Information about Europe Europa
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International Monetary Fund
Published Date:
March 1996
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I. Introduction

1. The political background

In June 1995, more than three years after regaining independence, Ukraine turned the page on its Soviet-era political system. Following months of negotiations, and a protracted political struggle. President Kuchma and Parliament reached an accord on the division of powers between the executive and legislative branches. This accord, which gave the executive branch greater powers to govern by decree, and to implement decisive reforms, defined the political landscape of the year 1995.

Like other republics. Ukraine inherited from the former Soviet Union a constitution which made it virtually impossible to conduct decisive political and economic reforms. Under the Soviet constitution, Parliament could veto any government decision and could refuse the appointment of any Cabinet member. As a result, Ukraine’s reform-minded government had to wage a constant struggle with Parliament to forge ahead with reforms.

In December 1994, President Kuchma introduced a draft law on the separation of powers which sharply limited Parliament’s authority and created a powerful presidency. The initial draft gave the President the power to dissolve parliament, after consultations with the supreme and constitutional courts, if parliament twice failed to approve a government program or failed to approve a budget within three months of the Government submitting it. These provisions caused strong opposition in Parliament, and months of political wrangling. Eventually, President Kuchma agreed to withdraw them and Parliament agreed to sign a pact.

Under the agreement signed on June 8, 1995, the President won the right to choose the Prime Minister and ministers without the approval of legislators. He also won the right to issue decrees on economic reform when legislation was lacking. Finally, the President won authority to veto legislation, but lawmakers may overturn a veto with a two-thirds majority vote. Parliament retained the right to veto presidential decrees, with a simple majority of votes, if they are deemed unconstitutional. It also kept the right to reject government programs, and to hold votes of confidence in the Cabinet. Such votes can lead to automatic dismissal of the Cabinet.

As the accord contravened many articles of the constitution, it was agreed that the text would serve as a temporary constitution--until a permanent new constitution could be agreed upon--by June 1996. Immediately following this accord, President Kuchma appointed Mr. Yevhen Marchuk as Prime Minister and instructed him to form a new government. Mr. Marchuk, who had been acting prime minister since the resignation of Mr. Masol in April 1995, said that he would form a government consisting of reformers and professionals. The new government was finally formed in July, with Mr. Roman Shpek elevated from the post of Minister of Economy to Deputy Prime Minister for the Economy.

While the new political accord was intended to allow a more decisive implementation of economic reforms, it did not result in any immediate improvement. Despite the new framework, the political struggle between the Government and Parliament continued. In September 1995, President Kuchma used his new authority to introduce, by decree, a number of tax increases required to achieve the deficit target; however, these decrees were vetoed by Parliament a few weeks later, in an apparent contradiction of the June accord. Parliament subsequently adopted a bill which blocked privatization of all enterprises in the gas production and distribution sector, without opposition from the President. Thus, while the new political accord provides a useful framework in principle, its effectiveness in practice remains, at the end of 1995. still in doubt.

Another major event marked the political landscape: in April 1995, Presidents Yeltsin and Kuchma signed an agreement that ended the dispute on the future of the Black Sea Fleet. Under this agreement. Ukraine receives half of the vessels in the fleet, but agrees to sell a large part of them back to Russia. The agreement also stipulates that Sevastopol shall be the main base of the Russian navy and that the Ukrainian navy will be based in another location, still to be identified. This agreement, together with the March accord on the rescheduling of gas debts, cleared the way toward a substantial improvement in the bilateral relations between Russia and Ukraine.

2. Summary of economic developments

In October 1994, Ukraine finally embarked upon a comprehensive program of economic reform and stabilization. The tasks faced by the Government in the formulation of this program were immense: not only had Ukraine to address the legacy of decades of pervasive controls and economic decay, but it also had to repair the damage caused by three years of mismanagement following independence. Confronted by this situation, the Government launched a radical program of macroeconomic stabilization and structural reform.

The initial steps taken by the Government in the closing months of 1994--with the support of a first purchase under the Fund’s STF--were aimed primarily at liberalization of prices, the exchange market, and the trade regime. Most price controls were removed at once, except on some foodstuffs and communal services. Interest rates were raised, and banking system credit strictly curtailed in an effort to forestall a slide into hyperinflation. The budget was also tightened by containing expenditure on subsidies. The dual exchange system was abolished, and the karbovanets was allowed to float at the auction exchange market. Finally, most export quotas were eliminated.

While the efforts made in late 1994 were far-reaching, the short-term results were not encouraging: inflation remained stubbornly high, the exchange rate weak, activity declined, and the rate of accumulation of external arrears dangerously rapid. These continued imbalances, in spite of the efforts exerted, underscores the gravity of Ukraine’s initial economic conditions.

The Government therefore introduced a second package of measures in spring 1995. This second program aimed at reducing inflation drastically to the level of 1-2 percent by the end of the year. To achieve this objective, the program focused on cutting the consolidated state budget deficit from about 9 percent of GDP in 1994 to 3 percent in 1995, and on containing the expansion of money and credit. The program also provided for an acceleration of structural reforms, in particular trade liberalization and mass privatization. Ukraine’s creditors--Russia and Turkmenistan--agreed to reschedule Ukraine’s debts and arrears, Western countries pledged financial support, and support was provided by the IMF and the World Bank.

By the first half of 1995, the performance of the economy was more encouraging. Inflation slowed to monthly rates of about 5 percent. Exports to western markets expanded strongly. The karbovanets stabilized on the exchange market. As confidence in the national currency improved, and the Government’s credibility increased, capital flows returned to Ukraine, and the National Bank was able to acquire greater international reserves than expected. There were also signs that output had stabilized.

But the resolve required to sustain these early gains appears to have been lacking, and some of the Government’s policies and actions during the summer months served to undermine the stabilization achieved. First, commercial banks were encouraged by the Government to extend new credits to the enterprise sector in amounts incompatible with the low targeted rate of inflation. Second, the budget renewed its subsidies to ailing industries, particularly to the coal sector. Third, the Government decided that the budget would continue to assume responsibility for the gas debts accumulated by the enterprise sector. These slippages in policy implementation--together with official statements shedding doubt on the commitment to economic reforms--led to a renewed weakness of the karbovanets on the exchange market in August, and to a pick up in consumer price inflation in subsequent months. At the end of 1995, Ukraine’s ability to adhere to its ambitious program of economic stabilization and reforms thus remains uncertain.

3. Major economic and political events in 1995


  • Agreement reached with Turkmenistan on gas deliveries for 1995, on settlement of the 1994 debt, and rescheduling of the 1993 debt.
  • Agreement reached with Russia on gas deliveries for 1995, on settlement of the 1994 debt, and rescheduling of the 1993 interstate debt.


  • President signs decree on financial-industrial groups.
  • Price increases for communal services intended to reach 20 percent cost-recovery.
  • Opening in Kiev of the National Privatization Center.
  • NBU prohibits the use of cash in international settlements for Ukrainian exports. Prohibition of the use of foreign currencies for domestic transactions is suspended.
  • Agreement reached with Russian Gazprom on rescheduling of debt for gas deliveries.
  • NBU permits direct trading of the Russian ruble between commercial banks.
  • First auction at the agricultural commodity exchange.


  • Cabinet of Ministers approves memorandum of policies under the Stand-By Arrangement.
  • Price of gas charged to industrial users raised to world price.
  • First auction of government bonds; Government submits 1995 budget, with a deficit of 7.3 percent of GDP.
  • Rescheduling of debt payments to Russia and to Russian Gazprom.
  • Consultative Group meeting in Paris.
  • Parliament establishes VAT rate of 20 percent.


  • No confidence vote in the government; President appoints interim Prime Minister, and proposes new government.
  • Parliament adopts 1995 budget, with 3.3 percent of GDP deficit (IMF definition).
  • 4,000 enterprises cut off from gas delivery due to nonpayment of bills.
  • IMF Executive Board approves Stand-By Arrangement, and second drawing under the Systemic Transformation Facility.
  • Preliminary agreement reached between G-7 and Ukraine on closing Chernobyl by the year 2000.
  • Cabinet of Ministers adopts subsidy scheme for communal services to ensure that combined monthly payments do not exceed 15 percent of income.


  • Decree issued setting up treasury.
  • List of 5,334 enterprises subject to privatization approved by government.
  • World Bank Executive Board approves second tranche of import rehabilitation loan.
  • Parliament fails to put the Law on Power into effect.
  • NBU stops granting licenses for sale of goods in exchange for foreign currency.
  • President Kuchma issues a Decree on Plebiscite declaring a national referendum in June to resolve deadlock over the Law of Power.
  • Signing of Interim Agreement with EU; granting of most-favored-nation status to Ukraine by EU.


  • President Kuchma announces that the new currency, the hryvna, will be introduced in the fall.
  • Presidential decree abolishing previously granted tax privileges.
  • NBU undertakes clearing operation of interenterprise arrears.
  • Parliament votes in favor of Constitutional Agreement with the President, putting the Law on Power into effect.
  • IMF Executive Board approves the first review under the Stand-By Arrangement.
  • Parliament introduces a real estate tax.
  • President Kuchma declares the need for correction of reforms and easing of monetary policy to stimulate industrial production.


  • Increases in communal services and energy prices charged to households.
  • Decree issued on levying VAT on imported goods.
  • Residents permitted to privatize land for commercial use.


  • NBU bans the use of foreign currency for domestic cash transactions.
  • Presidential decree on equity sharing of kolkhozes.
  • Presidential decree on use of housing certificates for enterprise privatization.
  • Exchange rate slides from Krb 147.300 per dollar to Krb 167,000 per dollar amidst concerns about imminent currency reform. NBU intervenes heavily.


  • Price increases for communal services and energy prices charged to households.
  • Incomes policy re-introduced.
  • Bill on industrial-financial groups amended; anti-monopoly legislation to be applied to industrial-financial groups.
  • NBU authorizes banks to buy foreign currencies on the interbank market and sell them to the population in the cash market at rates within 10 percent of the official exchange rate.
  • Introduction of new currency postponed until 1996.
  • IMF Executive Board completes the second review under the Stand-By Arrangement.


  • Government’s economic program for 1996 is approved by Parliament.
  • Parliament adopts a resolution setting the minimum income at Krb 4.8 million per month.
  • Ukrainian Interbank Exchange branch is opened in Donetsk.
  • The Supervisors’ Council of the State Credit-Investments Company created.
  • NBU adopts a credit regulation, according to which the sum of credits may not exceed 25 percent of commercial banks’ own resources.
  • NBU allows commercial banks to draw on enterprises accounts the arrears corresponding to energy consumption and to settle the energy producers.
  • Kiev administration adopts the list of land plots for hotel buildings financed by foreign capital. The plots will be given for a long-term lease of 49 years or more.


  • Parliament adopts the 1996 budget with a deficit of 2.5 percent of GDP (IMF definition).
  • The Ukrainian Government and the Russian joint-stock company Gazprom agreed to supply Ukraine with Russian gas and the transit of gas through Ukraine in 1996. Ukraine will receive at least 50 billion cubic meters of gas at US$80 per thousand cubic meters. Russia will pay US$1.75 to transport a thousand cubic meters of gas over 100 kilometers of Ukrainian territory.
  • Parliament ratifies the Free Trade Agreement with Uzbekistan and Turkmenistan.
  • Ukraine becomes a member of the European Council.
  • The 1996 Privatization Program is approved in principle by the Cabinet of Ministers. According to the Program, the privatization of small enterprises is expected to be concluded by July 1, 1996. Privatization with the use of share certificates will last until December 31, 1996.
  • The Cabinet allocates Krb 52 trillion to repay government debt to miners. The resources will be allocated gradually in order avoid the acceleration of inflation.
  • The Cabinet issues an order prohibiting the export of coal from Ukraine for the period between December 1, 1995 and March 1, 1996.
  • Ukraine and Turkmenistan agreed on supply of 23 billion cubic meters of gas from Turkmenistan to Ukraine in 1996. The Government of Ukraine will not provide guarantees to the suppliers.
  • Parliament ratifies the agreement to borrow ECU 85 million from the EU.
  • The Cabinet creates the State Committee for Establishing Exchange Markets of Agricultural Products. The Committee will institute regulations for the sale of agricultural products on exchange markets.

II. Real Sector

1. Overview of output, expenditure, and employment

During 1994. and much of 1995, Ukraine suffered steep declines in output and in real economic activity. Official statistics suggest that, in 1994, real GDP may have fallen by as much as 23 percent (Chart 1). 1/ Real GDP is expected to fall by a further 12-13 percent in 1995. The output collapse in 1994 appears to have been widespread, with net product of the industrial sector falling by 28 percent, of agriculture by 25 percent, and of construction by 38 percent. Some service sectors fared marginally better, with net output of transportation and communications falling by 9 percent, and that of the retail and catering sectors by 12 percent. Based upon preliminary data, it would appear that these trends continued-somewhat abated--in 1995. Gross domestic product fell by 11 percent in the first half of 1995, as against the 26 percent decline recorded in the first half of 1994. 2/

CHART 1UKRAINE Output Indicators

Sources: Ministry of Statistics; and IMF staff estimates.

1/ Chained index: rotes of change of Net Material Product through 1990. and of Gross Domestic Product from 1991.

2/ Net Material Product through 1990, and Cross Domestic Product from 1991.

Underlying these trends were a number of factors affecting both supply and demand. The domestic components of aggregate demand shrank as real incomes of the population (deflated by the consumer price index) fell by almost 33 percent in 1994 and, relative to the first half of 1994, by a further 8 percent in the first half of 1995 (compared to a decline of 44 percent in the first half 1994). Correspondingly, real expenditure on goods and services, again deflated by the consumer price index, fell by 26 percent in 1994, and by about 5 percent in the first half of 1995 (compared to the 40 percent fall in the first half of 1994). 3/ Other components of aggregate demand were also very weak during 1994: in real terms, gross investment fell by about 23 percent, and there has been little recovery in capital expenditures in 1995. Exports, however, picked up significantly in the first half of 1995, particularly to non-FSU industrialized countries (Table 42).

On the supply side, enterprises have had to contend with significant changes in the micro- and macroeconomic environment. Some of the obstacles facing enterprises are outlined below, while Appendix I offers a more analytical discussion of the factors underlying the output collapse. In addition to these factors, generally slow progress on structural reforms (discussed in Appendix II) has severely retarded growth of the emerging private sector.

Notwithstanding the poor output and income performance of the economy, registered unemployment remains very low, seldom reaching more than 0.4 percent of the labor force (Table 20). Such statistics belie the reality of the labor market, however, since a significant proportion of workers are either on unpaid and involuntary leave, or are only partially employed. Figures on under-employment appear to be more commensurate with the observed output decline, with 14 percent of the labor force on involuntary leave (at some point during the first half of 1995), and 6 percent on part-time work (as of July 1995). Consistent with the slower fall in output, the number of such workers declined in the first half of 1995 relative to 1994.

Table. Comparison of Economic Activity 1994-95

First Half

First Half
(Growth rate relative to corresponding period of previous year
Real GDP-26.4-10.7
Industrial Production-31.9-14.6
(In thousands of persons)
Unpaid leave2,7842,165
Part-time work1,170731
Source: Ukrainian authorities.
Source: Ukrainian authorities.

2. Sectoral developments

a. Industry

Many of the methodological problems of the industrial production statistics noted in previous reports remain, and indeed have been exacerbated, by high rates of inflation and sharp gyrations of relative prices. Nonetheless, on the basis of the available data, it appears that the very steep decline in industrial production observed in the first quarter of 1994, when output fell by 38 percent, was largely avoided in 1995 with industrial production falling by a somewhat more modest 13 percent (Chart 2).

CHART 2UKRAINE Industrial Production

Sources: Ministry of Statistics; and IMF staff estimates.

At a microeconomic level, Ukrainian industrial enterprises have had to contend with three main issues. First, by late 1994, the system of state orders and contracts was breaking down, as branch ministries were unable to continue supplying essential inputs. State orders and contracts were formally abolished at the beginning of 1995 (with the exception of grain procurement, and some interstate agreements for debt-service and gas imports). Second, enterprises continue to be burdened by high taxes, not so much from punitive tax rates as from the broad definition of profits on which taxes must be paid. In addition, payroll taxes are more than 50 percent, and in 1994, deductions for capital depreciation were severely limited because the value of the capital stock was not indexed to inflation (depreciation allowances were increased progressively in 1995 to reflect inflation since 1993). Third, and perhaps most importantly, in November 1994 energy prices charged to Industrial users were increased substantially when the price of gas was raised to reflect the border price, valued at a market-determined exchange rate. In March 1995, this price was further increased, to the world price of gas. Ukrainian enterprises were particularly vulnerable to this energy price increase because of energy-intensive techniques of production and the timid energy-pricing policy of the past. 1/

Macroeconomic factors also contributed to the output decline. Instability of monetary and fiscal policies resulted in considerable price uncertainty and volatility of key relative prices. Inflation in 1994 averaged 16 percent per month, but the monthly standard deviation was more than 19 percent. During the first nine months of 1995, monthly inflation averaged 10 percent, with a standard deviation of 6 percent, although some of this volatility is accounted for by administered price changes.

Beyond the uncertainty engendered by this inflation, it also resulted in exceptional volatility of real credit to the economy. As discussed in Appendix I, this volatility of real credit, particularly during 1994, contributed significantly to the observed output decline. Tightening credit conditions also reflected a curtailment of lending by commercial banks as they sought to limit the deterioration of their loan portfolios. While formal channels for credit evaporated, there was an explosion of inter-enterprise arrears which rose, in real terms, by 240 percent in 1994, and by a further 128 percent in the first half of 1995 (Chart 3). After a seasonal decline in July, interenterprise arrears continued to increase in real terms.

CHART 3UKRAINE Interenterprise Debts and Arrears

Source: Ministry of Statistics.

The various branches of industry have been able to cope to different degrees with the challenges of this changing environment (Chart 2; second panel). While aggregate industrial output fell by 28 percent in 1994, for instance, the machine-building and light-industry sectors, which use energy particularly intensively, contracted by 33 percent and 47 percent, respectively. Two sectors fared significantly better than the rest of the economy: food processing, which contracted by 18 percent, and power generation, which contracted by 13 percent. In both cases, this development reflected, in large measure, increases in controlled prices.

b. Agriculture

Contributing to the decline in real GDP in 1994 was the significant fall in agricultural output, particularly in the production of crops. Grain output fell by 22 percent, to about 35 million tons, which may be contrasted to the more than 50 million tons produced at the beginning of the decade. Similar declines were observed for other crops, except for fruit production, which fell by more than 55 percent. Output of animal products also contracted, though by a significantly smaller degree (Table 7).

Relative even to these depressed levels of output, agriculture is expected to contract in 1995. Drought in the early part of the year, followed by higher - than - usual rainfall has reduced expected crop yields. As of end-October, 29.2 million tons of grain (excluding maize) have been produced, or roughly 11 percent less than output during the corresponding period of 1994. Assuming some buoyancy of animal products, however, the decline in total agricultural output is expected to be in the order of 3 percent for the year.

During the course of 1995, significant structural reforms were undertaken in the agricultural sector. In the past, the absence of decentralized agricultural markets has meant that agricultural financing needs have placed enormous strains upon the conduct of financial policies. In 1994, as in the previous two years, monetary and fiscal policies were subject to the highly seasonal financing needs of the agro-industrial sector. Underlying this problem has been the chronic lack of working capital to finance either the spring planting or autumn harvesting and the inability of farmers to use market mechanisms to obtain the necessary financing. Exacerbating the issue was the practice of pervasive price controls on agricultural output which resulted in a substantial terms-of-trade deterioration for the agricultural sector. Coupled with delayed payments to farmers under the state contract, these practices substantially eroded the real value of farmers’ receipts. 1/ Whereas in 1993 financing to agriculture took the form of NBU refinanced credits from the banking system, in 1994 the summer procurement was financed through budgetary credits channelled through the banking system, and a similar scheme was adopted for the autumn crops under the state order.

In 1995, however, the Government undertook a number of measures to withdraw state involvement from the agricultural sector. The state contract for sugar beets and sunflower seeds was discontinued, and the state contract for wheat was limited to a maximum of 10 million tons. In all likelihood, procurement under the state contract will not exceed 7 million tons. More importantly, an agricultural commodity exchange has been established, which now holds weekly auctions, for both spot and forward delivery, of key agricultural products (especially wheat, barley, sunflower seeds, and sugar). Farmers are able to sell their crops forward at the commodity exchange in order to obtain financing for the spring planting work and the autumn harvest.

While the commodity exchange has had a promising start, volumes traded remain modest (Chart 4). A number of factors have hampered growth of the exchange. Until April 1995 the state procurement agencies were selling their existing stocks of grain from the 1994 harvest at prices significantly lower than prevailing market prices. Not only did this divert buyers from the commodity exchange, it also prevented the procurement agencies from building up working capital which could have been used to finance the spring planting and the harvest. Partly as a result, the Government has continued to provide agricultural financing by making advance payments for farmers fulfilling the state contract. The size of the state contract has mushroomed from an originally planned 2.5 million tons to about 6-7 million tons. Even though, in 1995, government procurement of wheat under the state contract was undertaken at a price indexed to the price prevailing at the commodity exchange, the transactions themselves typically did not take place through the exchange.

CHART 4UKRAINE Auctions at Ukrainian Commodity Exchange

Sourer Ukrainian authorities.

1/ Pries of wheat at US. Mexico Gulf ports, i.o.b.

2/ Pries of U.S. 03 barley in Duluth.

The Government’s decision to continue the state contract for grain also reflected concerns that adequate provision for outlying areas would not be made unless the Government itself enters the market. The situation is exacerbated by the lack of privatization of storage, distribution, and transportation facilities; indeed, such enterprises in the agricultural sector have been subject to particularly stringent regulations governing their privatization (Appendix II).

After much hesitation, and several reversals, in late-1995 the Government lifted the export quota on grain which previously limited grain exports to 3 million tons (plus an additional 1 million tons to fulfil intergovernmental trade agreements). Once farmers have delivered the grain for which they received advance payment under the state contract they may participate in the commodity exchange, and grain purchased at the exchange may be freely exported.

Together with these institutional reforms, the structure of agricultural ownership has been evolving, albeit slowly, in recent years. The share of collective and state farms in terms of area under cultivation had only fallen to 85 percent by the beginning of 1995 (from around 90 percent in 1991). Currently, members of a collective farm are assigned shares of that farm and these shares are given a specific geographic assignment when any one member wishes to leave the farm. There is, however, a six-year moratorium on the sale of such land and, in the absence of adequate title registration, considerable uncertainty about ownership.

c. The energy sector

Ukraine is a substantial net importer of energy, particularly of natural gas (from Russia and Turkmenistan), and of crude oil (part of which is refined and re-exported).

Until recently, Ukraine was self-sufficient in coal. Production has fallen sharply in recent years, from 165 tons in 1990 to less than 95 tons in 1994. While some of the coal mines are clearly viable and competitive by international standards, the coal industry maintains a system of internal cross-subsidies which has served to cripple the competitiveness of mines that would otherwise have been profitable. Through much of 1994, the Government subsidized both the production and the consumption of coal (whether by industrial users or by households). The consumption subsidies have been progressively removed and, by early 1995, were largely eliminated. The politically vocal coal miners, however, have been able to secure continued, if sporadic, budgetary support for coal production. Coal imports have been increasing in 1995, though the volumes remain modest.

