Last year’s economic results proved an unexpected exception to the general rule, as the consumer price index decreased, and, instead of expected inflation, Vadym Pishcheyko, deputy chief of the Macroeconomic Forecasts Department with the Ministry for the Economy and Integration with Europe, reported a 0.6% deflation. From the viewpoint of economic theory, the situation is quite ambiguous. On the one hand, this is evidence of the stability of the nation’s currency. On the other, in a sharply worded statement President Leonid Kuchma criticized the overstated exchange rate of hryvnia to US dollar and erroneous inflation forecasts which, to quote him, have cost the state budget a billion hryvnias. Newly- appointed NBU Board Chairman Serhiy Tihipko has pledged all- round support to the coalition government on issues of economy growth, stressing he would send word to them of changes in the exchange rate policy, if any, well in advance. Skeptics, however, point to the involvement in this situation on the part of the displeased lobby of exporters, as erroneous inflation forecasts of the Kinakh government and rigid monetarism of the NBU under Stelmakh have dealt a heavy blow to enterprises working for export. This year, the budget sets the target inflation rate at 6%. What lies in the offing for hryvnia in 2003? After all, what makes for a healthier economy, inflation or deflation? The Day addressed these questions to experts.
Viktor SUSLOV, Chair of the State Committee for Regulation of Ukraine’s Financial Services Markets:
We must understand clearly that deflation can potentially harm the economy more than inflation. Virtually in all of the developed countries an increase in the exchange rate of the nation’s currency is a cause for economists’ concern. To illustrate, over the past couple years increases in the exchange rate of the yen were accompanied with special restrictive measures on the part of world financial institutions. Apart from the universally known rule that deflation leads to a deteriorating balance of payments, more expensive exports, and cheaper imports, all of which deals a heavy blow to the domestic market, among the serious negative consequences for Ukraine is the increasing domestic and foreign debt servicing load. To the contrary, according to Keyne’s theory, slow-rate inflation can have positive results. Such inflation makes for a smoother structural transformation of the economy, thus facilitating the mobility of resources. Unquestionably, Ukraine’s deflation in 2002 is to be blamed on the previous government and NBU. The 6% inflation rate planned for this year is not high, and if the government manages to keep it within these limits, the economy will continue to grow. And a slight devaluation of the national currency will also have positive consequences as a result of increasing export efficiency, higher import prices, which, without a doubt, will make domestic consumer goods more competitive. Whether the planned rate of inflation will be secured depends on the NBU policy rather than that of the government. And although the government can control inflation by means of administrative levers (adjusting public utilities tariffs, transportation fees, etc.), I believe that inflation will hardly exceed forecasts. There is one circumstance which can be viewed as a potential source of problems, namely the commitment to pay $1.6 billion of foreign debts. However, in view of the fact that the NBU has built up quite substantial foreign currency reserves, Ukraine has every precondition to successfully adjust its financial policy so as to be able to react to any unexpected changes. In a word, Ukraine will pay its debts, thus avoiding high inflation and drops in the value of hryvnia. The looming threat of FATF sanctions against Ukraine is a more serious problem. Our economy is not strong enough to withstand sanctions that can be imposed by the West. It stands to reason that if Ukrainian banks’ correspondent accounts in the West are frozen (which, experts say, is a strong possibility) and if other restrictions are imposed on Ukraine’s external payments, the situation may go from bad to worse. As I see it, such decisions are, if anything, a means of political pressure on Ukraine. They cannot possibly issue from the negative processes in the Ukrainian economy. It does not take an expert to see that no big “dirty money” is laundered in Ukraine. On the contrary, over the past ten years money has been pumped from Ukraine and laundered elsewhere. That is to say, our country is mistakenly considered a money-laundering haven. In my view, if the current trends in the economy continue, we should not expect any sharp drops in the value of hryvnia or high inflation rates. Sudden changes for the worse, if any, will be caused by political factors. The watchword for Ukraine in this context is normalization of relations with the US and stabilization of foreign economic relations.
Andriy VOYTENKO, Director of the Treasury Operations Department at the Finance and Credit Bank:
I believe it will be difficult to keep inflation within the limits of the 6% rate planned for this year. Possibly, this rate will be raised and by year’s end inflation will reach 6 to 8%. The volatile political situation, threat of FATF sanctions, growing competition on world markets, pessimistic market outlook for domestic exporters as a result of continuing recession in Western Europe and America can upset the fragile market balance, thus undermining the confidence of investors, businessmen, and citizens in the national currency. Against the backdrop of excessive liquidity in the banking system of Ukraine, this may increase the risk of growing inflation, when growing consumer prices exceed the money supply growth rate. On the other hand, a healthy inflation rate of 5 to 7% will only prove good for the economy. A strong exporters’ lobby in the government and the declared closer cooperation between the Cabinet and NBU give reasons to expect relatively stable rates of inflation throughout the year. Last year’s deflation hardly did the economy any good. It indicates stagnation in the consumption sphere. The decline in prices does not serve the interests of producers working both for foreign and domestic markets. In my view, this year’s expected inflation of 6 to 8% will not seriously affect the consumers, provided per capita income growth rates stay unchanged (about 20%).
The National Bank has all the required tools to balance this year’s foreign debts payments, using both foreign currency reserves and state bonds. Currently, Ukraine’s starting rating is quite low, which makes Ukrainian government bonds less attractive for investors. In my view, however, with the 10 — 11% yield on bonds the problem of foreign loans and their servicing will be resolved.
Max HOLTSBERG, Vice-chancellor, the International Management Institute:
Forecasting the hryvnia exchange rate and inflation is by and large meaningless. Such questions can be best answered using quotations from classical writers: there will be changes, while the currency exchange rate will fluctuate. In Ukraine, interests of financial groups in power should be taken into account together with other factors of stability of the nation’s currency known to economists. It’s obvious that a stable hryvnia serves the interests of one group and hurts the other. Thus, to make forecasts means to foresee which lobby in the government will prevail. Of course, only in case the stability of hryvnia will be influenced artificially, that is, using regulatory methods. It’s difficult to say how justified the inflation targets for the next year are, and whether the government and NBU will be able to meet them. It’s common knowledge that the methods of calculating inflation rates vary. Thus, it’s simply impossible to judge the soundness and objectivity of forecasts without knowing the methods employed by the government. Without a doubt, a stable hryvnia serves the interests of the national economy. In this context, I consider last year’s slight deflation a positive trend. It would be not bad at all if the monetary policy of the state was headed in this direction. Inflation should by no means be considered the main means of revitalizing the economy, fighting unemployment and insufficient capitalization of the financial services market. Although, slow inflation can, in fact, produce a temporary positive effect. The wisdom of state regulation is about finding this golden mean, the optimal solution which makes it possible to achieve certain targets not at the expense of the others. This is possible only if normal conditions are created in the state for doing business and attracting foreign investment.
