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12 May 1998
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On May 12, 1998, President Leonid Kuchma of Ukraine addressed the Ukrainian people and the new parliament in his annual State of the Nation address. Greeting the new parliament upon the inception of their work, the  President stressed that Ukraine is and will remain a sovereign and independent state, which now finds itself at a  historic turning point at the turn of the century.

In this first address to the newly elected Parliament President emphasized that Ukraine’s future and its further progress in the 21st century depends largely on responsibility of the current Verkhovna Rada. Leonid Kuchma resolutely made it clear  that  during his term no doomsday scenario will be realized in Ukraine.

Through more effective government to a stronger state - this must be a priority for a future work, he said. "Now it is time to  rediscover our national identity, one which captures the whole spectrum of social interests, and relies on the historical memory of the nation, its mentality and tradition. It should also put forward  main priorities of our progress".

The urgency of this task, in his words, stems from the following factors:

  1. Ukraine finds itself at a critical turning point of its history,
  2. certain part of Ukrainian population do not associate themselves with the current national identity,
  3. the level of politicization of economic and social issues is unacceptably high.

The President has renewed his strong commitment to market reforms, which would allow Ukraine to become a part of a global economy with all its benefits. The market reforms, however, are not ends in themselves. They are implemented to restructure the economy and lead to a higher living standards of the nation.

Analyzing today’s economic policy, the President confirmed once again the course towards market transformations, which was approved by the Verkhovna Rada in 1994 and which  organically proceeds from the Declaration on State Sovereignty and the Law on Economic Independence of Ukraine.

However, in his words, these are just the first signs of positive trends, the conditions for reforming the economy still remain challenging. The major barriers for Ukraine’s progress in the previous years were:

  1. underestimated complexity of the starting conditions for the Ukrainian economy after the breakdown of the former Soviet Union,
  2. political standstill,
  3. aggravated financial crisis of a systemic nature.

Last year the budget deficit grew by almost 2 per cent of the GDP. And it’s not the fault of the executive branch alone. The Parliament last year refused to accept any spending cuts, proposed by the Cabinet of Ministers, the President said.

To prevent failure in the stabilization processes of production, the President introduced a harsh regime of cutting expenditures to reduce the  budget deficit up to 2.5 % of GDP this year.

He said that the situation is complex, but there is no intention to let it get more dramatic, as it is under control. The budget financing of the social sphere is continuing, inflation is slowing, the national currency is stable and the government continues to guarantee that it will service its debts. "The reduction of the inflation rate and the stability of the exchange rate are positive results of our efforts to cope with the crisis", the President noted.

As forecast, if Ukraine manages to overcome the financial crisis and reestablish a  favorable macroeconomic environment, its economy would grow by 0.5% of the GDP this year, and could grow 2-3 % in 1999 and 2000, and by 4-5 % in the following years.

However, Ukraine must first implement sweeping structural reforms in its economy. It also requires the revision of  certain  lines of expenditures and elimination of numerous budget entitlements. "We see the way out of the crisis in further strengthening our national currency (for 1999, we project the inflation rate at 7-8 %, with further decline to 5-6 % in later years)", the President noted.

He also emphasized a need for a program of monetization of the GDP without inflationary consequences. "The exchange rate policy should not concentrate on maintaining artificially strong Hryvnia, which harms domestic producers and exporters. In the future there should be a parity between the depreciation rate and the rate of  inflation."

The President stressed that the budget process will serve as a litmus test of the ability and willingness for productive cooperation between the Cabinet and the Parliament. Specific domestic conditions and world experience do not leave any other alternative, but to combine structural and innovation policies. The President stressed that herein lies the only way Ukraine can fully achieve economic prosperity.

Ukrainian economy needs comprehensive restructuring. The major concern is the decline in the production of final goods, the share of which in the industrial output since 1990 has dropped more than twice to 34%. The share of  production of machinery (including aircraft and shipbuilding) has fallen by half, and that of light manufacturing - by 6 times.

At the same time the ferrous metallurgy, which accounts for almost 40 % of electricity and natural gas, consumed by the whole industry, has grown more than 2,5 times.

The development of aircraft construction, which already has made Ukraine one of the seven leading nations in this field, aero-space complex, shipbuilding and tank production were named by the president as  the most promising industries for Ukraine’s economic growth.

