Modern economic POTENTIAL OF UKRAINE

Economic development of the country

The economy of Ukraine has been historically formed by factors such as its auspicious geographic location, availability of chernozyom (black soil) soils, sizable mineral deposits, and a productive labor force. These factors especially determined Ukraine’s high level of development as compared to other republics of the-then USSR. When Ukraine proclaimed independence in August 1991, it had one of the highest indicators of GDP, as well as per capita industrial and agricultural production in the region.

Ukraine used to produce approximately 5% of industrial output of the world: 10% of its cast iron production, 9% of the world’s steel, and 8% of the coal mined.

At the same time, the economy’s pattern in the 1980-90s was irrational and with a very large emphasis on heavy industries and machine building. More than 80% of industrial manufacture had no complete production cycle, and the proportion of end products and consumer goods was extremely low.

Despite starting economic reforms after becoming independent in 1991, the country still faces problems in economic restructuring and enforcing market relations.

Picture 1. Dynamics of real GDP in 1998-2005

The years following the declaration of independence show distinct periods of transformation in Ukraine’s economy:

1991 – 1994 – liberalization and collapse of production.

The economy of Ukraine suffered considerable losses in 1991-1994. During this beginning of the transformation, GDP dropped by 40.4%. Monetary and financial systems were thrown completely out of balance. Hyperinflation showed at record-high tempos, reaching 10,256% in 1993, and the state budget deficit was covered by monetary emission from the National Bank.

Starting in 1994, the government defined a common strategy for the starting stage of economic reforms and the mechanisms to overcome the in-depth crisis of the Ukrainian economy.

1995 – 1998 – more active countermeasures to crisis and slower decline in the economy.

The government took fundamental organizational and economic measures to set up a market infrastructure. Financial and customs systems, as well as a securities market, were formed and improved; the privatization and de-monopolization of key economic segments began. They created a competitive environment and state interference into economy was limited, while ensuring the continued influence of state institutions on economic processes to manage them and control distributive relations.

The primary results of this stage include lower inflation, macroeconomic stabilization, and the halted decline of production. Direct foreign investments in 1995-1998 grew 5.8 times. The number of enterprises with foreign investments increased 3.3 times to 7 thousand firms. The annual growth of investments came to 28% on average.

1999 – 2004 – stabilization of production and economic growth.

A phase of economic stabilization and growth started in the first half of 1997, but ceased developing for some time due to the Russian financial crisis of 1998. The process returned by the second half of 1999, with positive results in almost every economic indicator. The year 2000 was a crucial point in Ukraine’s economic dynamics. After a decade-long economic collapse, GDP growth in 2000-2003 totaled 33.1%. In 2004, real GDP came to 12.1%, which was the all-time highest figure since Ukraine became independent. This period saw the continued development of production, which added more than 60% in volume. The boom was attributable to export-oriented industries, which took advantage of high prices on the world metals market.

2005 – to present – transformation of economic relations towards Economic integration, liberalization, and transparency.

The primary task of the new government after the 2004 presidential elections is to run economic reforms, with the urgent implementation of efficient and socially-sensitive reforms at the macro and micro levels in various economic segments. The primary actions of the government aimed to strengthen Ukraine’s macroeconomic position, secure financial stability and investment appeal, facilitate integration processes, establish the institution of effective private property, improve productivity of key industries, fight corruption, and add liberalization and transparency to the state administration of the economy at every level. At the same time, the economy saw downward movements of macroeconomic indicators because of unfavorable prices for Ukraine’s staple exports on the world markets, the necessity to solve social issues, and political problems during the transition period.

Picture 2. Dynamics of consumer prices (% to December of last year)

Resource base

Gross domestic product (GDP)

In comparison to an official figure of 12.1% GDP growth in 2004, real GDP in 2005 grew by 2.4%. This indicator is notably low versus the figures of the last 5 years (picture 1). The background included a number of negative factors: internal – cutting of investment expenses from the budget in favor of social outlays; contraction in the entrepreneurial environment because of fundamental changes in legislation; internal political factors; external – deteriorated foreign economic conditions; a gradual decline in world prices and demand for Ukrainian export commodities. Internal influences were the most important factors.

