By Judy Dempsey, International Herald Tribune (IHT)
Published by The New York Times Europe, Wednesday, December 21, 2005

BERLIN – Fending off strong opposition from a coalition of Communists, political foes and former supporters, President Viktor Yushchenko won a major battle Tuesday in the Ukrainian Parliament after mustering enough votes to push through his budget for 2006.

The budget, blocked for several weeks by political parties that have already started jockeying for position before parliamentary elections in March, was a key test for Yushchenko and Prime Minister Yuri Yekhanurov.

It was Yushchenko’s first significant victory since September, when he dismissed the government led by Prime Minister Yulia Timoshenko, who wanted to adopt a radical populist economic program, and replaced her with Yekhanurov.

Yekhanurov, a leading member of Yushchenko’s Our Ukraine party, told legislators that the budget deficit would be limited to 2.5 percent of gross domestic product and predicted that the economy would grow 7 percent next year, despite slow growth so far this year.

“The priorities for next year are to revive macroeconomic balances,” Yekhanurov said after the vote, according to Reuters. “We will stop eating up gross domestic product and increase funds for development and investment.”

With only a month left before Ukraine moves from a presidential-type system to a parliamentary democracy that will endow the new Parliament with broad powers at the expense of the presidency, Yushchenko seemed determined to undo some of the mistakes made in his tenure.

But few economists believe there will be any significant changes introduced before the elections because they would be either too unpopular or would be blocked by a fractious Parliament.

“So far, there has been no clear privatization strategy, and we do not see an acceleration of reform,” said Elisabetta Falcetti, an analyst on Ukraine at the European Bank for Reconstruction and Development. “Much now depends on the outcome of the parliamentary elections.”

Those opposing the budget included supporters of Timoshenko, the Communists and the powerful Party of the Regions, which based in eastern Ukraine, the country’s industrial heartland.

The opposing parties wanted a looser budget deficit in order to gain popular support during the election campaign, regardless of the country’s recent economic indicators.

Ukraine’s economy grew by 2.5 percent for the first nine months of this year, compared to a growth of over 12 percent for the same period last year, according to the National Statistics Office.

Falcetti said last year’s growth had been driven by high commodity prices, particularly Chinese demand for steel. This year, however, commodity prices have been declining, she said.

Ukrainian economists also said that investments had fallen and that the large trade surplus that Ukraine enjoyed last year had turned into a trade deficit as consumer demand soared because of a loose fiscal policy adopted by Timoshenko and the previous administration, led by Viktor Yanukovich.

Yanukovich ran against Yushchenko for president last year but, amid charges of vote-rigging and fraud, was defeated in a runoff. Just before the presidential election, Yanukovich had raised pensions and the minimum wage as a populist measure to win votes.

Ivan Poltevets, an economist at the Institute for Economic Research and Policy Consulting, which is in Kiev, said that Timoshenko had continued the populist policies of Yanukovich. “Populist measures have driven up inflation but also imports because there is now more consumer demand,” he said.

During the first eight months of 2005, real household incomes increased by 24.5 percent, largely because of higher social assistance payments.

According to the National Statistics Office, exports for the first 10 months of this year rose 6 percent but imports jumped 25 percent. The trade surplus for the first 10 months of last year had amounted to 6 percent of gross domestic product. This had been turned into a trade deficit of $1 billion over the same period for 2005.

Poltevets said that the administration had a confused policy over privatization and no clear reform program, which tended to keep create extreme caution among investors.

Timoshenko, for example, had wanted a sweeping policy of reprivatization on the ground that many enterprises had been sold below market prices to oligarchs close to the former president, Leonid Kuchma. Her opponents accused her of starting a vendetta against any oligarchs who had supported the former government. -30-



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