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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

ECONOMY FOR THE WEEK 

6 October, 1998 - 00:00


The first approach to the budget problem last week could hardly rate
as front page stories in economic journals. There were no original solutions
to financial problems and no political discoveries. Considering that the
budget bill is perhaps the most important instrument issued by the government
to determine Ukraine's life for the next year, political debates focusing
on it acquire a special meaning.

To begin with, unlike all previous budget battles in Parliament, even
the official version of the 1999 budget program does not pretend to be
realistic. In other words, the executive knew from the outset that they
would not be able to offer a genuine financial document, state cost and
profit sheet. Suppose we try to find out why.

Regrettably, the mean reason for the political and economic situation
that has developed is the inadequacy of the government's social obligations
(i.e., laws, habits, and illusions) to the actual capacities of the Ukrainian
economy. Over the past few years the state has actually discarded most
previous commitments in the economic domain which allowed the economy to
become a market or at least market-like. The situation in the social sphere
turned out entirely different. Here the state did the opposite, constantly
declaring its adherence to all the guarantees which it could never implement,
considering the amount of spending required by the economy with its continuous
production decline and failure to collect taxes in full.

It should be noted that social commitments, with regard to the Ukrainian
economy, are very different from the approach practiced in all civilized
countries: public education, health care, pensions, and welfare. In Ukraine,
these budget expense items are smaller compared to other countries with
transitory economies. Here social maintenance is manifest, say, in government
subsidies in the coal industry and constant concessions to coal miners'
blackmail; gratuitous loans to perfectly incompetent administrators and
managers. As for refusing to launch a real large-scale bankruptcy vehicle
in the industries, it was a purely social commitment undertaken to keep
people on enterprises' payrolls, regardless of those enterprises' efficiency
or viability. And the same is true of agribusiness. In other words, what
we have is social obligations "a la Ukraine" - i.e., the Cabinet's commitments
to retain industries that are useless and even harmful from an economic
point of view. And that all the above examples are to be referred to social
obligations is evidenced by the simple fact that the powers that be receive
nothing in return, not even political support.

It is hard to say which of the factors - political short-sightedness
or administrative incompetence - played the decisive role, but the absurd
principles of financing the so-called budget sphere have been kept intact
and automatically transferred from one budget program to the next.

Considering that the social obligations assumed by the powers that be
do not tally with the capabilities of the economy and state, Ukraine had
a large-scale budget deficit from the very onset. The consequences have
been studied and described in sufficient detail by the media. Until 1995,
this deficit was coped with by the government using National Bank credits
- in other words, by direct monetary emission. The inevitable result was
soaring inflation during the first three years of independence. In 1995,
it became possible to apply a more civilized non-inflation instrument:
borrowings made by the Cabinet abroad using internal government bonds.
Naturally, it was a typical financial pyramid, yet this vehicle has been
used by many countries for many years, in most cases working quite effectively
(for as long as the loan-GDP ratio remains within certain limits and its
precise value is very hard to determine - say, an average of 30-40%). As
a rule, the state acts as the most reliable guarantor, using taxes and
a normally functioning and growing economy. This was what the Ukrainian
government relied upon, as a matter of fact, as loans were first received
only from domestic resident legal entities, mostly commercial banks. However,
in 1996 it became clear that the banks were prepared to credit the state
only at a very high interest rate. The simplest way to lower it was by
allowing nonresidents access to the IGB market. This was done, but the
result was that Ukraine had become dependent of foreign buyers of government
securities and of the world market situation. In 1997, the situation was
going from bad to worse, with factors setting to work which were beyond
Ukraine's control. But there were domestic factors, too. The most important
one was that in the second half of 1997, each and everyone who knew and
cared realized that the Cabinet could not arrange for economic growth,
so the trends appearing at the turn of 1998 continued to gain in strength,
but then the economic crisis broke out and the situation worsened drastically.

The Day was informed by a Cabinet source that by the end of the
third quarter, government finance was on the verge of catastrophe. In July,
real budget returns amounted to Hr 995 million and dropped by a quarter
in August. In view of this decline, September ought to have brought at
least Hr 1.9 billion so as to make up for the July-August losses. In reality,
the September indices are likely to remain more or less the same as in
August and the prospects for the fourth quarter do not look any better,
although the government originally hoped to receive at least Hr 1.5 billion
monthly.

The budget bill tabled by the Cabinet (and voted down by Parliament)
represents the income item in the amount of Hr 19.2 billion and expense
worth Hr 22.9 billion, with 0.6% GDP budget deficit. Therefore, the Cabinet
still hopes to collect at least one billion hryvnias every month (compared
to Hr 744 million in August, which was more or less trouble-free). In turn,
the VR Budget Committee intends to continue working on an alternative budget
bill. Will it sound more realistic?

If one remembers that Yulia Tymoshenko pushed through Parliament a budget
resolution making no mention of a budget deficit and with the Committee
being prepared to finance all the above-mentioned social obligations, either
of two things is bound to happen: the alternative budget bill turns out
even less realistic than the Cabinet's (see 3rd quarter income figures),
or Ms. Tymoshenko urges to start the money-printing machines (because at
the interest rate stipulated by her budget resolution, no one will borrow
money from anybody).

Before actually starting the budget process, the key positions of the
opposing sides are polarized so much that an attempt to reconcile the interests
of budget-sustained  and other applicants for government subsidies
will have to be put off until all key political and economic issues are
ascertained, namely: will there be a financial landslide? If so, who will
remain in power (to allocate the budget resources)? Will the money-printing
machines be activated? If so, who will be the first to get hold of this
printed matter (along with the first superprofits). These questions sound
much more interesting, don't they?

 

 

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