UKRAINE SHOWS FIRST SIGNS OF ECONOMIC RECOVERY, YET SITUATION REMAINS CHALLENGING: GDP MAY FALL BY 14% IN 2009, SAY EXPERTS 

Interfax-Ukraine, Kyiv, Ukraine, Friday, October 23, 2009 

KYIV - Despite the first signs of economic recovery, the situation in Ukraine in the near-term will remain challenging: Ukraine's GDP may fall by 14% in the 12 months of 2009, experts have said.

This opinion was shared by participants in a press conference in Kyiv on Wednesday, which summed up the First Annual International Forum on the economic development of Ukraine.

The forum, which took place in Washington, the United States, on October 15, 2009, was attended by over 300 representatives from the world's largest companies, international institutions, financial organizations, namely from the International Monetary Fund, the European Bank for Reconstruction and Development, the World Bank, the European Union, as well as high-ranking officials. In particular, among the forum's attendees were Ukrainian Vice Premier Hryhoriy Nemyria and Ukrainian Economy Minister Bohdan Danylyshyn.

Speaking at the press conference in Kyiv, Director of the Institute for Economics and Forecasting under the National Academy of Sciences Valeriy Heyets said that despite the fact that the pace of economic decline in Ukraine has slowed recently, the general economic situation remains challenging.

The CEO of the Bleyzer Foundation, Oleh Ustenko, agreed. He said that the long-term economic forecast for Ukraine remains favorable, although the state of affairs of business environments should be improved to attract investment as a key source of economic growth.

According to the analytical materials issued at the press conference, Ukraine has survived one of the most serious downturns and the strongest devaluation of the national currency at the peak of crisis: in autumn 2008 the national currency fell by over 50% against the U.S. dollar, and the PFTS stock index plunged by over 70%, while real annual GDP shrank by 8% and 19% in Q4, 2008 and in H1, 2009 respectively. Moreover, over the last two months 2008, exports of goods fell by 16% in the annual terms, and in January-July 2009 they fell by 49%.

Starting from spring 2009, more signs that the economic adjustment has reached bottom in the industrial, trade and construction sectors have appeared.

"The further improvement of the economic situation this year will continue thanks to a low statistical base and thanks to recovery of commodity and material stocks and the introduction of fiscal stimuli. The reinforcement of the international economy will promote the more rapid recovery of Ukraine," the experts said.

Among the key achievement of the Ukrainian government in fighting the crisis were agreements with the International Monetary Fund (IMF, the Stand-By program worth $16.4 billion), and with the World Bank and other international financial institutions, which mitigated refinancing of the short-term foreign debt; the high level of fiscal discipline; the cut of the budget's deficit in 2010 to 4% of GDP and satisfaction of IMF quantity criteria regarding the monetary base.

However, the experts said that the Ukrainian government has not drawn up a common coordinated strategy for overcoming the crisis, has not allocated enough funds to support the domestic economy, while the rise in crediting stopped too sharply. The use of funds given by the cabinet to support liquidity was not controlled in the proper manner.

"It's likely that the funds were spent on the purchase of foreign currency to take aboard and not on the recovery of the domestic crediting market. This strengthened the devaluation pressure on the hryvnia," the experts said.

The Ukrainian cabinet has not implemented an IMF requirement to increase prices of gas for households, and on utility public services, to realize a comprehensive strategy aimed at restoration of solvency of Naftogaz Ukrainy and the Pension Fund, to realize initial privatization plans, which affected the financing of the national budget, the experts said.

According to the press conference materials, it is important to receive financial support from the IMF to avoid a worsening of the downturn within the next six months. The authorities should introduce a number of key economic measures agreed with the IMF, reads the document.

"In 2009, the deficit of the national budget should not exceed 6% of GDP, and the national budget for 2010 should foresee a deficit not exceeding 4%. This means that the increase of pensions and minimum wages should not be higher than inflation. Tax relaxations and a moratorium on tax audits should not be adopted.

"The financial state of Naftogaz Ukrainy and the Pension Fund should be improved to a level that will prevent there being a need for extra aid using budget funds," read the materials.

As for monetary policy, the experts said that the NBU should try not to print too much money and refuse proposals to finance projects linked to preparations for the Euro 2012 European football championship using the NBU's profit; to avoid monetization of the deficit of the national budget; improve the transparency of the bank refinancing policy and strictly control target usage of funds allocated to banks.

"The Ukrainian authorities will have to use new ways to increase direct domestic and foreign investment, which will promote growth in production and the creation of new jobs to boost the pace of economic development," the experts said.