How to freshen way of Ukraine's economy to 5-10% growth annually?

Author : Oleksiy Kushch

Inflation targeting used by Ukraine’s National Bank has not yet led to the expected economic growth
21:18, 31 January 2019

Press-service of the Cabinet of Ministers

Combine harvester and grain crops are good, but they would not help us catch up the world

Inflation targeting used by Ukraine’s National Bank (NBU) has not yet led to the expected economic growth. This is not about 2.5-3%, but about the dynamics of 5% +. After all, this would be the right impulse that can allow us to reach at least the figures for 2013 (for the currency equivalent of GDP). And the gross product then reached $ 183 billion. At the end of last year, this indicator is likely to reach $ 120 billion. That is, Ukraine needs to still “find” about $ 60–70 billion to return to its past level.

Under the conditions of relative exchange rate stability in 2016–2018, Ukraine was only partially able to get out of the pit into which it has fallen. Relatively speaking, only the top of our economy (in the form of a zero point) have appeared over the economic horizon: after the bottom of 90 billion, GDP won back 30 billion, and that was only due to the fact that the inflation dynamics in this period were ahead of hryvnia devaluation. Three years and thirty billion. Thus, in order for the GDP to reach the level of 183 billion, we will have to spend at least five years in this economic paradigm, provided that the next hryvnia devaluation does not happen during this five-year period. Dubious condition.

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Taking this into consideration, a nominal GDP increase, when inflation exceeds the depth of devaluation, can quickly recover the currency equivalent of gross output. Even in conditions of low growth rates of real GDP, adjusted for the deflator level. Put simply, we are growing slowly, but with the help of the inflationary component, against the background of the stability of the national currency, we are "catching up" the dollar equivalent of the national product.

It is quite a dubious scheme, especially considering that inflation does not disappear anywhere and gradually accumulates in the monetary sphere. Once the "inflationary flood" would begin, as it happened in 2008 and 2014-2015. In usual conditions, hryvnia needs from seven to ten years to accumulate devaluation potential. And these “breakthroughs” miraculously coincide with the global economy commodity cycles, when a high price for metal is replaced by a period of negative price correction.

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Today, the goal of the exchange rate and inflationary policies is quite obvious. In the context of the restructuring of our “Jaresko’s foreign debts” (Natalie Jaresko, Ukraine’s Minister of Finance in 2014 – 2016, - ed.) are committed to the obligation of Ukraine to pay so-called growth bonuses to the external creditors. In case our economy grows at the level of 4%, Ukraine will be obliged to pay back 40% of such "profit" to the external creditors. This obligation takes effect in 2020, but on condition that the currency equivalent of GDP is ... $ 120 billion.

In 2002 – 2008 inflation in Ukraine reached 10% +. And during this period economic growth rates were highest in the history of our country: from 6% to 12%. Will the current format of the Ukrainian economy actively develop with inflation of 5%?

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While the developed world is moving towards creating a quaternary sector of the economy (education, medicine, information technology), the current Ukrainian government has included maximum incentives (export VAT refunds, subsidies to enterprises) to stimulate the primary sector (agriculture, mining, and semi-finished products). As a result, the logic of systemic modifications pulls the country forward, while the mechanism of the applied incentives pulls back. Although a simple calculation shows that the expansion of the tertiary sector by 70% of GDP, while the current industrial and agricultural potential remains unchanged, can yield up to 14% of GDP growth. That is, in a five-year term, more than 3% of the gross domestic product grows annually. And this can be achieved without significant capital investments, using only tax incentives, deregulation, and simplification of connecting SMEs to infrastructure systems, protection of property titles, legalization of shadow business and reduction of corruption.

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The goal of the economic system is to create general conditions, and the goal of an individual is to increase the local productivity of his labor. These tasks are most fully accomplished within the framework of the new industrialization of the economy, as well as the stimulation of the tertiary sector (services, science, healthcare, education). But only in the presence of monetary conditions of growth: stimulation of household income, availability of affordable loans. Poor people deal with the problem of survival, not of increasing the productivity of their labor, and it is proved by the slaveholding system.

But growth in the tertiary sector of the economy can only be achieved by stopping labor migration and reviving existing industrial potential. In this case, Ukraine can repeat the dynamic of rapid economic development in the 3-5 year time interval by analogy with the 2000-2004 figures.

Low inflation cannot be an end in itself, because stability is rather connected with the cemetery. Why does the country need inflation of 5% if the economy grows by 2-3% and this macroeconomic stability will be beneficial for the external lenders? After all, it is realistic that with low hryvnia economic growth, the dollar equivalent of GDP would grow by 5-6% (as required by the external creditors). This will not last long, until the next course break, but there is no need for long-term growth for the “interested parties” - the main thing is to recapture the conditions for restructuring our foreign debts and make a profit in a short time.

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Why did the NBU and the lenders initially supported high inflation against the background of a stable rate, and now they are betting on a slowdown in price dynamics? This is a common two-level task. Level one: increase nominal GDP and, using a stable exchange rate, raise the currency equivalent of gross product at $ 120 billion (or more) by 2020. This task has already been completed. Level two: step on the "brakes" and pay off the price dynamics even at the cost of a breakdown in lending to the real sector. So that it would be possible to weaken the devaluation impulse as much as possible and not let GDP fall below the specified 120 billion.

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But after all, the lenders are interested in our longer and dynamic growth, and NBU’s policy of targeting the GDP dynamics should be as beneficial for us too. After all, the new model of targeting the growth of the gross product will provide a more effective dynamic of economic development in the long term. Why then do they lobby fast-moving models of monetary regulation? The answer is both cynical and simple at the same time: they no longer believe in the possibility of the dynamic growth of the Ukrainian economy at the level of 5-10% per year. The National Bank does not believe in the growth of salaries, as it exceeds any inflation rate and hryvnia devaluation. Political "elites" do not believe in such growth either. And what about the people? It just remains silent.

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