The volume of crude oil imported has fallen sharply in 1994, by more than 40 percent. Correspondingly, Ukrainian oil refineries have been operating at well below capacity. The decrease in oil imports may be attributed to several factors, including arrears incurred in 1994, and taxes imposed by Russia on its oil exports.

Ukraine is a large importer of natural gas, from Russia and Turkmenistan, and produces about 18 billion cubic meters, or around 22 percent of its consumption. Gas prices charged to both industrial users and to households were heavily subsidized through most of 1994. The price charged to industrial users was raised in November 1994 in the context of a unification of the exchange market, and has been increased periodically to reflect the depreciation of the exchange rate. The border price for Russian gas is below the world price because of an offset for the gas transit undertaken through Ukraine on Russian gas exports to Western Europe. Beginning in March 1995, however, industrial users are charged the world price of gas with full indexation for any exchange rate depreciation. The price of the domestically produced gas has been increased to this world price as well. Gas usage by households remains subsidized, however, with the cost recovery ratios progressively increased through 1995. This usage takes the form of cooking and heating gas, as well as heat and hot water provided through communal services enterprises. Currently, households pay 60 percent of the world price of gas. 1/

The subsidized price of gas in 1994 (which continues in 1995 for household usage) resulted in substantial external arrears. While the stock of arrears has been regularized, weak domestic payments discipline, including by the budget on the subsidized portion of communal services, has resulted in continued accumulation of arrears in 1995. Steps are being taken to strengthen payments discipline: in the first half of 1995 some 6,000 enterprises were cut off for failing to make timely payments. Higher gas prices have led to a modest decline in consumption: during the fist six months of 1995, for instance, gas consumption fell by 15 percent, relative to the same period in 1994. Appendix III describes Ukraine’s gas sector in greater detail.

Electricity production declined by about 17 percent in 1994, and preliminary data suggests a continued decline in 1995, although again by less than the fall in GDP. Electricity usage is not subsidized by the budget, although through the first half of 1995 a system of cross-subs ides existed whereby industrial users were charged substantially more than household users. 1/ This cross-subsidy has been largely eliminated, although electricity usage by rural consumers continues to be charged at a lower rate than other users.

3. Wages, income, and expenditure

a. Wages

In real terms, the national economy average wage fell by 17 percent in 1994, with the decline particularly sharp in the last months of the year as administrative and other price increases eroded nominal wages (Chart 5). In addition, the traditional Christmas bonus (typically equal to one month’s wages) was not paid to workers in most enterprises.


Sources: notional authorities; and IMF staff estimates.

1/ Average for Estonia, Latvia and Lithuania.

The Government maintained an incomes policy intended to limit the increase in the enterprise wage bill to 80 percent of expected inflation. In practice, with the highly variable inflation rates, this limit was seldom achieved precisely. Some attempt was made, however, to preserve the 80 percent of inflation relationship on a cumulative basis. This wage policy was enforced by administrative control over enterprise bank accounts; in addition, there was a tax on excess wage increases although it was not enforced.

In February 1995 the Government discontinued its incomes policy and enterprises were allowed to set wages at will. Thereafter real wages rose sharply, by 19 percent in the second quarter and a further 10 percent in the third quarter of 1995. The share of wages in costs and in GDP remains small, however, and measured in dollars, the average monthly wage does not, at end-year, exceed US$55 per month. While international competitiveness is not yet a major issue, there has been a significant budgetary impact of the sharp increase in average industrial wages. A separate law requires that wages paid to professionals (who constitute about two-thirds of all budgetary employees) be indexed, with a one-month lag, to the average industrial wage. In practice there have been periods of budgetary stringency during which this indexation did not take place. Nonetheless, budgetary wages rose by as much as 50 percent in real terms during the first half of 1995, on grounds that they had been lagging the average industrial wage. Partly in response, the Government has re-imposed the 80 percent wage indexation ceiling effective September 1995--this time enforced by an excess wage tax--while Parliament considers legislation de-linking budgetary wages from the industrial average.

b. Income and expenditure

Information on household income is subject to the important caveat that, since it is collated from the banking system, it fails to capture sources of income from the informal sector. Moreover, household income is at times augmented by the receipt of goods from enterprises at cost which can then be sold at a margin by the worker. A substantial portion of the overall remuneration package is also provided in the form of social or other services by the enterprise.

Total monetary income fell in real terms by 33 percent in 1994 (relative to 1993), and a further 8 percent in the first half of 1995 (relative to the first half of 1994); correspondingly, expenditures fell by 26 percent and 5 percent over the same periods. On a cumulative basis, retail sales fell by 6 percent by the end of 1994, following a sharp decline in the early part of the year (of almost 50 percent) and an increase toward the end of the year.

With the steep increases in communal services prices, there has been a substantial shift in the pattern of expenditure. Expenditure on food, which used to account for about 45 percent of total household expenditure in 1992, rose to 65 percent by the end of 1994 and is estimated to have fallen to 53 percent by mid-1995. Expenditure on services, which used to account for less than 4 percent of expenditure in 1992, rose to 12 percent by end-1994 and may now account for somewhat more than 25 percent of total expenditure.

Savings rates (measured as the ratio of bank savings plus increments to cash balances, to monetary income) hovered around 20 percent in the first quarter of 1994, but then fell sharply in October as inflation eroded real purchasing powers. In January 1995, when increases in nominal wages were well below the inflation rate and increases in communal services charges took place, the savings rate fell to 13 percent; subsequently it recovered and in July 1995 is estimated to be around 20 percent of monetary income. 1/

4. Inflation

Following the nearly hyper inflationary conditions prevailing at the end of 1993, inflation remained high, and extremely volatile, through much of 1994 and the first half of 1995 (Chart 6). Appendix I discusses, in greater detail, inflationary dynamics in Ukraine over the past three years.

CHART 6UKRAINE Money and Prices

Source: Ministry of Statistics; and IMF staff estimates.

1/ Foreign currency deposits valued at parallel exchange rates.

During the first two months of 1994, inflation was 19 percent and 13 percent, respectively. Thereafter inflation fell rapidly in the face of a significant tightening of monetary conditions. The summer saw eerily low rates of inflation, despite mounting evidence that credit was again being relaxed in connection with the needs of agricultural financing. Price controls appear to have been instrumental in subduing inflationary pressures and achieving monthly inflation rates that were as low as 2 percent. By September, however, inflation started picking up. In October, inflation reached 23 percent as prices for grain and other foodstuffs were liberalized, and administered prices for communal services were increased substantially. Partly in response to the sizable devaluation when the exchange market was unified, inflation accelerated rapidly toward the end of the year, reaching 72 percent in November and 28 percent in December.

In the first two months of 1995, inflation appears to have been driven primarily by inertia from the end of 1994, and further increases in administered prices for energy and communal services. Whereas food and manufactured goods prices rose by about 10 percent in February 1995, for instance, the services component of the consumer price index rose by almost 70 percent yielding an aggregate inflation rate of 28 percent for that month (Chart 7).

CHART 7UKRAINE Consumer Prices

Sources: Ministry of Statistics

Inflation decelerated rapidly thereafter, much like the seasonal pattern observed in earlier years, with monthly inflation rates averaging around 5 percent. Yet underlying this inflation performance has been much tighter monetary conditions than in previous years and the (almost) complete absence of price controls. Limits on profit and trade margins were lifted in December 1994 and most other controls have been eliminated. In addition to bread, on which profit margins still exist, there are now only sixteen categories of (mainly capital) goods, for which advance declarations must be made to the Ministry of Economy before price changes can be made. In some instances there are also limits on price increases by monopolies.

In the fall of 1995, inflation increased sharply, reaching 14 percent in September, 9 percent in October, and 6 percent in November. The September inflation reflects some monetary loosening during the summer months, weakness of the exchange rate, seasonal increases in food prices, and increases in communal services charges. The administered price increases are estimated to have contributed about 5 percentage points to the September inflation.

III. Public Finance

1. Overview

A critical component of the authorities’ stabilization effort in 1995 was containment of the budget deficit. The substantial reduction that has been achieved--from a peak of 23 percent of GDP in 1992 to around 4½ percent in the first nine months in 1995--was accompanied by restructuring of the fiscal system to better support a market-based economy (Chart 8). These reforms have been wide ranging, covering the revenue system, government expenditure policies vis-à-vis households and producers, and tax and expenditure administration practices.

CHART 8UKRAINE Fiscal Indicators 1/

Sources: Ukrainian authorities; and IMF staff estimates.

1/ Expenditures include directed credits; both revenues and expenditures include the Pension Fund.

2. Fiscal adjustment in 1994 and 1995

In 1994, the cash general government deficit was 8 percent of GDP, compared to 12 percent in 1993. The accruals deficit was substantially higher--estimated to be around 15 percent of GDP--as external arrears for gas imports increased sharply due to low domestic prices for gas relative to the import price. Revenue was below initial expectations as the base of the VAT was eroded by exemptions--especially for the agricultural sector--and excise tax rates were reduced. Cash expenditure was contained through the accumulation of arrears on subsidies and other social payments, and by a 14 percent reduction in civil service staff who left for work in the private sector. Wage pressure grew throughout the year following mandated increases in wages and benefits.

The STF-supported adjustment program from October 1994 saw the start of the restructuring of the fiscal sector. Most of the initial adjustment came from a tightening of expenditure. While minimum pensions and benefits were raised at the outset of the program, subsidies for coal, agriculture, bread, gas, and for household use of utilities and energy were cut sharply. Achievements on the revenue side were less positive, as tax concessions were granted to alleviate the impact of price liberalization. Arrears for gas subsidies continued to increase, and agricultural loans and directed credits to key sectors made earlier in the year were not repaid as intended.

The 1995 Budget had two major purposes: (i) to offset the potential revenue loss stemming from major tax reforms that shifted the tax system toward that in market economies; and (ii) to restructure expenditure so as to restrict outlays to the traditional role of government, while placing priority on a targeted social safety net. In addition to the general weakening of economic activity, a revenue decline in the order of 15 percent of GDP was expected from a shift in enterprise taxation procedures toward a genuine income tax that excluded the wage bill and fringe benefits from the profit tax base, a decline in the VAT rate from 28 percent to 20 percent, and a reduction in personal income tax rates and the number of bands, which saw the highest rate reduced from 90 percent to 60 percent. Further, enterprises were allowed to increase the value of their assets by up to 52 times to reflect past inflation, with the rate of increase staggered throughout the year. To offset, in part, the revenue effect of these changes, exemptions from paying the enterprise tax were reduced (agricultural income is now the only major exemption), the base rate was increased from 22 percent to 30 percent. In addition, the authorities Introduced a royalty on domestic gas and a price differential surcharge on the import of gas from Russia--both of which were set at rates so as to raise industrial gas prices to their world levels--and land taxes were increased by 25 times. A Presidential Decree in May canceled exemptions that had been introduced by the President and the Cabinet of Ministers for the value-added, customs, and excise taxes. A subsequent Presidential Decree in June reintroduced exemptions from the VAT for imports of machine building, raw materials, some equipment for production, and imports for personal use. The introduction of an enterprise assets tax and the passing of a new VAT law that would substantially reduce exemptions were presented to Parliament but are still pending, while a stabilization tax of 3 percent on gross sales was rejected by Parliament (along with the gradual transfer to the budget of social services currently provided by enterprises that the tax had been intended to finance).

Throughout the year, enterprise profits taxes performed much better than had been expected, which offset poor performance in VAT and gas and oil royalties. The 5 percent of GDP overperformance of the profits tax receipts in the nine months to September in part reflected taxation of inflationary gains from the end of 1994, but also, seemingly, a preference for • enterprises to pay their employees benefits in terms of after-tax services rather than as pre-tax wages, where the enterprise would also have to pay the high payroll tax rate. The 3 percent of GDP underperformance in the new gas and oil revenue measures reflected ongoing domestic arrears by final users of gas, but also some delay in introducing these new measures. Finally, the VAT has underperformed by 1 percent of GDP due to the failure of Parliament to pass a new VAT law that would reduce the number of exemptions.

Expenditure at the outset of the year was significantly affected by the delay until April in passing the 1995 Budget. In its absence, spending ministry allocations were made on the basis of those set in 1994, which were inadequate for some expenditure, especially the subsidy on household use of energy and communal subsides following the increase in domestic gas prices which substantially raised the cost of providing communal services. In consequence, there was another sharp build-up in domestic and external gas arrears during the first quarter. The Central Government assumed responsibility for paying these arrears during the first three quarters of 1995, and reduced transfers that had been intended for local governments so as to partly offset the direct payment by the Central Government for these services. Local government arrears for the subsidy for household services continued throughout the year.

Other expenditure items were reduced following the reduction in the role of the Government in the coal sector, for net agricultural procurement, and for other budgetary lending. The cost of restructuring the coal sector in 1995 had initially been intended to be on the basis of intra-industry transfers. In practice, the revised July 1995 Budget (see below) added direct budgetary support, and additional support was provided through targeted auctions by commercial banks. Thus far, only two mines have been prepared for closure. In contrast to previous years--and as a direct result of the liberalization of bread prices in December 1994--around half the Government’s grain purchases in 1995 were financed by reflows from budgetary loans made to procurement agencies in 1994 for grain that was on-sold by these agencies to bakeries in 1995. However, unexpected expenditure pressure arose for some budgetary wages--as a law that required wages in the socio-cultural sphere be set at the average level for industry was implemented which implied a sharp catch-up, especially for education and health wages--and from delays in raising the required cost recovery ratio. Wages of nonprofessionals and benefits have increased by around 80 percent of the increase in the CFI during 1995. Anticipated expenditure was increased--especially for capital expenditure--in the revised 1995 Budget passed in July, with a consequent increase in the projected deficit by around 1 percent of GDP. Expenditure has also been inflated by the Government’s decision to extend until the end of 1995 guarantees on the payment of gas imports.

Pressures from the sharp increase in professional wages earlier in the year, and the decision to continue to guarantee external payments, became acute toward the end of the year. In response, the President introduced by decree a 5 percent surcharge on the VAT, reintroduced a 25 percent amortization tax that had been suspended by Presidential Decree in December 1994, taxes on the import of coal and on petroleum products to fund energy sector restructuring efforts, and an excess wage tax set at 30 percent for wages in the enterprise sector that increased by more than 80 percent of the increase in the CPI. Further, the Government scaled back several expenditure lines in the revised 1995 Budget presented to Parliament in October. Parliament vetoed the revised October Budget and all the new tax measures except the excess wage tax. In addition, Parliament doubled the subsistence level and signalled its intent to also double the minimum income, upon which most wages are based. Discussions between Parliament and the Government on this and other issues are ongoing, though the budget deficit and financing targets for the year now look increasingly unlikely to be achieved.

The 1995 Budget has seen a somewhat different pattern of financing than had been intended, as shortfalls of external assistance have been replaced with additional domestic financing. In addition, larger-than-anticipated financing from the NBU has been offset by a build-up in government deposits in the banking system (see below). The authorities established a treasury bill system, which in the first nine months raised Krb 17 trillion (0.5 percent of GDP). At present, only banks can directly purchase these securities, though they can act as brokers for enterprises.

Despite the various slippages, the overall fiscal adjustment in 1995 has been remarkable. The cash deficit for 1995 is now expected to be around 4 percent of GDP--or less than half the 8.6 percent of GDP deficit recorded in 1994. This accomplishment is all the more impressive in that the deficit reduction was achieved largely through a containment of expenditure.

3. Social safety net expenditure

As noted, there were substantial adjustments to the subsidy for household use of energy and communal services (heating, water, sewerage, and rent). In October 1994, the cost recovery ratio for these services paid by households was around 5 percent; the increase in costs due to the gas price increase led to a substantial increase in the budgetary burden and, correspondingly, to an external arrears for gas imports. Since then, the authorities have gradually increased cost recovery ratios, rising from 20 percent at the end of 1994 to 40-50 percent of their tax-inclusive cost as at September 1, 1995. To protect the most vulnerable households, on may 1 the Government introduced a targeted scheme, whereby the maximum that households pay for a standard sized apartment’s use of communal services is 15 percent of household income. The scheme was later widened to include household use of coal, gas and electricity. In practice, the scheme has cost little in 1995, due to the cumbersome administrative procedures to obtain payments and the delays in raising the cost recovery ratios.

There are numerous other forms of social assistance in Ukraine. These subsidy and welfare payments are largely untargeted, and are increased at around the rate of increase for nonprofessional wages. The largest component is the Pension Fund, with expenditure around 8.5 percent of GDP in the first nine months of 1995. The substantial inflation of the past reduced all pensions to close to the minimum pension specified by the Government (pensioners represent around one-quarter of the population). Social payments are also made through the Chernobyl Fund (2.0 percent of GDP), Social Insurance Fund which is run by the trade unions (1.0 percent of GDP), and Employment Fund (0.2 percent of GDP) are financed through a payroll contribution set at 52 percent for employers and an additional 1 percent for employees.

4. Institutional aspects

In the absence of a Treasury, the authorities rely on a rigid, daily, system of cash rationing. As one outcome of this system, there has been a substantial build up of deposits in the banking system by local and other government units, which are outside the control of the Ministry of Finance. To offset this problem, the Government has made moves to establish a Treasury, with the assistance of a long-term advisor sponsored by the Fund. Relevant decrees to establish an interim manual system have been signed, a Head has been appointed, and treasury operations will start soon. A computerized system is envisioned for the medium term, and the groundwork for this is under way.

The substantial tax reforms in 1995 coincided with a need to upgrade tax administration, and the Fund is sponsoring two long-term experts to assist in the establishment of a computerized tax administration project. An initial site in one district office within the Kiev region was selected, and the authorities are now considering extending the project to other areas.

5. The 1996 budget

On December 1, the authorities presented the 1996 Budget to Parliament. The Budget envisions a deficit of 6 percent of GDP (Ukrainian definition) and 2.3 percent of GDP (IMF definition). Given the substantial changes introduced during 1995, the Budget envisions little further change in the tax code. The tax agenda is to be limited to unifying the international and domestic excise tax rates, relatively minor changes in the personal income tax schedule, passing the new VAT law that will reduce exemptions, and introducing a new assets tax on enterprises and individuals. Most expenditure lines are also maintained at their 1995 trend, with the exception of a sharp decrease in the budgetary cost of the generalized housing subsidy as cost recovery ratios are to increase early in the new year and the cancellation of many housing privileges currently provided to around 40 categories, in favor of an increase in the cost of the 15 percent housing subsidy scheme. Agriculture is to be financed almost exclusively from reflows next year from the sale of grain purchased in 1995, and coal support will be financed by the same tax mechanisms proposed in the revised 1995 budget presented to Parliament in October. A limited amount of transfer of social activities of enterprises to the budget will be undertaken in 1996.

IV. Money and Credit

1. Policy environment

Given the almost exclusive reliance of the budget on central bank financing to cover deficits, the monetary policy of the National Bank of Ukraine (NBU) since independence has largely reflected developments in public finances. 1/ In addition, politically driven off-budget directed lending programs have contributed to weaken the NBU’s policy stance. As a result, sustained monetary and price stability have been elusive goals.

Significant progress in tightening financial policies has been made in the past year, although the authorities’ credibility remains fragile, as evidenced by the exchange-rate and inflation developments during August and September 1995. Furthermore, the slow pace of structural change in the economy threatens to undermine the relative financial stability that has been achieved. There remains a real danger that sectoral interests will again gain the upper hand. Evidence of the continuing power of these groups is provided by the strong pressure exerted this year on commercial banks to engage in what are effectively directed lending operations.

2. Developments in money and credit during 1994 and 1995

Monetary policy in Ukraine during 1994 continued in the stop-go pattern characteristic of the previous two years. In the first half of the year, credit policy was gradually relaxed in order to lessen the liquidity squeeze on enterprises and banks arising from the tight monetary policy of late 1993, and to finance the budget (Tables 33 and 34). Nonetheless, inflation continued to decline during this period, primarily because of the lingering effect of the monetary tightening in late 1993, which led to a sharp fall in demand associated with the decline in real incomes of households and enterprises.

In the late summer of 1994, the weakening budget, and in particular Parliamentary and Presidential orders on financing to agriculture, led the NBU to extend large additional credits to the Government. 1/ Credit to a broad range of other economic activities also expanded sharply during this period. As a result, real base and broad money grew by 54 percent and 53 percent, respectively, during the third quarter and by early autumn the economy was in a situation of abundant liquidity (Table 35). By this time, there were also clear indications that expectations of high inflation had developed, with the exchange rate depreciating sharply in September. In addition, time deposit growth slowed significantly from its pace earlier in the year, as reflected in the declining share of these deposits in karbovanets broad money (Table 36). These developments set the stage for the double-digit monthly inflation of the last quarter of 1994 and early 1995.

Early in the fourth quarter of 1994, the NBU began to tighten monetary policy. National Bank credit to government grew slowly, reflecting the strong performance on the cash budget deficit. The refinance rate was raised from just under 12 percent per month at end-September to 25 percent per month in October (Table 37). 2/ While these actions contained the rate of growth of base money, the money multiplier jumped sharply as banks drew down their excess reserves and lent heavily to the nongovernment sector. Nevertheless, even with this credit expansion, real broad money fell by 37 percent during the fourth quarter.

Reflecting the generally good performance of the budget through the first half of 1995, the NBU’s credit policy remained tight during the period. Demand for refinancing credit was initially reduced as commercial bank lending was subdued during the first quarter; banks showed a cautious approach to new lending due to the deteriorating quality of their loan portfolios and the continued high real cost of refinancing credit. This reduced lending activity was reflected in a build-up of commercial banks’ excess reserves at the NBU from January continuing into April of 1995.

Beginning in April, however, commercial banks began again to lend heavily to the nongovernment sector and this led to a large increase in credit to the economy during the second quarter (Table 38). Much of this lending was done under pressure from governmental organizations, and was spurred by a Presidential decree of late March that directed banks to support the restructuring efforts of specific enterprises. At that time, the NBU also began to make available resources to banks for these lending operations. This led to a substantial increase in refinancing credit late in the second quarter. Commercial banks’ domestic currency resources were further increased during this period when the NBU intervened on the auction market to prevent an appreciation of the karbovanets, thereby building its own international reserves and increasing base money.

The authorities’ success in keeping credit policy tight through much of the first half of 1995 was reflected in the rapid decline in inflation during the period and contributed to an increase in confidence in the karbovanets. This was illustrated by the more than 45 percent increase in real holdings of karbovanets from March through July. 1/ In the ensuing three months, however, confidence was undermined by a number of factors. In late July, the National Bank extended large credits to the budget to cover wage payments and to finance renewed subsidies to the coal sector. In addition, commercial bank credit to the nongovernment sector continued to grow rapidly, and real base money increased by 6 percent during the month. In August, the Government announced a monetary reform that was rumored to include confiscatory measures and government officials made a number of policy statements that fed inflationary expectations. These factors led to strong pressure on the exchange rate in August and September, and it depreciated steadily through the period despite almost continuous NBU intervention on the auction market. The weakening of the exchange rate contributed to the strong surge in inflation in September and October that further eroded real domestic currency balances.

3. Interest rates

The NBU’s statutory refinancing rate is the key reference rate in the Ukrainian economy. It is the standard rate at which the NBU lends to commercial banks, and it was positive in real terms for all but four months between January 1994 and September 1995. However, part of NBU lending to commercial banks has continued to be at rates lower than the statutory rate and many of these credits have been extended at interest rates fixed at the time that the loan was made. Hence, the average interest rate on refinance credit outstanding has often been lower than the statutory rate (Chart 10). During 1995, the NBU has generally adjusted the statutory refinancing rate in line with inflation, while also taking into account exchange rate developments.

