Ukrainian government's difficult choice for 2019

Author : Olexandr Honcharov

Source : 112 Ukraine

What does Ukraine need now: tightening government regulation or stimulating Ukrainian consumers?
18:55, 9 November 2018

Open source

The next year 2019 is expected to be very challenging for us. First of all, because Ukraine does not have super-efficient politicians ready to destroy the current economic model with its hypertrophied role of oligarchs and monopolists.

In fact, what do we need now: tightening government regulation or stimulating Ukrainian consumers? Is it possible to implement the savings measures and try to stimulate economic growth? I hate making forecasts, but still, we have two options for the next 2019: either to allow a deflation shock with a new wave of bank failures and a sharp rise in price for money or to issue new hryvnia emissions and accelerate inflation, which would quickly absorb the savings of the wealthy citizens.

Related: Ukraine ranked 134th in Economic Freedom of the World

In recent years, the increase in Ukraine’s domestic demand has been driven by consumption. And what did this increase go to? So, out of 100 hryvnia growth, 53-57% was covered by inflation, 22-25% by import, and only 1 hryvnia out of 50 stimulated domestic productions. What do these impartial numbers say? If we will stimulate consumption now, we will stimulate inflation by 50-60% and domestic production only by 20% (the rest goes for import).

On the one hand, the sharp fall in Ukraine’s economy several years ago was caused by the huge amount of short-term loans that had to be paid back, so, 96 commercial banks went bankrupt. But now credit institutions do not have such a debt overhang, therefore, there is little dependence on external financial markets. But on the other hand, we should not forget about the gas price. The dependence has risen sharply in recent years (just compare the gas price and the utility tariffs of 2014 and of 2018).

Related: Ukraine's cooperation with IMF improves economic prospects, - EBRD

October 31, the National Bank of Ukraine (NBU) reported that in January-September, the current account deficit increased to $ 3.9 billion compared to $ 1.5 billion in the corresponding period of 2017, in addition, the export volumes of Ukrainian goods in September 2018 decreased by 3.6% - up to $ 3.3 billion. The NBU report also clarified: "The dynamics of exports deteriorated in all commodity groups, primarily due to the lower yield of early grains, steel mills modernization, transportation difficulties, and deterioration in the external price situation."

And the NBU figures look very alarming against the background of a sharp increase in borrowings in the global financial markets: in January-September 2018, the net inflow of foreign direct investment (FDI) amounted to only $ 1.5 billion, of which 28% are operations of debt re-registration. And we need at least $ 10 billion in FDI every year for a real and sustainable recovery of the Ukrainian economy. How can we deal with it?

Related: Ukraine to be able to pay all debts if it develops strong economy, - MP

Let the Cabinet of Volodymyr Groysman think about it. But one thing is clear here – stimulating the consumption of the population will lead to inflation and import growth, especially with a stable exchange rate. It is unlikely that in 2019 our debt problems will be solved without a credit download from the International Monetary Fund.

In addition, the National Bank has again raised its inflation forecast for the end of 2018 from 8.9% to 10.1%. They explain it by the rapid growth of world prices for energy and wheat, and by the wage growth in Ukraine, which is more significant than expected. There we go!

I have two questions here. First, if you look at the velocity of circulation of money – it is currently decreasing in Ukraine – what kind of inflation are we talking about? Second, what monetary methods the NBU uses the fight against inflation if its next wave is caused by Cabinet’s decision to increase gas prices and excise taxes? Finally, if the National Bank deals with a core inflation reduction, this will lead to the fact that the economy will not have enough money. Accordingly, the taxable base will continue to fall, the budget deficit will increase, and it will negatively influence the commercial banks themselves.

Related: Ukrainian pension reform is symbol of ignorant economic policy

Moreover, the classical methods of saving money in a crisis are not working anymore. The current situation in global stock markets is very complicated and alarming. According to The Wall Street Journal, last month the decline in the value of stocks and bonds exceeded $ 5 trillion! Analysts at Bank of America Merrill Lynch argue that this is the 3rd largest fall since 1970. So today, even the US dollars would not save your condition.

In 2019, we will witness the presidential race and a brutal fight for the MP’s offices. In this context, I remember Cromwell's prophetic words: "No one rises so high as he who knows not whither he is going." It is not safe, but it seems we have no other way out.

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

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