from one hand to another until it vanishes
Robert SARNOFF, RCA president
The National Bank of Ukraine (NBU) opposes combining national and local budget funds in a joint treasury account. NBU Governor Serhiy Tihipko called this cabinet decision a fatal mistake. In his view, withdrawing enormous funds from the banking system might serve only to destabilize it. The NBU fears that if the government first concentrates large amounts in the State Treasury account and then abruptly injects these into the economy, this could unbalance the market. Moreover, once every quarter, when businesses increase tax payments and banks are desperately short of funds to meet reserve requirements, these risks will get out of control. Mr. Tihipko thinks it better to keep budget funds in this country’s banks chosen best through tenders.
In fact, a similar mechanism long functioned in Ukraine. But scandals caused by budgetary machinations in a number of local administrations and ministries prompted the government to form a joint treasury account. Among the adamant supporters of budgetary fund consolidation is First Vice Premier Mykola Azarov. In his view, more stringent control over the utilization of public finances has already helped improve budget-fulfillment discipline in the provinces. In other words, state coffers no longer look like a sieve. Money is now distributed strictly according to formulas and in amounts approved by the Ministry of Finance. The latter is also headed by Mr. Azarov, which explains his stand in the continuing debate. Note that last year the first vice premier suggested that the State Treasury be directly subordinated to the Ministry of Finance, but the president opposed this idea.
Last November Ukraine fully realized that the State Treasury system in its current shape could be not only useful but also harmful. That was when budget funds were being actively transferred to a joint account and, as a result, the government acquired about seven billion hryvnias — money to burn, to put it bluntly. With the disposal deadline still far away, the money simply lay unclaimed. Such a large amount of money out of circulation immediately created a deficit of funds on the credit market. When commercial banks entered, as usual, the market at the end of the quarter to form the reserves, it turned out that the market was running catastrophically short of money. Short-term credit rates immediately shot up to 40% per annum, and in some cases the market saw offers as high as 100% a year The NBU was able to infuse the required finances into the economy within a few day and thus stabilize the situation. Yet, the market runs the risk of plunging into a similar crisis at the end of each quarter. It is perhaps no accident that the NBU governor should have stated precisely now that it is wrong to concentrate budget funds in a joint treasury account, for March is the first quarter’s last month.
Following the November crisis, Premier Viktor Yanukovych instructed Azarov to draw up proposals to overhaul the current treasury system. Although three months have elapsed since, the Ministry of Finance is still to come up any kind of ideas on this. But now that the NBU chief himself has publicly expressed his discontent over the current procedure, Azarov will not be able to duck the issue. The situation demands that the NBU and the Ministry of Finance negotiate a compromise which would take into account the positive aspects of concentrating budget funds in the treasury and simultaneously offset the negative aspects of freezing the budget surplus. It is not ruled out that the compromise will mean allowing the State Treasury would enter the money market as an independent subject — both as a borrower and a lender, depending on how the budget is being fulfilled. This mechanism is widely used abroad. It should be noted that, if implemented, this scenario would greatly increase the political weight of the office of treasurer and might sharply intensify the struggles for the right to control this office.