CHART 9UKRAINE Monetary Ratios

Source IMF staff estimates on the basis of information provided by the Ukrainian authorities.

1/ Nominal base money deflated by the consumer price index.

2/ Nominal broad money deflated by the consumer price Index. Foreign currency deposits valued at parallel exchange rates through September 1994.

3/ Ratio of karbovanets brood money to base money of the NBU.

CHART 10UKRAINE Interest Rates

Source: Notional Bank of Ukraine.

1/ Quoted nominal annual rate without taking into account the compounding of interest payments.

Average lending rates charged by the commercial banks have moved in concert with the refinance rate over most of the past year and a half. Reflecting the ample liquidity of commercial banks during the summer, however, the lending rate continued to fall in August and September 1995 even as the refinance rate was raised. As with the refinance rate, these lending rates have also been mostly positive in real terms. Lending rates typically float, with loan contracts specifying that the rates will generally be adjusted to movements in the refinance rate.

During 1995, the average interest rates offered on bank deposits have fallen less rapidly than lending rates, leading to a reduced spread between the average lending and deposit rates of commercial banks. However, the spread has remained large and was equal to almost 50 percentage points in August 1995. Moreover, average rates offered on deposits have been zero or negative in real terms since May of 1995. Rates offered on deposits also float with movements in the refinancing rate.

The NBU has held treasury-bill auctions since March 1995, with regular weekly auctions beginning in mid-August. Treasury bills have been auctioned with maturities of 3, 6, and 9 months, and, for those bills of maturity longer than three months, there is a quarterly interest payment. 1/ Effective yields on treasury bills have tracked the National Bank’s refinance rate, and therefore prevailing market rates, fairly closely. There have been a number of exceptions to this, including when investors anticipated in mid-April cuts in the refinance rate and when investors became unsettled in July by statements that anti - inflationary policies would be relaxed.

V External Sector

1. Balance of payments

Ukraine’s balance of payments continued to be under significant strain during 1995, and the country continued to accumulate external arrears, particularly on gas import payments (Table 39). Clearly such accumulation of arrears is not sustainable. It is therefore encouraging that--aided by large cuts in energy imports--the pace at which arrears were accumulated in 1995 was much lower than that observed in 1994.

The balance of payments was helped by the availability of trade credits from countries outside the former U.S.S.R. region. Ukraine also received substantial exceptional financing in 1995 (although lover than the financing envisaged under the program), particularly from the World Bank and the European Union. In addition, unidentified short-term capital has been a significant source of balance of payments financing in 1995, as capital appears to have returned to Ukraine following the liberalization of the exchange market.

This financing was insufficient, however, to prevent a balance of payments deficit, which was covered by the rescheduling of significant obligations falling due to Russia and Turkmenistan, and by Fund purchases. Such financing also helped the National Bank of Ukraine to accumulate an estimated US$450 million in reserves. As a result, gross official reserves, at end-1995, are estimated to be somewhat more than US$1 billion, about four weeks of imports.

a. Current account

The current account deficit remained essentially unchanged in 1995, at about US$1.4 billion. Exports, particularly to non-FSU countries, are estimated to have increased by about 40 percent over the first nine months of 1995. This increase has more than offset the fall in trade with the FSU. The growth of exports to the rest of the world was particularly remarkable since it took place despite a substantial real appreciation of the domestic currency during the first half of the year. This performance underscores the benefits of the trade liberalization measures taken earlier in the year (such as the elimination of the export registration scheme). 1/

Imports remained essentially flat during the first nine months of 1995, as a contraction in energy imports by about 10 percent was offset by other imports, particularly those from non-FSU countries. The latter increased by an estimated 16 percent during the first 9 months of 1995. As a result of these developments, Ukraine’s trade deficit fell by an estimated US$460 million during the first nine months of 1995.

The services account is dominated by the substantial--and rather stable--receipts of transit fees paid by Russia on its exports of gas to Western Europe through Ukraine. As a result, the surplus of over US$1 billion in 1995 is much the same as in 1994. In 1996, however, as part of a new agreement reached with Russia, payment for gas transit will be substantially higher which will be offset by a higher price charged to Ukraine for its own consumption of gas.

b. Capital account and external arrears

Despite these generally positive trade developments, Ukraine continued to accumulate external payment arrears on gas payments to Russia and Turkmenistan, as noted, and on debt payments to various creditors. These arrears reflected weak payments discipline by the Government, households, and enterprises within Ukraine. 1/

Ukraine received about US$300 million of trade-related credits in 1995, less than in 1994, perhaps reflecting an insufficient absorption capacity, and the inability to service the debts by the final beneficiaries of the loans. Such credits were supplemented by US$400 million in credits from the World Bank and US$110 million from the EU.

c. Debt

The recurring arrears have meant a very heavy burden for the budget which has been forced to take over about US$800 million in payments to Russia and Turkmenistan on account of gas payments arrears during 1995, including some arrears rescheduled in November 1995, but due before the end of the year. Resources needed to cover the official guarantee for gas payments account for more than half of the budgetary resources needed to cover external obligations. The debt now stands at over US$8 billion, or about 25 percent of GDP--a significant sum in relation to Ukraine’s budgetary resources.

Ukraine’s total external liabilities have increased significantly in the last three years (Table 43). This has resulted primarily from the cumulative current account deficits of the last few years, which were initially financed by overdrafts in the central bank’s correspondent accounts with countries of the former Soviet Union, and subsequently by the accumulation of arrears with the main energy suppliers noted above. The composition of Ukraine’s external liabilities at the end of 1994 mirrors such behavior. Since 1993 the country has accumulated nearly US$2 billion in debts to Russia and Turkmenistan. In addition, of the US$8.1 billion in overall debt, more than half is owed to FSU countries, mainly Russia.

2. Exchange market developments, arrangements, and system

a. Exchange market

The exchange rate has been relatively strong during the first half of the year, as capital inflows strengthened the balance of payments position, perhaps reflecting early confidence in Ukraine’s economic program (Table 44). Weakening policy implementation during the summer months, however, had an immediate impact on confidence and on the exchange market. The karbovanets depreciated from Krb 144,000 per U.S. dollar in July to Krb 165,000 per U.S. dollar in September, despite sizable exchange market interventions of the National Bank (Chart 11). In August there was an incipient run against the karbovanets, following public statements by senior government officials casting doubt on the course of the stabilization program and concerns about the extent of credit growth during July. The National Bank responded by tightening its monetary stance and intervening forcefully. The run was largely contained, although the exchange rate was allowed to depreciate by 11 percent in August.

CHART 11UKRAINE Exchange Rate Developments

Sources: Ukrainian authorities; and IMF staff estimates.

Following the exchange market upheaval in late summer, and partly in response to increases in the National Bank’s refinancing rate, the karbovanets stabilized at around 180,000 per U.S. dollar in November and December. Ukraine’s real exchange rate has appreciated by about 60 percent since December 1994; however, the economy’s external competitiveness remains supported by the low level of wages (US$55 per month on average) in comparison to Ukraine’s main competitors.

b. Exchange arrangements and system 1/

Since the end of 1994, Ukraine has significantly liberalized its exchange system. Until October 1994, Ukraine maintained a system of multiple exchange rates, comprising an official exchange rate set by the authorities and a market rate set at a foreign currency option. On October 24, 1994, the Government abolished the multiple exchange rate regime. The National Bank of Ukraine declared that the official rate would be set at the rate established at the auction.

In October 1994, the Government re-opened the Kiev interbank auction exchange market. Since then, the foreign exchange auctions have been held every business day. Exchange rates in the auction are freely determined on the basis of supply and demand. Fifty percent of export earnings must be surrendered to the foreign exchange auction through commercial banks licensed to operate in foreign exchange. Ukraine also has re-opened the interbank market, where foreign exchange transactions are allowed to take place with a margin of plus or minus 5 percent (including commissions, fees, and charges) around the auction exchange rate. On the cash foreign exchange market, intermediaries are required to maintain a maximum spread of 2.5 percent between buying and selling rates.

Trade settlements with countries of the former Soviet Union are made mainly in convertible currencies, particularly in U.S. dollars, and through commercial banks. Transactions may in some cases involve the Center for International Settlements of the National Bank of Ukraine (CIS). The CIS operates as a private settlement system that expedites the clearing of international payments operations. Ukraine maintains bilateral trade (and in some cases payments) agreements with Bulgaria, the People’s Republic of China, Hungary, India, the Islamic Republic of Iran, and Mongolia. Ukraine also has signed free trade agreements with Russia and Kazakstan, although many of Ukraine’s imports from, and exports to, these countries are specifically excluded from the agreements.

Barter continues to be a major form of trade of Ukrainian companies in their transactions with FSU and non-FSU countries. Official estimates put the scale of foreign trade conducted under barter arrangements in 1995 at more than 30 percent; while high, it is still much below the 50 percent observed in 1994.

Table 1.Ukraine: Net Material Product and Gross Domestic Product, 1990-94
(In billions of rubles/karbovanets at current Prices)
Net Material product118.0224.33,887.1118,237967,046
Loss: Adjustments Losses on stocks0.4-0.6-6.1-11.1
Plus: Value added on nonmaterial services 1/30.058.6786.525,499204,892
Lass: NonMaterial costs of Material services-1.7-2.4-1.8-2,804.0-51.094
Plus: Depreciation in Material sphere 2/21.527.0367.07,452.016.970
Gross domestic product167.1299.55,032.7148,2731,137.794
(percentage change in real terms)
Memorandum items:
Real rate of change of NMP-3.6-13.4-17.5-18.8-24.5
Real rata of change of GDP-0.7-9.9-14.2-23.0
Ratio GDP/NMP1.401.341.291.251.18
Sources: Ministry of Statistics; and staff estimates.

Including depreciation.

The figure for 1991 is at book value, unadjusted for actual price increases.

Sources: Ministry of Statistics; and staff estimates.

Including depreciation.

The figure for 1991 is at book value, unadjusted for actual price increases.

Table 2.Ukraine: Net Material Product, 1990-94
(In billions of rubles/ karbovanets at currant prices)
Industry and mining
Gross output173.6326.16,287.3187,268.01,341,779.0
Material input-124.9-231.1-4,384.1-140,409.0-930,200.0
Net product48.795.01,903.246,859.0411,579.0
Agriculture and fisheries
Gross output61.9106.11,260.353,425.0308,542.0
Material input-26.1-38.3-495.9-28,223.0-150,729.0
Net product35.867.8764.425,202.0157,813.0
Gross output0.20.45.6191.03,368.0
Material input-0.1-0.1-1.3-63.0-1,403.0
Net product0.10.34.3128.01,965.0
Gross output22.844.8801.027,013.0285,728.0
Material input-11.3-20.4-338.9-19,063.0-128,041.0
Net product11.524.4462.112,950.0157,687.0
Transport end communications
Gross output12.219.1570.823,927.0182,433.0
Material input-5.1-8.1-221.1-9,818.0-61,139.0
Net product7.111.0349.714,109.0121,294.0
Trade and catering
Gross output8.316.1328.514,593.0100,481.0
Material input-1.8-3.1-47.5-3,032.0-31,860.0
Net product6.513.0281.011,561.068,621.0
State procurement
Gross output1.02.253.12,130.012,317.0
Material input-0.4-0.6-18.4-748.0-4,284.0
Net product0.61.634.71,382.08,033.0
Gross output2.96.5127.78,608.060,368.0
Material input-0.8-2.6-40.0-2,562.0-20,314.0
Net product2.13.987.76,046.040,054.0
Foreign trade
Gross output5.67.3
Material input----
Net product5.67.3
Total material sphere
Gross output288.5528.69,434.3317,155.0229,501.4
Material input-170.5-304.35,547.2-138,918.0-1,327,970
Net product118.0224.33,887.1118,237.0967,046.0
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 3.Ukraine: Net Material Product by Sector, 1990-94

(Percentage change at comparable prices)

Industry and mining
Gross output-1.7-5.0-6.4-7.4-28.2
Material input-2.1-3.7-3.00.8-28.1
Net product-0.8-8.5-14.6-25.1-28.5
Agriculture and fisheries
Gross output-3.6-13.2-8.53.5-16.0
Material input0.9-5.6-5.2-1.7-8.2
Net product-7.0-18.8-10.36.8-24.7
Gross output-8.2-7.8-3.9-11.7-8.4
Material input-1.6-0.7-16.9-5.7-11.1
Net product-10.6-10.7-0.8-13.7-7.0
Gross output-3.1-6.0-35.7-9.7-40.7
Material input-6.5-5.0-23.83.7-43.7
Net product0.5-7.0-45.7-19.5-37.4
Transport and communications
Gross output-4.1-6.2-11.1-20.6-15.9
Material input5.47.3-5.6-16.1-25.7
Net product-12.2-15.8-15.1-23.4-9.0
Trade and catering
Gross output11.7-2.3-20.7-25.4-7.8
Material input9.3-1.3-18.732.29.2
Net product12.4-2.5-21.1-33.1-12.2
State procurement
Gross output-4.7-13.7-17.3-9.1-27.5
Material input4.
Net product-8.7-25.5-30.9-16.5-30.8
Gross output4.6-7.2-24.8-19.7-23.5
Material input25.637.5-14.5-27.8-25.4
Net product-2.4-24.7-29.6-16.0-22.7
Foreign trade
Gross output-21.4-38.7------
Material input------
Net product-21.4-38.7------
Total material sphere
Gross output-2.4-7.5-10.2-7.9-25.2
Material input-1.5-3.5-5.00.2-25.6
Net product-3.6-13.4-17.5-18.8-24.5
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 4.Ukraine: Sectoral Shares in Gross Output, Material Cost, and Net Output, 1990-94

(Share in percent, at current prices)

Gross material output100.0100.0100.0100.0100.0
Of which:
Industry and mining60.261.766.659.158.5
Agriculture and fisheries21.520.113.416.813.4
Transport and communications4.
Trade and catering2.
State procurement0.
Foreign trade1.91.4------
Material input100.0100.0100.0100.0100.0
Of which:
Industry and mining73.375.979.070.670.1
Agriculture and fisheries15.312.68.914.211.4
Transport and communications3.
Trade and catering1.
State procurement0.
Foreign trade----------
Net material product100.0100.0100.0100.0100.0
Of which:
Industry and mining41.342.449.039.642.6
Agriculture and fisheries30.330.219.721.316.3
Transport and communications6.
Trade and catering5.
State procurement0.
Foreign trade4.73.3------
Source: Table 2.
Source: Table 2.
Table 5.Ukraine: Utilization of National Income Produced, 1990-94
(In billions of rubles/karbovanets)
Intermediate goods1783336,124229,2491,737,924
Final consumption1232143,19994,925791,409
Social consumption275288423,699278,294
Services to individuals112651812,830170,669
Collective services162636610,869107,625
Fixed investment38601,36636,017207,672
Net exports-26100-46418,060
(In real percent change)
Intermediate goods-3.4-4.80.5
Final Consumption-5.7-6.1-18.8
Social consumption7.43.80.1
Services to individuals18.215.4-3.3
Collective services---7.74.9
Fixed investment-18.4-15.0-30.5
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 6.Ukraine: Industrial Production, 1990-95

(In billions of current rubles/karbovanets)
Total industry166.9334.06,090.6172,366.21,269,177.83,993,386.8
Of which:
Power generation5.311.0391.016,713.1150,012.0477,492.8
Fuels sad energy9.512.0870.114,963.6145,527.8546,266.1
Ferrous metallurgy18.433.01,354.729,757.5259,731.0902,451.1
Non-ferrous metallurgy1.83.382.72,555.416,094.463,871.1
Chemical and petrochemical10.119.8405.79,437.879,897.0297,920.0
Machine building51.288.01,133.233,462.7200,426.6639,629.7
Wood and paper4.89.7133.04,475.729,295.686,970.3
Construction materials5.712.5222.97,917.949,689.0165,451.4
Light industry18.141.2405.610,133.052,840.0104,637.4
Food industry35.087.1920.334,360.2219,173.9623,889.3
(Share at current prices)
Total industry100.0100.0100.0100.0100.0
Of which:
Power generation3.56.49.711.012.0
Fuels and energy3.814.38.711.513.7
Ferrous metallurgy9.922.217.320.522.6
Non-ferrous metallurgy1.
Chemical and petrochemical5.
Machine building26.418.619.416.416.0
Wood and paper2.
Construction materials3.
Light industry12.
Food industry26.115.119.917.315.7
(Real percentage change1/
Total industry-0.1-4.8-6.4-8.8-28.1-14.4
Of which:
Power generation0.7-4.0-6.4-5.9-12.5-5.2
Fuels and energy-5.4-11.2-14.5-22.5-17.2-15.2
Ferrous metallurgy-3.6-11.7-9.7-23.8-28.8-8.8
Non-ferrous metallurgy-3.6-9.1-16.3-12.2-26.3-5.0
Chemical and petrochemical-1.3-6.8-12.7-25.2-27.7-11.2
Machine building1.34.2-3.66.1-33.3-24.0
Wood and paper2.32.31.3-2.8-32.8-18.8
Construction materials-1.71.5-3.7-15.0-37.0-26.2
Light industry0.4-2.65.4-13.3-46.8-36
Food industry0.7-12.8-14.5-12.3-18.4-17
Source: Ministry of Statistics.

Percentage change over corresponding period in the previous year.

Source: Ministry of Statistics.

Percentage change over corresponding period in the previous year.

Table 7.Ukraine: Output of Major Agricultural Products, 1986-94

(In thousands of tons unless otherwise stated)
Crop production
Fruits (including grapes)3,3763,2893,7372,2102,7793,4641,540
Animal products
Egss 1/17,21517,39316,28715,18813,49611,79410,154
(percentage change from previous year
Crop production
Fruits (including grapes)13.6-40.925.724.6-55.3
Animal products
Index number average 1986-90 = 100)
Crop production
Fruits (including grapes)100.097.4110.765.582.3102.645.9
Animal products
Source: Ministry of Statistics.

In million pieces.

Source: Ministry of Statistics.

In million pieces.

Table 8.Ukraine: Agricultural Production, 1990-94
(In billions of 1983 rubles)
Total gross agricultural production49.042.539.039.633.0
Crop production22.018.218.520.715.8
Of which:
Animal production27.024.320.518.917.2
Of which:
Livestock for slaughter12.510.
Material inputs22.921.6
Net material product26.120.9
Crop production
Animal production
(In billions of rubles/karbovanets; at current prices)
Total gross agricultural production61.9105.01,439.154,888.0358,574.1
Crop production29.249.8730.326,777.6178,940.6
Animal production32.755.2708.824,471.7155,378.9
Agricultural services3,638.724,254.6
Material inputs26.138.1495.921,344.0170,118.9
Crop production8.712.1159.08,252.683,229.9
Animal production17.426.0336.911,377.373,612.4
Agricultural services1,714.113,276.6
Net material product35.866.9943.233,544.0188,455.2
Crop production20.537.7571.318,525.095,710.7
Animal production15.329.2371.913,094.481,766.5
Agricultural services1,924.610,978.0
(Real percentage change)
Total gross agricultural production-3.7-13.2-8.21.5-16.5
Crop production-6.4-17.31.711.9-23.3
Animal production-1.1-10.0-15.6-7.8-8.9
Material inputs0.4-5.7
Net material product-7.0-18.8
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 9.Ukraine: Production of Major Energy Products, 1990-94
Percent of Domestic Consumption
Crude petroleum (In millions of tons; including gas condensate)
Natural gas (in billions of cubic meters)28.124.320.919.218.3191920
Coal (in millions of tons)164.8135.6133.7115.894.4959694
Electricity (in billions of kilowatts)298.5278.7252.5229.9202.99899100
(Percentage change)
Crude petroleum-2-8-8-7--
Natural gas-9-14-14-8-5
Sources: Ministry of Statistics; Ministry of Economy.
Sources: Ministry of Statistics; Ministry of Economy.
Table 10.Ukraine: Energy Prices, 1993-95
(In karbovanets)(In thousands of karbovanets)
Coal (rub/krb per ton)
Producer price8,00018,00046,90059,7003503585001,9293,0143,5504,975
Consumer price

Households 1/1,5003,70013,00032,0004848483002,5003,6003,900
Natural gas (rub/krb per

thousand cubic meters)
Average import price 2/6,81071,843215,787423,2005895891,0834,2008,48010,77412,612
Consumer price
Households 1/1,7007,71734,50049,0004949493802,5003,5606,240
Sources: Ministry of Economy; and staff estimates.

Ratail prices.

Includes gas tax from March 1995.

Sources: Ministry of Economy; and staff estimates.

Ratail prices.

Includes gas tax from March 1995.

Table 11.Ukraine: Retail Turnover in Goods and Services, 1993-95 1/
(Percentage change at comparable prices relative to the same period the Previous Year)
Source: Ministry of Statistics.

Retail trade in the state and cooperative sectors.

Source: Ministry of Statistics.

Retail trade in the state and cooperative sectors.

Table 12.Ukraine: Money Incomes and Expenditure of the Population, 1993-95
(in billions of karbovanets
Total money Income2,3804,38314,84242,48769.17684,870127,788225,704331,441808,408891,977
Wages and other remunaration in state sector and cooperatives1,3032,4047,03323,47044,80064,46177,884124,728188,660316,573447,918
Pensions and other transfer income8701,8005,88215,78521,79725,50236,16787,816120,329170,412197,631
Other Incomes1772991,8473,3082,5794,91813,63713,16012,43219,42348,428
Total expenditure1,7413,31010,77034,19695,92279,859106,405194,327289,786438,690653,975
Goods and services1,5402,8008,61130,14848,08666,79589,112168,405245,820358,289824,062
Other expenditure2015192,1684,0477,53713,18417,67225,92243,98878,401129,923
Savings in banks2152804781,2872,5284,0413,1315,3039,4686,8124,735
Increment of cash balances3947843,3676,98511,02810,27917,87328,07432,16762,90633,267
(Percentage change over the same counter of the previous year)
Total money Income1,3331,1892,3243,5082,9442,085773431379434442
of which:

Wages and other remunaration in state sector and cooperatives
Total expenditure1,4831,3752,1963,7993,0952,309891468421448512
of which:

Goods and services
(Real percentage change over the same quarter of the previous year1/)
Total money Income364-21.5-19.9-56.2-51.4-32.3-27.4-10.4-10.7-4.8-10.0
of which:

Wages and other remuneration in state sector and cooperatives
Total expenditure49.8-10.2-24.1-82.7-47.3-25.3-17.6-4.2-2.9-2.71.6
of which:

Goods and services
(Real percentage change over the previous Quarter) 1/)
Total money Income-30.0-17.112.2-32.8-22.314.821.4-17.1-22.822.114.9
Total expenditure-30.3-15.29.1-28.5-22.420.120.4-14.6-21.420.525.9
Mamorandum Items:
Percentage change of the CPI over the same Quarter of the previous year9581,5422,9268,1365,9623,1251,102493437461502
Percentage change of the CPI over the previous quarter1851251963321102011113802519
Sources: Ministry of Statistics; and IMF staff estimates.

Deflated by the consumer price index.

Sources: Ministry of Statistics; and IMF staff estimates.

Deflated by the consumer price index.

