WTO is no longer as relevant as it once was, even though Ukrainians still have fresh memories of the confident, or by now rather self-confident, statements of the Ukrainian leadership to the effect that Ukraine would be admitted to the WTO this year.
On the eve of the NSDC session, some conflicting rumors were circulating in Kyiv that this “debriefing” on Ukraine’s progress to the WTO would result either in decisions to dismiss some high-profile officials or in the formulation of a coordinated position that would explain to the public the reasons why promises are not being fulfilled. However, Valeriy Pyatnytsky, the former first deputy minister of the economy, who used to work on this question in his official capacity, offered a reassuring forecast in an interview with The Day. “[WTO accession] talks have been going on for quite a number of years, and I don’t believe that it would be appropriate to conclude that something wrong was done during the last six months or one year, because we made certain decisions at different stages and concluded certain agreements that reflected an understanding of the process within a specific context,” Pyatnytsky said, adding, “Bilateral talks and agreements signed in 2001 are one thing, but those concluded today are a different matter. The situation changed in the economy in general and in individual sectors in particular.” He also said that the NSDC session would analyze the situation “very profoundly and decisions will be made to finalize the process, not decisions aimed at canceling something. Otherwise we would have to start the negotiation process all over again.”
