Ukraine is a country with huge potential: well educated population, rich natural resources, as well as advantageous geographic location enabling to benefit from foreign trade. Besides, the country possesses unique technologies and scientific developments,

PLAYING WITH DEBTS

Elena SALIKHOVA, research officer with the Statistics Scientific Research Institute under the Ukraine’s State Statistics Committee

Ukraine is a country with huge potential: well educated population, rich natural resources, as well as advantageous geographic location enabling to benefit from foreign trade. Besides, the country possesses unique technologies and scientific developments, implementation of which opens fresh opportunities for both Ukrainian and world progress. Good examples are the launch of Sich artificial satellite, which made possible Ukraine’s accession to the club of space-exploring states; Mriya airplane and other products of Antonov aircraft plant; electronic microscopes and various types and classes of ships; the most powerful presses, turbines and diesel engines in the world. All these can be manufactured by the Ukrainian industry. This list can be continued with up-to-date diesel locomotives and automobiles of different grades and purposes.

Along with this, genetic engineering and bio-technologies; mono-crystals and artificial diamonds; explorations in the field of hylology including space materials and substances; fundamental research in mathematics, theoretical physics, biology and chemistry – all these bring Ukraine in line with the leading highly-developed countries of the world. However, despite such a huge scientific, production and personnel potential, in the last few years the Ukraine’s economy showed signs of a crisis. As a result, output of main types of products has plummeted disastrously.

According to the official statistics, in 1991-1998 the industrial production figure was unfavorable. For instance, in 1995 the annual change in production volumes amounted to 12.0%, in 1996 — 5.1%, in 1997 — 1.8% and in 1998 — 1.5%. Summarizing the results of the year 1998, one can see that the largest decrease was registered in ferrous metallurgy (-6.8%), mechanical engineering (-4.5%) and fuel industry (-0.7%).

However, starting from 1999 the aforementioned tendency underwent certain changes. According to the data with the State Statistics Committee, in the 9 months of 1999 the gross production of goods added 2.3% and average daily production respectively moved up by 3.6%. In September 1999 industrial production output increased by 4.9% against August 1999 and by 18.1% against September 1998.

Thus according to the performance results of the 9 months of 1999, production saw an increase for the first time in the last 10 years. Actually, more than a half of industrial enterprises reported an increase in production against August, while some 38% indicated a decrease. Besides, some 12.8% of industrial companies sat idle.

Analyzing the sectoral breakdown of the Ukrainian industry, one can say that in September 1999 industrial output expanded in most sectors as compared to the previous month. The largest growth was registered in food processing sector (up by 26.6%), mechanical engineering and metalworking (9.5%), as well as in woodworking and pulp & paper industry (7.8%).

Moreover, the aforementioned tendency was traced not only throughout one single month, but also was evident for the period of January-September 1999.

For example, due to increase in metal output in August and September 1999 (up by 14.1% and 32.9% respectively against the 1998 figures), it was possible not only to cover the lag, but also to gain a 2.7% increase in production.

As compared to 1998, indicators of industrial production also increased at woodworking and pulp & paper companies. Output in these sectors increased by 46.5% in September and by 18.9% in January-September 1999.

In September 1999 light industry reported a 7.6% increase in production output against September 1998. This favorably influenced the performance results of the industry in the 9 months: production output advanced by 1.1% against the respective period of 1998.

Unfortunately, not all the industrial sectors reported an increase, though it is positive that some of them slowed down the decrease tempos. Since the beginning of the year this has been traced in chemical and petrochemical industry, mechanical engineering and metalworking, as well as in construction materials industry. It should be mentioned that in January-September fuel industry practically reached the 1998 output and the decrease in production amounted to only 0.3%.

In January-September 1999 the lag in chemical and petrochemical industry reduced to 4.6% against the respective period of 1998. To compare, as of the beginning of 1999 decrease tempos in chemical and petrochemical production indicated 16.7% (in January-February). There was some increase in output at basic-chemical plants, where production increase equaled 20.6% as compared to September 1998, and 7.8% in the 9 months of 1999. However, the considerable downward tendency keeps on in petrochemical industry – since the beginning of the year, the decrease has totaled 17.9%, which negatively influenced operation results of the industry in the 9 months of 1999.

As well, output by machine-building and metalworking enterprises rose by 9.5% against August 1999 and by 10.2% against September 1998. It should be mentioned that in January-September 1999 production decrease in these sectors slowed down to 3.8%. Mainly, this occurred due to increase in production in metallurgic mechanical engineering (up by 17.4%), machine-building for food processing and feed industry (by 12.9%), instrument-making industry (by 10.1%), machine-tool industry and instrument machine-building (by 9.0%), aircraft industry (by 7.9%), mechanical engineering for power industry (by 6.6%) and agricultural machine-building (by 1.2%). The largest decrease in output was observed at enterprises of automobile construction industry (41.1%), hoisting-and-conveying machine-building (23.0%), bearing industry (16.3%), machine-building for light industry (14.9%) and electrotechnical industry (8.4%). See table 1 below for additional information on behavior of industrial output in various regions of Ukraine.