Table 13.Ukraine: Investment, 1990-94
(In billions of rubles/karbovanets)(In billions of karbovanets)
Gross investment31,11442,676865,99329,310229,904
Material sphere22,33029,100538,35015,974123,439
Transport and communications3,0033,06056,8441,88616,938
Trade and other material services9381,14569,4691,2976,567
Non material sphere8,73413,496327,64313,336106,465
Other nonmaterial services3,7065,767127,6815,14942,982
(In millions of 1991 rubles)
Gross investment53,51649,71331,36328,12221,745
Material sphere38,49432,87220,09216,60814,433
Transport and communications5,1653,5612,0851,6181,504
Trade and other material services1,6131,2906961,034582
Nonmaterial sphere15,02216,04111.27111.5147,312
Other nonmaterial services6,3746,9304,0564,6563,321
(Real percentage change)
Gross investment1.9-7.1-36.9-10.3-22.7
Material sphere1.9-14.6-38.9-17.3-13.1
Transport and communications1.5-31.1-41.4-22.4-7.0
Trade and other material services18.6-20.0-46.048.6-43.7
Nonmaterial sphere1.912.1-33.12.2-36.5
Other nonmaterial services0.38.8-41.514.8-28.7
(Shares at current prices)
Gross investment100.0100.0100.0100.0100.0
Material sphere71.960.462.254.553.7
Transport and coamunications9.
Trade and other material services3.
Nonmaterial sphere28.131.637.845.546.3
Other nonmaterial services11.913.514.717.618.7
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 14.Ukraine: Rates of Price Increase, 1992-95(In percent)
Consumer Price Index 1/Producer Price Index
Change Over

Preceding Month
Change Over

12 Months 2/
Change Over

Preceding Month
Change Over

12 Months
Sources: Ministry of Statistics; and staff calculations.

“Hybrid” CPI during January 1991-December 1992; CPI beginning January 1993.

Calculated from the monthly rates of change.

Sources: Ministry of Statistics; and staff calculations.

“Hybrid” CPI during January 1991-December 1992; CPI beginning January 1993.

Calculated from the monthly rates of change.

Table 15.Ukraine: Consumer Price Index, 1993-95
Monthly Rates of Change
Overall IndexNon-FoodFoodServices
Dec. 93 to Dec. 9210,156.011,101.0120,780.09,106.0
Dec. 94 to Dec. 93401.1373.1373.2781.4
Sources: Ministry of Statistics; and staff calculations.Figures differ from those given in Tables 14 and 16 due to re-basing of consumer price index weights.
Sources: Ministry of Statistics; and staff calculations.Figures differ from those given in Tables 14 and 16 due to re-basing of consumer price index weights.
Table 16.Ukraine: Wages end Prices, 1992-95
Average Wage in the State SectorConsumer
Average WagePrice IndexReal Wage
(Rub/Xrb Per MonthPercentage ChangePercentage Change1987-91-100Percentage Change
Sources: Ministry of Statistics; and staff calculations.
Sources: Ministry of Statistics; and staff calculations.
Table 17.Ukraine: Average Wages in State Sector by Branches, 1994-95
(In thousands of karbovanets per month)
Public catering3854194594925355826196727861,1101,4001,763
Communal services7827598268488559681,0911,1441,2161,8372,5533,091
Consumer services3623804945966056036327097681,0101,3341,567
Social security4344344595885995595725635731,4461,6781,877
Financial sector2,0201,8061,8232,0062,1612,2102,1672,1812,2772,9976,5618,159
Public administr.8268769751,0341,0721,1481,1281,0911,2622,1684,0204,484
(Percent change)
Public catering8.
Communal services-
Consumer services4.830.120.61.6-0.34.812.38.331.532.117.5
Social security0.15.628.21.8-6.72.4-1.61.8152.216.111.9
Financial sector-
Public administr.
(In thousands of karbovanets per month)
Public catering1,7142,2422,6702,8373,3743,5663,7394,0384,7505,089
Communal services3,2804,4515,5085,1855,8237,3397,4728,1698,7699,376
Consumer services1,5282,2212,7493,0563,2963,7174,2134,4204,4884,856
Social security2,4543,1093,2883,8254,4574,8235,2835,3795,5926,471
Financial sector8,5117,91010,90314,50114,18914,31814,78216,09315,12317,239
Public administr.4,5625,2695,8285,9916,0797,2837,3767,1607,7898,887
(Percent change)
Public catering-2.730.819.16.318.
Communal services6.135.723.8-5.912.326.
Consumer services-2.545.323.811.17.912.813.
Social security30.726.75.816.316.
Financial sector4.3-7.137.833.0-−6.014.0
Public administr.1.715.510.62.81.519.81.3-2.98.814.1
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 18.Ukraine: Population, Labor Force, and Employment, 1985-95(In thousands of persons)
Outside active age21,95322,87422,94523,06423,00022,785
Active age28,88928,81628,85728,92528,86028,689
Total employment25.59224.99524.50523.94523.025
State sector21,22320,43816,08515,10413,136
Collective and cooperative sector3,8693,9646,9617,1517,654
Private sector4905931,4591,6902,235
Source: Ministry of Statistics; and staff calculations.

Beginning of period.

Source: Ministry of Statistics; and staff calculations.

Beginning of period.

Table 19.Ukraine: Average Employment by Branches, 1985-94

(In thousands of persons)

Agriculture 1/5,3504,9604,7624,9204,8744,750
Transport and communication2,1311,7881,7741,6231,6041,491
Trade and material services 2/1,9741,8921,8631,7511,7111,629
Health and social services1,3461,5021,5211,5211,5321,508
Education and culture2,1712,3602,3672,3612,3002,277
Source: Ministry of Statistics.

Including employment in private farms.

Including public catering, technical procurement, sales, and storage.

Source: Ministry of Statistics.

Including employment in private farms.

Including public catering, technical procurement, sales, and storage.

Table 20.Ukraine: Unemployment, and Vacancies, 1993-95 1/

(In thousands of persons)

Registered UnemploymentRecipients of Unemployment BenefitsReported VacanciesUnemployment Rate 2/
Source: Ministry of Statistics

End of period.

In percent of working age population, excluding disabled persons.

Source: Ministry of Statistics

End of period.

In percent of working age population, excluding disabled persons.

Table 21.Ukraine: Budgetary Assistance to Enterprises, 1993-94
(In billions of Krb)(In percent of GDP)
Subsidies from the budget16.59779.95211.27.0
Of which:
Credits from the budget1,06784,9140.77.5
Of which:
Additional directed credits11.38727.9717.718.9
Of which: agriculture10,1916.9
Sources: Ministry of Finance; and staff calculations.
Sources: Ministry of Finance; and staff calculations.
Table 22.Retail Trade and Catering Enterprises, 1995
Retail Trade as of Jan. 1, 1995Catering as of Jan. 1, 1995
Leased enterprises11,1484,335
Collective property95,60824,301
Central government property17,37710,692
Communal property16,3548,386
State property33,73119,078
Private property8,940874
Foreign-owned property22
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 23.Ukraine: Loss-Making Enterprises, 1994 1/
(Number of enterprises)
Loss-making enterprises9.9207.6416.1756.771
Of which in:
(In percent)
Proportion of loss-makers relative to all enterprises22.817.414.111.4
Of which in:
(In Krb billion)
Total recorded losses2/7,194.89,966.912,076.569,988.2
Of which in:
Source: Ministry of Statistics.

Excluding small businesses, joint ventures and cooperatives.


Source: Ministry of Statistics.

Excluding small businesses, joint ventures and cooperatives.


Table 24.Ukraina: Ownership Structure in Agriculture, 1992-95
Number of farms/plotsHectares per farm/plotAreas (thous. hectares)Share

(in percent)
Thousands of workersShare

(in percent)
(January 1, 1992)
Collective farms (kolkhozes)9,3512,87926,92267.13,41267.7
State farms (sovkhozes)4,6591,9999,31323.21,09621.7
Interfarm enterprises2,68718490.150.1
(January 1, 1993)
Collective farms (kolkhozes)9,5752,61825,06965.03,26165.0
State farms (sovkhozes)4,7181,8178,57322.21,08421.5
Interfarm enterprises17,474203500.9330.7
(January 1, 1994)
Collective farms (kolkhozes)9,7222,67926,04664.43,14162.1
State farms (sovkhozes)5,3591,6338,74921.71,08821.5
Interfarm enterprises30,344206191.5521.0
(January 1, 1995)
Collective farms (kolkhozes)9,9772,63826,32364.53,00560.7
State farms (sovkhozes)5,4851,5248,36120.590318.3
Interfarm enterprises34,692217411.8551.1
Sources: World Bank; and Ministry of Statistics.
Sources: World Bank; and Ministry of Statistics.
Table 25.Ukraine: Incidence of Monopolies in Major Industrial Branches, 1993-94
Number of EnterprisesNumber of MonopolistsProportion of Monopolists in the Branch
(In percent)
Machine-building and military-industrial complex1,9542,00627630914.115.4
Heavy industry 1/17418213110775.258.8
Light and textile industry737744963913.05.2
Food processing2,3962,50814130.60.5
Chemical and pharmaceutical2731201474.045.1
Building materials1,0091,00727292.72.7
Source: State Anti-Monopoly Committee.


Source: State Anti-Monopoly Committee.


Table 26.Ukraine: Bourses in Ukraine, 1993-94
(In number of bourses)
Commodity, stock and currency exchanges7570727385909091
(In Krb billion)
Total turnover63.395.3154,7941,1448,6694,71,060,22,595,7
Of which:
Raw materials32.011.046.2692.0151.0201.4172.6255.8
Consumer goods0.62.11.811.
Stocks and bonds0.
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 27.Ukraine: General Government Operations, 1993-95 1/
(In percent of GDP)
A. State budget balance, including directed credits-12.2-8.6-3.3-4.1
State budget balance-4.5-6.1-3.3-4.1
Total budget revenue42.444.340.643.0
Tax revenue39.841.4
Taxes on income and profit11.515.67.413.3
Taxes on sales of goods and services14.813.712.812.1
Pension Fund revenues 2/
Other tax revenue4.
Nontax revenue 3/2.72.9
Total budget expenditure46.950.443.847.2
Consumer subsidies7.
Producer subsidies, incl. credits4.110.0
Pension Fund outlays 2/
Directed credits 4/7.72.5----
B. Balance of extrabudgetary funds0.40.4--0.1
Total revenue1.31.81.4
Total expenditure0.91.41.3
C. General government balance (A+B)-11.8-8.2-3.3-4.0
Total revenue43.746.144.4
Total expenditure55.554.348.5
D. Financing11.88.2-3.34.0
Bank 5/
(In trillion rubles/karbovanets)
Memorandum item:
Sources: Data provided by the Ministry of Finance; and staff estimates.

All data are on a cash basis.

The Pension Fund was incorporated in the budget only in 1994.

Breakdown fox 1995 not available.

In 1993, directed credits were not charged to the government’s account by the National Bank. An estimate is included here for comparability.

Includes errors and omissions.

Sources: Data provided by the Ministry of Finance; and staff estimates.

All data are on a cash basis.

The Pension Fund was incorporated in the budget only in 1994.

Breakdown fox 1995 not available.

In 1993, directed credits were not charged to the government’s account by the National Bank. An estimate is included here for comparability.

Includes errors and omissions.

Table 28.Ukraine: Fiscal Operations of Consolidated State Budget, 1993-95 1/

(In trillions of rubles/karbovanets)

Total revenue635041,850766
Tax revenue594711,850766
Turnover tax/VAT17130475176
Enterprise tax14143227187
Personal income tax33411049
Chernobyl Fund receipts3248436
Pension Fund receipts 2/1392369157
Foreign trade receipts296122
Export revenues141815
Customs duties15437
Other tax revenue422479122
Nontax revenue 3/433
Total expenditure705742.000841
Current expenditure665311,957815
Social safety net1870389132
National economy1214718299
Social and cultural spending13129461233
Health careg5519797
Interest payments--6691
Administration and Justice33013453
Chernobyl Fund outlays2238433
Pension Fund outlays1289369158
Other current expenditure31616267
Capital expenditure4434326
State budget balance-7-70-148-75
Directed credits1128----
State budget balance including directed credits-18-98-148-75
Memorandum items:
Privatization receipts0.13171
Sources: Data provided by the Ministry of Finance; and staff estimates.

All data are on a cash basis.

The Pension Fund was incorporated in the budget only in 1994.

Breakdown for 1995 not available.

In 1995, includes external payments by Central Government for gas delivered in 1995.

Sources: Data provided by the Ministry of Finance; and staff estimates.

All data are on a cash basis.

The Pension Fund was incorporated in the budget only in 1994.

Breakdown for 1995 not available.

In 1995, includes external payments by Central Government for gas delivered in 1995.

Table 29.Ukraine: Budgetary Expenditure by Policy Items, 1993-95

(In percent of GDP)

BudgetJan. -Jun.
Total expenditure (including directed credits) 1/54.654.149.849.7
National economy14.614.96.15.2
Coal price differential3.
State reserve0.
Agricultural support (state purchases)
State lending for agricultural procurement--
Budget loans and credits8.
Of which: investment (mainly agriculture)
Military conversion0.
Other 2/
Social and cultural9.011.310.113.1
Health care3.
Social protection12.
Consumer subsidies7.
Communal services2.
Natural gas0.
Solid fuels0.
Meat, milk and other food4.20.1----
Construction materials, housing--------
Social benefits4.
Pensions for armed forces, police0.
Additional support for WWII veterans----0.2
Credits for rural housing construction0.10.2----
Children’s allowances0.
Children’s bread allowance--0.1----
Support for single mothers0.10.1--0.1
Support for disabled0.20.20.3--
Transfer to Pension Fund 3/
Pension Fund outlays 3/
External economic activities0.
Of which: payment of guaranteed agricultural credits----0.3--
Foreign debt service (Including principal)--
State Internal debt service (to the NDU)--0.51.3--
U.S.S.R. debt service----0.4--
Of which: agriculture0.
local governments1.
Chernobyl Fund1.
Military housing----0.30.1
Municipal housing and road repairs1.
Law enforcement1.
Legislative and executive branch0.
GDP (trillion karbovanets)1481,1384,5621,780
Sources: Ministry of Finance; and staff estimates.

Ratios are higher than in Table 29Table 28 since the authorities classify foreign debt service as an expenditure item.

“Other” expenditure on the national economy covers 20 small programs (for instance, irrigation, the space program, etc.).

The pension rend was incorporated into the Budget after the 1994 budget had been presented. The data do not permit a uniform treatment of budget transfers to the pension fund.

Sources: Ministry of Finance; and staff estimates.

Ratios are higher than in Table 29Table 28 since the authorities classify foreign debt service as an expenditure item.

“Other” expenditure on the national economy covers 20 small programs (for instance, irrigation, the space program, etc.).

The pension rend was incorporated into the Budget after the 1994 budget had been presented. The data do not permit a uniform treatment of budget transfers to the pension fund.

Table 30.Ukraine: Minimum Wage, Minimum Income, Average Wages 1995

(In thousands of karbovanets per month)

Minimum WageMinimum IncomeAverage Wage
Source: Ministry of Statistics.
Source: Ministry of Statistics.
Table 31.Ukraine: Financial Operations of Extrabudgetary Funds, 1993-95 1/
Jan. -JunJan. -Jun
(In billions of Krb)(In percent of GDP)
(Employment Fund balance)429.03.168-5410.30.3--
Payroll contributions550.95,6063,3860.40.50.2
Budget transfers0.11--------
Unemployment compensation11.3146331------
Job creation schemes45.3----------
Training and retraining8.7131390------
Public works0.1610------
Pension Fund balance1,045,010.6441,7330.70.90.1
Payroll contributions9,340.093,436151,2776.38.28.5
Budget transfers3,910.05,58111,7222.60.50.7
Retirement pensions9,457.058,18871,8306.45.14.0
Military pensions311.03,1599,5810.20.30.5
Child allowances331.02,1105,9800.20.20.3
Social Insurance fund balance236.71.2911.8690.20.10.1
Payroll contributions1,275.612,28718,0770.91.11.0
Budget transfers3.78--------
Sickness benefits535.05.65810.3300.40.50.6
Maternity benefits106.79341.7100.10.10.1
Child allowances23.6199263------
Sources: Data provided by Ukrainian authorities; and staff estimates.

Figures in this table may differ from those in Tables 27-29. because they represent unconsolidated accounts.

Sources: Data provided by Ukrainian authorities; and staff estimates.

Figures in this table may differ from those in Tables 27-29. because they represent unconsolidated accounts.

Table 32.Ukraine: Social Benefits, 1993-95
Jan. -June
(In billions of karbovanets)
Total social protection33.677198.301340.595
Pension Fund expenditures12,30389,730158,369
Benefits paid by the budget18,06070,350126,461
Chernobyl Fund1,93922,67533.312
Employment Fund expenditures2423,3634,428
Social insurance expenditures1,13312,18318,025
(In percent of GDP)
Total social protection22.717.419.1
Pension Fund expenditures8.37.98.9
Benefits paid by the budget12.26.27.1
Chernobyl Fund1.32.01.9
Employment Fund expenditures0.20.30.2
Social insurance expenditures0.81.11.0
Sources: Data provided by the Ukrainian authorities; and staff estimates.
Sources: Data provided by the Ukrainian authorities; and staff estimates.
Table 33.Ukraine: Monetary Survey, 1993-95

(In billions of karbovanets, end-Period)

Net foreign assets 1/2,2063,2923,1138,12044,87350,60974,08510,211-19,797
Net international reserves 2/2,8393,1227,26029,57934,65946,539-10,055-29,452
Net foreign assets of the rest
of the banking system and other
net foreign assets of the NBU453-984015,29416,15027,54620,2669,655
Net domestic assets45,15964,779105,282178,162273,685342,725457,385630,556644,948
Net domestic credit54.25988,459135,213223,381370,713474,367619,553833,258864,415
Net credit to government 3/5,01321,88136,31966,23596,930133,939162,709265,413279,418
Claims on rest of the economy 3/49,24666,57898,894157,146271,763340,428456,844567,845584,996
In domestic currency38,93853,59578,133122,477145,697175,003263,881335,213343,119
In foreign currency 1/10,30812,98320,76234,669126,066165,425192,964232,632241,887
Other items net-9,100-23,680-29,932-45,219-96,828-131,642-162,168-202,702-219,467
Broad money47,36568,071108,395186,282318,758393,534531,470640,767625,151
Karbovanets broad money38,18857,82493,303160,476216,623268,144385,465466,536456,811
Currency in circulation12,76923,03333,27652,01679,319113,444176,241223,527212,179
Karbovanets deposits25,42034,79160,027108,460137,304154,700207,244243,009244,632
Demand deposits21,42226,84842,69583,554105,858112,744164,703196,263195,269
Karbovanets time deposits3,9977,94317,33224.90631,44641,95642,54146,74649,363
Foreign currency deposits 1/9,17710,24715,09125,806102,134125,390145,985174,231168,339
Memorandum items:
Monetary aggregates valued at
parallel exchange rate 4/
Claims on rest of the economy59,37484,698125,552180,920
Broad money56,38282,373127,772203,978
Sources: National Bank of Ukraine; and staff estimates.

Valued et official exchange rates.

Of the NBU. Through March 1995, included small amounts of foreign reserves held by other domestic banks on behalf of the NBU.

In 1993, net credit to Government excludes (and claims on the rest of the economy include) directed credits.

Interbank auction rate, NBU auction rate, or NBU administered exchange rate.

Sources: National Bank of Ukraine; and staff estimates.

Valued et official exchange rates.

Of the NBU. Through March 1995, included small amounts of foreign reserves held by other domestic banks on behalf of the NBU.

In 1993, net credit to Government excludes (and claims on the rest of the economy include) directed credits.

Interbank auction rate, NBU auction rate, or NBU administered exchange rate.

Table 34.Ukraine: Accounts of the National Bank of Ukraine, 1993-95

(In billions of karbovanets, end-period)

Net foreign assets 1/1,4482,8393,1227,28029,57934,65946,539-10,055-29,452
Net domestic assets25,44546,65971,875122,181122,743164,928221,166326,547342,145
Net domestic credit22,64745,08468.159119.081134.979177,899227.445356.787380,380
Net credit to Government 2/11,25632,69355,981104,318124,403171,875204,941327,107350,077
Claims on banks 2/11,63112,93912,71415,35310,7707,63123,92033,31931,753
Claims on rest of the economy (net)-239-548-535-589-194-1,607-1,416-1,639-1,450
Other assets net2,8181,5753,7163,100-12,236-12,972-6,279-32,240-38,235
Bass money26,91349,49774,997129,461152,322199,587267,705316,492312,693
Currency in circulation12,76923,03333,27652,01679,319113,444176,241223,527212,179
Banks’ reserves14,14526,46441,72077,44573,00366,14389,46592,965100,515
Cash in vault2,4565,4926,8388,84813,99516,00519,72522,25528,331
Deposits at NBU11,68920,97234,88368,59759,00868,13869,74070,71072,183
Sources: National Bank of Ukraine; and staff estimates.

Net foreign assets through December 1993. and net international reserves (staff estimates) from March 1994, valued at official exchange rates. Through March 1995, included small amounts of foreign reserves held by other domestic banks on behalf of the NBU.

In 1993, net credit to Government excludes (and claims on banks include) directed credits.

Sources: National Bank of Ukraine; and staff estimates.

Net foreign assets through December 1993. and net international reserves (staff estimates) from March 1994, valued at official exchange rates. Through March 1995, included small amounts of foreign reserves held by other domestic banks on behalf of the NBU.

In 1993, net credit to Government excludes (and claims on banks include) directed credits.

Table 35.Ukraine: Summary Indicators of Money and Credit, 1994-95
(Within-period percentage change, unless otherwise indicated)
Banking system
Net domestic credit63536566583283134
Of which: claims on rest
of the economy35495973452253424
Broad money44597271573233521
Of which: Krb broad money51617235467244421
Real broad money 1/13753-3733-2316-4
Real net domestic credit 1/153247-3936-20137
National Bank of Ukraine
Net domestic assets835470--382343448
Net domestic credit99517513496322858
Base money84527318466313418
Currency in circulation80445652521435725
Real base money 1/303154-5713-1816-6
Krb money multiplier 2/-186--15---672
(Within-period changes in relation to monetary base at the beginning of the period
National Bank of Ukraine
Net foreign assets5161710536-21
Net domestic assets795167--361282839
Net credit to Government80476416420311746
Claims on banks5--4-4-3-284
Base money84527318466313418
Memorandum items:
Consumer prices (percentage change within period)421612171401601626
End-period official exchange rate
Krb/U.S. dollar
Parallel 3/30,21039,97047,200
Sources: National Bank of Ukraine; and staff estimates.

Deflated by the consumer price index.

Ratio of karbovanets broad money to base money of the NBU.

Interbank auction rate, NBU auction rate, or NBU administered rate.

Sources: National Bank of Ukraine; and staff estimates.

Deflated by the consumer price index.

Ratio of karbovanets broad money to base money of the NBU.

Interbank auction rate, NBU auction rate, or NBU administered rate.

