What Legacy Will the New Government Inherit?

Anatoly Kinakh’s confirmation as premier appears to be the culmination of a sharp phase in the ongoing political confrontation, inspiring hope that Ukraine’s political life will get back to normal. It is symbolic that Oleksandr Moroz, architect of the cassette scandal, unexpectedly sided with those voting for Kinakh, thus ending the whole affair.

The way the new premier was approved and everything preceding it became irrefutable evidence of the moral fiasco suffered by both the Right and Left oppositions. Despite all the ado raised by the Yushchenko factions, they could not muster the strength to block Kinakh’s candidacy, and this was a matter of principle for them. Simultaneously, they demonstrated the fatuity of that principle; they actually had no arguments for rejecting Kinakh, except perhaps to show how deeply hurt their feelings were. And so they found themselves on the side of the political road; on the one hand, it is clear that they are now a factor not necessarily to be reckoned with and on the other, one cannot come to term with them much as one might wish to. The way Moroz’s faction voted points to the final collapse of the Right-Left opposition. In fact, he must have given up all hopes for the Right and decided to show some pragmatism. Another thing is that the nature of his pragmatism remains to be explained; Moroz has no allies left, and he will never make a deal with the regime or Center fractions. The Right, after suffering defeat, will never forgive him what they consider his apostasy. There are reasons to assume that the active part of society supporting the opposition will be bitterly disappointed. The Right opposition shouted so much about the catastrophe sure to befall us after Yushchenko’s replacement. Now he has left, but life goes on. We have to live and work, not shout.

The Communists are also on the losing side. They wanted to preserve their image as an opposition party in the eyes of the electorate, yet pragmatic reasoning prevailed. They missed a chance to take part in the formation of the new cabinet and restore their rights in the parliament. The Center fractions, acting as a political stabilizing factor, demonstrated very good coordination and this is inspires optimism, especially considering the future election campaign.

Confirming Kinakh proved such a success that this should impact positively on the West’s attitude. Messages of greetings from those recently lashing out at the opposition are the first signs that this is so. Western analysts are likely to revise their estimates of the political situation in Ukraine. Of course, much will depend on how active and consistent the new government proves to be. The tasks facing it are anything but easy.

The government crisis has drawn to a close, the country knows the new premier’s name. Anatoly Kinakh has taken over this cabinet at a very complex period, to which it is difficult to take an other than ambivalent view.

There is no way to deny certain achievements made by the previous cabinet (paying back pensions, reducing offset transactions and barter deals, etc.). However, it is political bias and conscious rejection of hard facts that prevent many from soberly comparing the true scope of what has been accomplished to that of the remaining problems. Thus far there are no serious grounds to discuss radical improvements in the economic and social situation or the conditions actually provided for steady economic growth and rising living standards.

The no confidence vote against Viktor Yushchenko’s government had no effect on our positive macroeconomic dynamics. Contrary to numerous apocalyptic forecasts by the former premier’s exponents, GDP and industrial output have shown some increase and the hryvnia has strengthened. This is explained rather easily: the favorable foreign economic situational factors starting in 1999 are still at play, causing production stability and even some growth. Ukraine’s main exports, metallurgical and chemical goods, are still very much in demand, and the renewal of production in CIS countries has dramatically expanded the market for our machine-building industry. The result is that the trade balance is definitely positive with much foreign hard cash flowing into Ukraine, making it possible to replenish National Bank reserves without much difficulty and find the money to repay part of the national debt.

In terms of positive foreign trade conditions, the Yushchenko government’s departure changes nothing, and the new cabinet’s prospects do not look bad. Of course, no one can guarantee that the situation will not worsen tomorrow, exposing the Ukrainian economy to foreign economic shocks. The situation on the domestic market, which is the indicator of economic stability, does not look cloudless at all. This is especially true of consumer goods.

Against the backdrop of increasing GDP and industrial output, consumer goods were lower by almost one-third in January-April compared to last year (and the nonfood goods down by almost 50%).

