THE COST OF PRE-ELECTION ABSURDITY
Last week the most important issue was summing up the elections. First, everybody wanted to hear about the winners and know the score to try to figure out how this would affect the balance of political forces. After it transpired that the results would not change anything substantially, experts turned to abstract notions: Why had Ukraine made this choice? What had it cost the people? How quickly would the economy get over the pre-election absurdity?
The first question was quite simple. The very next day after the elections the principal political personae announced that they had predicted it all along. Elections in Ukraine did not seem to surprise anybody, serving fresh evidence of certain trends inherent in a number of postcommunist countries. The better off the electorate, the lower the voter turnout. The worse its economic condition, the better Leftists did.
Another characteristic of a transition democracy is its populist pandering. Ukraine is a graphic example. President Kuchma's team correctly estimated that a Communist influx in Parliament would prolong the Ukrainian economy's amorphous, depressed condition, and they were prepared to reinforce the pro-President strata at Verkhovna Rada come what may. The old Parliament's Left majority, in turn, was firmly resolved to seize the chance and become autocratic, later to get the Cabinet under their control and liquidate the presidency. Now it is safe to assume that neither side has succeeded. Still, the populist phenomenon has political as well as economic components. A careful analysis shows that what we have after the elections is not just a victory scored using all means available, but also staggering economic losses.
How much did Ukraine really have to pay for the elections? When posed this question, most experts would say they are not going to count how much money was actually spent on campaigning, adding that this is a lot of money (between several tens and several hundred thousand dollars per candidate, or between several hundred thousand and several million per party). Basically, the country has suffered not from campaigns (rather the contrary, as each campaign meant jobs, supplies, and services), but from political uncertainty and populist economic policy.
Very approximate estimates point to some $2,000,000,000 taken out of Ukraine under import contracts which no one seems in a hurry to perform. Add here $2.2 billion worth of foreign investment in government securities (this money is being exported pro rata the redemption of internal government bonds, as nonresidents had no other way to avoid purchasing them). Over 2.5 months of this year NBU's direct emission amounted to Hr 1,673,000,000 of which only Hr 50 million went to finance economic sectors. The Ministry of Finance used the rest to redeem domestic bonds.
One might think that this repatriation of funds and emissions are two different things. In reality, this policy has noticeably aggravated Ukraine's financial climate, calling forth an exodus of bankers. In fact, what the Finance Ministry and Cabinet did was to return Ukraine to early 1997 level when banks gave practically no loans to enterprises and internal government bond investment remained the most profitable transaction. One of the gruesome consequences of this economic policy is soaring government spending and budget deficit. According to NBU, 1990-97 state consumption rose from 19% to 60%, facilitated, among other things, by the Verkhovna Rada's lawmaking "talent." Currently, national disbursements are "regulated" by 62 laws, so even if the executive really wanted to, they would never be able to get out of the budget crisis.
Over the past several months the budget deficit has grown by 30% (up to 6.6%, or Hr 650 million). According to Minister of the Economy Viktor Suslov, this and other bungled government commitments caused the IMF and World Bank to halt financial aid. Fortunately, there is still hope as an IMF mission will work in Ukraine on April 7-21 discussing Ukraine's progress in fulfilling the Stand-by program and negotiating the FFF project, although this, too, will mean certain losses.
Last week news agencies reported that the National Bank had ordered all commercial banks with anonymous accounts to report on them. One IMF requirement for activating the FFF program is the invalidation of anonymous foreign exchange accounts in Ukraine. The United States wanted the same in order to sign a bilateral agreement preventing double taxation. At the time the Ukrainian side argued that such accounts attracted potential private investors and might well return to the banking system the equivalent of $2 billion in so-called shadow money.
In all probability this $2 billion dream never came true, which was to be expected. Lack of confidence in the Ukrainian government, constantly going from bad to worse, was also manifest in distrust in the reliability of bank deposits, reluctance to use the national currency, and disregard of the laws all of which would have a disastrous effect on the financial system of any country. NBU reports that in 1997 the population purchased $1.4 billion more than it sold. About $10-11 million is in circulation outside the banking system, and the budget sector picture is just as disheartening. As of March 1, 67,000 enterprises and institutions (11% of those operating in Ukraine) owe the budget over Hr 3 billion. The Tax Police's pressure on the taxpayer allowed reduction of these arrears over two months by Hr 704,900,000 (23% of total indebtedness). Public prosecutors received cases on 2,076 enterprises in default, but only 15 were declared bankrupt.
What meager returns the budget did receive were used for social payments (which, nevertheless, did not reduce the government's total debt). All other budget commitments have remained practically unfulfilled since the start of the year. Last week, to somehow improve budget revenues, the Cabinet discarded its own decision made two weeks ago, returning to clearing settlements. A Cabinet resolution instructed the Ministry of Finance, State Tax Administration, and a number of ministries and agencies to carry out such clearing in financing national budget expenses in the first quarter of 1998, setting the deadline of April 4, 1998. In other words, the authorities once again attested to their incompetence, this time in maintaining a rational fiscal policy in the heat of the campaign.
SUMMARY. The price Ukraine has paid for elective democracy and the right to continue on the road to civilization means at least a year and a half of foreign investors keeping the country under siege, the collapse of budget income and expense structures, exodus of billions of dollars in capital, exhaustion of hard currency reserves, and stock and monetary market crisis.
FORECAST. In the year and a half remaining to the next presidential campaign the government may attempt to improve the financial climate in political conditions similar to last year's. They will have to restore confidence in the currency and government securities, correct tax and budget discipline, try to ease tensions using the available ineffective social political tools, and persuade investors that the process of market reforms is irreversible in Ukraine. The more effective their effort in this direction, the less Ukraine will have to pay for the presidential race.
