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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 

29 May, 1999 - 00:00

No Alternative: Economy Faces Either Inflation or Money Hunger
The sooner the presidential elections, the more hopeful and optimistic
information we will receive from the authorities and the harder it will
be for us to understand what is going on in reality.

For example, last Tuesday President Leonid Kuchma announced he intended
to sign a new package of economic decrees aimed at stabilizing the economic
situation in this country, and a similar statement was also made on Wednesday
by Prime Minister Valery Pustovoitenko. But does this mean the economic
situation in Ukraine will get any better? Recall the President's hectic
efforts last summer to form a "legal field" to sign the memorandum with
the IMF, and promulgated thirty or so economic decrees. Since those decrees
were written by different groups of political supporters, they clearly
ran counter to each other. Moreover, they were not supported by Verkhovna
Rada. This resulted in the long-awaited crisis that broke out in the fall,
followed by stabilization. Now we can expect another a wave of decree-making.

Take an example from real life. According to an instruction dated May
24, the Cabinet of Ministers obliged the central and local authorities
to pay as much as possible for social payments in the last week of May.
Reassuring, is it not? But is it doable? If it is, then how can it be done
if state budget revenues fell dramatically in May? Minister of Finance
Ihor Mitiukov says, "The budget is in a very poor state. We have lost at
least UAH 300 million because of the holidays. I think May will be one
of the weakest months of this year, as far as new budget revenues are concerned...
We will consider urgent measures to rectify the situation. The point is
arrears keep growing, and only 62-63% of the taxes due are being paid."

Incidentally, similar instructions were issued on April 11 and 24, with
an eye to speeding up social payments made by the Cabinet of Ministers.
In April, social payment arrears from the budgets of all levels actually
dropped by UAH 150 million or 4.2% and came to 3995.4 million at the beginning
of May. In the first quarter, however, social payment arrears from the
budgets at all levels increased by UAH 284.8 million or 8.7%. And one more
"but." According to Interfax-Ukraine, the financing of the consolidated
budget deficit rose from UAH 14 million on April 21 to UAH 582 million
on May 11. National Bank (NBU) funding of the Ministry of Finance (i.e.,
emission) has already reached UAH 926 million this year. The NBU has thus
exceeded the government funding limit by over 900 million, which was caused
by meager foreign earnings and the absence of domestic demand for bonds.
We can all see the effects of such monetary and fiscal policies on the
market for consumer goods and services.

Sources at the price-formation departments of several oblast administrations
told the Ukrayinski Novyny News Agency that the weekend before had seen
an abrupt jump in the prices for foodstuffs, including sugar, flour, macaroni,
and cereals. And although local authorities hastened to note the ensuing
price drop, they most likely indulged in wishful thinking: nothing of the
sort has been observed, at least not in the capital. It in fact cannot
be seen because of the continuing production slump and the upward tendency
in flooding the market with unsecured money.

"It is mainly sugar, flour, and cereals that have gone sharply up in
price," said an expert of the price-formation department in the Mykolayiv
oblast administration. The price of sugar has risen, on the average, from
1.5 to 2.5 hryvnias/kg, that of flour from 0.6 to 0.8-1.1 hryvnias/kg,
that of buckwheat cereals from 1.7 to 3 hryvnias/kg. Local experts put
the increased foodstuff prices down to a panic buying caused by the negative
expectations in connection with the May frost spells being interpreted
as foreshadowing a poor harvest. "People artificially created demand to
which the market reacted instantly," said an expert from one oblast. "The
people has begun to fear expected negative results of the late frost and
to actively buy up foodstuffs, to which the wholesalers reacted immediately,"
said the representative of another oblast.

By all accounts, it is not at all important what triggered the price
rise. The important thing is that the populace has ready cash to buy up
the goods at higher prices. Meanwhile, a number of regional bosses seriously
contemplate the introduction of fixed prices for foodstuffs. For example,
the Kharkiv oblast administration, according to a source at its price-formation
department, will regulate foodstuff prices. "In the next few days the legal
organs will an instruction on price regulation in Kharkiv oblast," the
source told Ukrayinski Novyny on May 24.

It should be noted the syndrome of administrative intervention in bazaar
relationships will end up as sadly as administrative regulation did in
Soviet times. Our local leaders must have forgotten what could come of
this. Or perhaps on the contrary, they wanted to learn a lesson? Fortunately,
they do not have to rummage through old newspapers. Suffice it to glance
at the latest news from Belarus, where that country's strongman has launched
a new offensive on price hikes. President Alyaksandr Lukashenka gave a
full vent to his anger at a government meeting on May 18. "We have a manageable
state, we have strong power, we are capable of carrying out any measure
related to price-making," he said. Then two days later on May 20 he issued
a decree on tighter price controls. Under the decree, the government is
to set limits on price variation within a month. If an enterprise intends
to raise prices higher than the set limit, it will have to register these
prices with administrative bodies on the basis of a feasibility report.
Raising prices above the limit index without proper registration entails
transfer of the obtained income to the budget and levying a fine twice
that of the income derived. Why have prices become by far the central problem
of the Belarusian economy? Inflation was 283% last year. This year, inflation
was planned at 5-6% a month but in fact was 15% a month, and only in April
did it drop to 8%. Consumer prices rose by 48% in the first quarter, and
prices of industrial goods went up by over 78%. Most noteworthy is that
until recently prices were regulated on the consumer market. But now the
situation has changed: since the beginning of this year, prices in the
industrial sector have been outdoing those in other sectors. And nobody
can curb this process.

Why? Because the authorities artificially hold back the exchange rate
to "save" consumers from fuel price hikes. Since the rate is extremely
overrated - the market rate is twice the official one - this causes deformations
in the economy. Shortages and endless lines for eggs, butter, and other
goods became a kind of calling card for the Belarusian economy late last
and early this year. Now there are no lines. Price rises have beaten shortages.

However, Ukraine will not necessarily face such global results of price
control. As soon as the IMF and other lending organizations furnish loans
to the government, the events of six months ago will repeat themselves:
after a speedy emission, the NBU will simply reduce the amount of money
in circulation. And where there is no empty money, there are no price rises.

By Iryna KLYMENKO, The Day

 

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