The reason is understandable: the population’s disastrously low purchasing power. What little growth it showed in the first quarter of 2000 does not tally as yet with the high production rate and is absolutely insufficient, considering its very low initial level. The new government faces the acute problem of revising a completely ineffective incomes policy, a problem that was not solved by the previous cabinet.

The legacy inherited by the new government includes UAH 4.6 million worth of wage and salary arrears and over 44 million (roughly as much as the Yushchenko cabinet faced when taking office) in terms of social payments to large families. Add here the problem of the people’s mounting municipal debts, currently over UAH 6.5 billion.

In 2001, the payments crisis continues to aggravate and enterprises are piling up debts. Direct foreign investment dropped by 5% in the first quarter of this year.

A list of such transient attainments could be made longer, but the main point is perhaps that the new government is starting to work at a time when there is a real threat of a budget shortfall for the year. Shortly before its dismissal, the previous cabinet began to discuss the possibility of sequestering budget expenses. Online data show that over UAH 8.9 billion was transferred to the common fund of the state budget in January- April, which is 97.4% of planned revenues. The payment shortage in the consolidated budget rose by UAH 1.741 million in the first quarter, totaling UAH 11.8 billion as of April 1, 2001.

The state budget was slated to receive UAH 1 . 564 billion in terms of privatization proceeds in January- April. UAH 714.2 million actually came in, and the April schedule was completely bungled, producing only 5 million.

Gas transit payments totaled UAH 534.4 million against the scheduled 827.5 million.

Considering that the previous cabinet failed to normalize relations with international financial institutions and Paris Club, the new cabinet’s task of replenishing budget coffers becomes extremely difficult.

Among other things, the new government will have to pay for the failure of privatization, it being the result of incompetent and often unlawful interference of previous cabinet members in privatization procedures. It will also have to pay for the failure to enact the tax code last year, contrary to the president’s requirement. This year the previous cabinet was confidently on the way to adopting its 2002 budget based on the old tax system. Preserving the old faulty tax system is the main reason for tax payment shortfalls and for fulfilling planned tax returns to the state budget in the first quarter of 2001 by only 78% (characteristically, tax payments in terms of fines and financial sanctions registered 127.5% above plan, which is graphic evidence that primitive fiscal pressure is being applied instead of consistent and painstaking efforts to increase tax payments).

The new government will have to practice a new approach to the social tasks of the budget that still remain slogans. Proceeding from the first quarter’s results, a budget surplus was again proclaimed — with just 90.3% of the quarterly budget expenditure items implemented to date. Naturally, expenses on education, health care, and culture remain considerably underfinanced.

Such is the actual worth of so- called proficit and social orientation of the budget.

The Yushchenko cabinet’s fall gave birth to countless forecasts about further increase in pension arrears. Yes, the problem exists and the Pension Fund shortage amounted to UAH 1.347 billion at the beginning of April. The new government will have to exert considerable effort to prove all those so-called well-wishers wrong.

It makes no sense to pause yet again on the critical situation in the energy sector or the previous cabinet’s “attainments” in establishing relationships with energy suppliers.

Another alarming fact is the inflation rate jump in April.

Anatoly Kinakh declared that he does not want to start with a clean slate. No need to worry about this, for the slate is already not that clean. It belongs to what someone once called success in digging up dirt.

There are reasons to believe that the new government will effectively cope with the extremely complicated tasks it faces. The new premier has identified his priorities: enhancing the social orientation of reform, tax reform, economically justified protectionism, active structural industrial and agrarian policy, administrative reform, change in the energy sector development strategy, pension reform, enhancing the role of the regions, etc. This can become the actual basis of bringing society together, securing cooperation between the government and sound forces at the Verkhovna Rada.

Another thing that inspires hope is that the new premier regards his approval by Verkhovna Rada primarily within the context of the compulsory resumption and deepening constructive cooperation between the legislative and executive branches. Experience shows that an effective government policy is impossible without such cooperation.