The government has little time left to press ahead with urgent reforms before Ukraine's financial crisis spins out of control, a well-known Harvard economist said Wednesday. In the months leading up to parliamentary elections, Ukraine must take measures to ease the debt burden and speed up structural reforms or else face the threat of currency collapse, Harvard Institute for International Development Director Jeffrey Sachs told reporters. 'This crisis requires the attention of all the senior political figures in the country … to bring forward measures that are going to preserve the very hard-won currency stability of this country,' he said. Sachs said government officials had shown an increased awareness of the pressing need for economic reforms during his visit, but still could not agree on a specific course of action. He also urged leaders not to be swayed by pressures from upcoming elections, which have made potentially painful cuts in public spending especially unpopular with many lawmakers.
'All of this is taking place in a very political environment with elections coming up. But financial markets don't wait for elections,' cautioned Sachs. Sachs said he warned government officials last year of the consequences of relying on the sale of Treasury bills and foreign borrowing to cover the deficit while major structural reforms needed to reassure foreign investors were still lacking.
'I worried that … Ukraine could borrow a lot of funds in the short term and then find itself with a big debt burden but a loss of international confidence,' he said. 'I'm afraid that is something like the actual sequence of events.'
Turmoil on world financial markets and a sharp fall in T-bill sales have conspired to worsen Ukraine's predicament.
'The international situation in combination with a lack of critical reforms internally has brought Ukraine to a much more difficult financial situation today than just six months ago,' Sachs said.
Sachs urged the government to further lower spending targets and aim for the lowest budget deficit possible, while simplifying tax laws to draw potential revenues out of the shadow economy.
A decree passed by President Leonid Kuchma last month said the deficit would be brought down to 2.5 percent of gross domestic product. The government has forecast the economy will grow this year for the first time since independence, by 0.5 percent, but a report issued last week by independent economists cast doubt on the official estimates.
Another top priority for the government is increasing direct foreign investment, which has been stifled by red tape and punitive tax and licensing legislation. Since independence, Ukraine has attracted just $2 billion in foreign investment, which Sachs described as 'shockingly little.' In order to increase that number, Ukraine should press ahead with stalled privatizations of large enterprises, especially in the telecommunications sector. 'This would not only attract a lot of money, but make the phones work as well,' Sachs said.
Sachs urged reforms of Ukraine's banking sector as well, stressing the need to pass laws protecting the independence of the central bank and for the government to end the practice of forcing commercial banks to issue credits to loss-making enterprises.
(Information from The Associated Press was used in this report.)