Table 36.Ukraine: Structure of the Money Supply, 1993-95

(Shares, in percent)

Broad money100.0100.0100.0100.0100.0100.0100.0100.0100.0
Karbovanets broad money 1/80.684.986.
Currency in circulation27.033.830.727.924.928.833.534.933.9
Demand deposits45.239.439.444.933.228.631.030.631.2
Time deposits8.411.716.013.49.910.
Foreign currency deposits 1/19.415.113.913.932.031.927.527.226.9
Karbovanets broad money100.0100.0100.0100.0100.0100.0100.0100.0100.0
Currency in circulation33.439.835.732.436.642.346.247.946.4
Demand deposits56.146.445.852.148.942.042.742.142.8
Time deposits10.513.718.615.514.515.611.010.010.8
Source: Table 33.

The shares of domestic and foreign currency components of broad money move substantially between the third and fourth quarters of 1994 due to the unification of the exchange rate in October 1994. Prior to this date, foreign currency components in the monetary survey were valued at the relatively appreciated official exchange rate (see memorandum item in Table 35). For historical share data with foreign currency deposits valued at the parallel exchange rate, see SM/94/263 of October 19, 1994.

Source: Table 33.

The shares of domestic and foreign currency components of broad money move substantially between the third and fourth quarters of 1994 due to the unification of the exchange rate in October 1994. Prior to this date, foreign currency components in the monetary survey were valued at the relatively appreciated official exchange rate (see memorandum item in Table 35). For historical share data with foreign currency deposits valued at the parallel exchange rate, see SM/94/263 of October 19, 1994.

Table 37.Ukraine: Interest Rates, 1994-95

(In percent per annum: end of period)

Statutory refinance rateAverage refinance rate 1/Average lending rate 2/Average deposit rateEffective yield on T-bills 3/
Sources: National Bank of Ukraine; and Ministry of Finance.

Includes preferential rates; average interest rate on refinancing credits outstanding.

Average of the major banks, weighted by size of loan portfolios.

On bills of various maturities, depending on last auction in month.

Sources: National Bank of Ukraine; and Ministry of Finance.

Includes preferential rates; average interest rate on refinancing credits outstanding.

Average of the major banks, weighted by size of loan portfolios.

On bills of various maturities, depending on last auction in month.

Table 38.Ukraine: Structure of Credit to the Economy, 1995 1/

(In billions of karbovanets, unless otherwise specified)

Stock of CreditShare (z)Stock of CreditShare (z)Stock of CreditShare (z)
Total credit to the economy

in domestic currency
Power generation1.6911.27.2793.316,1015.6
Machinery and metal industries10.6947.927.15112.435,50612.4
Light industry3.0192.24,1221.96,5352.3
Food processing4.9893.79.8664.518,0536.3
Transport and communications1,1460.81.8930.92,8001.0
Retail trade and catering9,7997.213.8576.318.7256.5
Wholesale and supply5.5384.19,4424.36.8542.4
Other material sphere 2/46,24034.061,92428.280.56528.1
;Housing and communal services1.0660.81,2360.61.5020.5
Joint ventures and non-residents1,2870.91,8470.81.9850.7
Long-term 3/19,34414.224,24511.029.56310.3
Source: Rational Bank of Ukraine.

Credit to the economy in domestic currency, excluding credit in foreign currency. The totals in this table differ from the amounts shown in Table 33 because they exclude capitalized interest and penalities on principal in arrears.

Mainly credit extended to the non-state sector.

No economic breakdown available.

Source: Rational Bank of Ukraine.

Credit to the economy in domestic currency, excluding credit in foreign currency. The totals in this table differ from the amounts shown in Table 33 because they exclude capitalized interest and penalities on principal in arrears.

Mainly credit extended to the non-state sector.

No economic breakdown available.

Table 39.Ukraine: Summary Balance of Payments

(In billions of U.S. dollars)

Current account balance-0.621-0.854-1.395-1.380
Merchandise trade balance-0.622-2.519-2.360-2.105
Exports, f.o.b.11.30812.79611.81812.350
Imports, f.o.b.-11.930-15.315-14.177-14.455
Nonfactor services0.0161.6141.0281.042
Investment income-0.015-0.069-0264-0.516
Official transfers (net)0.0000.12002000200
Capital account-2.087-0.317-0.238-2206
Medium- and long-term loans0.4150.709-1.065-0.337
Direct investment0.17002000.0910.120
Short-term capital-2.672-1.2260.736-1.989
Errors and omissions-0.0290.0140.062--
Overall balance-2.738-1.157-1.571-3.586
Gross official reserves (-: increase)-0.096-0.037-0.513-0.450
Net use of IMF resources0.0000.0000.3731.207
Other monetary liabilities (+: increase)2.834-1.3410.0000.000
Net Use of Correspondent Accounts0.0000.0070.2350.000
Exceptional financing0.0002.5281.4772.828
Financing gap0.0000.0000.0000.000
Memorandum items
Total External Liabilities3.5134.2147.1678.143
External Liabilities as percent of GDP17.312.429.327.7
Debt service ratio0.11.212.410.2
Interest payments as percent of Exports of G&NFS0.
Gross International Reserves in Weeks of Imports0.
Export volume growth rate9.5-14.7-15.83.0
Import volume growth rate-18.1-20.7-13.8-22
Of which: energy-6.327.0-6.6-14.8
Source: Staff estimates based on data provided by Ukrainian authorities.
Source: Staff estimates based on data provided by Ukrainian authorities.
Table 40.Ukraine: Values and Volumes of Energy Imports, 1993-95

(Value in millions of U.S. dollars: volume In indicated units

Crude oil1,571.0219.8317.8325.837.9202.8231.7261.7
Volume (million tons)
Unit price (US$/ton)
Oil products610.0180.7159.5156.498.3145.2205.6230.8
Volume (million tons)
Unit price (US$/ton)98.457.9126.1174.393.5181.5228.4177.5
Volume (billion M3)79.816.
Unit price (US$/’000 M3)49.850.950.850.950.153.553.957.3
Volume (million tons)
Unit price (US$/ton)20.031.947.837.941.133.141.341.3
Memorandum items:
Adjusted world crude oil price 1/105.789.694.998.096.3100.1106.898.9
Adjusted world natural gas price 2/83.569.970.674.674.670.570.871.0
Sources: Ministry of Economy and Ministry of Statistics; and staff estimates.

Adjusted for quality of oil imported by Ukraine.

Price at Germany’s border adjusted for transportation costs.

Sources: Ministry of Economy and Ministry of Statistics; and staff estimates.

Adjusted for quality of oil imported by Ukraine.

Price at Germany’s border adjusted for transportation costs.

Table 41.Ukraine: Trade with Countries of the Baltics, Russia and other Countries of the Former Soviet Union, 1994-95 1/

(In millions of U.S. dollars)

19941995 2/19941995 2/
Source: Ministry of Statistics, based on survey data.

Figures differ from those in Table 39 because of different statistical coverage.

Data for 1995 refer to January to August.

Source: Ministry of Statistics, based on survey data.

Figures differ from those in Table 39 because of different statistical coverage.

Data for 1995 refer to January to August.

Table 42.Direction of Trade with Countries Outside the Baltics, Russia and Other Countries of the Former Soviet Union, 1994-95

(In millions of U.S. Dollars)

1994First Half 1995
Industrial Countries19342435-50112451412-166
Of which: United States34218216022677149
Developing Countries26831426125812221106116
Of which: China6759558023723214
Of which: Czech Rep.18415529142155-13
Middle East1103971762650
Western Hemisphere927417635311
Of which: Brazil6472-84252-10
Source: Direction of Trade Statistics, IMF.
Source: Direction of Trade Statistics, IMF.
Table 43.Ukraine: External Liabilities, 1992-95 1/

(In billions of U.S. dollars; at end of period)

I. Total External Liabilities (II + III)3.5134.2147.1678.143
Of Which: Russia0.5483.2514.2444.253
II. Debt Outstanding (A + B)3.2493.6664.4458.143
A. Medium- and long-term loans0.4153.6534.4418.140
Of which: US0.1750.3370.1270.087
Other 2/----0.5822.212
B. Other Monetary Liabilities 3/2.8340.0130.0040.003
III. Arrears Outstanding 4/02640.5482.722--
Of Which: Russia02640.5482.025--
Source: Ukrainian Authorities; and Fund staff estimates.

The stock of Ukraine’s external liabilities is derived from staff estimates based on incomplete and partial information. As such, it should be considered as tentative, in particular for the stock of arrears, and subject to substantial revisions.

Includes liabilities to the Fund. World Bank, and EBRD.

Correspondent accounts with FSU central banks and other monetary liabilities subsequently converted into intergovernmental debts in 1993.

Consists of arrears on energy imports and on scheduled debt service obligations (principal and interest). Net of arrears to Ukraine.

Source: Ukrainian Authorities; and Fund staff estimates.

The stock of Ukraine’s external liabilities is derived from staff estimates based on incomplete and partial information. As such, it should be considered as tentative, in particular for the stock of arrears, and subject to substantial revisions.

Includes liabilities to the Fund. World Bank, and EBRD.

Correspondent accounts with FSU central banks and other monetary liabilities subsequently converted into intergovernmental debts in 1993.

Consists of arrears on energy imports and on scheduled debt service obligations (principal and interest). Net of arrears to Ukraine.

Table 44.Ukraine: Exchange Rates, 1992-95
NBU official RateAuction Rate 1/NBU official RateInterbank Rate 1/
End ofEnd ofEnd ofEnd of
(Local currency Per U.S. dollar)(Local currency per Russian ruble)
Source: National Bank of Ukraine.

January 1992-September 1992: market rate. October 1992-October 1993: Interbank auction rate. November 1993-January 1994: NBU administered rate. Since February 1994: NBU auction rate.

Source: National Bank of Ukraine.

January 1992-September 1992: market rate. October 1992-October 1993: Interbank auction rate. November 1993-January 1994: NBU administered rate. Since February 1994: NBU auction rate.

Appendix I Output and Inflation Dynamics: 1993-95

As discussed in Chapter II, Ukrainian industrial output has fallen dramatically over the past three years. This appendix develops a simple econometric model to explain some of the factors underlying the output collapse. Such factors, of course, are manifold. External demand for Ukrainian industrial products fell sharply, as previous trade and commercial relations were disrupted in the aftermath of the break-up of the Soviet Union. More importantly, as described in Appendix II, progress on structural reform measures has been meager, and corporate governance remains week.

1. A theoretical framework

To understand the reasons behind the output collapse, it is useful to begin with a description of the typical Ukrainian firm. There are three salient features of a representative Ukrainian enterprise--considerable freedom in day-to-day operations (including pricing); almost no say in the allocation of its assets; and, increasingly a market-oriented trading environment. An Ukrainian enterprise may be thought of as a collection of assets devoted to a specific and fairly fixed purpose--i.e., production of a particular kind of good. The objective is to produce as many of these goods as the physical facilities and the self-financing constraint allow, while providing employment to the entire incumbent work force.

If market conditions change, an enterprise has almost no ability to produce different kinds of goods to what it was producing before (Appendix II). Consequently, an enterprise would typically adjust to relative price and demand changes by reducing or increasing the output of whatever it is that it was set up to produce by the planners.

A typical enterprise faces the following liquidity constraint:

pX + wL = dA + dB + dD

That is, an enterprise has three sources of funds to pay for material (X) or labor inputs (L): it can run up interenterprise arrears (A), obtain credits (B), or use accumulated deposits (D), which are themselves a function of past earnings. Thus, access to inputs can be expressed as:

X = dA/P + dB/P + dD/P - wL/P

In other words, ability to purchase inputs improves with an increase in real arrears, credits and money holdings, and declines with an increase in the real wage (assuming that enterprises try as much as they can to keep (L) unchanged).

Output is related to access to inputs through some kind of production function:

Q = f (X)

Consequently, output is a function of the variables identified above:

Q = f(dA/P, dB/P, dD/P, - w/P)

Holding all other variables constant, the above function gives a negative relationship between output and the real wage. The way this comes about is through enterprises’ attempts to maintain production*-when squeezed, they will cut the real wage in order to obtain liquidity to purchase inputs. This explanation is more consistent with the actual behavior of the Ukrainian economy than the alternative theory that state enterprises, if left to themselves, will consume public capital by paying workers a high real wage. In fact, as observed in Ukraine, pay rates in public enterprises often lag behind the rates mandated by the Government’s incomes policy.

Moreover, preservation of employment appears to be a key element of enterprise managers’ objective function. In many enterprises, workers have the formal ability to vote managers out of office. Even in the absence of this right, workers have considerable moral clout due to the deeply entrenched culture of life-time association and identification with the enterprise. In addition, managers face the prospect of future privatization through a process which is likely to favor the acquisition of majority ownership by the “workers’ collectives”.

The relationship described above can be thought of as a representative enterprise’s supply function. It can be represented graphically in a (Q, w/p) space as a downward sloping curve S.

A demand relationship is needed to complete the framework. For simplicity, it is convenient to assume that output is an increasing function of the real wage: the higher the income, the more people will demand. Consequently, in the (Q, w/p) space, the demand function can be represented by an upward sloping curve D. The intersection of the two curves determines output and the real wage at any instant.

An unexpected acceleration of inflation, a movement towards pre-payment for inputs, reduced ability to run up interenterprise arrears, or any other shock to the liquidity of state enterprises would, in this model, be represented as an inward shift of the supply curve. Assuming that the demand curve is reasonably stable, and given various liquidity shocks experienced by the Ukrainian enterprises in recent years, the model would predict an upward sloping observed series of points in the (Q, w/p) space.

2. Empirical analysis

The evolution of total industrial production, and some of the key branches of industry, is illustrated in Chart 12. Industrial production in Ukraine typically exhibits some seasonality: most branches show a low level of activity at the beginning of the year, a sharp pick-up at the end of the first quarter, and another peak at the end of the third quarter. This seasonal pattern is particularly pronounced for food processing, which ranges from 22 percent of total industrial production in January to almost 30 percent of industrial production in September. As discussed below, in recent years this apparent seasonality also stems from monetary policy which was very expansionary at the end of the third quarter and the beginning of the fourth quarter and was then tightened significantly in the first quarter of the following year. This pattern was seen in 1993 and, albeit to a much lesser extent, in 1994 as well.

CHART 12UKRAINE Industrial Production

(In prices of January 1, 1994; in Krb tin.)

Source: Ukrainian authorities.

a. Partial equilibrium determinants of the output decline

The theoretical framework above suggests three determinants of industrial output: the growth of real banking system credit to the economy, the growth of real wages, and as a proxy for other costs, the growth of real gas prices. 1/Chart 13 illustrates the evolution of nominal and real banking system credit to the economy in Ukraine over the period 1993-95. During 1993 there were two sharp spikes in the growth rate of nominal credit, in March and in September, corresponding to financing needs for spring planting, and the procurement and processing. Thereafter, there was a sharp fall in the growth rate of nominal credit at the end of the year, and at the beginning of 1994. The pattern was somewhat different during 1994, with a steady increase in the growth rate of credit throughout the year, peaking in October (when the monthly growth rate exceeded 30 percent) followed by a sharp fall toward the end of the year as the stabilization program was launched. In 1995, credit growth has been much more stable, and the seasonal pattern significantly muted.

CHART 13UKRAINE Banking System Credit to Economy

The breakdown of credit to industry across various branches is as follows:

Shares of Credit to Industry

(As of March, 1995)

Metallurgy and machine building45.0
Light industry12.7
Food processing21.0
Source: Ukrainian authorities and staff calculations.
Source: Ukrainian authorities and staff calculations.

The second panel of Chart 13 shows the evolution of real credit to the economy. Corresponding to the surges in nominal credit in 1993, real credit growth shows two spikes as well. By end-year, however, inflation caught up, and there was a very sharp contraction of real credit to the economy: in October real credit was falling at a monthly rate of 30 to 40 percent. These negative real rates of growth continued through much of 1994, with March and October being the only months during which real credit growth was positive. Again, the expansionary excesses during the summer eroded real credit at the end of the year, this time by as much as 50 percent in a single month. Following the first month of the stabilization program, the growth of real credit, though still negative, started increasing rapidly. Since March 1995, real credit growth has been modest, though generally positive.

Table 45 reports the coefficient estimates, by branch, of a regression of output growth on growth rates of real credit to the economy, real wages, and real gas prices:

where ŝt = log(st) - log(st-1) for any variable st, and where q is industrial production, ce is credit to the economy, w is the average wage, p is the price index for domestically produced goods, e is the exchange rate, and pS is the price of gas.

Table 45.Ukraine: Regression of Industrial Production Growth on Growth Rates of Real Credit, Real Wages, and Real Gas Prices
Real creditReal wageReal gas price
Fuel0.13(0.39)-0.19(1.84) 1/-0.22(2.60) 2/0.36
Oil0.27(0.65)0.13(1.02)-0.29(2.71) 2/0.31
Oil proc.0.37(0.73)0.11(0.66)-0.35(2.68) 2/0.29
Coal-0.09(0.09)0.12(1.28)-0.06(3.52) 3/0.40
Ferrous0.28(1.07)-006(0.42)-0.07(180) 1/0.18
Mich. blgd.0.40(2.62) 2/-0.26(3.58) 3/-0.04(1.19)0.32
Wood0.24(1.65) 1/-024(3.00) 3/-0.02(0.48)0.25
Construction0.48(2.47) 2/0.21(2.17) 2/-0.07(2.01) 1/0.32
Light0.45(2.48) 2/-0.47(4.90) 3/-0.03(0.54)0.43
Food proc.0.59(2.16) 2/0.27(1.86) 1/-0.10(1.76) 1/0.30
Other1.14(2.33) 2/-0.86(3.17) 3/-0.04(0.31)0.44
Total0.37(2.27) 2/-0.17(2.05) 2/-0.08(2.73) 2/0.34
Source: Staff estimates.

Significant at the 10 percent level.

Significant at the 5 percent level.

Significant at the 1 percent level.

Source: Staff estimates.

Significant at the 10 percent level.

Significant at the 5 percent level.

Significant at the 1 percent level.

While the energy related sectors do not appear to depend upon real credit growth, machine building, woodwork, construction, light industries, food processing, and other miscellaneous branches all appear to be highly sensitive to real credit growth. All together, these branches account for slightly more than one half of Ukraine’s industrial production. Taking industrial production as a whole, the real credit elasticity is estimated to be 0.37, and is highly statistically significant. These industries--which represent the more labor-intensive branches of industry--are also vulnerable to real wage increases, with elasticities ranging from minus 0.21 to minus 0.86. For total industrial production, the elasticity of output with respect to an increase in the real wage is minus 0.17 and is, again, statistically significant. Increases in real gas prices affect a wide range of industries, although the elasticity of total industrial production with respect to real gas price increases is only minus 0.08.

What caused the collapse in real credit? From Chart 13 it is clear that, especially in 1993 and early 1994, the decline in real credit was not caused by a tightening of nominal credit. Rather, the collapse in real credit occurred because money demand was insufficient to support the nominal credit increase. More generally, all of the right-hand side variables of (1) are themselves endogenous. In order to relate the behavior of the right-hand side variables to policy variables--and the growth rate of nominal credit, in particular--a full structural model needs to be specified. With such a model, in which the only exogenous variable is the growth rate of nominal credit to the economy, it is possible to determine the extent to which excessive growth in nominal credit is responsible for the output decline.

b. A structural model

Increases in nominal credit affect output growth directly through the term in (1) and indirectly by affecting prices, wages, and the exchange rate. 1/ Prices for domestically produced goods are assumed to be determined by a money demand function:

Where all parameter estimates are reported in Table 46. The fit of the money demand function is illustrated in Chart 14 which shows the evolution of real broad money and the model’s projection, (2). The model under -predicts real money in the summer months of 1994, which is consistent with anecdotal evidence of price controls being applied during this period. Not surprisingly, the model also fails to capture the collapse of real money in November 1994 where prices were liberalized and substantial administered price increases took place.

Table 46.Ukraine: Coefficient Estimates of Econometric Model 1/
Equ. (1)0.25-0.16-0.030.611.83
(3.12) 2/(3.15) 2/(1.31)
Equ. (2)0.640.351.58
(2.38) 3/
Equ. (3)0.950.840.722.51
(5.20) 2/(2.33) 3/
Equ. (4)1.810.372.55
(2.59) 3/
Equ. (5)0.840.170.901.35
(4.69) 2/(0.50)
Source: Staff estimates.

Heteroskedastic consistent t-statistics reported in parentheses.

Significant at the 1 percent level, or better.

Significant at the 5 percent level.

Source: Staff estimates.

Heteroskedastic consistent t-statistics reported in parentheses.

Significant at the 1 percent level, or better.

Significant at the 5 percent level.


Sources: National bank: and IMF staff estimates.

Nominal wages are assumed to be a function of the rate of consumer price inflation and the growth of activity:

The coefficient β3 is estimated to be 0.95, which is broadly consistent with the Government’s “80 percent” wage indexation rule.

Given the plethora of exchange rates prevailing in Ukraine in 1993 and much of 1994, it is difficult to specify an adequate model of exchange rate determination. Nominal interest rates appear to have relatively little effect on the exchange rate--which accords with the low degree of capital mobility. The estimated equation relates the exchange rate to the rate of growth of total domestic credit (not just credit to the economy):

Perhaps surprisingly it is lagged, not contemporaneous, credit which influences the exchange rate. Again, this suggests that, in Ukraine, the exchange market does not, generally, act as an asset market.

To close the model, the consumer price index is written as a linear combination of domestic prices and the exchange rate:

The structural model (1) to (5) relates the evolution of industrial production to the growth of credit, while allowing for endogeneity of prices (and hence real credit), wages, and the exchange rate. An increase in credit is not precisely equivalent to an increase in broad money as the money demand function, (2), assumes. Nonetheless, given the low degree of exchange market intervention in Ukraine, the two are highly correlated (the correlation coefficient exceeds 0.96).

Can the collapse in output be attributed to excessive rates of growth of nominal credit? The model’s simulation suggests that it can. The top panel of Chart 15 shows actual industrial production and the fitted values of (1) with the explanatory variables of (1) exogenous. The fit of the model is remarkably good, with the fitted value tracking most of the important movements of monthly industrial production growth rates.

CHART 15UKRAINE Industrial Production

(Percent change from previous month)

Sources: Ministry of Statistics; and IMF staff estimates.

The bottom panel allows these variables to be determined endogenously, according to the model (1) to (5). 1/ The only exogenous variable in the model now is the growth rate of domestic credit. While the fit of the model’s projection deteriorates marginally, the model can still account for much of the collapse in output. It would appear, therefore, that excessive rates of credit expansion, far from helping to boost output, caused much of its decline. Quite simply, money demand was insufficient to sustain the excessive rates of credit growth, and the resulting inflation eroded real credit growth. The increase in nominal credit also depreciated the exchange rate, causing consumer price inflation, and an increase in nominal wages. Together, these effects served to reduce output growth.

Appendix II Structural Reforms

This appendix describes Ukraine’s progress on structural reform of the economy.

1. Privatization

Despite several attempts at enterprise privatization, progress to date has been slow. In 1993, the Ministries of Destatization and Demonopolization were consolidated to form the State Property Fund. The State Property Fund was strengthened in early 1994 when oblast-level Property Funds, originally created to sell off locally owned or communal property (mainly small-scale enterprises in the retail trade and catering sectors), were placed under its authority.

Privatization has been hindered by a 1992 law which gave workers’ collectives priority right to lease the assets of state-owned enterprises. Many of these lease agreements include buy-out provisions under which the leasee has the right to block any initiative to privatize the enterprise and, typically, the first right to purchase the enterprise (often at artificially low prices). These leases pertain mainly, though not exclusively, to small-scale enterprises.

