Economy booming, but jobs remain thin on the ground

By Jerome Glass

Date: 10/03/05

• Positives

From a low point in 1998, the Ukraine has experienced several years of sustained economic recovery. Growth in gross domestic product (GDP) in 2000-04 averaged 8.4%, well ahead of the central and eastern European countries' average of 3.8%, and the International Monetary Fund (IMF) forecasts that this will increase further in 2005. The motor for this recovery is Ukraine's exceptional export performance. Exports have grown by an average of 25% annually for the last three years, resulting in both a substantial current account surplus and a significant increase in investment. With the economy booming, the government of Ukraine has even succeeded in dragging down its public debt ratio, from 61% of GDP in 1999 to around 27% in 2004. For the time being, this strong economic performance has been achieved without a noticeable knock-on effect on inflation, although with the inflation rate reaching a new high of 9.5% at the end of 2004, there are signs that the good times may be coming to an end.

• Negatives

The big headache for the government, however, is the high unemployment rate. Although the official rate puts unemployment only at around 4%, when hidden unemployment is taken into account the International Labour Organisation estimates the real figure to be closer to 9%.

The IMF has expressed concern that Ukraine's failure to link its growth to a commitment to reduce unemployment, coupled with a reluctance to undertake structural reforms, has led to a widening gap between rich and poor. The other worry for the government is that the Ukrainian economy is unusually vulnerable to external shocks. With exports running at some 60% of GDP, any major fluctuation in export demand could have potentially disastrous results.

• Outlook and international

All this means that the economic outlook for Ukraine is mixed. The IMF predicts that growth will slow to 6% in 2005 but should hold at around this level in the following years. On the other hand, there is evidence that the economy is beginning to overheat and that inflation may continue to rise above 10%. Analysts have suggested that one way of preventing this would be to stop pegging the Ukrainian hryvnia to the dollar and thereby prevent it from being undervalued. But the government appears reluctant to do this. It also appears loath to invest in its creaking public infrastructure, with pension problems looming in the near future.

On the international front, the EU is still withholding market economy status until Ukraine undertakes measures to reduce state influence on prices. Similarly, it seems unlikely that Ukraine will obtain World Trade Organization membership this year, largely because of disputes over its agricultural quotas, although its average tariff of 7% is lower than other transition countries.

Brief analysis of the Ukrainian economy.