By Iryna KLYMENKO, The Day
In a special instruction dated May 17, the President recommended the National
Bank cut the discount rate to a level not 10% over the inflation rate by
September 1. By a strange coincidence of circumstances, almost two years
ago, in mid-May 1997, the Cabinet of Ministers also advised the National
Bank (NBU) to change the mechanism for setting the discount rate to cut
it by about half.
In an apparent attempt to meet the President's wishes, the NBU cut the
discount rate on May 24 by 5% from 50 to 45% per annum. It is more difficult
to fulfill the other recommendation - to soften economic requirements for
export loans and long-term loans to banks as well as to speed up the restructuring
of the banking system and intensify coordination with the Cabinet of Ministers
in pursuing its monetary and currency policy.
However, these wishes also are by no means new in official policy. It
will be recalled that only recently all sector ministries demanded in chorus
that the NBU resort to a monetary emission on favorable terms. Now the
picture is fundamentally different. Ministerial officials, especially "political
entrepreneurs," have clearly understood that there are no goods which cannot
be bought in a market (or even semi-market) economy. There are only prices
at which they cannot be bought. Thus it is not at all necessary to demand
that the NBU print new hryvnias, it is far more important to secure reasonable
prices for the money reserves already existing in the banking system. For
all banks are not so conscientious as the Ukrayina Bank which used to issue
loans to the agrarian-industrial complex at 30% annual interest and is
now trying to put its finances in order.
The Economy Ministry forecasts 19% inflation this year. In January-April,
prices rose 5.9%. According to the President's logic, the credit rate should
not exceed, say, 16%, 20%, or 30% by September. Is the President aware
of there being, in addition to the inflation rate, other criteria and standards
for interest policy? In particular, the fact that any administrative encroachments
on the balance of supply and demand on the money market are bound to inevitably
provoke a still deeper general economic crisis in the future, which in
fact happened after forcing through a policy of rate-cutting in the fall
of 1997.
It is known that the strength of any national currency is guaranteed
by the central bank's ability to maintain the credit-related interest rate
at a level exceeding the rate of inflation. But let us assume the NBU has
agreed to the government's reasoning that the inflation rate in 1999 will
be under 20%. Even if so, it would be extremely risky to lower the discount
rate for the simple reason that the inflation index is an important, but
still not the only, factor affecting the rate's value. A no less important
benchmark for any central bank (including the NBU) is the level of market
interest rates for commercial bank loans and deposits, as well as the level
of revenue from government securities. And if the officials were eager,
they could easily learn from banking statistics that commercial interest
rates do not follow blindly fluctuations in the NBU rate, but react sensitively
to the overall condition of the economy and, in particular, to the levels
of financial and general economic risk in Ukraine.
As of now, various sectors of the financial market show a wide gap between
the prices of money resources, with the difference between the most "market"
(bank loans to residents) and the most "non-market" (the NBU refinancing
rate) exchange rate being at least 80%. Approximately the same corridor
is being maintained by commercial banks between the rates on resources
attracted (deposits) and all kinds of loans to enterprises and banks. The
NBU discount rate is now holding back the hryvnia's spillover into the
currency market, but it hardly keeps the banks from lending for production.
Loans are not issued for other reasons, well known to all officials. So
it would be far more advisable for Cabinet and Presidential Administration
officials to handle the true cause of high interest rates, high financial
and systemic risks, and thus create the natural conditions for bringing
down the price of money.






