2016 in review: Ukraine's main economic results

Author : Olena Honcharova

2016 would be remembered by the growth of utility tariffs, devaluation of hryvnia, and the collapse of banks. Ukraine is conducting economic policy of survival

14:44, 23 December 2016

Read the original text at 112.ua.

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GDP is growing, consumption declines, Ukrainian industry has “broken even”

Last year, according to the State Statistics Service, Ukrainian industry has dropped by 20%, while this year it registered a growth of 3%. The economic expert Olexander Okhrymenko said that the growth trend was enabled through the food industry indicators: increase in the production of poultry meat (1.8% growth), sunflower oil (11.3%), and butter (10% growth); improvement in coke production is also visible (9.8% growth). But success in mechanical engineering is quite little (0.4% growth). It restores the industry (6.5% growth).

Related: Ukraine's state budget 2017: the key figures

"This year, there is no such a big decrease, as in 2015. We can say that we have “broken even,” said the expert.

Conditions for the development of Ukrainian business has not improved in 2016. In addition to standard problems flowing from year to year, such as lack of VAT reparation, corruption, rising taxes, and excise taxes, the new problems have appeared. Among them are high price for energy resources, the increase in tariffs, and instability of hryvnia. State Statistics Service notes that GDP in comparison with the previous year increased by 1.4%, while the growth of budget revenues amounted to 18%.

"This suggests that Ukrainian business is forced to pay more than it earns," says Okhrymenko.

GDP growth means that we started to produce a little bit more, but we do not consume more. The reason is the low purchasing power of the population.

Prices for products and services have increased since last year, prices have soared by several times, and this year, they slightly fell, but still remained unaffordable for the majority of Ukrainians.

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Food prices were falling, but in December they increased

General Director of Ukrainian Association of Suppliers Oleksiy Doroshenko says that food prices have fallen since the beginning of 2016, and then went back. The reason for that is the instability in the foreign exchange market. World price of food, which dictates the terms for suppliers also contributed to the price reduction.

"Accordingly, when the world price began to decline at the beginning of the year, Ukrainian products became cheaper. Ukraine exports abroad virtually everything and the price ofr goods inside and outside the country is actually the same," said the expert.

According to the State Statistics Service, these products became more than 7% cheaper:

fat – by 10.1%;

eggs - by 11.8%;

cabbage  - by 64.1%;

carrots - by 62.1%;

onion - by 58.5%;

beet - by 51.7%;

potatoes - by 13.3%.

Conversely, the purchasing power of the population has fallen; the prices have grown, while revenues have virtually unchanged. Therefore, we cannot say that the number of domestic producers of goods on the shelves has increased.

In December 2016, the staple foods prices have risen again.

Related: Russia plans to raise gas price for Ukraine in the first quarter of 2017

According to the State Statistics Service, all dairy products went up significantly (for the year):

butter - by 40.1%;

cottage cheese - by 18.6%.

sour cream - by 28.7%;

milk - by 28.1%;

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"Social" types of bread also increased in price:

rye bread - by 7%;

white bread (grade-A flour) - 4.7%.

Price for these goods became higher than by 7%:

sausage - by 8.4%;

sunflower oil - by 11.4%;

bird chicken - by 7.9%;

buckwheat - by 8.8%.

Raising tariffs - the peak of deep anger

Experts say that one of the requirements of the IMF was to establish economically justified tariffs. Conversely, the Ukrainian government has gone the other way, increasing them by half. Experts from the Research Association showed that the price of Ukrainian gas was 60-70 dollars per thousand cubic meters, which is about 1500-1600 UAH.

"If we add an objective tax burdening, it will cost no more than 3000-3500 hryvnia per thousand cubic meters," said "Public Audit" head Maksym Goldarb.

Related: Protest against high social tariffs in Kyiv is over

Since April 1, 2015 the tariff for gas reached 7188 UAH per thousand cubic meters and discount variant of 3,600 UAH per thousand cubic meters.

Related: Tombinski: Ukraine pays high price for its European choice

At first, it was planned to gradually increase the price, but Groisman’s Cabinet decided to increase it at once (we are talking about gas, which further automatically resulted in a utility service rise). Since May 1, 2016 with the price of gas was 6879 UAH per thousand cubic meters.

Some experts argue that raising prices is not justifie; the officials and intermediaries share the profits and so impoverished population. At the same time, the authorities note that "Naftogaz" reached the profit and began to invest in its own production of natural gas.

Ukraine has lost its markets and has established contacts with new partners

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Economic expert Vsevolod Stepanyuk notes that the outgoing year is characterized by the preservation of negative trends in the economy and in foreign policy. So for the first 9 months of this year the trade balance of Ukraine has sharply worsened. According to the State Statistics Service, the export of the first 9 months of this year amounted to only 91.3% from the same period of 2015, while imports remained at the same level. This is connected with the faster growth of imports from the EU and the continuation of the loss of traditional markets for Ukraine.

Thus, exports to China amounted to only 72.4% from last year, while imports rose to 122.2%. Trade with all CIS countries has also worsened. Ukrainian exports decreased, while the level of imports increased. Negative balance of foreign trade in goods reached US $ 1.76 billion for 9 months.

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"Against this background, macroeconomic indicators of Ukraine's budget for 2017 looks ridiculous: increase of the foreign trade by 8%, imports growth by 9.5%," said Vsevolod Stepanyuk.