"We need a new level of high-tech competitive production in heavy industry, energy equipment, communication and information technologies, non-ferrous metallurgy." The Government must allocate the   scarce investment resources for the effective and innovative state programs.

"Regarding the position of exports in Ukraine’s GDP, we have to improve the structure of the goods component."

President L.Kuchma drew attention to an urgent need to streamline the system of taxation for boosting production and structural changes. In particular, following measures are to be implemented:

  • the payroll taxation level in the second half of 1998 should be reduced to 35%
  • the VAT rate should be gradually reduced to 10-15%
  • lessen the tax burden on the agricultural producers
  • introduce tax incentives for innovation oriented investment, small businesses and export of high-tech goods.

    The Parliament should take the challenge of the revision of the subsidies and entitlements, financing of which requires 20 per cent of the consolidated budget revenues. In this connection,  the President emphasized the need to adopt in 1999 the Tax Code and to form a budget for 2000 on its basis, after which the moratorium on the changes in the taxation system must be in place.

    The resolution of issues which are extremely important for the nation’s economy,   such as a reduction of the tax burden on commodity producers, the introduction of a uniform land tax and tax incentive for small businesses, all depend exclusively on the Verkhovna Rada, the President underlined.

    Leonid Kuchma also stressed the necessity of the revitalization of the investment process and balanced  deregulation  of the economy, with due consideration of the peculiarities, challenges and goals of the transition period. "Now Verkhovna Rada plays a pivotal role in reviving Ukrainian economy and ensuring its growth", he underlined.

    In this connection, the President called for substantial strengthening of the banking sector. To provide the long-term credits for innovative projects Ukrainian Bank for Reconstruction and Development will be established.

    He also emphasized that structural transformations of the economy could take 20 or even 30 years, if Ukraine relies only on its internal capacities.  Therefore, active approach to attraction of foreign investment, supported by necessary legislative guarantees,  is crucial for Ukraine. In his statement, the President paid particular attention to the problems of the agricultural and industrial complex and determining methods of settling the crisis in this area: "The problems of agriculture need to be specially addressed. Today this sector with its high potential is in critical shape. We have to introduce the instruments to support the prices on the basic agricultural goods. A flat tax on agricultural activities must be introduced. Conditions which allow free enterprising in agriculture must be established".

    Shortcomings in reforming the Ukrainian economy can for the most part, be explained by the fact that models of development in  Ukraine have been implemented without proper consideration of its unique features. In particular, the problem of reforming ownership relations in Ukraine would best be settled on the principles of a mixed economy.  Additional  attention should be paid to strengthening positions of private ownership and national capital.

    The President also emphasized the basic task of privatization - the search for clever and skillful owners to allow the active stimulation of small and medium business activities.

    Ukraine will not be able to create a full-fledged market economy without forming a basis for sound competition. The President stressed the need for strengthening anti-monopoly bodies and increasing their  influence over economic processes.

    The president’s message also focused on the need for the creation of a reliable system of energy supply and energy-saving, being of particular importance to the Ukrainian economy and its national security.

    The issues of relations between Ukrainian state and its citizens also occupied a considerable place in the Presidential Message. The President stressed that in the future, "we must place the interest of the individual above the interest of the state". National interests should, in fact, be united with interests of individuals by means of active support of social balance.  Such a shift of priorities in the policies of the state can only occur once a sufficient economic foundation is laid down.

    In this connection, the payment of salaries and pensions and the elimination of the factors which are causing shortcomings in this area, are currently vital objectives.

    The President called for comprehensive reforms in the remuneration system. A key aspect of this reform shall be the implementation of a minimum hourly wage.   Among immediate tasks, lies the reformation of the pension system and the fulfillment of complex measures on resolving the problems of employment.

    The President drew attention to the phenomenon of concentration of unemployment in certain regions, and acknowledged that finding a solution is difficult due to local specificities. He views unemployment as potentially one of the most acute, difficult, and urgent issues both for national and local authorities.  People will assess the governments’ activities to a large extent by their ability to solve it.

    Another important aspect of this problem is that the government should create a mechanism to guarantee employment for displaced workers as a result of privatization and restructuring.  Finally, the trend for more active migration processes in Ukraine should also be taken into consideration.  The problem of uncontrolled immigration into Ukraine requires attention as well.

