A noticeable shift toward products with higher value added took place during the first seven months of 2000. Thus, the greatest growth in Ferrous Metals was in pipe production, which grew by 31 percent compared to the previous year. In Machinery, auto production grew by 72 percent; shipbuilding, by 54 percent; electronics, by 41 percent;
and aircraft production, by 39 percent. The highest growth in Foods was in tobacco production, which grew by 52 percent; confectionery products, by 42 percent; and brewery products, by 35 percent. The production of cardboard and paper increased by 52 percent.
These positive changes reflect an ability within certain sectors to adapt to changing market conditions. The effect of such changes should become evident in the long run.
ENTERPRISE FINANCIAL PERFORMANCE 1. Enterprise mutual obligations and arrears4
The growth in production in most industries was accompanied by the considerable accumulation of mutual obligations. As of August 1, 2000, receivables came to UAH 197 billion, which was almost 50 percent greater than the nominal GDP in 1999. Payables as of that date were at UAH 272 billion – more than twice the nominal GDP in 1999.
An increase in overall obligations, when economic activities are reviving, is not necessarily a negative phenomenon. However, the accumulation of overdue obligations (i.e. arrears) should be a matter of concern.
Arrears result when poor payment discipline exists together with impunity for nonpayment. This reflects the presence of soft budget constraints, a phenomenon quite typical of the Ukrainian economy.
While mutual obligations between enterprises support development of the national economy by facilitating mutual interest-free credits, overdue obligations do not. Arrears do not support, but rather, jeopardize development. Currently, they account for almost half of both total receivables and total payables.
Overdue receivables, being largely illiquid assets, significantly slow down the production process. As of June 30, 2000, overdue receivables for goods and services supplied stood at UAH 80 billion, which exceeded by almost 50 percent the value of Ukrainian enterprise inventories. Overdue receivables totaled approximately one third of all working capital, while the share of total receivables in working capital reached 71 percent.5 Currently, inventory holdings account for approximately 20 percent of working capital, while cash and money in banks comprise less than 2.5 percent of working capital. Given that the rate of capital turnover is an important determinant of enterprise profitability, particularly during an economic crisis, enterprises suffer tremendous losses as a result of the massive volume of overdue receivables.
4 In the accounting system for enterprises, a distinction is drawn between obligations and arrears. Obligations are trade credits provided by enterprises to each other.
Two types of such obligations exist: payables – that which the enterprise owes, and receivables – that which is owed to the enterprise. If obligations are not fulfilled within a specified period (usually three months), they become overdue and are referred to as arrears. There can be arrears in both payables and receivables, called, respectively, overdue payables and overdue receivables.
5 In 1995 the share of receivables in working capital was 28 percent; in 1998 it was 62 percent.
Overdue payables inflict no less damage. Their presence precipitates not only unreliable partnership relations among enterprises but also delinquent payments to the budget, employees, and extra-budgetary funds. Three quarters of overdue payables are for deliveries.
The situation with arrears deteriorated significantly during the first half of 2000, compared to same period in 1999 (Table 1). This was particularly true of the increase in overdue receivables. It was also observed that the situation with overdue receivables for deliveries did not improve over the first seven months of the year 2000, compared to the same period last year, which was marked by a significant decline in output.