IMF loans did not meet the expectations: decrease of the exchange-rate

Since the beginning of last year, the IMF transferred to Ukraine $ 7.6 billion in the framework of a four-year Extended Fund Facility program (totaling $ 17.5 bln). The country expected to get a new tranche in the amount of $ 17.5 billion at the end of 2015. As a result, it could hardly wait for $ 1 billion by 15 September 2016.

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"Public Audit" head Maksym Goldarb notes that Ukrainians have witnessed a real show with the IMF loans. The politicians tried to create the impression that without this loan the country's economy will not survive.

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"Debt bondage and Ukraine's regular cooperation with the IMF resulted in hryvnia devaluation. In fact, the IMF tranches were not directed at supporting vital reforms of our country. As soon as we receive the money, it immediately goes to foreign exchange reserves," underlined the expert.

At the end of April 2014 the IMF approved decision to allocate $ 17 billion for Ukraine. 3.2 billion dollars were received in May of the same year, in September came another 1.4 billion dollars. Then the well-known story with the exchange rate instability began.

Related: Ukrainian government raises electricity tariffs

"The leaders of the country deliberately sent the hryvnia in the doomed flight, during which its value was reduced to 10, 15, 20, 30 and even 40 hryvnia for one dollar. But not a single hryvnia was spent on support and modernization of the production. IMF money never run in the real economy, but go to the foreign exchange reserves," Goldarb notes.

Now the currency's position seems very precarious. It is a vicious circle. We take loans to allegedly stabilize the national currency. But in fact, we get the nocebo effect.

In order to bring the economy out of the stupor, Ukraine needs more than 100 billion euros.

"I want to note that after the Maidan reserves were estimated at about 15-17 billion dollars. It is the same 15 billion dollars today, but this money are almost entirely borrowed," concluded the expert. He stressed that in 2013, Ukraine took the time out on the IMF loans. And then the situation in the monetary market has relatively stabilized. Today, Ukraine’s debt to IMF is more than 11 billion dollars. In 2017, it would make first payment in the amount of $ 1 billion, in 2018 - $ 2 billion.

Survival economy: patching budget holes, destruction of the banking system, and cheap labor

Director of the Analysis and Forecasting Institute Yuri Lisnychyi says that a special decline in 2016 was caused by the monetary instability or by its expectation itself. In addition, many banks have closed, and now some of them might lose their licenses. It looks like someone wants to monopolize this sector.

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"People’s trust in domestic banking system becomes weaker; people prefer to keep their savings "under the pillow," and this money does not work for the economy," he said.

As a result, business, the main “filler” of the budget, suffers a lot. As well as the citizens themselves, whole level and quality have deteriorated. In addition, foreign investors, seeing the opacity of markets and policies in Ukraine, as well as consistently threatening corruption, do not dare to come to Ukraine this year.

Experts agree that Ukraine cannot supply the sustainable development with its own resources only. We are losing our positions at the markets of CIS countries. Cooperation with Europe is possible, but not on favorable terms for us.

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"We are becoming a raw materials appendage to Europe. We are exporting timber, grain, and agricultural products in general, but the Ukrainians are not getting richer. There are no conditions for the development of high-tech production in Ukraine. After all, Ukrainian operating force is now cheaper than in China, our experts continue to migrate abroad, we remain a source of cheap labor for the developed countries," says Yuri Lisnychyi.

He emphasizes that European highly qualified specialists get very decent salaries. The corporations want to save on Ukrainians and pay them less than others. In legal terms, our citizens, are not protected. Therefore, defending their rights is just a waste of time. At the same time, many remain unclaimed in the labor market. So we have to work where the charge, and on the conditions that offer.

Related: Russia’s economy hits rock bottom

Experts agree that Ukraine is conducting economic policy of survival.

Europe has not yet been loyal towards Ukraine, which, naturally, is not conducive to the establishment and development of business with foreign partners. In addition, the visa-free regime in 2016 has not been granted. The main reason for that, according to the analyst Mykola Spiridonov are low incomes, at least not officially. Thus, the minimum wage of December amounts to 1, 1600 hryvnia, which equates to 55 euros.

"Europe does not need the poor people. It does not willingly opens visas for the Ukrainians. The country suffers from the economic and political instability. in And in order to make a difference, we need more than one year," sums up the expert.

Related: EU extends economic sanctions against Russia

Budget 2017 as a consequence of the passing year

Economic expert Vsevolod Stepanyuk said that the basic fundamental economic risks for 2017 are dubious figures, budgeted, and foreign policy risks, namely, the failure to receive international assistance to Ukraine. "Thus, the budget figures - 3% GDP growth, 27.5 hryvnia exchange rate to the US dollar, 8.5% inflation - are just unreal," he said.

The internal economic risks also include economically unreasonably high tariffs for public utilities and gas. In the future, the population might just refuse to pay unreasonably high prices for the utility services, and it can seriously increase the need for the expenditure side of the budget. Besides, budget revenues from privatization and special confiscation look unrealistic too, as well as revenues from the foreign aid.

"Failure to comply with the budget, due to the above factors, and continued foreign policy failures would lead to an increase in social and political tension in Ukraine, which, in turn, could lead to unrest and early elections in the country," claimed Vsevolod Stepanuyuk.

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