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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 

8 June, 1999 - 00:00

Tomorrow Begins Today
Several weeks ago few if any had reason to distrust NBU Governor Viktor
Yushchenko saying that the hryvnia exchange rate problem had been finally
solved, since "there is a sufficient degree of confidence in the stable
level currently achieved" in Ukraine. Although analysts could have smelled
a rat even then.

Indeed, independent Ukraine has never witnessed an increase in NBU emission
without IMF approval in terms of loans given, yet this is precisely what
happened in late May. In other words, several weeks later both money-wise
and ordinary Ukrainian citizens became aware of the presence of freshly
printed 582 million hryvnias. Last week, even the Ukrainian banker decided
to revise the dollar rate. Oleksandr Prokopenko, senior Privatbank dealer,
told Ukrainski Novyny that it all started on Thursday May 27, producing
several days of peak greenback demand, pulling the hryvnia from approximately
3.923 to 3.945 (UAH/USD). First, because there was an emission of nearly
UAH 600 million, and also because people saw a gap in the cross rates and
started earning before the market reached the UAH/USD 3.945 mark. There
were also other factors at play. Currency dealers maintain that the start
of devaluation spurred bank customer demand for hard currency: "There was
plenty of hryvnias available and people decided to buy dollars before the
two percent additional import tax comes into effective on July 1," Ukrsibbank
senior dealer Dmytro Fedotov added. Still, most dealers are of the opinion
that the exchange rate will be stabilized several days after the jump,
even despite NBU currency regulation department head Serhiy Yaremenko's
statement that the bank "will not take any measures to enhance the hryvnia
rate," adding that "we have no economic factors to strengthen this rate.
These factors could consist in a well-regulated trade and payments balance,
but we have none."

The International Center for Policy Studies presented another Quarterly
Forecast on June 2, predicting a 31% devaluation rate during 1999, including
26% retail and 19% wholesale increment. Center experts attach primary importance
to the national currency exchange rate as an indicator of Ukraine's financial
stability, so their inference is that NBU monetary policy will be geared
primarily to manage this indicator. What, then, is one to expect from NBU,
following the logic of these experts?

First, the bank will avoid plummeting devaluation. Fortunately, NBU
expects the same. Serhiy Yaremenko points out that his bank has nothing
against devaluation, in principle, yet it expects a smooth, rather than
jumpy regress. "I want this process to be gradual, rather than occurring
as leaps downward," says the NBU currency department head.

Second, NBU will add to its hard currency reserves, being too low according
to international standards. Moderate NBU estimates say its hard currency
reserves will be $900 million by the end of this year (vs. $788 million
now). Third and last, NBU will not allow the hryvnia to strengthen because
of the negative consequences for exporters.

By and large, the ICPS forecast shows some promise and looks trustworthy
- unless one tries to guess further than the presidential campaign, for
if one does, there will be a host of possibilities with absolutely nothing
certain. How will the NBU behave when asked by the Cabinet to buy "a few
more internal government bonds?" For the time being, NBU has bought as
many IGBs as it could under the budget law. But there is a Cabinet resolution
saying the lawful debt limit can be lifted 2.4 times. No one except NBU
will borrow that much: some UAH 1.5 billion.

Or take another collision; how big should be an emission, meaning that
someone can "steer" the exchange. The budget law reads that the monetary
emission is to be 20%. The NBU's monetary strategy (and IMF memorandum)
says it should be 10%. More so, by trying to reconcile the two irreconcilable
targets - allowing for the assumption formulated by Mykhailo Savluk, Ph.D.
in economics, that the NBU will have to spend UAH 2.9 billion buying IGBs
- it follows that the money mass increment will be 35%, not 20%, along
with price jumps and the government's inability to keep the currency corridor
within planned limits.

Once again, all this could happen after the presidential campaign, regardless
of who becomes President. Remarkably, the ICPS forecast was developed without
any adjustment for figures presented by the next chief executive; its authors
suggest that we continue with the existing state finance control trends.
The Center's young economists, among other things, are convinced that whoever
becomes President will have to deal with the same problems: exchange rate
stability, paying the staggering public debt ($3 billion), and controlling
inflation. In addition, they believe that the winner of the presidential
race will have only one option for solving the multitude of problems, large-scale
monetary privatization that will produce a much-needed $1-2 billion and
prevent the Cabinet's otherwise unavoidable announcement of default.

Curiously: the current President does not regard the existing scenario
for preserving financial stability the only acceptable one. Among other
reasons because Mr. Kuchma has suffered more than one fiasco going through
the motions of carrying out his privatization program, unable to supply
all of his retinue's needs. This is probably why Administration experts
are now busy trying to come up with an alternative way to lead Ukraine
to its nomenklatura-supervised prosperity - e.g., affixing the hryvnia
rate to some freely convertible basket or another. Presidential Aide Halchynsky
says that this concept "correlates" with Mr. Kuchma's stand, namely a strong
monetary unit to secure a stable economy - yet such a decision can be made
only if and when he gets reelected. "Given a weak regime, in the absence
of effective coordination between the Cabinet and Parliament, this could
only yield a negative result," he adds.

It is anyone's guess whether this scenario will be played out. One assumption
sounds feasible enough: the President's team, after winning the October
race, will stage a big political tender with international financial creditors.
Hryvnia rate adjustment to freely convertible currencies will be mandatory,
of course, but this will call for tangible political concessions, primarily
giving up an independent monetary policy. Will this be bad or good for
Ukraine? It will all depend on Ukraine's independent policy at the time.
If this policy remains the way it is now, especially with NBU's Oversight
Board actively meddling in, it will be good. Incidentally, there is no
positive evidence that Anatoly Halchynsky will offer such recommendations
only to the current President. It is possible that his current boss will
have to step down, leaving his successor a very "rich" legacy in terms
of inflation, devaluation, etc.. so that surrendering monetary independence
will be in the cards in any case.

By Iryna KLYMENKO, The Day

 

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