Table 1
Change in arrears, billions of UAH, and as percent of GDP, January–December 1999, January–July 2000, and January-August 2000
Indicators Units 1999 Jan–Jul
2000 Jan–Aug 2000 UAH
billion 18.4 21.2 12.8 Increase in overdue
accounts receivable
% of GDP 14.5 24.2 12.2 UAH
billion 23.9 16.3 11.1 Increase in overdue
accounts payable
% of GDP 18.8 18.7 10.7 UAH
billion 16.3 21.3 13.2 Increase in overdue
accounts receivable for
goods and services % of GDP 12.9 24.4 12.7 billion UAH 17.5 11.6 9.5 Increase in overdue
accounts payable for
goods and services % of GDP 13.8 13.3 9.1 UAH
billion 4.5 3.5 1.0 Increase in overdue
debt to the budget
% of GDP 3.5 4.0 1.0
GDP UAH
billion 127.1 87.4 104.0 Sources: Monitoring (September 2000), Main Indicators (January, August and September 2000), and author’s calculations
The poor payment discipline of Ukrainian enterprises forced the Government to adopt a much stricter policy toward payments for
consumed electricity, gas and coal, which are produced mainly by state-owned enterprises. Starting early in the summer 2000, the Government exercised strict, almost daily control over these payments. The electricity supply at a number of large debtor-enterprises was disconnected, and such measures began to elicit the desired response. Mutual obligations and arrears among enterprises began to decrease, and by the end of August had declined – not only when compared to the previous seven months of 2000 – but also to the corresponding period in 1999. The ratio of arrears to GDP has also decreased. Growth of most categories of arrears has slowed down (Table 2).
Table 2
Change in overdue receivables and payables, by category, UAH million, January–July 2000
Overdue receivables Overdue payables Total, including: 21,216 16,333
- goods, works, services 21,310 11,594 - bills of exchange -367 -217 - wage payments N/A -31
- budget 115 3,499
- extra-budgetary
payments N/A 403
- advances -253 -38
- subsidiary enterprises 1,508 -672
Sources: Main Indicators (January and August 2000) and author’s calculations GDP growth and simultaneous slowdown of the rate of arrears accumulation led to a decline in the ratio of arrears to GDP (Figure 2).
The relationship between receivables and payables is crucial for the assessment of the situation in the domestic economy. Taking into account that in Ukraine, receivables are calculated on the basis of costs, while payables are calculated on the basis of contract prices, one can conclude that the relationship between them indirectly characterizes the profitability of production. In Ukraine, as a whole, inter-industry receivables and payables were almost equal (as of August 1, 2000, UAH 145 billion and UAH 146 billion respectively6).
However, comparing overdue receivables and payables, it can be
6 Almost equal numbers for inter-enterprise receivables and payables reflect the situation with Ukrainian enterprises when the average profitability is almost zero.
seen that the former exceeded the latter (as of August 1, 2000, UAH 84 billion and UAH 81 billion, respectively). It means that producers were underpaid for delivered goods. Such extraction of liquidity from enterprises may substantially hinder their productive activity and may cause losses.
Source: Monitoring (September 2000) and author’s calculations
Power was in the worst shape. In the first seven months of the year 2000, receivables in this industry grew by nearly 70 percent, compared to the same period last year (Table 3). Out of this increase, 87 percent is attributed to the increase in arrears (overdue receivables). This means that this sector implicitly subsidized (by providing zero-interest credit) other sectors of the economy.
Such poor payment discipline has several explanations: (1) pervasive soft budget constraints; (2) lack of market mechanisms for the services related to generation and delivery of electricity; and (3) non-market pricing of energy final products as a whole.
Under the existing system, energy consumers have practically no choice in selecting their energy suppliers. A market mechanism is almost absent in the industry.
Unsatisfactory payments for electricity give rise to a “vicious circle” of arrears in the economy: being underpaid for the energy delivered, electricity suppliers and generators fail to fulfill their obligations to budget and suppliers. So, over the first seven months of 2000,
0,5 0,6 0,7 0,8 0,9
XII'99 I'00 II'00 III'00 IV'00 V'00 VI'00 VII'00 VIII'00
Overdue receivables Overdue payables
Figure 2
Ratios of overdue payables and overdue receivables to GDP, December 1999 – August 2000
payables of Power grew 2.3 times compared to the same period of the previous year (Table 4). About three quarters of the increase in accounts payable are attributed to growth of overdue payables.
Importantly, payables of Power, both overdue and non-overdue, grew faster than overdue and non-overdue receivables. Thus, the direction of subsidization began changing to the reverse: other industries and budget began subsidizing Power.
