OLD AGE SECURITY — FOR IMMIGRANTS ONLY SO FAR
Over the past few years endless debates on the reasons behind the sharpening budget crisis and ways out seem to have accustomed everybody to the idea that budget problems can stay unsolved for years in Ukraine without affecting the financial market’s stability. Perhaps such self-complacence explains why the financial circles took the government’s decision to increase the issue of internal bonds threefold rather calmly.
Last year, when Ukraine received no credits from international financial organizations, contrary to their promises, a similar Cabinet decision increased the issue of such bonds almost twice over to make up for the resultant deficit. Toward the end of 1997 the Cabinet experienced something of a shock when the holders of government bonds, instead of reinvesting their yields, wanted to sell immediately every bond they had, even at a loss. But even then a compromise was found and early in 1998 the internal government bonds, described as “expensive” were replaced by Eurobonds.
After the tempestuous election campaign it again transpired that the ruling regime would have to pay too much to get inexpensive foreign loans, and again the Cabinet used “cheap” hryvnia resources. Cheap for the government, of course, because for citizens who had to live on back wages, barely making ends meet, bonds at 50% hryvnia (or 25% in hard currency) could not seem “cheap.” In fact, talking about “expensive” and “cheap” money does not seem proper in this context. Oleksiy Vashchenko, a consultant at the Harvard Institute of International Development, believes that this was the only practical move the Ukrainian government could make under the circumstances: “As of April 5, 1998, out of Hr 2,996,000,000 worth of government bonds to be issued in 1998, Hr 2,979,000,000 had been placed. Naturally, to continue issuing bonds on lawful grounds, the government had to change the law. But it could not discontinue piling up the external debt, because by April 1 the Finance Ministry’s liabilities totaled some Hr 8,289,000,000, of which Hr 6,044,000,000 had to be paid by the end of the year,” Mr. Vashchenko explains, adding that “at the current level of government spending and continuing economic decline the existing debt commitments can be redeemed only by borrowing more funds, thus adding to foreign and domestic liabilities.”
Under economic laws, a financial system can be revived by observing two most important conditions: starting economic growth and reducing budget expenses. Last week, the Ministry of Statistics published a report on the industries in the first quarter of 1998. In particular, Ukraine’s industrial output increment in March, compared to February, was 12.5%, or 1.7% compared to the same period last year. But could this trend be considered reason enough for optimistic forecasts? In Mr. Vashchenko’s opinion, “Increasing industrial output does not mean that economic growth has begun nationwide. Gross domestic product has not increased and no one knows when it will...” Minister of the Economy Viktor Suslov adds to this picture of illusory growth: the above “attainment” appears to have been achieved due to free use of the national material reserves (some Hr 3 billion), increasing nonpayments (Hr 8.5 billion worth of arrears on gas consumption), back wages (Hr 5.3 billion as of 04.01.98), budget debts, etc.
It would be a mistake to think that the government does not realize the scope of the ongoing crisis. Evidence of this is the President’s public statement about the need to economize on budget funds last week. Of course, promising reforms and carrying them out are different stories. Take the pension reform, for instance, which is supposed to reduce budget spending, at least by putting things in order at the Pension Fund. In mid-1996, the Cabinet first announced that things would change for the better for the pensioners. However, due to either lack of consideration or someone’s malignant plotting, everything seemed to be done to convince the populace that this reform would mean raising the retirement age and imposing allowance restrictions on working pensioners. As a result, no one mentioned this reform again, not in 1996 or 1997. Another attempt to return to this large-scale project was made last week, but that does not mean it will be successful, of course.
Perhaps to somehow improve the “image” of changes stipulated by the Presidential edict, the document lists measures to improve the pensioner’s condition: stage-by-stage increase in minimum old-age allowances, to reach the official low-income level (currently set at Hr 73.3 per month), periodic indexation of pensions pro rata growing prices, and providing conditions for the development of pension insurance. However, the key proviso, for which the President actually stepped up the lawmaking process, is the institution of personified accounting of citizens’ contributions to the Pension Fund. The thing is that 14,000,000 citizens are receiving pensions in Ukraine, of whom about 3,000,000 have not reached the age of retirement. At the same time, only 1,000,000 of 30,000,000 able-bodied residents are making payments to the Pension Fund. Only 10,000,000 of 16,000,000 can work full hours. The rest are either underpaid or formally on payroll without being paid. Add here the populist pension rise on the eve of elections and the fact that over 70% of the enterprises are either heavily in pension debt or pay no “official” wages. The resultant picture clearly shows that the present pension system does not allow any increment in Pension Fund returns.
Everyone realizes that the budget agony makes reforms in the social sphere imperative. Still, was it worth starting budget reforms with the pension issue? Maybe they should first win public confidence by invalidating bureaucrats’ privileges, deregulating enterprises, and allowing people to earn their pensions? Otherwise their insurance policies will resemble what people have in the West only outwardly, with pension accruals remaining an unaffordable luxury.