    The President noted that one method by which these objectives can be completed is to increase the number and percentage of owners.  Constitutional right to private ownership, including for land,  should not remain just hollow words, he said.  Moreover, 21 million Ukrainians have already become shareholders and owners of plots of land.

    The President’s message urged the Verkhovna Rada to pay special attention to the problems of health, such as overcoming unfavorable demographic tendencies. He called to create a sound environment in the society for enhancement of family values, in order to save the nation from degradation, social ills, and lack of morality.

    The President also underscored the importance of developing education and culture in this regard, and expressed his strong opposition to the commercialization of education, saying that history will not forgive us if young Ukrainians are deprived of the right to free education. He also placed emphasis on the need for the full realization by the citizens of Ukraine of their right to freedom of conscience, and urged against involvement of the Church in political struggle.

    The President also emphasized that significant measures must be taken to realize the political rights of Ukraine’s citizens. To accomplish such goals, the President believes  the institutions of the democratic political system and assertion of civil society in Ukraine must be strengthened. He underlined that this requires legal guarantees, the formation of national parties, the modification of election legislation and the adaptation to new realities of the trade unions and other mass public associations.

    Concrete tasks and objectives of Ukraine’s development were outlined in the Cabinet of Ministers Program, which was submitted for the Parliament’s consideration.  Over 70 drafts of laws on the most important issues of economic and social development worked out by the government would provide a legal basis for its implementation. The President called upon the parliamentarians to grant priority to these laws in their deliberation.  It would allow Ukraine to not waste valuable time or lose the pace of reform.  The President urged the members of Parliament to concentrate their efforts on realistic and achievable tasks.  Better bitter truth than sweet gimmicks, he said.

    To realize these numerous tasks, the President stressed the need to rely mainly on Ukraine's own strength, capacities and internal factors of growth. He also emphasized that these tasks are inalienable from securing political stability and consensus within Ukrainian society. Speaking about such an important instrument of formation of public opinion as mass media, the President stressed that Ukraine needs a free and impartial press, but not tomahawks. The refusal of one-sided approaches and extremes in concepts about the role and functions of the state in the transition period is vital, the President stressed.

    This means either equal inadmissibility or the return to the administrative-command system and liberalization, without limits. It is extremely necessary to overcome the low competence of the public administration, to put an end to legal nihilism and to intensify the fight against crime, however, without extralegal means or extreme measures.  Especially important in combatting organized crime is to undermine its economic, social, and political basis, as well as to prevent its internationalization.

    To this end, the President called to complete formation of the relevant legal basis and its effective and full implementation. He informed that in a few days, a systematized package of draft laws on combatting crime is to be submitted to the Parliament.  Without its approval, all struggle against crime and corruption would remind fighting windmills.

    A sphere of the Ukrainian leadership’s particular attention is national security in all its aspects, most notably political, social demographic, economic, informational, environmental, and military ones. All of them interdependent and interrelated, therefore weakening any of them would provoke a chain reaction, the President said.

    He paid attention to a new -- constitutional -- aspect of Ukraine’s national security, stressing that the fundamental law of Ukraine needs protection.

    Among the important components of national security, the President emphasized that Ukraine’s principal priority is the formation of a favorable international environment. The President noted that Ukraine, thanks to its balanced and realistic foreign-policy, has considerably improved its international image and enhanced its prestige.

    The President underscored that Ukraine’s considered and balanced foreign policy, makes it possible to move further into new avenues in European and other world communities, while at the same time, strengthening its traditional relations with Russia and other partners of the former Soviet Union, rectifying deformation in these relations.

    The President also declared the need for strengthening of the system of public administration and all branches of power in Ukraine at large.  The leadership of Ukraine and all its public servants must stop being just bureaucrats, and they must act as an instrument of implementation of the communities’ will.  This will allow to bridge the gap between the people and public administration.  The main weak points of power, in the President’s view, are lack of its institutionalization and balance of power, where one body overrides and overshadows another.  He also called for better interaction between national government and local bodies of power, stressing that the machinery of public administration should be unified and consistent.  Ukraine has more than enough public servants (300,000) but the task now is to enhance their competence and professionalism, their orientation on market principles, and democratic values.

    In for mutual understanding and cooperation with the Parliament, and as a protector of the Constitution he will not permit confrontation, transfer of authority or substitution of law-making activity for the imposition of ideologies. He called the deputies to constructive cooperation.

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