CREDIBILITY GAP OR WHICH HRYVNIA RATE IS MOST "TRUTHFUL"

For example, Mr. Yushchenko declared on several occasions, over a short period, that he hoped the populace trusted his judgment in running NBU (supposedly the way Germans trust their Bundesbank). This had an al most immediate effect on the extent to which people trust him personally.

It is hard to say whether he wanted his professional activities to become a kind of barometer for the official financial decision-makers. Be as it may, up to now cabinet manpower shifts — replacements of the Premier, Finance Minister, etc. — have been regarded as having minor significance compared to NBU Board elections and its President's public appearances, precisely what he had to say on a given situation.

However, Yushchenko's news conference last week served to alter some of hackneyed stereotypes. At long last the fact that the government and the National Bank could not act independently of each other was publicly acknowledged (something long taken for granted in all civilized countries), and that such coordination was an important element of the economic policy. Even if unintentionally, his commentary on the monetary market situation became a key domestic political event, although it boiled down to blaming the financial crisis on budget problems. And so his words that "our (i.e., NBU Board's) monetary policy has been adequate to the monetary market trends; under the circumstances one cannot assume responsibility for the hryvnia's untruthful rate" gave rise to more questions than it answered.

On the one hand, there is no denying that NBU's reaction to snowballing budget problems was adequate. Most importantly, it was situation-oriented. Thus, it is only logical to expect that the bank, after a positive market blip, will renew its efforts to stabilize the hryvnia and establish its "real" rate (which will be temporary, as everyone has come to realize by now).

This assumption is not contradicted by the word being spread about the NBU considering two rate-setting options in March: (a) stabilizing the hryvnia and (b) letting it be devalued, rather intensively, for the rest of the month. "Both options have advantages and drawbacks," NBU spokesman told The Ukrainian News, explaining that "devaluation will help exporters and stabilization will lower demand for national cash and dollars, while attracting more nonresidents to our hryvnia-denominated securities."

Meanwhile, money market operators think that the hryvnia's sharp devaluation served to increase, rather than decrease, NBU's hard currency losses, as a dropping hryvnia caused a greater demand for dollars in cash, paving the way for speculation and raising foreign investors' risks. In a word, experts believe that devaluation will not cause a lesser demand for dollars in the next several months, since this demand is regulated by factors beyond the NBU's and cabinet's control: foreign investors are quitting the market, while the population and those in the shadow economy are in a hurry to convert their savings in dollars.

Assuming that today's devaluation indicates dwindling financial support of the current economic policy, the NBU's silence, compared to its recent assurances in support of the cabinet's alleged market reforms, is surprising. Contrary to Yushchenko's declarations, no one can be sure that NBU will actually stop maintaining the hryvnia's artificial rate, thus dispersing the myth about reforms in Ukraine.

The government has for quite some time succeeded in keeping the money market stable, while enterprises' financial performance has been on a downward curve just as their reciprocal debts have increased, adding to soaring overall losses. At the same time, statements made on various occasions by various cabinet bureaucrats make it clear that the government has not yet developed a clearly formulated strategy to overcome the crisis. Some ministers think the current balanced fiscal policy should be discarded and start printing money (known as a surrogate money) to subsidize bankrupt enterprises. And even those opposing the idea (including the Premier) cannot muster the courage to take decisive, although unpopular, measures.

Premier Pustovoitenko said last week that the cabinet intended to forward a package of tax bills to Verkhovna Rada. In his words, these documents will help make better conditions for economic and sector adjustment programs, in a word, allow Ukrainian enterprises to function normally. However, considering the economy's devastation, these cabinet projects look rather one-legged; they are hardly likely to be taken seriously. What the government really needs, as always, is a clear-cut program of adjustment reforms, capable of solving the nonpayment problem, freeing the economy of barter, providing enterprises with simple and effective incentives so they can start making lawful tangible profits. Naturally, if the cabinet had any such program this would not have escaped experts and businessmen.

As it is, the cabinet has to face realities: in February, the state budget received only half of planned revenues, while wage arrears rose by Hr 199,000,000 from January 30 to February 20, bringing the total to Hr 5,356,000,000 (including, respectively, Hr 128,000,000 and Hr 4,501,000,000 at non-budget organizations; Hr 72,000,000 and Hr 855,000,000 at budget-sustained organizations and institutions). Pensioners are not likely to be overjoyed at their Hr 9.00 increase, since the Pension Fund's expenses by the end of the second ten days of February surpassed income by Hr 68,000,000, totaling Hr 629,000,000, whereas back pensions in the same period amounted to Hr 1,106,000,000.

The National Bank will not emphasize its involvement in today's policy of cosmetic reforms, Mr. Yushchenko's words that "in the event of a worsening market situation we could repeat the February scenario" may well be regarded as NBU's preparedness to refuse the cabinet support. Of course, others might interpret this differently, or just shrug it off, as is often the case these days.