Table 3
Change in receivables, by industry, January–July 2000 Industries Change in
accounts receivable
Change in overdue accounts receivable million UAH Index*,
% UAH
million Index*, %
Change in overdue accounts receivable,
as % of change in
accounts receivable
Industry 8,217 46 5,138 39 63
Power 12,655 167 10,963 150 87
Fuels 933 25 280 12 30
Ferrous Metals 983 131 553 176 56 Non-ferrous Metals 59 38 -4
Chemicals 119 32 -126
Machinery 190 20 -8
Wood 149 125 11 218 7
Construction
Materials -292 -49
Light Industry 76 136 17 22
Food 937 198 47 5
Flour Milling and
Feeds 42 85 -19
Other -7,634 -6,527
* Index is constructed by dividing the change in (overdue) accounts receivable between January and July 2000 by the change in (overdue) accounts receivable between January and July 1999.
Sources: Main Indicators (January and August 2000) and author’s calculations Fuels suffered the most from arrears incurred by electricity generating companies. The latter paid for a mere 34 percent of all coal delivered to them.
Table 4
Change in payables, by industry, January–July 2000 Industries Change in total
accounts payable Change in overdue accounts payable
UAH
million Index*,
% UAH
million Index*, %
Change in overdue accounts payable, as
% of change in
total accounts
payable
Industry 17,425 85 10,229 93 59
Power 19,524 230 14,219 234 73 Fuels 1,946 67 1,920 458 99 Ferrous Metals 398 28 -327.5
Non-ferrous Metals 13.0 6 55.2 23 425 Chemicals 994 131 166 952 17 Machinery 1,077 71 508 63 47
Wood 192 90 -2
Construction
Materials -121 25 7
Light Industry 308 223 163 301 53
Food 963 138 349 188 36
Flour Milling and
Feeds -32 -61
Other -7,837 -6,786
* Index is constructed by dividing change in (overdue) accounts payable in January-July 2000 by change in (overdue) accounts payable in January-July 1999.
Sources: Main Indicators (January and August 2000) and author’s calculations Despite the growing overdue receivables, Fuels was in better shape in terms of payments collection than Power. The increase in Fuels receivables for the first seven months of the year 2000 constituted 25 percent, and overdue Fuels receivables increased by nearly 30 percent.
At the same time, Fuels payments to creditors were much worse. Of payables, 99 percent is attributed to the increase in overdue payables. Over the first seven months of 2000, payables increased by 67 percent, while overdue payables grew 4.6 times compared to the same period of the previous year. This industry also has the greatest debt to the State Budget.
As industries of the economy vary considerably in size, it would be useful to compare the ratio of increase in arrears (both receivables and payables) to industrial sales during the period analyzed. The increase in overdue receivables is spread quite evenly throughout all industries (Figure 3), and this increase is rather insignificant if expressed as a ratio to industrial sales. The only significant deviation occurs in Power. The increase in overdue payables to industrial sales is not distributed so evenly. The greatest increase appears in Power, although Fuels and Light Industry also show significant increases.
Figure 3
Ratio of change in overdue receivables and overdue payables to industrial sales, percent, January–July 2000
Sources: Monitoring (September 2000), Main Indicators (January and August 2000), and author’s calculations
It is not accidental that Power and Fuels perform significantly worse than other industries in terms of payments to the State Budget.
Fuels accounts for nearly a half of overall industrial arrears to the budget and increased 3.4 times over the first seven months of 2000.
The share of arrears of Power to the budget is also large – 37 percent (Figure 4).
The ratio of arrears to industrial sales also indicates that Fuels and Power differ significantly from other industries in terms of payments to the budget (Figure 5).
0 40 80 120 160 200
Power Fuels Ferrous Metals Non-ferrous Metals Chemicals Machinery Construction Materials Light Industry Food
Receivables Payables
Figure 4
Arrears to the budget, by industry, percent, as of September 1, 2000
Source: Main Indicators (August 2000)
Figure 5
Ratio of arrears to the budget to total industrial sales, percent, January–July 2000
Sources: Main Indicators (January and August 2000) and author’s calculations