Medium- and large-scale enterprises were initially privatized through a two-stage process of corporatization followed by share sales. Branch ministries, however, blocked much of the corporatization program which was, in any case, protracted, due to detailed inventory and valuation procedures. A lack of transparency in the auction process for large- and medium-scale enterprises led Parliament, in July 1994, to effectively impose a moratorium on privatization of such enterprises. It also prohibited lease buy-out options being exercised, although in practice many collectives were able to circumvent this.

Two important decrees were issued in late 1994 as part of the Government’s economic reform program. The first decree pertained to medium-and large-scale enterprises. It dramatically reduced the preparation required for enterprises to be auctioned by determining the nominal value of an enterprise’s shares according to its book value as of the beginning of 1995. The law required that 70 percent of large enterprises (and 100 percent of medium-scale enterprises) be offered for sale, either to workers in closed subscription, or to the general population in open subscription for privatization certificates. In all, the decree envisaged privatizing 8,000 medium- and large-scale enterprises by end-1995, out of a total of about 18,000.

A second decree pertained to the privatization of small-scale enterprises. The decree prohibited the signing of new lease agreements and required existing lease holders to buy out the assets of the enterprise by June 1, 1995. Thereafter, the enterprise would be subject to privatization through competitive means. The decree was intended to achieve privatization of 90 percent of small-scale enterprises by end-1995, out of a total of 30,000 enterprises (of which 8,000 had already been privatized by the end of 1994).

In January 1995, the new privatization certificates were distributed in five pilot oblasts and auction centers were set up. 1/ Each Ukrainian citizen receives one certificate, with a face value of Krb 50 million, although they are given to the population for free and are nontradable. 2/ They may be used to bid directly for an enterprise, or given to an investment fund which will hold a portfolio of shares in different enterprises; the certificates themselves are indivisible, and so can only be used to buy shares at a single enterprise.

Distribution to the general population started in February and in the first four months of the program about 500 enterprises were brought to the auction. The target of 1,000 enterprises being brought to auction by mid-1995 was met with a comfortable margin although actual sales of shares has been quite modest. Indeed, of the enterprises brought to auction in the first half of 1995, in only 10 percent of cases were more than 70 percent of shares offered actually sold. During the latter half of the year, the number of enterprises successfully privatized rose, but remains well below the target of 8,000 enterprises. Several factors account for this disappointing performance. First, after three years of abortive attempts at privatization, the general public has grown cynical about the privatization process. Second, a minimum reservation price, based upon the enterprise’s nominal value (as of the beginning of 1995), has been imposed at privatization auctions. This was intended to prevent accusations of selling enterprises too cheaply (as similar charges had resulted in a Parliamentary moratorium on privatization in 1994) although this reservation price is clearly above the market clearing price in a number of instances. And third, until mid-July, there was an insufficient number of auction centers. These issues are being addressed by the State Property Fund.

Foreigners may not participate in the mass privatization program, although they may purchase shares of enterprises, following their privatization. Some medium-scale enterprises are sold at auction or through tender and there have been one or two notable sales to foreign investors.

In August 1995, a Presidential decree was issued permitting enterprises to privatize the land on which their premises are located. Hithertofore, privatized enterprises received a long-term lease for the land on which they are located. The land is not included in the voucher program and must be privatized separately for cash once the enterprise has been privatized.

Progress on small-scale privatization has likewise been slow. Implementation of the President’s decree was delayed until March 1995, and the deadline for leaseholders’ buyouts was postponed until September 1995. As a result, only about 2,200 enterprises were privatized in the first half of 1995. Unlike the mass privatization program for medium and large-scale enterprises, small-scale enterprises are sold for cash at auctions or at tender and the proceeds accrue to the local government where the enterprise is located.

Included in the list of 8,000 medium- and large-scale enterprises under the mass privatization program are about 4,000 that are in the agro-industrial complex. Enterprises engaged in the storage, transportation, or distribution of agricultural products, however, are not included among these 4,000 enterprises, and special rules govern their privatization. In September, a new law on privatization of all enterprises in the agro-industrial sector--including the 4,000 covered under the mass privatization program--passed a second reading in Parliament. This law would have required 51 percent ownership of such enterprises by collective farms, even if that meant re-nationalization of enterprises that had already been privatized. The President vetoed this law, and it has been returned to the parliamentary commission for re-drafting.

2. Demonopolization

Ukraine’s industrial structure remains highly monopolistic. Monopolies are defined at the national or the regional level according to whether their share exceeds 35 percent of the relevant market. On this basis, the State Anti-Monopoly Committee estimates that there are 480 national monopolies and more than 1,500 regional monopolies. Not surprisingly, the most monopolistic sectors are heavy industries and the chemical and pharmaceutical industries, where the incidence of monopolies in the sector exceeds 50 percent.

During the course of 1995, the focus of the Anti-Monopoly Committee has been gradually shifting from price regulation of monopolies to demonopolization, although the powers and administrative capacity of the Anti-Monopoly Committee remain limited. Where feasible, such demonopolization is undertaken at the time of privatization, or by breaking up horizontally integrated structures that produce the same commodity. Trade associations, for example, are coming under increasing scrutiny for providing a potential venue for setting prices.

At the same time, financial industrial groups are being formed which would enjoy tax advantages and which could pose an additional threat to the creation of a competitive market environment. Moreover, these financial industrial groups may be able to exert undue influence on banks in order to obtain continued financial support and this, too, could serve as a barrier to entry by potential competitors.

Consumer cooperative enterprises which dominate retail trade in small towns and rural areas, and which are not subject to privatization, present a particular challenge for competition policy. These enterprises are controlled by a central organization and thus do not compete with each other. At the same time, through vertical integration of the farming, processing, and retail trade, they can prevent new competitors from breaking into rural markets.

3. Enterprise governance and restructuring

With privatization stalled due to administrative hurdles, enterprise governance remains nebulous and ill-determined, and there has been little or no enterprise restructuring. As a result, the typical Ukrainian enterprise retains many of the institutional features of Soviet production units of the late 1980s, particularly since it continues to be governed by a pre-independence Soviet-style Law on Enterprises. The key features are an almost complete lack of external oversight over operational decision-making, combined with severe restrictions on capital and investment decisions.

Although sectoral ministries and the State Property Fund retain nominal ownership of state enterprises, the bonds of authority for day-to-day management are loose. Those enterprises that, prior to independence, were responsible directly to the now defunct all-union ministries, are virtually free of administrative oversight. Those enterprises that had originally been under the republican or local government control face an unbroken machinery of supervision. Since enforcement mechanisms have been substantially weakened, however, with the elimination of state orders and a sharp reduction in state procurement in the beginning of 1995, they too appear largely able to escape close direction.

This is not to deny that there is considerable consultation between enterprise managers and government officials with regard to pricing and production decisions. But this relationship should be seen as a fairly subtle process of give and take between enterprises and authorities, rather than a clear administrative hierarchy running from sectoral ministries to enterprise management. Enterprises, in fact, wield considerable influence, individually at the level of local administrations and as an organized lobby at the republican level. Enterprises do not hesitate, in some instances, to take aggressive legal action against state bodies to exploit loopholes in tax legislation and in trade and foreign exchange regulations.

Sectoral ministries also play a major semi-commercial role intermediating between enterprises, both in making available necessary primary inputs, and in directing output to enterprises that require it for further processing. The main objective of this intermediation is to ensure the flow of supplies to perceived priority sectors, such as food and consumer durables. However, it would appear that enterprises use such governmental services voluntarily rather than under duress, although their motivation is hard to understand, given continued supply problems in those areas where branch ministries are active. For example, in the first nine months of 1995, enterprises on average reported that 18 percent of all temporary shut-downs were due to lack of energy inputs, 40 percent due to lack of other inputs, and only 22 percent of shut-downs were ascribed to the absence of demand for finished products. Overall, however, discussions with enterprise managers suggest that while government agencies retain a visible presence in the enterprise sector, their actions place little constraint on managerial autonomy.

Alongside the nearly complete autonomy in day-to-day operations, managers of state enterprises have no legal authority to dispose of fixed assets--either equipment or buildings. Assets continue to be allocated to enterprises by the Government (typically a branch ministry) for a specific purpose. If an asset is no longer used by an enterprise--e.g., because production is no longer profitable--the only way to ensure the continued use of that asset is to obtain a government decision to re-allocate it administratively to another state enterprise. In that case, the asset would be transferred from the “authorized capital” of one enterprise to another.

Under the current law, the only way to transfer “authorized capital” or part of it into private hands is through an approved privatization program. The privatization program is aimed at selling enterprises as going concerns. If a state enterprise wanted to sell an isolated asset into private hands prior to its complete privatization, it would have to get approval from the State Property Fund, the duly constituted Privatization Commission and from the Ministry of Economy to alter its pre-privatization “authorized capital”. This approval would be very difficult to get since the main principle behind the privatization law is that every citizen should be given an equal chance to acquire a portion of state property.

In effect, enterprise managers are required to ensure that “authorized capital” remains intact. If an asset is not required, and is not taken away, it has to be moth-balled. Enterprises, of course, have very little incentive to ask a branch ministry to relieve them of an asset administratively. The only compensation they would get is the book value of the asset, which is likely to be well below the option value derived from keeping it moth-balled. There is also a significant disutility in signalling to the ministry that one cannot make use of a scarce resource. Moreover, even if an enterprise wanted to have an asset taken off its hands, it is not clear which officials would have the authority to approve a transfer. The State Property Fund and local authorities may block decisions of a branch ministry.

An enterprise may dispose of an asset semi-legally, by leasing it to its own managers, to another state enterprise or to a private entrepreneur. However, the legal status of leasing is uncertain. Although much of spontaneous privatization has been achieved by managers leasing assets to themselves, this is not representative. In these situations, the same people appear on both sides of the transaction. Attempts to lease property to or from an outsider are fraught with great risks since the property right is unclear. While leasing out an asset does represent a potential source of cash flow for a cash-strapped enterprise, such deals are rare and time-consuming.

Overall, a representative state enterprise in Ukraine faces an institutional structure uniquely unsuitable to successful functioning in a market economy. At the same time, these enterprises do find themselves in an increasingly open and competitive market environment. Although most wholesale and much of retail trade continues to be conducted through state-owned channels, enterprises (other than those producing for state contracts) have no guaranteed markets for their output. The product has to find a willing buyer, and even that is not enough to assure cash flow due to the break-down in payments discipline. Consumer demand and willingness and ability to pay thus place a constraint on enterprises’ pricing and production decisions which had not existed only a year or two ago.

A “semi-hard” budget constraint has been imposed under the auspices of the economic program supported by the IMF in 1995. Enterprises are supposed to meet a self-financing condition--income from the sale of their output and access to credits has to match its payment obligations. This is an important departure from recent practices, when enterprises’ financial flows were passively accommodated by the authorities to meet physical output targets. With the tightening of monetary policy in late 1994, access to credit is no longer guaranteed, and insolvency has ceased to be a purely theoretical possibility.

Insolvency does not mean bankruptcy or even replacement of the management team. It does, however, have fairly dire consequences. Enterprises unable to meet their cash flow constraint have to fall into arrears in wage payments or in payments to their suppliers, or face closure.

The number of loss-making enterprises grew sharply in 1994, particularly in the first quarter; about 20 percent of enterprises made accounting losses in 1994. These are particularly concentrated in the communal services and housing enterprises where government controls on prices prevented adequate cost recovery. If account is taken of the market value of inputs, however, the portion of enterprises making economic losses may be rather higher.

Another indication that enterprise budget constraints are not sufficiently hard is afforded by the data on interenterprise arrears. Such arrears have grown very significantly, even in real terms, during the latter half of 1994 and the first half of 1995. In part these arrears reflect trade credit between enterprises particularly in an environment in which banking system credit has grown increasingly scarce. Yet the growth of the interenterprise arrears which are considered formally overdue suggests that the problem of insufficiently hard budget constraints remains very real (Chart 3).

There are periodic netting and clearing operations for interenterprise arrears. Netting operations are undertaken by banks, most commonly when the enterprises hold accounts at the same commercial bank. In addition, the stock of outstanding arrears is often converted into bonds, usually with six-month maturities, and a secondary market in these bonds is developing. In March 1995, a Presidential Decree was issued seeking to assign priority to payments by indebted enterprises; after 5 percent set-aside, enterprises are to pay, in order of priority, any tax arrears, wage arrears, and arrears for energy consumption. The decree also stipulates that overdue arrears are subject to a 0.5 percent fine per day, or 0.75 percent fine per day on energy related arrears.

4. Asset markets

Markets for physical assets remain largely limited. As in the past, the residential real estate market is the most active, and the number of privatized apartments has risen to about 30 percent of the stock of state-owned housing. Such privatization can be undertaken for a nominal fee but since rent payments continued to be made after privatization (these payments are intended for the upkeep of the building and the common areas), and there is uncertainty about future property taxation, privatization is typically only done when the tenant wishes to sell the apartment. Apartments can be sublet, exchanged, or bequeathed without privatization.

The market for capital equipment and commercial real estate is severely limited. As discussed above, the supply of capital equipment is constrained by the Corporate Law which prohibits the sale of assets belonging to state enterprises.

Financial markets are also nascent. The Ukrainian equity markets received somewhat of a push when the process of transforming state enterprises into open joint stock companies began during the 1993 privatization program. With the mass privatization program, there is expected to be a substantial increase in activity in the bourses as individuals who received shares in a particular enterprise either seek to diversify their portfolio or to sell their shares completely. At present however, only a small number of companies are officially quoted on the Ukrainian Stock Exchange and weekly volumes seldom exceed a few billion karbovanets. The over-the-counter market is somewhat more active though trading is generally thin and few securities list both buy and sell quotations. Among the difficulties that potential investors encounter is the lack of adequate share registration and the lack of protection for minority shareholders. Foreign investors are permitted to purchase Ukrainian securities (their subsequent sale is not specifically addressed in the legislation) to the extent that such transactions are consistent with the currency regulations. Similarly, Ukrainian enterprises may issue securities outside of Ukraine although the proceeds from such sales would be subject to the 50 percent surrender requirement of foreign currency proceeds.

Appendix III The Gas Sector and the Arrears Problem

1. Introduction

Since its independence, Ukraine has accumulated large external payments arrears on gas imports. In early 1995, agreements were reached with Russia and Turkmenistan according to which payments arrears were rescheduled. Since then, however, new arrears on gas imports were accumulated, both vis-à-vis Russia, and Turkmenistan. At the root of Ukraine’s external payments problem is the nonpayment of domestic gas bills. At end-1994, domestic gas arrears amounted to the equivalent of 5 percent of GDP. In the first half of 1995, the accumulation of domestic gas arrears accelerated to more than 8 percent of GDP. The rate of increase slowed considerably, reflecting, in part, seasonal factors, but also more vigorous action by the Government against delinquent payers. Toward the end of 1995, however, domestic gas arrears appear to be increasing rapidly again. This appendix describes the Ukrainian gas sector, and examines some key issues related to the arrears problem.

2. Structure of the Ukrainian gas sector

Ukraine’s reliance on gas as a source of energy is among the highest in the world. Measured in tons of oil equivalent, gas accounted for 53 percent of total energy usage in 1994. Of the total amount of 93 billion cubic meters consumed, domestically-produced gas accounted for less than 20 percent, with the difference imported from Russia and Turkmenistan. Between 1991 and 1994, Ukrainian gas consumption declined by 22 percent, i.e., significantly less than the contraction in recorded GDP, estimated at more than 45 percent. The main group of gas consumers are industrial enterprises, accounting for 40 percent of total gas consumption; power companies and households (mostly for cooking gas and residential water heating) have shares of slightly more than 20 percent, with the rest being used by heat companies and other users. An undetermined amount of gas consumed by industrial enterprises is used for the generation of power and heat that is supplied to districts where enterprises are located.

Ukrgazprom (UGP) dominates international gas operations in Ukraine. The company, which is entirely state-owned, imports gas from Russia and, to a much lesser extent, from Turkmenistan. Owning 34,500 kilometers of gas transmission pipelines, whose maximum operating pressure reaches 80 atmospheres, it also stores and transmits Russian gas to Western European markets. It owns 12 underground storage facilities with an active volume of 35.5 billion cubic meters. The company’s value is estimated at US$20 billion to US$29 billion, exceeding the combined worth of British Gas, Gas de France, OMV (Austria), and SNAM (Italy).

Gas intended for the domestic market is transmitted by UGP’s high pressure pipelines to “gas distribution stations”. At the stations, the gas’s ownership is transferred to one of the nine regional transmission subsidiaries (“Transgas” companies), all of which are completely owned by UGP. From these stations, gas is transferred through 60,000 kilometers of low pressure pipelines to the end user. The network is owned by 50 local gas distribution companies that are organized under a trade organization known as Ukrgas.

Until recently, each local distribution company entered into a contract with a regional Transgas company. According to the contract, the local distribution company physically delivered the gas to end users, collected payments, and transferred the money (after subtracting a transportation and collection fee equal to US$2.88 per thousand cubic meter) to the Transgas company. In its billing and collection activities, local distribution companies were assisted by more than 400 local offices located all over Ukraine. In early April 1995, however, the billing and payment procedures were modified by a Presidential Decree, giving the Transgas companies the responsibility for collecting gas payments. At the same time, the local distribution companies’ role became limited to gas transportation, eliminating one channel of the payment chain.

Under the new system, the Transgas companies had to negotiate and sign contracts with 110,000 nonhousehold users, all of whom are metered. Each contract includes an indicative volume broken down by quarter. Every five days, the user is to pay for five days’ worth of gas as envisaged by the contract’s indicative amount. Three to seven days after the end of each month, a reconciliation is made between what was actually paid and the amount of gas actually delivered. Any shortfall is payable immediately. A penalty of 0.75 percent per day (not compounded) starts accumulating from the day the reconciliation is made. The users are charged US$80.8 per thousand cubic meter (up from US$65 in mid-March.) The price, which is set by the Ministry of Economy, is the sum of the border price (US$50), high pressure pipeline fee (US$7), low pressure pipeline fee (US$2.4), meters’ maintenance (US$1), VAT and other taxes (US$3.88) and UGP’s “profit” (US$16.52).

As regards small and household gas users, few local governments required that the Transgas companies actually sign a contract with each and every apartment. Instead, most oblasts allowed the Transgas companies to subcontract the household billing and collection effort back to the local gas distribution company (i.e., Ukrgas’s companies). In fact, the Transgas companies have also begun to ask the local distribution companies, in return for a commission, to bill, and collect payments from, small industrial users, budgetary organizations, all residential units, and small heating boilers. In Kiev, this amounts to 40 percent of gas usage.

Procedures used by the local distribution companies for billing and collecting are not codified in their own internal rules nor in any nationwide energy law. In general, the procedure for collecting from small nonresidential gas users is similar to that employed by the Transgas companies. For residential units, the distribution company sells gas through offices of the local authorities (“Gyecks”) that, in turn, collect the payments from households and transfer it to the gas distribution company. In households where gas meters are not yet installed, payment is based on the number of people in a household and on the number and kind of appliances used. Households that are metered pay relatively less per cubic meter, providing an incentive for others to install meters as well. It is estimated that households consume some 25 percent less gas as a result of the installation of meters. Gas consumption by households is still subsidized, although the cost recovery ratio has already been raised significantly and is expected to reach 80 percent in 1996 (Appendix IV).

3. The external dimension of the gas arrears problem

Volume deliveries of gas from Russia are monitored by a set of meters positioned at every border crossing point. Each meter is checked daily by an Ukrainian and a Russian inspector. By the 15th of the following month, all the readings are consolidated into one registry, which is signed by officials of UGP and Gazprom of Russia, RaoGazprom (RGP). The contract between UGP and RGP has indicative delivery volumes for each quarter. Every five days, payments are to be made for five of the 90 days’ worth of gas imports as foreseen in the contract (valued at US$50 per thousand cubic meters) minus fees for transmission services. 1/ In fact, the contract between UGP and RGP has indicative volumes for gas to be transmitted through the territory of Ukraine to other countries. Every five days, RGP is charged a transmission fee, valued tentatively at US$0.65 per 100 kilometers of transmission per thousand cubic meters of gas.

However, the price of gas delivered to Ukraine is well below the price Russia charges its Western European customers. On the other hand, the pipeline transmission fee UGP charges is only about 40 percent of the cost it incurs. Which of the two subsidies is greater depends on the volume of gas delivered to the Ukrainian market as well as on the volume of the Russian gas transmitted to the Western European market. The contract allows the parties to renegotiate the transmission fee in cases where volumes of gas delivered to the Ukrainian market varies from the indicative amounts specified in the contract. In the past, UGP has made use of this possibility.

As regards UGP’s storage facilities, which are needed to guarantee a constant flow of gas balanced against seasonal demand for gas by Western European countries, RGP pays a fee that is calculated per hour of “sendability” (i.e., the number of hours in which gas was removed from the underground facility). Storage fees are determined and paid at the final reconciliation date, i.e., the 15th of the following month. Terms of the storage services (and the fees) are subject to a separate contract between UGP and RGP.

Payments are made through the Russian “National Credit Bank”. On the 15th of the following month, the exact amount of gas delivered and transportation services rendered are determined. The amount is checked against what was actually paid during the month. The amount of storage fees and in-kind payments are subtracted from the difference. If positive, the residual becomes the liability of UGP and is due immediately. A penalty interest rate of 0.05 percent per day is applied if payments are not made within five days. If payments are not made after fifteen days from the reconciliation’s date, RGP may exercise its right to interrupt shipments.

The contract between UGP and RGP states that delivery of Russian gas “shall be made under the condition that Ukrgazprom provides an irrevocable guarantee from the Cabinet of Minsters of Ukraine through the National Bank of Ukraine of payments for the monthly volumes of gas deliveries.” However, the UGP/RGP contract is not countersigned by the Government of Ukraine. In fact, according to a decree “On Rendering State Guarantees for Foreign Credits Provided to Ukraine According to International Agreements” that was issued by the Cabinet of Ministers on March 17, 1993, guarantees have to be issued by the Cabinet of Ministers. Under Ukrainian law, no other instrument can constitute as a formal government guarantee.

Gas imports from Turkmenistan, are treated somewhat differently. There is a contract for gas deliveries signed by an autonomous Ukrainian company (Ukrresourcy- -UR) and the Turkmen Ministry of Fuel and Energy (TMFE). The contract describes volumes, prices, and payment mechanisms but includes no references to any government guarantee. In parallel to the UR/TMFE contract, however, there is a side agreement signed by the Presidents of Ukraine and Turkmenistan, that states that the “Ukrainian party (defined elsewhere as the Government of Ukraine) will ensure payments for the delivery of Turkmen gas.” Nonetheless, the Ukrainian authorities insist that this side contract does not qualify as a formal guarantee.

Concerned by the magnitude of contingent budgetary liabilities--as well as the moral hazard engendered by government guarantees of payments for gas deliveries--the Ukrainian Government has informed both Russia and Turkmenistan of its intention to withdraw these guarantees. Starting in 1996, there will be several intermediaries responsible for providing gas to enterprises and these intermediaries will be responsible for entering into contractual arrangements with foreign suppliers and for collecting payments from consumers. State guarantees will be limited to payment for gas consumed by households and communal services enterprises as well as--possibly--the power generation sector.

4. Domestic issues

The accumulation of domestic gas arrears reflect three main factors: the nature of the gas-related subsidy schemes; the methods used in setting utility tariffs; and the technical difficulties associated with cutting heating to nonpayers. As regards household subsidies, the Government has taken steps to replace the current system by an income-targeted scheme. This is discussed in Appendix IV. This section, therefore, focuses on the other two factors.

