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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert
13 November, 2012 - 00:00

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ECONOMY FOR THE WEEK

Borrowing Because There's No Other Way Out

Or how much do "political steps" cost?
Until very recently, the currency exchange rate was the main sore point
for the Ukrainian authorities. In one way or another everything in Ukraine's
financial sphere was connected  with the task of maintaining the exchange
rate at all costs: the hryvnia deficit, increased budget debt, and discontinued
bank loans to enterprises. "To put it mildly, these were desperate measures,"
National Bank Governor Viktor Yushchenko summarized.

Now that the Rubicon has been crossed, the currency market has been
somewhat stabilized, and the IMF blessed the government with a new loan
for further exploits. The authorities lost no time in reacting: "Now we
are already able to say that this kind of policy may be somewhat weakened.
International support has been won, and the dynamics of hard currency earnings
returning to Ukraine slightly surpasses our expectations. These two components
of the currency market show that the supply of hard currency is being formed
at an optimistic tempo," the National Bank governor told journalists last
week. Thus, "the National Bank can ease up monetary pressure on the hryvnia
rate, and, in particular, reduce a little the discount rate and decrease
reserve requirements on banks."

It is quite logical that, having done away with one "eternal" problem,
they at once turned to another. Last Monday, addressing a meeting of National
Bank governors, heads of the largest commercial banks, and government representatives,
President Leonid Kuchma said that if we do not find in the immediate future
a mechanism for attracting bank loans to the real economy, Ukraine will
face "catastrophe." For example, in February the credit rate rose from
55.2% to 58%, with inflation 0.9% in February and 2.5% since the beginning
of the year. Mr. Kuchma also stated that owing to the fall of the hryvnia,
prices of industrial goods have risen by 35.3%, while loan volume has fallen
by over 20%, with interest rates skyrocketing by 47.7%.

It is noteworthy that, according to the German Consultative Group, the
IMF-program's dual task of controlling currency exchange rates and the
money mass (the latter has an impact on interest levels) is insoluble.
In plain terms, concentrating on protecting Ukrainian's money, the National
Bank loses flexibility in monetary policy and is not in a position to fundamentally
affect the level of nominal interest rates. However, the NBU itself is
all too aware of this. Mr. Yushchenko says, "Reduction of interest rates
is a political step toward a situation when the money price may drop, thus
making money more accessible to the economy."

But then, on what does the price of loans to the real sector depend?
For if you know the source of a problem, you can deal with its causes rather
than its results, more so, by political methods. It is common knowledge
that the economic resources of any society are always finite, and one can
only increase the reserves of material capital by partial rejection of
day-to-day consumption. In other words, the people who dare refrain from
consuming something today expect to receive in the future much more than
they might consume today. This means that the value of an interest rate
is only the price of time determined on a market where current benefits
are exchanged for those of tomorrow. This is in fact the essence of the
credit market.

Experts usually name two main reasons for high interest rates: a high
share of government borrowing which diverts money from the industrial sphere
and the high risks of production. However, the issue is not confined to
these two reasons. First, since the times of the Soviet economy, the broad
mass of the population have in fact had no motive for accumulating investment
funds. Money was saved for expensive purchases but not for investing in
enterprises or securities with the aim of increasing consumption in the
future. Now these people, facing the necessity to make managerial decisions,
again opt, by force of inertia, for current consumption to the detriment
of public capital accumulation.

Secondly, the accumulation of funds is being hampered by the extant
system of ownership relationships. Privatized enterprises have, in addition
to shareholders, a host of economic subjects who are authorized to intervene
in the work of an enterprise and earn incomes off it (both legal and illegal).
Various regulating structures, starting with the local administrations
and tax inspectorates, and ending with public hygiene, firefighting, and
other services, have virtually become the partial owners of enterprises.
It is in this capacity that they strive to withdraw resources from the
enterprise as soon as possible, before others can. As a result, nobody,
even the legal owner, is interested in increasing the capital of an enterprise,
but all are bent on consuming it as fast as they can.

Thirdly, the tax system now in force encourages firms not to produce
profits rather than to reinvest them. Moreover, the system is such that
it tries to pull all the money out of an enterprise well before any real
profit is assessed. In this respect, there is, of course, no question of
accumulation.

Can we find a way out of this investment crisis? Experience shows that
many countries have successfully solved this problem, but only if they
truly wanted to solve it. And here? Late last year Ukraine heard wide-ranging
debates on who the NBU will target for loans. At first they wanted to give
money to banks so that the latter could refinance the real sector. But
in the end, all additional loans go to the government, only to be consumed,
not invested.

However, last week some indications appeared that the government is
ready to slightly "nurse" the business climate in Ukraine. The point is
that the government has at last made up its mind not only to somewhat restrict
the interests of the resource consumers it protects but also perhaps to
curb the appetites of the self-styled enterprise "co-owners." In particular,
the draft bill On the Procedure of Compulsory Repayment of Debts to the
Budget and Governmental Targeted Funds provides for the cancellation of
current provisions whereby banks can, upon receipt of orders of the relevant
organs, transfer money to pay budget debts without a court decision or
knowledge of the enterprise involved; at the same time it envisages a drastic
increase in the property liability of enterprises for non-payments. It
is planned to submit the Tax Code to Parliament in early April, whereby
the VAT and profit tax are subject to a reduction of from 20% to 15% and
from 30% to 20% respectively. Another bill in preparation provides for
reduction of the state fee for submission of lawsuits to recover overdue
debts from debtor enterprises and a simplified procedure for instituting
court proceedings. It is also planned to cut from three years to one the
term of lawsuit limitation for recovering overdue debts.

The participants in the credit horse-trade will soon show if the government
manages to fulfill what it planned and whether it really strives to do
so. Incidentally, a week ago the risk premium was 120% per annum, twice
as high as the so-called "not-yet-political" NBU price.

By Iryna KLYMENKO, The Day

 

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