Ukraine's authorities raise the rates: Where's the light at the end of the tunnel?

Author : Olexandr Honcharov

Source : 112 Ukraine

Has the shadow sector of the Ukrainian economy shrunk? No. Nothing has changed, only the life of the overwhelming majority of Ukrainians has worsened
10:00, 7 March 2018

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In late 2017, I predicted that after the state budget-2018 was adopted in a hurry, our financial authorities would have to raise the National Bank of Ukraine (NBU) discount rate at least twice. Still, there was a hope for some kind of “common sense;” that the politicians would stop these chaotic activities on reducing inflation, but on January 25, the National Bank's board raised the discount rate from 14.5% to just 16%, and on March 2, the rate jumped to 17%!

Can you imagine how the rates on the Ukrainian banks' loans increase would now? Why in other countries central banks and governments support national enterprises and population, and in Ukraine, it does not work? Bank of England maintains the benchmark interest rate at 0.5% per annum in 2018. The European Central Bank has gone further, keeping the base rate at 0% this year (unlike our 17%), that is, giving away the money for nothing. The rates for marginal loans and deposits in the EU also remained unchanged: 0.25% and minus 0.4%, respectively. In addition, the ECB confirmed that it will make monthly purchases of 30 billion euros assets until the end of September 2018.

Related: Big Mac Index reveals Ukraine’s hryvnia undervalued by 69%

Switzerland so far holds the record; the interest rate is minus 0.75% here. In other words, they decided to pay the banks extra money for borrowing and lending to the business and the population. The strategic goal of this policy is supporting the national economy and dispersing consumer demand. And will the Ministry of Economic Development and the Ministry of Finance argue that our producers are competitive in the European market? Will they say that the population is solvent? Of course, we must admit that every country has its own economic crisis. Yes, unfortunately, our problems have not disappeared after Maidan-2.

Has the shadow sector of the Ukrainian economy shrunk? No. Has the ownership structure of the financial and industrial groups of local oligarchs changed? No. Has direct investment increased, especially from abroad, into fixed capital? No. Nothing has changed, only the life of the overwhelming majority of Ukrainians has worsened. At the same time, we continue to spend a lot on top officials and people's deputies. But the deficit of the state budget and the debt burden continue to grow uncontrollably. And there is no light at the end of the tunnel.

Related: Hryvnia bears the cost of mistakes of Ukraine's Cabinet and Parliament

It looks like every Wednesday, Groysman's ministers give the society a new impulse to strong social tension. As if we do not know what is happening in the streets and markets. March 2, the current Minister of Energy Igor Nasalik stated from the rostrum of the Verkhovna Rada that even if we find an acceptable solution at his request, we will still abandon it from. Because this cannot happen in a civilized market environment.

I think these politicians suffer from psychological inertia and an inferiority complex, which prevent them from finding strong solutions for the development of Ukrainian markets and the country's economy. As Walter Kelly noted, "we met with the enemy, and this enemy is ourselves." Either we do not know some backstage secrets, or the Ministry of Finance and the National Bank are playing their own games, creating huge problems not only for each other but for the entire Ukrainian economy.

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March 2, the state regulator's leadership has sharply raised the discount rate of the NBU from 16% to a record 17%. At the same time, Finance Minister Olexander Danyliuk increasingly complained about the lack of money and repeated that he plans to receive $ 2 bln in 2018 from the placement of Eurobonds. That is, he recognized the need to enter the capital markets with the placement of government bonds. But don’t they realize that when there is a cycle of raising the discount rate, then the bond market does not attract investors?! Even the head of the NBU Council Bohdan Danylyshyn said that an increase in the discount rate of the NBU will not have the proper effect on inflation retention. As he stressed, the NBU board was late with the beginning of the cycle of raising the discount rate, so its next increase will not affect the slowdown in the growth of consumer prices.

Maybe, Ministry of Finance wants to attract very expensive money and at the most disadvantageous for Ukraine conditions again? At the same time, everyone knows that national financial and industrial groups are a powerful driver of both growth and decline in the country's economy and markets. And, of course, it is very difficult for the Groysman’s Cabinet to combine stimulating the economy and balancing the state budget for 2018. The experts see significant risks here. For investors and financial authorities, the problems of high inflation and sharp fluctuations of the hryvnia exchange rate are permanently growing.

Related: Why Ukrainian hryvnia falls: Secrets of the real exchange rate policy

Inflation has reached a really high level and would have a long-lasting effect because of the depreciation and instability of the hryvnia. I think this was the miscalculation of the financial and economic block of the Cabinet when it failed to prevent such chaotic swings of the national currency. However, the recent comments of the NBU representatives regarding the possible next round of hryvnia devaluation are quite harsh. That is, the National Bank's management is signaling that under certain conditions, monetary policy might become even tougher. Especially if negative factors to weaken the national currency are formed.

According to estimates of the Ukrainian and foreign analysts, the National Bank would not resume the trend of lowering the discount rate. It is not going to form such conditions when the hryvnia really stabilizes or really starts to strengthen in the foreign exchange market. The Ukrainian securities market, which is still in a prolonged stagnation, will be able to receive its share of the benefits.

Here we could confidently talk about the long phase of investor activity with a long monetary resource and, accordingly, expect more or less serious strengthening of the hryvnia. Then you can expect that the National Bank would lower its discount rate. But I think this would not happen until the end of 2018. And there is no doubt that the Cabinet of Ministers and the National Bank leadership will resume stimulating lending to enterprises in the real sector of the economy. Finally, then the funds for balancing the state budget in 2018 will appear.

Related: Ukraine's economic vicious circle

This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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