The highest rise of the transportation sector – by 8.1%, the extraction industry – by 4.4%, and processing industry – by 3.0%.

Table 1. Main macroeconomic indicators

Industrial production sector

As compared to 2005, industrial output throughout 2005 grew by 3.1% (in 2004 – 12.5%), including 3.0% in the processing industry (14.6% in 2004), extracting industry – 4.4% (4.1% in 2004), and generation and distribution of electrical energy, gas, and water – by 2.9% (a 1.1% downturn in 2004).

Machine building. Industrial production rose 7.1% over 2005 compared to 2004 (28.0% in 2004). Machine building volumes grew mainly due to a higher output of metallurgical machinery (+30.4%), office and PC devices (+29.8%), equipment for radio, television, and communications (+29.5%), car vehicles (+22.8%), and household devices (+22.1%). The year 2005 outran 2004 volumes in the production of mechanical equipment – by 13.6%, agricultural machinery – by 10.8%, machine tools – by 10.7%, and railway machine building – by 2.4%. Meanwhile, reductions were seen in the engineering of electrical machinery and devices – by 14.9%, test equipment – by 14.0%, as well as machinery for the extracting industry and construction – by 8.4%. In January-November 2005 60.4% of enterprises in the industry were profitable (59.3% in January-November 2004).

Metallurgy and metal working. The industry cut output by 1.5% over the year, (in 2004, a 12.0% rise was recorded). A drop was reported by producers of cast iron, steel, and ferroalloys – by 0.2%, other kinds of primary working of cast iron and steel – by 6.7%, non-ferrous metals – by 23.6%, and metallic casting – by 13.6%. At the same time, tube production volume went up by 10.2%. There is also a positive dynamic at metal working enterprises – a 15.7% upturn in the period under review. In January-November 2005 66.0% of enterprises in the industry were profitable (64.0% in January-November 2004).

Chemical and petrochemical industries. Production volumes in 2005 versus 2004 went up by 9.8% (14.4% in 2004). The volume of chemical output rose 7.8%, which was backed by higher production of base chemicals – by 4.5%, paints and varnishes – by 18.0%, pharmaceutical production – by 17.7%, manufacturing of soap, perfumes, cleaning and polishing agents – by 18.8%, as well as artificial and synthetic fibers – by 8.3%. Growth was also a tendency in production of rubber articles – by 10.7%, and plastic items – by 21.0%. In January-November 2005 69.4% of enterprises in the industry were profitable (61.4% in January-November 2004).

Food processing industry. In 2005, food and agricultural processing enterprises increased production volumes by 13.7% (in 2004 – by 12.4%). In particular, an upturn was seen at fruit and vegetable processing enterprises– by 29.8%, drinks producers – by 24.0%, tobacco products – by 18.2%, pasta – by 18.4%, and dairy produce – by 15.6%. In January-November 2005 63.2% of enterprises in the industry were profitable (61% in January-November 2004).

Light industry. In 2005, as compared to 2004, the industry reached a 0.3% growth (in 2004 – 13.6%). In January-November 2005 59.5% of enterprises in the industry were profitable (64.7% in January-November 2004).

Currency and monetary market

The official rate of the Ukrainian hrivna against US dollar in 2005 got stronger by 25.5 kopecks (UAH .255) or by 4.81% and was fixed at UAH/USD 5.0500. In 2005, the national currency also strengthened against Euro by 124.6 kopecks or by 17.26% (UAH/EUR 5.9716).

The increase of monetary aggregates in 2005 included: money stock expansion by 54.3% (in 2004 – by 32.4%), monetary base – by 53.9% (in 2004 – by 34.1%), cash in turnover – by 42.2% (in 2004 – by 27.9%).