There are a number of distortions in the way energy “costs” are estimated by the Ukrainian Ministry of Economy. First, the cost formula provides only for limited investment outlays. Second, the Ministry tends to delay the adjustment of utility tariffs in response to inflation and rising fuel prices. Third, the Ministry “shields” end users from the effects of large fuel price increases by excluding from the cost calculation formula basic operations and maintenance costs. The above practices cause energy companies to incur losses that translate into inter-energy sector arrears. Finally, heat provided by nonmunicipal companies to households is cross-subsidized by enterprises. The cross-subsidy is burdensome to enterprises and has contributed to their inability to pay utility bills.

Heat and hot water are predominantly supplied through district heating networks although many enterprises own their own boilers and supply heat to the region where they are located. Heat originates from cogeneration power plants that are typically fueled by gas (47 percent), coal (41 percent), or by mazut (8 percent). There are two systems through which end-users access heat and hot water; both originate from a network of “principle pipelines.” In the first system, independent distribution pipelines branch out from the “principle pipeline” and typically service one unit (a building) which can be controlled without jeopardizing the rest of the network. In the second system, a “mini-network” (often circular) branches out from the “principle pipeline” and services a large number of units; it can be controlled only at the aggregate level. Cities usually use the second system, while smaller towns and villages have the first system. Heating plants can control and monitor the amount of heat leaving their plants. They can do the same with heat supplied to nonhousehold users. However, heating plants generally lack the ability to control and monitor household heat usage beyond the “principle pipeline” level.

Heating tariffs are determined by the Government on the basis of cost proposals made by the heating companies. In April 1995, the cost of producing 1 Gilo-Calorie (GC) of heat was Krb 3.5 million. Households pay a tariff of Krb 0.68 million per GC. If heat is provided by district heating companies, the subsidy is covered by the local governments. If, on the other hand, heating is provided by enterprises or power companies, the subsidy burden is incurred by nonhousehold users unless the subsidy exceeds 15 percent of household income in which case the budget is responsible for the difference. This cross subsidization system has meant that the heat tariff for nonhousehold users amounts to several times the production cost (i.e., Krb 11.057 million per GC).

Heating companies enter into contracts with the “Gyecks”, which essentially are real-estate management companies overseeing the affairs of a number of apartment buildings in a certain district. The contract with each Gyeck stipulates that the heating company will supply to each apartment heat, ensuring that temperature (during winter) will not go below 18 degrees, and hot water whose temperature will not deviate from 50-60 degrees. The heating company estimates GK energy needed per Gyeck; the estimates are based on the number of square meters managed by each Gyeck and by the width of the pipeline to which the apartments are connected. The total annual cost of heat is billed to the Gyeck that is required to pay 1/12th of it each month. The Gyeck, in turn, bills each apartment on the basis of the apartment’s area. Households pay directly into a special Savings Bank account, with the difference between actual costs and the amount charged paid by the local governments to the Gyecks. The consolidated amount is then transferred, with a delay of one month, to the heating company.

Appendix IV The Social Safety Net in Transition

There are several forms of social protection expenditure in Ukraine.

1. Consumer subsidies

Considerable income support has been provided through untargeted housing subsidies, including energy, covering the difference between the required cost recovery ratio and the true cost of providing houses with utilities and direct use of energy. Until the fourth quarter of 1994, untargeted subsidies amounted to about 95 percent of actual costs. Since then, however, tariffs have been gradually raised in a move toward a system of income-based subsidies. In October 1994, the cost recovery ratio was raised to 15 percent for heat, water sewage, hot water, and gas and further to 20 percent in February 1995. Further increases to 30 percent and 40-50 percent were introduced in June and September 1995.

At the same time, the Government introduced a scheme of income-based targeted subsidies to protect the most vulnerable segments of the population from increasing housing costs and energy tariffs. According to a government resolution that became effective May 1, 1995, a family is entitled to receive income support if its housing and energy bill exceeds 15 percent of its total income--regardless of the form of ownership of the apartment (private, state-owned, or collective). In addition to those utilities provided under the untargeted scheme for communal services, the new system also includes coal, gas, and electricity. To determine whether a household is eligible for income support, both monetary and in-kind incomes are taken into account. 1/ Payments for the use of communal services in excess of “sanitary” norms for living space remain the responsibility of the user. According to these norms, each person in a household may occupy up to 21 square meters, with an additional allowance of 20.5 square meters as a common living area for the household.

The initial take-up of the new subsidy system was slow due to inadequate information and bureaucratic delays in processing applications for income support. Out of Krb 18 trillion of budgetary funds earmarked for the new scheme, less than Krb 1 trillion were actually used during the period from May through September 1995. However, enrollment in the new scheme gathered momentum following the rise in the cost recovery ratio to 40 percent in September. With further gradual increases in the cost recovery ratio to 80 percent next year and simplifications in the application procedures for direct income support, it is expected that the untargeted subsidy scheme will eventually be fully replaced by the new system.

2. Social Security

Social security payments are made through the Pension Fund, the Chernobyl Fund, and the budget.

a. Pension Fund

Over 80 percent of expenditure by the Pension Fund is for retirement benefits, for payment of the social pension (there are around 15 million pensioners in Ukraine), and for compensation for the price increase in foodstuffs and commodities. The standard retirement age is 60 years for men and 55 years for women. Full retirement benefits require a minimum of 25 years of service for men and 20 years for women where the minimum replacement rate is 55 percent. This rate increases one percentage point for each additional year of service, to a maximum of approximately 70 percent to 75 percent. Early retirement is possible but at reduced benefits. Supplements are paid so that all pensions are at least equal to the minimum income level (Krb 2.6 million per month as of September 1). Due to a lack of indexation, most pensions are now paid at close to this minimum. Only a few privileged groups such as miners and militia earn substantially more than the minimum pension. The social pension of Krb 1.38 million per month is paid regardless of work history. Compensation to low-income pension and non-pension families that receive benefits under the Pension Fund for price increases in foodstuffs and commodities is set at Krb 1.33 million per month.

Around 4 million low-income pensioners are eligible to receive reductions of up to 50 percent on their required cost recovery payments for their use of household utilities and energy, provided the pensioner holds title to the home. In addition, pensioners without families are entitled to receive one cash payment for the winter season.

The Pension Fund is also responsible for paying disability pensions. The amount of benefits an individual receives depends on the number of years of service and the severity of the disability, with the replacement rate varying between 40 percent to 70 percent. Benefits range from 50 percent of the minimum wage to 400 percent of the minimum wage (Krb 7.1 trillion cost in 1995).

Finally, the Pension Fund pays some military benefits. These are for children between 1.5-3 years to substitute for the father’s lost income while he is in the service (Krb 6.8 trillion cost in 1995). The second is for disability benefits for privates (Krb 9.6 trillion).

The Pension Fund operates as a pay-as-you-go system, financed with an allocation of 88 percent of the 37 percent social security tax, implying a legal contribution rate of 32.56 percent (the balance is paid to the Social Insurance Fund). Preferential payroll tax rates apply for some workers (Appendix VIII). In practice, the average actual contribution rate was 30.6 percent in 1994 and 28.8 percent for the first nine months of 1995.

b. Chernobyl Fund

The Chernobyl Fund pays a variety of benefits, including social payments for Chernobyl victims (Krb 77 trillion in 1995, Krb 11 trillion of which is for pensions and benefits that are paid through the Pension Fund and reimbursed by the Chernobyl Fund), state capital investment (Krb 22 trillion), measures to clean up the polluted areas (Krb 7 trillion) and compensation for voluntary migration (Krb 5 trillion).

The Chernobyl Fund is financed by a 12 percent payroll tax. However, many enterprises receive an exemption from this contribution (Appendix VIII), and the actual average collection rate is only around 7 percent.

c. Military pensions

Military personnel do not pay the social security payroll tax, and their pensions are financed directly from the budget. Militia can earn up to four times the minimum pension. The cost of military pensions in 1995 was around Krb 35 trillion. War veterans and their families also receive benefits of up to 50 percent on the required cost recovery ratio for their use of household utilities and energy.

3. Unemployment benefits

Unemployment benefits, which are provided through the Employment Fund, vary according to different categories of unemployment:

  • Workers who are laid off must be given three months’ notice. During this period, they receive severance pay from their employers, amounting to 100 percent of their last wage. Following a waiting period of 10 days, unemployed workers receive unemployment benefits amounting to 75 percent of their previous wages, with lower and upper limits set by the minimum wage and the average wage in the oblast, respectively. The amount is further reduced to 50 percent for the next six months, subject to the same lower and upper limits. While thereafter long-term unemployed are covered by other social assistance, unemployed workers who are close to their retirement age are eligible for unemployment benefits for another six months. In order to collect benefits, the unemployed must meet certain job search criteria.
  • Those workers, who decide to leave voluntarily after at least 12 weeks of work within the last 12 months, are eligible for unemployment benefits of 50 percent of their previous wage, whereby lower and upper limits also apply. In the first year of unemployment, these benefits are restricted to six months; in the second and third year, the maximum period is three months.
  • Unemployed graduates and people discharged from military service may claim unemployment benefits for up to six months, amounting to the minimum wage. In contrast, those unemployed who have already entered the labor market but have been laid off after less than one year receive 75 percent of the minimum wage for up to six months.

With open unemployment remaining very low, the administration of unemployment benefits has played a rather limited role for the Employment Fund. Instead, its activities have continued to concentrate on measures aiming at increasing the transparency of the labor market and to raise labor mobility. Reflecting the authorities’ concern that open unemployment could rise significantly and become a low turn-over pool, a nationwide network of some 600 employment centers has been established. Inter alia, these centers have been charged with providing job search assistance for unemployed workers and administering retraining programs, which are largely subcontracted to specialized training institutions. In addition, employment centers organize public works programs, placing unskilled unemployed workers in local government institutions and enterprises. In contrast, lending to enterprises and local authorities to create new jobs was discontinued in early 1995. The acute shortage of housing in some regions continues to represent a major impediment to regional labor mobility.

Notwithstanding a significant increase in its expenditures on job search assistance and re-training programs, in the first nine months of 1995, the Employment Fund continued to enjoy a sizable surplus of financial resources. Financed by a 2 percent payroll surcharge paid by employers, investment income and, if needed, budgetary transfers, the Employment Fund saved its surplus as reserves against future claims on unemployment compensation in case that large-scale open unemployment should emerge. While the need for employers to provide severance pay for three months has likely contributed to their reluctance to shed labor, many workers on unpaid leave continue to enjoy significant benefits, such as free housing, subsidized meals and access to kindergartens, as long as they remain on the payroll, representing an important incentive for not registering as unemployed.

4. Other welfare benefits

Enterprises also administer some family benefits, which, however, are financed by the state or local budgets or the pension fund. The system of family benefits is highly complex and poorly targeted, consisting of the following components: 1/

  • Birth grant, amounting to Krb 2.83 million; an additional benefit of Krb 1.42 million is granted if the child’s health is poor.
  • Child benefit for children under age three: mothers who are employed receive an allowance of Krb 1.32 million per month per child, while those without a job receive Krb 410,000.
  • Benefit for disabled children: amounts to Krb 1.17 million per month per child if mother is able to work but needs to take care of her child.
  • Benefit for large families with three or more children: amounts to Krb 710,000 per month per child if there are three children, whose mother is employed; otherwise, each child receives Krb 810,000 per month. In families with four and more children, each child receives Krb 1.42 million if their mother is employed or otherwise Krb 1.66 million.
  • Benefit for families with total income below the poverty line and children aged 16 or younger: amounts to Krb 520,000 per month per child.
  • Single mother benefit: amounts to Krb 410,000 per month per child or Krb 830,000 per month per child if his/her mother herself grew up in an orphanage.
  • Families, where father serves in the army: amounts to Krb 710,000 per child per month for the period of military service.
  • Foster benefit: amounts to Krb 1.66 million per child per month.
  • Alimony benefit, where parents refuse to pay for their children: amounts to Krb 410,000 per month per child.
  • Maternity leave: for the period of up to 140 days, the mother receives 100 percent of her salary.

An important impediment to the reform of the social safety net has been seen in the absence of adequate household survey data, which has made it very difficult, if not impossible, to identify the neediest segments of the population. Following the methodology of the Family Budget Surveys of the former Soviet Union, families are selected on the basis of the industrial affiliation of their wage earners, with the selection probability increasing with the number of wage earners in the households. Moreover, the survey results are difficult to interpret as income data remain grouped, i.e., are presented as percentages of the total population falling into various income intervals, with both the lower and upper income ranges being open-ended.

Appendix V Terms of Rescheduling Agreements Signed by Ukraine

Ukraine signed two major rescheduling agreements, with Turkmenistan and Russia, in late 1994 and early 1995, involving over US$3 billion of arrears in debt service and gas payments, and principal falling due to Russia on interstate debt (Table 43). Such reschedulings were crucial to finance both the 1994 and the 1995 programs. This appendix provides a background on the rescheduling agreements, and compares them with Paris Club precedents on the subject.


Ukraine accumulated about US$670 million in arrears on gas payments with Turkmenistan during 1993. In early 1994 these arrears were converted into debt, and Ukraine agreed to pay the whole amount plus interest (of LIBOR plus + 1 percentage point) during the year. The country was not able to make any payments on this debt during 1994, and on November 4, 1995, Turkmenistan agreed to reschedule the debt falling due in the fourth quarter of 1994 plus the arrears. Payment of the consolidated amounts of US$715 million would be made in 20 equal quarterly installments with a maturity of seven years, including a two-year grace period.


Ukraine accumulated significant debts to Russia in the period 1992-94 on two counts: (i) gas payment arrears of about US$1.4 billion accumulated with RAO Gazprom; and (ii) overdraft in the National Bank’s correspondent account with the Central Bank of Russia which went to finance the bilateral deficit in trade. In May 1993, a debt conversion agreement was reached with Russia under which payments arrears from 1992 of US$1 billion and the outstanding correspondent account balance of the National Bank of Ukraine with the Central Bank of Russia (US$1.5 billion) were consolidated into a state debt. The agreement provided for equal quarterly repayments by Ukraine over six years, beginning in the first quarter of 1994, at LIBOR plus 1 percentage point. Ukraine did not service this debt during 1994, and therefore significant arrears on it were accumulated by the end of the year.

On March 20, 1995, Ukraine reached a new rescheduling agreement with Russia that involved: (a) the gas arrears noted in (i) above plus some oil arrears (US$155 million); (b) the 1994 arrears on interstate debt of about US$650 million; and (c) the US$485 million in amortization payments falling due on the interstate debt during 1995. The gas arrears were securitized and rescheduled by RAO Gazprom. Payments on the new securities were to be made in 40 quarterly installments with a maturity of 12 years including a two-year grace period, at 8.5 percent fixed interest rate. Amounts under (b) and (c) also were securitized and rescheduled to be paid over 13 years, including a three-year grace period. New debt under (b) carries an interest rate of LIBOR plus 2 percent, and the amounts under (c) carry an interest rate of LIBOR plus 1 1/2 percentage points.

Comparison of Terms

Table 48 compares the terms of the Ukrainian agreements with those that other countries have obtained under the Paris Club. The benchmarks in the table correspond to the terms obtained by middle- and lower-middle-income countries in this decade. The reschedulings obtained by Ukraine with Russia in May 1993 and with Turkmenistan in early 1994, contributed little to restore Ukraine’s balance of payments liability, particularly because they had no significant grace period. They clearly compare unfavorably with the benchmarks in Table 48. By contrast, the reschedulings obtained with Turkmenistan in late-1994 and with Russia in early-1995 have been crucial to restore balance of payments viability. Their terms are comparable with those obtained by middle-income countries, perhaps with a somewhat lower grace period offset by a longer maturity.

The recent Ukrainian debt agreements are comparable with recent reschedulings by middle-income countries. All four Paris Club rescheduling agreements for such since end-July 1994 (Algeria, Croatia, the Former Yugoslav Republic of Macedonia, and the Russian Federation) have grace periods of two-three years and maturity of about 15 years (SM/95/228, 9/8/95). As an example, Croatia rescheduled arrears on pre-cutoff date debt, and principal payments falling due during the consolidation period on previously rescheduled debt, over 15 years with three years grace. Russia reached an agreement with broader debt coverage than Croatia, but similar terms (with payments to be made over 15 years including a three-year grace). However, in contrast with the Ukrainian case, all four agreements mentioned above incorporated graduated payments schedules--that is, a payment schedule with payments increasing throughout the maturity period. Debtor countries favor these agreements because they avoid a jump in principal payments.

While Ukraine’s recent debt agreements are comparable with those obtained recently by middle-income countries under the aegis of the Paris Club, the coverage of the agreements appears to have been broader. In addition to debt arrears, the Ukrainian agreements included “involuntary” bilateral trade credits that had financed Ukrainian gas imports in the past. In contrast, however, the securitization of the amounts involved will significantly limit Ukraine’s ability to reschedule these debts in the future.

Appendix VI Developments in the External Trade Regime

Since the fall of 1994, and during the course of 1995, the Government of Ukraine undertook a significant liberalization of the external trade regime. These measures were complemented by the unification of the exchange rate, and the liberalization of the foreign exchange market, as described in Chapter V.

1. Export regime

Beginning in November 1994, the system of export quotas--that used to cover some 40 percent of exports--was largely abolished and remained in place for only five categories of goods (grain, ferrous and nonferrous scrap, cast iron, and coal) in addition to goods subject to voluntary export restraint or other international agreements. In the beginning of 1995 this shorter list of goods subject to export quotas was abolished as well, and only the export of grain remained subject to a quota. In the meantime, the system of state contracts and orders for exports has been dismantled, and now exists only for fulfilling intergovernmental barter arrangements for gas imports.

The export quota on grain (set at 4.2 million tons for the year, of which 1 million tons was reserved for deliveries under intergovernmental agreements for the import of natural gas) was maintained because of concerns that, should there be a poor harvest, there would be insufficient supply to meet domestic demand; in the event, agricultural output declined only modestly in 1995. Nonetheless, the authorities delayed removing the grain quota by several months lifting it only in late September 1995. Currently, the only restriction on grain exports is the requirement that sales for the export market be undertaken through the agricultural commodity exchange. 1/

Accordingly, the only goods currently subject to quotas and licenses are goods for which Ukraine has entered into voluntary export restraints (primarily textiles and steel), and goods falling under the special export regime (coal, scrap of precious metals, and alcoholic spirits). The latter was instituted by then Prime Minister Kuchma under his special powers in 1993, and can be removed only by Parliamentary decision. The force of the licensing requirements have been largely removed, however, since--with the exception of licenses for precious metals--these licenses are freely provided to exporters.

With the removal of the quota system for most exports in November 1994, two concerns emerged: that enterprises might engage in international dumping: and that state enterprises might be subject to asset stripping. To address their concerns, the authorities instituted a new system of export contract pre-registration. A list of some 20 categories of goods were subject to this registration in addition to all goods traded under barter arrangements. A series of Presidential Decrees in March 1995 sharply curtailed the scope of the export registration requirement, limiting it to goods subject to voluntary export restraints, goods subject to anti-dumping actions, or goods potentially subject to such actions.

Although the requirement to pre-register contracts was relaxed, the authorities instituted a system of minimum indicative prices for a wide range of export products (covering as much as one half of all of Ukraine’s exports), in part to address the problem of anti-dumping actions being brought against Ukraine. These indicative prices are published monthly and are intended primarily to provide information for Ukrainian exporters. Yet in the past they have frequently been interpreted as mandatory minimum prices for exports by customs officials.

Ukraine’s problems with anti-dumping actions is exacerbated by its classification as a nonmarket economy (NME) by both the United States and the European Union. Under such a classification, once there has been a finding of dumping by a single firm, all firms exporting the same good from that country are subject to the same anti-dumping margin, regardless of their own behavior. There is thus an important externality whereby a single enterprise that dumps can queer the pitch for all Ukrainian exporters of the same product. Moreover, in computing the dumping margin, costs are calculated on the basis of factor costs in “comparable” market economies. These cost calculations, therefore, typically do not take account of Ukraine’s particular comparative advantages and prevailing vector of relative prices.

An issue of continuing concern to the authorities is the share of barter transactions in external trade. With the unification of the exchange market, and the greater stability of the exchange rate, this proportion has been falling steadily over time: whereas barter transactions accounted for more than 45 percent of trade in the first quarter of 1994, this share decreased to 33 percent in the first quarter of 1995, and currently about 30 percent of trade is undertaken through barter transactions. A scheme whereby barter transactions would be subject to an advance deposit--varying according to the nature of the good being exported and the corresponding import--was contemplated, but ultimately was not instituted. Instead, the authorities are considering a modest tax of 5 percent on barter transactions which would not discriminate according to the goods being imported.

Meanwhile, there already exist disincentives to barter trade arising from the tax system. Notwithstanding provision for accruals treatment of all tax liabilities under the Profit Tax Law, a suspension by Parliament of one of its clauses means that the profit tax on barter transactions must be paid when the goods cross the border, but only when the payment is received in the case of cash trade. Similarly, the VAT Law requires that VAT be paid before the goods enter the country in the case of barter trade, but can be deferred until the goods are sold domestically when imported on a cash basis (exports are now generally exempt from VAT). Moreover, exporters are required to undertake the corresponding import within 90 days, after which a 0.3 percent penalty applies daily.

2. Import regime

Ukraine continues to maintain a relatively liberal import regime. On a trade-weighted basis, the average tariff rate is around 5 percent. More recently, however, there have been increasing protectionist sentiments. Import duties on coal of ECU2-3 per ton (or around 15 percent on an ad valorem basis) and on refined oil products (about 15 percent as well) have recently been imposed. In addition to the customs duties, imports are subject to VAT (regardless of whether they are from CIS or non-CIS countries) and to excise duties. Imports from Russia and from Belarus are exempt from customs duties.

Excise duties can be substantial, and are applied differentially according to whether the good is of domestic origin or was imported. Duties are imposed on about 20 types of commodities.

Appendix VII The Banking Sector

This appendix focuses on developments in the banking sector. Section 1 provides a short review of the evolution of the banking system in Ukraine from the period just before independence through 1994, highlighting important developments and the reasons they occurred. Section 2 discusses bank interventions and bank profitability in 1995.

1. Evolution of Ukraine’s banking system through 1994

Significant steps were taken toward establishing a two-tier banking system in Ukraine in the three years prior to independence. The resulting structure, which was motivated by a desire to formally separate commercial banking activities from the central bank of the U.S.S.R., included the National Bank of Ukraine (NBU), which was formed from the Ukrainian branch of Gosbank U.S.S.R. in the spring of 1991; Bank Ukraina (the agricultural bank), Prominvestbank, Ukrsotsbank, and Oshchadny Bank (savings bank), which were spun off from the corresponding specialized All-Union state banks in 1990; and a number of small cooperative and commercial banks (CCBs).

The NBU was created in conjunction with the passing of the Law of Ukraine on Banks and Banking Activity. This law, although amended a number of times since 1991, continues to govern banking activity in Ukraine. It stipulates that the National Bank is directly responsible to the Supreme Rada (Parliament) of Ukraine, which appoints the Governor of the National Bank for a term of four years. The CCBs that existed at the time of independence were founded beginning in the late-1980s on the basis of Soviet laws that (i) authorized the establishment of cooperative banks to serve cooperative institutions, and (ii) granted state enterprises the right to form financial institutions.

