Ukraine Grapples With Reform To Pull It Out of an Economic Mess

The challenges: falling output, budget deficit, and huge, inefficient state sector

WITH billions of dollars in Western aid on the line, Ukraine's new president, Leonid Kuchma, has moved quickly to show he means business about reforming the collapsing post-Soviet economy.

But economists say the challenge now for President Kuchma - who said during his election campaign that he favored ``evolutionary, not revolutionary'' reforms - will be how fast he can transform his words into deeds.

Pulling this country of 52 million people out of its economic mire of plummeting industrial output, a widening budget deficit, and a huge, inefficient state sector will be a colossal process.

``They're saying most of the right things,'' a Kiev-based Western economist says of Kuchma's administration. ``But it's too early to tell at this point whether they'll actually go through with them, and when.''

Within a month of taking office, Kuchma took control of economic reforms in central and local government, giving himself ample room to sidestep a Communist-dominated parliament.

He ordered his Cabinet to draft seven decrees on some of Ukraine's most pressing economic troubles: tax reform, currency regulation, and the budget. The sole decree signed so far will limit loans to state enterprises.

Kuchma also has courted the International Monetary Fund (IMF), agreeing to intensive cooperation on shaping an economic stabilization program over the next two months to obtain an initial $700 million IMF loan.

Volodymyr Kuznetsov, his young economic adviser, calls the administration's approach to reform ``pragmatic radicalism.''

``This will not be like the shock therapy that Russia went through in 1992,'' he said recently. ``The government is quite conservative and the parliament even more so.''

``There are basic measures any country has to take to get out of crisis, such as cut the budget deficit, privatize, and liberalize prices, foreign economic policy, and the currency rate,'' he said.

The West has voiced impatience with Ukraine's lack of reforms, and also readiness to help. The IMF loan, once approved, will open the door to $4 billion in aid promised by the Group of Seven industrialized nations last month.

United States Vice President Al Gore, in a visit to Kiev two weeks ago, told Ukrainians that the ``West is ready to extend a helping hand'' just as soon as Ukraine shows the political will for change. Days later, a US government delegation promised Kiev it would get a promised $350 million in aid flowing to help the second-most-powerful former Soviet republic disarm its nuclear arsenal.

But Ukrainians, who earn on average less than $20 a month, have even less patience than the West for Kuchma to get to work. Hoping his campaign of fixing the economy will improve their lives, they gave him a solid victory over incumbent Leonid Kravchuk, who presided over two and a half years of economic collapse.

Olexander Slobodyan, director of a privatized Kiev brewery, says the only thing he needs is a market economy so that his factory and 1,200 employees can continue working. ``The more the government meddles in business, the more corruption it breeds and the less incentive there is to work,'' Mr. Slobodyan says. ``We're forced to sell beer at prices far below what the market demand would set it, and then officials turn a blind eye when our products are resold at three times the price.''

Unlike Russia or the Baltic states, Ukraine's economy has been barely touched by reforms. Less than 10 percent of state enterprises have been privatized, and a lack of investments means that factories and equipment are rapidly depreciating as parts wear out and are not replaced.

Those factors, combined with a cutback in subsidies - officials estimate the budget deficit at between 12 and 20 percent of gross domestic product - translate into a 36 percent decline in industrial output in the first six months of the year compared with the same period in 1993.

Kiev has also faced mounting pressure from Russia to pay up for energy supplies. On Wednesday, Ukraine agreed to repay its almost $1.5 billion fuel debt through a combination of cash, goods and a stake in Ukraine's gas-related enterprises after a delegation from Russia's Gazprom gas monopoly met with Ukrainian officials.

One of the few bright spots is the inflation rate, which hit a three-year low in the month of July at 2.1 percent. Last year, monthly inflation reached more than 90 percent, but strict central bank control over credits pared it down to single-digit inflation.

Economic adviser Mr. Kuznetsov, however, predicts that inflation will rise to at least 8 percent next month because Ukraine will have to cover state purchases on grain and fuel for winter.