By the end of 2005, cash in turnover accounted for 31% in the money stock structure (as compared to 33.7% by the end of 2004) and 72.8% in monetary base (versus 78.8%). The level of monetization in the national economy was 36.8% in 2005.

Bank liabilities upon means drawn to accounts of businesses and physical individuals over 2005 grew by 60.0%, coming to UAH 132.7 bn. Bank liabilities upon means drawn to physical individuals’ accounts increased by 75.9%.

Agricultural sector

In 2005, agricultural production by various farms stood stable at the level of 2004 (increase of 19.9% in 2004); including a 1.5% rise at agricultural enterprises and a 1% growth at farms owned by the general population. Agricultural produce volume in factual prices totaled UAH 92.5 bn.

Compared to 2004, meat production by all agricultural companies in 2005 (sales of livestock and poultry for slaughter in live weight) dropped by 2.0%. At the same time, the companies raised production of eggs by 9.0%, milk – by 0.1%, and wool – by 0.4%.

The gross volume of agricultural produce sales in 2005 went up by 7% compared to 2004, including crop production – by 8%, and stock-breeding products – by 6%.

Investments in fixed assets

Over the first 9 months of 2005, enterprises and organizations of all ownership forms launched capital investments worth UAH 60,049.2 mn. Investments in fixed capital accounted for 85.8% of capital investments. Compared to 2004, over the first 9 months of 2005, investment in fixed capital added 3.4% (vs. a 34.5% rise in the 9 months of 2004) and amounted to UAH 51,551.9 mn. 13 regions reported increases in investment in fixed capital. Investments were the most actively applied in Zhitomir region (by 31.1%), Kiev region (by 27.6%), Donetsk region (by 22.2%), Lugansk region (by 20.5%), Vinnitsa (by 18.7%), and Sumy (by 18.5%) regions. Investments in fixed capital were mostly used to buy machinery and equipment – 48.6% (in 9 months of 2004 – 48.3%) of total volume.

Foreign trade

In January-November 2005, commodity exports increased by 5.6% as compared to the respective period of 2004, imports – by 24.6%. The export-to-import coefficient was 0.96 (versus 1.13 in January-November 2004). Ukraine ran foreign trade in commodities with partners from 201 countries worldwide.

Picture 3. Export and import dynamics in 1996-2005 (import and export data for 2005 includes only 9 months.)

The largest export supplies were bound to Russia – 21.9% of the total volume of shipments, Turkey – 5.9%, Italy – 5.5%, Germany – 3.8%, Poland – 2.9%, the USA – 2.8%, Belarus – 2.5%, and Egypt – 2.3%.

Supplies to Russia in January-November 2005 were boosted by 28.2% as compared to the corresponding period of 2004, while imports rose by 6.6%. The balance of foreign trade in commodities with Russia remains negative at USD 4,906.7 mn.

The largest import volumes arrived from Russia – 36.1% of gross imports, Germany – 9.2%, Turkmenistan – 7.5%, China – 5.0%, Poland – 3.8%, Italy and Belarus – 2.7% from each, and France – 2.2%.

Population income

Nominal and real income of population

In January-November 2005, the nominal income of the population grew by 38.1% versus the respective period of 2004 and totaled UAH 323.0 bn.

In January-November 2005, nominal available income, which the general population can use to buy commodities and pay for services, increased by 36.4% versus the respective figure of 2004, whereas the real available income of citizens, considering price factor, rose 19.8%. Per capita available income in November 2005 totaled UAH 558.9.

Labor market

In 2005, the number of officially unemployed citizens decreased over the year by 10.2% and as of January 1, 2006 totaled 881.5 ths. people.

The level of registered unemployment as of January 1, 2006, was 3.1% of the employable population of working age. The highest level of unemployment was reported in Ternopol (6.6%), Rovno and Cherkassy (5.2% in each) regions, and the lowest was in the city of Kiev (0.4%).