It is perhaps no coincidence that the International Monetary Fund’s technical mission has arrived at a time when the government is drafting the 2013 budget. There is a good reason to presume that the visit of representatives of Ukraine’s biggest “creditor” is one of the instruments to pressure the Ukrainian government into drawing up an as much realistic budget as possible for the next year and revising this year’s key macroeconomic targets. What causes the greatest worry among experts today is the budget’s GDP growth target. They say the economy will be simply unable to reach it. What is also open to question is the attainment of the inflation rate target.
COMMENTARY
Viktor SUSLOV, ex-minister of economics:
“There are ample grounds to revise the 2012 budget. The main macroeconomic targets in this year’s budget are not being fully met. For example, it was projected that GDP would have risen by 3.9 percent by the end of the year. The State Statistics Agency kept reporting until recently that GDP had risen by not more than an annual 2 percent in real terms. Then things speeded up, and they announced that GDP would register a 3-percent growth by the year’s end. The latest official statistics show a serious slowdown in the economic development pace, especially in the industry where the growth was 0.4 percent in six months. Output dropped in agriculture, civil construction, and cargo transportation. This means that GDP will have risen by slightly more than 2 percent by the end of the year.
“But 2 percent is not 3.9 – it is almost twice as little. So, in my view, we will hardly manage to reap the previously planned budget revenues. Also open to question is reaching the inflation target of 7.9 percent. On the contrary, we have seen deflation in Ukraine lately. There are various factors that slow it down, but the main one is the NBU’s tough monetary policy aimed at keeping the national currency’s rate stable. But, as is known, one of the consequences of low inflation rates is reduced budget revenues. For this reason, due to this kind of policy, it will be difficult to obtain the projected budget revenues. With due account of the current economic policy, I can say that the budget should be revised towards the reduction of expenditures.
“But a different situation is also possible. The NBU announced recently that inflation might increase in the second half of the year. If the National Bank chooses to emit additional money into the economy, soften its policy, and increasingly stimulate the demand, the inflation rate will rise, as will the revenues (‘inflationary revenues’). In that case there will be no need to revise the budget.
“There are no grounds today for an abrupt devaluation of the hryvnia. It would be a mistake to carry it out. However, there have long been grounds for a gradual devaluation. The main cause is the continuing growth of import which considerable exceeds export. According to the NBU, the trade balance was negative in the first six months of 2012 – 4.483 billion dollars, whereas it was 3.17 billion dollars last year. In the first six months, the consolidated balance of payments was minus 1.121 billion dollars, while it was plus 1.795 billion dollars a year ago. A negative balance of payments makes it necessary to use the gold and hard-currency reserves, which is a prerequisite for devaluation. In all probability, it will occur.
“Is the government going to revise this year’s budget? Most unlikely. The government will find it more rational not to revise these targets but to use the opportunity to increase money emission (on the part of the NBU), speed up the inflation growth as well as the growth of investment revenues in order to fulfill the budget in this way.”