Table 1. Increase/decrease(-) tempos in industrial output by Ukrainian regions in January-September 1999

Experts with the Statistics Scientific Research Institute under the State Statistics Committee made some interesting findings in regard to this issue in their survey of business activities of Ukrainian industrial enterprises in the third quarter of 1999 (the sample of 1,425 enterprises representing 16 industries). According to these data, in the third quarter of 1999 industrial capacities were utilized by 38% in average. Management of most enterprises (93% of the sample) believes that their production capacities are ‘enough’ or ‘more than enough’ to execute the available orders, which witnesses a weighty under-utilization of industrial potential. Only 5% of the total number of enterprises have insufficient capacities.

The situation with utilization of industrial capacities was as follows. The highest rate of utilization was reported by the largest enterprises with over 5,000 employees (utilization by 52%) and by small-size enterprises with less than 50 employees (by 40%). The worst situation was registered at enterprises with 51-200 employees (utilization by only 33.5%).

Capacity utilization rates in industrial sectors in the third quarter of 1999 was as follows:

microbiology — 54%;

flour-and-cereals industry — 39%;

printing industry — 40%;

food processing industry — 57%;

light industry — 40%;

glass and porcelain industry — 37%;

construction materials industry — 62%;

woodworking industry — 37%;

mechanical engineering — 37%;

chemical industry — 30%;

nonferrous metallurgy — 35%;

ferrous metallurgy — 68%;

fuel industry — 48%;

coal mining industry — 65%;

electric power industry — 54%.

Besides, industrial enterprises of Ukraine in average have orders to function for 3.3 months in advance. A somewhat better situation was registered in electric power industry (11 months), fuel (5.8 months) and coal industries (5.1 months). However, the lowest figure is in printing industry (1.1 month).

As it was mentioned, the overall situation in the industry has improved, which undoubtedly influenced financial performance of enterprises. However, employment of barter settlements in trade operations is still the unsolved problem, which slows down the increase. According to the results of survey, most enterprises use barter transactions with the average figure of barter settlements coming to 40.2% of the total trade turnover. It is worth mentioning that, in the 9 months of 1999, in 13 Ukrainian regions this indicator exceeded the average level in the industry. The largest percentage of barter settlements was registered in Rovno region (52.1% of the total in the region), as well as in Kherson, Kiev and Khmelnitsky regions (some 50% in each region). However, during the year, selected regions showed narrowed portions of barter transactions in industry.

Besides, despite the weighty portion of barter transactions, some of the commodity output was sold for cash. In January-August 1999 cash earnings from sales amounted to UAH 27.6 bln. or 45.2% of the total sales. Food processing industry reported a 78.1% portion of cash sales, nonferrous metallurgy – 60.6%, light industry – 57.9%, woodworking and pulp & paper industries – 55.7%, chemical and petrochemical industry – 51.8%, ferrous metallurgy – 48.0%, mechanical engineering and metalworking – 46.1%. However, low percentage of cash sales was indicated by electric power industry – 18.0%, construction materials industry – 25.3% and fuel industry – 27.4%. The largest portion of cash sales within Ukrainian regions was registered in Cherkassy region – 77.4%, Odessa region – 77.2%, Zakarpatye region – 75.2%, as well as in the city of Kiev – 74.2%.

Table 2. Commodity output by major industrial sectors of Ukraine in 1999, mln. UAH

Thus, summarizing the present situation in the whole industry, it can be concluded that, despite some increase in production, there are still a lot of problems remaining. According to a number of experts, the situation observed in the 9 months of 1999 is short-lived. They believe that steady industrial growth in Ukraine is possible only provided fundamental changes in business environment, i.e. deregulation, simplification of the procedures for establishment and bankruptcy of companies, as well as reduction in tax rates. Therefore, in 1999 a 0.5% decrease in the gross industrial output is possible and a 1.5% decrease — in the year 2000. Besides, abrupt decrease is estimated for 2000 owing to a substantial decrease in effective investments in 1999 (due to large risks and unfavorable conditions for business expansion), as well as owing to introduction of property responsibility of enterprises, which will lead to stoppage or reduction in production at the enterprises, which build up their payables.

Besides, in January-September 1999 the increase in production mainly occurred due to contribution of power-intensive and non-competitive enterprises of heavy industry. However, huge enterprises can expand production only provided unlimited state financing and unrestricted accumulation of debts. But such conditions can’t be granted for long. Therefore, further decrease in production by these sectors is evident since demand for their output weakens and costs increase. The only way to support these enterprises is to ensure financial stability and favorable investment climate.

Along with this, unattractive investment treatment and state interference do not allow expanding recovery of oil and gas. Due to natural narrowing of coal recovery in fuel industry, there are definite forecasts for recession in this industry by 4% in 1999 and 3% in 2000.

One of the global problems of ferrous metallurgy is inefficiency of applied technologies and inability to attract private investments due to excessive state influence over the industry’s functioning. All this initiates a negative forecast for 1999 and 2000 (a decrease in production by this largest industry by 4% and 3% respectively is anticipated).

However, such industries as light and food processing can expand production in the near future, which primarily originates from mighty unsatisfied demand (increase in production simultaneously with decrease in earnings proves this), from stable export of products and from the need in relatively small original investments, as well as from high competitiveness of the industry on both foreign and internal markets.

However, what is going to happen is still nuclear. Presently, it is evident that, to further expand industrial production, both management with enterprises and the state authorities should make quite a few efforts.