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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

Economy for the Week

1 December, 1998 - 00:00

The Government's Invisible Hand in Our Conveyor-Belt Crisis

 

Last week was not marked by many official economic developments but
teemed with hearsay and forecasts. In the Parliament cloakroom the main
topic was whether the hryvnia would drop to six to the dollar by mid-December,
and the discussion organized by the Market Reform Center and Friedrich
Ebert Foundation, having nothing to do with the gossip, nonetheless convinced
one and all that the suggested scenario will actually be played out.

The short history of the Ukrainian crisis began at the end of 1997 when
the Cabinet suddenly discovered it could not afford to pay off Western
investor fleeing the Ukrainian market. The crisis was put off using fresh
foreign loans and an issue of domestic bonds. The next upsurge of the crisis
fell in the spring of 1998 when the hryvnia again tottered (there were
too many hryvnias after converting previously borrowed foreign cash), and
when domestic investors began leaving the market. It was then the National
Bank's reserve was put to use and the IMF was begged for help under its
loan program. The next August upsurge was greeted by a Cabinet bereft of
confidence and reserves. True, it bullied the Ukrainian banks and the remaining
unwilling foreign creditors into agreeing to deferred payments, whereupon
it was solemnly announced that the government had endured the hardships
and won.

However, the experts who gathered last Monday to discuss "The Discrepancies
of the Financial Crisis in Ukraine, its Nature, and Ways to Overcome it"
viewed this victory in an altogether different light. Moreover, Viktor
Pynzenyk, People's Deputy and former Deputy Premier, said that "the period
of relative quiet is temporary" and that people in Ukraine should "prepare
for the worst." Of course, such forecasts coming from a politician may
not sound impressive to some of our learned readers. And the same was true
of one of the participants in the discussion, Deputy Chaika who accused
Messrs. Pynzenyk, Suslov, and Lanovyi (they all took part) of being involved
in the crisis. All this made expert views even more interesting, since
the experts hold no office in any executive branch structures. In this
case, expert opinions were voiced by Valery Heyets, director of the Institute
for Economic Prognoses, Volkhart Vinsentz Ph.D. and member of the German
Consultative Group with the Ukrainian goverment, and Oleksandr Suhoniako,
head of the Association of Ukrainian Banks.

To demonstrate that Ukraine is in a permanent state of crisis, Mr. Heyets
cited statistics relating to effective yields in various sectors of the
economy from 1992 through 1997. He believes that this state finance dynamism
compared to the rest of the economy gives one a full picture of the reasons
for the crisis and ways to overcome it. Thus, the nonfinancial sector,
including industrial enterprises, accounted for a mere 5% in 1997 of what
they were in 1992. The financial sector, after the 1993-94 upsurge (233%
and 131% respectively), registered 22.8% in 1997 of their 1992 level. The
household sector - i.e., individual incomes - dropped to 42% of what they
were in 1992. The state administration sector is the only one never to
have shown lower incomes: 130% in 1993; 143% in 1994; 136% in 1995; 124%
in 1996; 112% in 1997. What does all this mean? "Compared to all the other
sectors," says Mr. Heyets, "the state administration sector that has never
produced anything of value has never experienced any crises; it has rather
created them for the other sectors." He also thinks that over the years
of "reform" in Ukraine no one has taken a serious approach to overcoming
the financial crisis; rather, efforts have been made to cushion its aftereffects.
The Institute for Economic Prognosis's estimates show that the government
will spend 4.7% of GDP to service the domestic public debt and 7.3% for
the external debt, and this considering that the government has no stable
income source in the form of revenues of industrial enterprises translated
into budget revenues.

The other participants in the discussion, each in his own field, agreed
with Mr. Heyets on the main point - to get out of its crisis Ukraine must
activate the real, not virtual reality economy. Only then will the government
receive real budget revenues, not figures on paper, and will be able to
pay its even more real debts. Otherwise, the crisis will become endemic,
depending not so much on peaks in paying government debts as on the strain
on the money-printing machines. Unfortunately, the experts agreed that
the government does not offer an alternative.

Summing all this up, the Ukrainian government should not think that
it runs the country; as always, the country is run by the laws of economics,
and these laws say our future does not look good. Before long the government
will work to get inflationary incomes (for want of any other), the National
Bank's resistance to hryvnia devaluation will be broken (NBU is still resisting,
although perhaps not as actively as at first), inflation will approach
20% monthly (something we have almost forgotten), in the end leaving the
government with a worthless hryvnia, privatized National Bank, and all
the rest with their dollars.

Finally, Herr Volkhart Vinsentz was asked by The Day last Thursday
to share his version of the temporary nature of the foreign exchange quiet.
"The worst thing would be if everybody continued pretending that nothing
has happened while debts continued to snowball. The budget is apparently
unable to meet the government's many commitments, and it is as apparent
that the limits of what is going on are set on the national frontier, because
people abroad are not inclined to take part in this game. Thus, if nothing
changes, yet another crisis will happen. In other words, everything depends
on whether or not any efforts are made to liquidate this "virtual reality
economy." If not, everything will depend on the patience of Ukraine's creditors:
Russia, IMF, and other donors." And how long the Ukrainian people will
put up with such leadership, I might add.

"Incidentally, the next installment of the IMF loan may be provided
later than scheduled," Presidential Adviser Valery Lytvytsky told the Ukrainski
Novyny Agency on November 23. "We can and must receive this installment,"
he added. It is interesting to note that the IMF mission left Moscow last
week without granting Russia its longed for loan of $4 billion. Of course,
the $78 million for Ukraine is no comparison to $4 billion for Russia,
but the amount is not the point. The point is what kind of economy is to
be sustained by this money.

 

By Iryna KLYMENKO, The Day

 

 

 

 

 

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