There were a number of important developments in the banking sector during 1992. Early that year, Ukreximbank, one of the two wholly state-owned banks remaining in Ukraine, was formed out of necessity as the Vneshekonombank of the former U.S.S.R. ceased to process Ukrainian foreign trade payments. 1/2/ In addition, a number of the specialized state banks were corporatized, primarily in a spontaneous fashion with large state enterprises taking substantial ownership shares in the banks that serviced their sectors. Finally, the number of smaller commercial banks began to mushroom, which was made possible by the extremely low minimum capital requirements in place at the time. By the end of the year there were approximately 130 of these banks, compared to just 11 two years earlier.

During the ensuing two years, the ownership structure of the three large formerly state-owned banks, Bank Ukraine, Prominvestbank, and Ukrsotsbank, changed dramatically. This change was largely the result of a 1993 order of the Government that all state-enterprise shares in these banks be transferred to the Ministry of Finance. This led these banks to devise a method of transferring ownership through the distribution of shares to the employees of client enterprises and of the banks themselves. Thus, ownership of each of the three largest private banks is now diluted among tens or hundreds of thousands of shareholders, most of which are individuals. However, it is not clear that decision making within these banks is controlled in a meaningful way by the full population of shareholders; in fact, most major policy and personnel decisions are probably still made by top managers of the state enterprises that were majority shareholders prior to the share redistribution.

The number of small- and medium-sized commercial banks continued to increase during 1993 and 1994, reaching around 230 by early 1995. 1/ However, the rate of increase slowed throughout the period, as minimum capital requirements were increased significantly in stages beginning in 1993. In particular, minimum capital requirements increased from Krb 0.5 billion for all banks at end-1992 to Krb 2 billion for banks operating only in domestic currency, and Krb 4 billion for banks with a foreign exchange license, by January 1994. In mid-1994 the minimum capital requirement for all banks was raised to Krb 5 billion. Beginning January 1, 1996, minimum capital requirements for existing banks will be denominated in ECU and be set at ECU 500,000. Banks established on or after that date will face a minimum capital requirement of ECU 3 million. The minimum capital requirement will be ECU 5 million for minority foreign-owned banks and ECU 10 million for majority foreign-owned banks. This action is likely to lead to some consolidation of the banking sector as small- and medium-sized banks join forces to meet the new requirements.

2. Banking sector developments in 1995

a. Bank interventions

Banks in Ukraine are not formally licensed by the National Bank of Ukraine, but instead are established, generally at the oblast level, under commercial laws as companies permitted to engage in banking activity. 2/ They are then registered as such by the NBU. 3/ This legal framework limits the ability of the National Bank to intervene in banks. In particular, it is not possible under current law for the National Bank to seize a bank’s assets and put a bank into bankruptcy proceedings.

Despite these limitations, in 1995 the NBU began to take a more aggressive stance in regard to intervening at banks. In the first ten months of the year, the NBU intervened at approximately 20 banks. Management changes were imposed and bank registrations were revoked for violations ranging from insufficient minimum authorized capital to overexposure to single borrowers. Most recently, the NBU restricted the rights of a number of the largest private banks to conduct foreign exchange operations. This followed the NBU’s assessment that the financial health of some of these banks had been jeopardized by speculative foreign exchange trading and that others had been engaging in illegal foreign exchange operations.

Notwithstanding the increased activity in this area, the NBU continues to intervene, and to apply bank regulations more generally, in an ad hoc manner. This reflects both the NBU’s concerns about the effect on depositors of rigorous enforcement of regulations in a system lacking deposit insurance and political pressures that prevent bank supervisors from moving aggressively against certain financial institutions.

b. Bank profitability

It is estimated that 30 percent of banks in Ukraine have capital below the legal minimum. This in part reflects the combination of the small size of many banks established in the period 1991 to 1994, the steady increase in minimum capital requirements throughout that period, and the unwillingness of the regulatory authorities to apply prudential regulations and sanctions uniformly. In addition, recent developments in banks’ profitability are contributing to the inability of many banks to increase their capital rapidly enough to comply with current regulations.

Recent data for 95 commercial banks show that, although on average these banks’ capital and assets have increased strongly during 1995, the ratio of profits earned in the first nine months of the year to both total assets and capital at the end of the period is down sharply on the comparable figures for the full year of 1994. 1/ The weighted average ratio of profits to assets fell from 9 percent to 5 percent, and that of profits to capital from 117 percent to 67 percent.

This declining average performance reflects, among other things, the accelerating accumulation of nonperforming loans arising from enterprises’ difficulty in servicing their debts in an environment of high real interest rates, and increased competition among banks, particularly the newer private banks. Both of these factors have affected banks unevenly and the data on banks’ profitability confirm this.

On October 1, 1995, the ratio of banks’ profits to assets ranged from 3 percent up to 26 percent. By this measure, the profits of the former state-owned banks included in the group of 95 banks were at the low end of this range. In addition, the decline in the profitability of these banks during 1995 was among the greatest in the group of banks surveyed. This reflects in part the heavy burden placed on these banks by what have become nonperforming or marginal loans originally extended under various directed credit programs in place during 1994 and 1995.

The remaining private banks have been less subject to pressure to extend credits to specific enterprises, and their average profits on assets in the first ten months of 1995, at somewhat more than 8 percent, reflects this. Nonetheless, the profitability of these banks has also suffered, in part due to increased competition in the sector from both the large formerly state-owned banks, which have made significant efforts to break out of their practice of lending to specific sectors, and other newer private banks. Finally, as noted above, the profitability of banks in general suffered during 1995, and this is exhibited by the fact that the percentage return on assets for 65 out of the 95 banks surveyed fell during the first nine months of the year.

Appendix VIII Tax Summary

Since 1994, Ukraina’s tax system has undergone a number of important changes. This appendix summarizes the major taxes as of October 30, 1995.

1. Taxes on income and profits
1.1 Personal income tax

(President Decree No. 519 on September 13, 1994 and No. 100, February 3, 1995).
Rate is based on multiples of the nontaxable minimum (nm), which is linked to the minimum wage. Taxes are levied on wages and salaries from the primary place of employment, income from part-time and contractual work, entrepreneurial activities, royalties, and income in kind (except from agricultural enterprises).Exempt income: Social security benefits, social Insurance, pensions, income of certain veterans and their families, alimony, Income from sale of property, income from personal farms, gifts and inheritances, and income used to purchase stock.

Personal deductions: One minimum monthly salary for one parent for each child under 16 years old (for parents with incomes below a certain threshold); up to 10 minimum monthly salaries for certain Chernobyl victims, the war disabled, veterans, survivors of military personnel (including parents, spouses, and children) killed or lost in the line of duty, parents raising disabled children, and the politically rehabilitated. Local governments may grant further deductions.

Business deductions: Certain expenses (materials, depreciation, wages, and interest, for example) for those engaged in entrepreneurial activity.
Monthly IncomeMarginal rate
Up to nontaxable minimum (nm)Exempt
From 1 nm to 5 nm10%
From 5 nm to 10 nm krb560,000+20%
from 10 nm to 15 nm krb1,960,000+30%
From 15 nm to 25 nm krb4,060,000+40%
More then 25 nm krb9,660,000+50%
Royalties received by heirs are taxed at twice the above rates, not to exceed 70%; income in foreign currency is taxed at half the above rates.

Wages and salaries of miners are taxed at a flat rate of 10%.

Dividend income is withheld at source at a final rate of 15%.
1.2 Tax on enterprises income

(Law of March 1995)
A tax on the profits of all legal entities located in Ukraine, plus all branches and divisions of companies located In Ukraine with headquarters outside Ukrainian territory, excluding Central Bank and penitentiary establishments.

Also subject to tax are international organizations that are not subject to immunity and diplomatic privileges carrying out business in Ukraine, non-residents who carry out business activities through its permanent missions in Ukraine, non-residents who carry out the repatriation of profit received from sources located on the territory of Ukraine.

1. Transactions exempt: Money and materials paid as a contribution to statute funds such as the wages and social payments funds of enterprises; additional pension fund contributions; valuation differences, included into own enterprise’s currency values; Joint investments; material values or intangible assets that have been invested on foreign contribution and refunded to foreign investors in the event of elimination of investment activity; material values and intangible assets delivered as non-repayable financial assistance or voluntary donations; religious organizations.

Exempt for Enterprises: Construction, cultural and health-care facilities in rural areas, fisheries and fishing collective farms; factories on proceeding and utilization of the animals and production from fodder protein additions; Interest by non-residents for credit provided to the Government of Ukraine and NBU. Collective farms and certain other agricultural enterprises pay income tax only on nonagricultural output.

Reduction of Profit Tax: For enterprise expenditure for the purpose of reconstruction and modernization of the active capital assets for depreciation and development - up to 20X.
Profit of enterprises-30%

Profit from intermediary transactions, auction sales of material values (except financial resources)-45%.

Profit of conducting lotteries, gambling houses and gambling activity—60%

State enterprises which direct dividends charged on the portion of their state property for purposes that are determined by existing legislation of Ukraine, profit of agricultural enterprises for providing services of agricultural production - 15%.

Passive profit of non-residents, increases from technical services - 15%.

Profit from amounts paid to enterprises of Ukraine by non-residents regarding international transactions - 6%.
For expenditure for purchasing of special equipment that provides working conditions for disabled - up to 50X.
For enterprise expenditure on public organizations of disabled, in case more than 50% of the staff are disabled and money is utilized for purposes of social labor and medical rehabilitation of disabled - up to 100%.
Loss carry forward for new enterprises is allowed.
2. Social security contributions:

Pension Fund and Social Insurance Fund (Law of November 5, 1991; Supreme Rada Decree of June 17, 1993; Cabinet of Ministers Decree No. 236 of April 27, 1994; Law No. 126 of April 6, 1995).
Social insurance contributions are split, with 88 percent of the amount collected is allocated to the Pension Fund, end 12 percent to the Social Insurance Fund (controlled by trade unions).Exempt; Defense employees.Wages of enterprises - 37 percent (employees pay an additional one percent). Wages of public organizations - 5 percent Income of persons who handle their own business which is based on their own work-9 percent. Payments by enterprises to persons on special agreements -33.3 percent.
3. Payroll taxes

3.1 Chernobyl Fund contribution
Tax paid on the wage fund of enterprises.Exempt (Chernobyl Fund): coal industry enterprises; manganese and iron-ore mining and construction enterprises; enterprises which deal with Tumenia region in Russia; creative unions; scientific and production union “Eastern mining combinate”; Ukrainian blind and deaf people’s union enterprises; social and cultural institutions on trade union budgets; scientific and other organizations on state budget.12 percent.
3.2 Employment Fund contribution Law No. 126 of April 6, 1993.2 percent.
4. Taxes on property
4.1.1 Land tax

Law No. 2536 of July 1, 1992.
Landowners and individual holders of long-term leases (of both agricultural and nonagricultural land) are assessed a land tax on an annual basis per one unit of land.Exempt National parks and arboretums; game refuges; research farms; cultural, scientific, health care, and educational Institutions; sports facilities (excluding private and cooperatives); charities and disabled persons; victims of the Chernobyl disaster; blind and deaf people’s unions; charity funds; victims of World War II; pensioners; radiation spoiled soil; cemeteries.Specific rates are assessed on the basic of quality of spoil, location, and similar criteria.
New agricultural farms have a 3 year holiday.
5. Taxes on goods and services
5.1 Value-added tax (Law of January 6, 1993;

Decrees No. 14 of Cabinet of Ministers of December 26, 1992;

President’s Decrees No. 502 September 7, 1994 and No. 685 November 18, 1994).
A tax on the value of goods and services, including barter transactions, for all legal persons in Ukraine, and for individual when the volume of goods sold exceeds krb 500,000 p.a. VAT paid on capital goods is fully creditable at the time the capital is put into operation; excess credits are carried forward.

Manufacturers use the invoice method to calculate VAT liability; retailers use the average markup as a base. Imported goods are subject to VAT only if resold; the liability is then calculated on the difference between the sale price and customs valuation.
Zero-rated: Exports for freely convertible currencies (exports for currencies of other CIS countries end barter transactions are taxable); goods and services used by diplomats; coal and electric power; construction and restoration of religious buildings or charity coats; repairs made necessary by the Chernobyl accident.

Exempt; Sales of precious metals and stones to the National Bank of Ukraine; goods for the disabled; public utilities; children’s magazines and certain newspapers; construction; baby food and baby products sold in special stores; educational services; laundry services for hospitals and educational institutions; insurance and banking services; securities; eitisen cooperations; stamps; entertainment activities; science and research; training; medical products; travel vouchers for sanatoria; municipal public transport; state and custom duties paid to budget; enterprises and private business individuals which do not set as legal entities and their turnovers are less then 100 minimum wages; funeral services; pre-school institution services; agricultural production which was paid as part of wages to agricultural enterprises workers; agricultural services for rural workers; state enterprises property which is going to be privatized; Ukrainian blind and deaf people enterprises; pharmacy services on medicare trade; forestry enterprises; governmental, Supreme Soviets, Cabinet of Ministers, other central and local authorities; creative unions; paper and other publishing materials and services.

Firms with foreign investment which registered before May 20, 1993 have a 5 year tax holiday.
20 percent on value added.
5.2 Excises

(Laws of December 26, 1992; January 11, 1993; and May 4, 1994;

Cabinet of Ministers’ Decrees of April 2, 1994 and July 5, 1994).
Duties on 26 highly profitable and monopoly goods, including standard excisable goods such as alcoholic beverages, tobacco products, and Jewelry, but also on chocolate, TVs, porcelain and crystal, care and tires, carpets, and leather products.Excises are not levied on exports paid for in freely convertible currencies; special-purpose vehicles (police care and ambulances); some medical inputs; for agribusinesses, the production of excisable goods that are exchanged for fuel, lubricants, or other sector inputs. Imports that are acquired with freely convertible currencies and that are subject to customs duties are also exempt. Excises are not levied on spirits if they are used by domestic producers, on medicine, food, and other production purposes of such kind, and if it exports in accordance with Ukrainian international agreements.Rates range from 10% to 300%; average unweighted rate in 69%. Rates differ for imported and for domestic goods.
6. Taxes on international trade

(Cabinet of Ministers Decrees on May 3, 1994 and June 6, 1994).

Duties levied on all imports, valued at the official exchange rate.
Standard rates range between zero and 10%. Some food and alcoholic beverages are taxed at higher rates, for instance: spirits (350%); chocolate (100%); sausage (100%); meat (50%); and vegetable oil (60%). Cars have a 50% rate.

Preferential rates (normally zero) apply to goods from the least developed countries, and privileged tariffs (2% or 5%) apply to countries covered by “free trade” agreements.
Appendix IX Statistical Issues

The information contained in this report is based primarily on official statistics. The limitations of the current statistical database for Ukraine remain considerable. The underlying principles covering the collection and processing of the data have been inherited from the command economy period and, as such, suffer from a variety of coverage and methodological problems. Drawing upon technical assistance from the Fund--including a resident statistical advisor stationed since February 1994--and other multilateral and bilateral sources, the authorities are making efforts to improve statistics in a number of key areas. The authorities have identified appropriate correspondents for IFS statistics, and expect to begin the necessary work for an IFS page shortly.

Key statistical data are generally provided in a timely manner, as summarized in the table attached.

1. Real Sector

The Ministry of Statistics has released revised national accounts covering the period 1993-94, as well as preliminary data for the first half of 1995. For the first time, these national accounts include a breakdown of GDP by expenditure components. Nonetheless, important shortcomings remain. Quarterly national accounts are based on cumulative data, and real figures are expressed in comparable prices of the previous year. A Fund technical assistance mission for the quarterly national accounts--originally slated for fall 1995--is now expected in early 1996. The authorities have repeatedly requested technical assistance to improve the industrial production indices.

In March 1995, the consumer price index was re-based, for the first time since end-1992, using the 1994 household expenditure survey. A number of methodological problems remain with the producer price index.

2. Government Finance

Although Ukraine has comprehensive budget statistics, including monthly coverage of central and local government, the classification of government finance statistics is yet to conform to the GFS. Ukraine has received considerable technical assistance in this area, and with the recent establishment of a Treasury, the authorities expect to move to a GFS consistent classification shortly.

3. Money and Baking Statistics

A technical assistance mission visited the National Bank in March 1995 to assist in the preparation of a series of new balance sheet accounts. A follow-up mission in September, however, found the reliability of the NBU’s accounting records, particularly as they pertain to international reserves, to be wanting. While the mission made a number of recommendations to improve the net international reserves data, these recommendations are yet to be implemented.

4. Balance of payments statistics

Balance of payments statistics remain weak, with responsibilities for their compilation spread over various agencies. Technical assistance has been provided in 1994 and in 1995, and the authorities are making some, albeit slow, progress in this area.

Ukraine: Core Statistical Indicators

(As of December 1, 1995)



Central Bank

Balance Sheet












Date of Latest ObservationNov. 30, 1995Nov. 21, 1995Nov 1, 1995Nov. 21, 1995Nov. 21, 1995Nov. 1, 1995Oct. 1995Sept. 1993Sept. 1995OctoberJuly 1995
Data receivedDec. 1, 1995Nov. 25Nov. 23Nov. 25Nov. 25Nov. 25Nov. 8Nov. 1Nov. 1Nov. 23Sept.
Frequency of DataD10 dayM10 day10 dayMMQQMQ
Frequency of ReportingD10 dayM10 day10 dayMMQQMQ
Source of UpdatingAAAAAAAAAAA
Mode of ReportingCCCCCCCCCCC
Frequency of Publication 1/DN/AN/AN/AN/AN/AMQQMQ
Source: Ukrainian authorities and IMP staff.

Some data (for instance fiscal data) are partially published by the authorities but cannot be used in the format in which they are being published.

Explanation of abbreviations:Frequency of data, reporting end publication: D-daily, W-weekly, M-monthly, V-irrregularly in conjunction with staff visits, N/A-none. Source of data: A-direct reporting by National Bank, Ministry of Finance, Ministry of Statistics and Analysis or other official agency. Mode of reporting: C-Cable or facsimile. Most data are provided to the Resident Representative’s office and then forwarded to Headquarters. Confidentiality: B-for use by the staff and the Executive Board, C-unrestricted use.
Source: Ukrainian authorities and IMP staff.

Some data (for instance fiscal data) are partially published by the authorities but cannot be used in the format in which they are being published.

Explanation of abbreviations:Frequency of data, reporting end publication: D-daily, W-weekly, M-monthly, V-irrregularly in conjunction with staff visits, N/A-none. Source of data: A-direct reporting by National Bank, Ministry of Finance, Ministry of Statistics and Analysis or other official agency. Mode of reporting: C-Cable or facsimile. Most data are provided to the Resident Representative’s office and then forwarded to Headquarters. Confidentiality: B-for use by the staff and the Executive Board, C-unrestricted use.
1/Such estimates are not uncontroversial, however. Plausible assumptions about the output elasticity of electricity consumption, for example, coupled with the much smaller decline in electricity usage, would imply a rather smaller rate of GDP decline. It is likely that the national accounts statistics are failing to capture adequately the growth of the nascent private sector. On statistical issues, see Appendix IX.
2/Comparing sectoral declines during the first half of 1995 with the first half of 1994 (given in parentheses) shows that industrial output fell by 14 percent (32 percent), construction by 30 percent (44 percent), transportation and communications by 4 percent (12 percent), and agriculture by 7 percent (15 percent); while services grew by 0.5 percent (as against 15 percent decline).
1/See Appendix I for an analysis of the effect of increases of gas prices on industrial production.
1/Price controls were not always imposed officially, but the Government exercised significant effective control through the state order and contract system. Monopsonistic state trading agencies required farmers to keep prices low, in exchange for hard-to-obtain credit and inputs.
1/See Chapter III. 3 and Appendix IV.
1/Nonetheless, the power generation sector has recently been running deficits and may require budgetary support to finance purchases of oil and coal. A real-time electricity market--in which electricity is bought and sold at market clearing prices--has been developed, but has not yet started operation.
1/Due to methodological problems, the savings rate is probably overstated.
1/Assuming the fiscal deficit is kept under control, pressure on the NBU to lend to government can be expected to decline in the future as alternative financing mechanisms are further developed. In March 1995, the NBU began to auction treasury bills. The amounts auctioned to date have been modest, however: net treasury bill sales accounted for approximately 9 percent of the net domestic financing requirement of the budget in the third quarter of 1995.
1/In 1994, the Ministry of Finance acted as the main intermediary between the National Bank and the final recipients of agricultural credit. This represented a change in practice from 1993, when the NBU provided refinancing to commercial banks that were extending most of the directed credit to the agricultural and other sectors.
2/The refinance rate was lowered to 21 percent in mid-December.
1/Karbovanets broad money deflated by the CPI.
1/Unlike almost all government bill auctions, the Ukrainian auction is not a pure “discount” auction with the face value of the bill redeemed upon maturity. Rather, the Ministry of Finance announces quarterly interest payments and then sets a stop price at the auction. The stop price and coupon payments combined determine the effective yield.
1/See Appendix VI for a description of trade policy developments.
1/See SM/95/313 (12/15/95) Attachment IX.
1/The growth of real interenterprise arrears does not seem to be systematically related to output growth, except for the food-processing industry for which it is statistically significant.
1/The model developed here ignores the long-run relationships--defined by co-integrating vectors--of the economy. A full model which takes account of these relationships, however, yields qualitatively similar conclusions.
1/This is a dynamic forecast in that lagged endogenous variable are determined by the model.
1/Previously, the medium- and large-scale privatization was done in exchange for “vouchers” which existed only in the form of a deposit at the Savings Bank.
2/In addition to the privatization certificates, are compensation certificates and housing checks. The compensation certificates have been prepared but are yet to be distributed. They are intended to compensate depositors who held deposits at the Savings Bank as of January 1, 1992. These deposits are indexed 2,200 times and compensation is in the form of a tradable certificate which can be used to purchase shares at privatization auctions. Until these certificates are distributed, 30 percent of shares of enterprises are reserved for future auctions in exchange for these certificates. Housing checks were vouchers given to the population to privatize their housing. Since part of the population already owned their housing, the Government has decided that these vouchers can be used to purchase enterprises instead, although the exact modality is yet to be decided.
1/Part of the gas delivered to Ukraine is paid for in kind. UGP monitors deliveries daily on the basis of reports sent by an intermediary company, which is responsible for procuring, valuing, and delivering the goods to Russia. Daily reports are consolidated on a monthly basis.
1/Except incomes from agricultural land of less than 0.06 acres.
1/The amounts refer to September 1995.
1/Access to the commodity exchange however, is restricted to those farmers who have fulfilled their obligations under the prepaid portion of the state contract.
1/UkrEximbank has no legal connection with the former Vneshekonombank.
2/The other state-owned bank in Ukraine at present is the savings bank, Oshchadny Bank.
1/The ownership structure of small- and medium-sized banks differs radically from that of the former state-owned banks. Many of these banks have only a few shareholders, and some are owned by individual companies or people. In both cases, the owners are often the banks’ most important borrowers.
2/Approximately 65 percent of all banks in Ukraine operate only in the oblast in which they were established, and many of these are single-branch banks.
3/The National Bank does grant specific licenses for cash and foreign exchange operations.
1/The information on profits and capital must be treated with caution due to the weak accounting systems of many commercial banks.

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