Economy for the Year

Looking back at the past year with its failures and troubles (for some reason success or accomplishment does not come to mind), one is tempted to suggest that something is wrong at the conservatory. Maybe something should be changed there to forget, once and for all, about the story of the year, the financial crisis. Incidentally, polls show that some 30% Ukrainians brace themselves for the worst in the New Year and experience indicates that they are right. And there is no reason to consider this year an exception from the rule.

Tracing the experience of several dozen crises in various countries over the past thirty years, resulting in the plummeting of national currencies, makes it clear that all have been caused by the same disease. Poland's Prof. Marek Dombrowski singles out two main reasons for this common peril: first, budgetary fiscal imbalance (when little is collected in taxes and budget spending is heavy), responsible for 70%-80% of all crises, and, second, weak banking and industrial sectors (when neither enterprises nor banks are made strictly liable for their debts, and when they cannot resist the temptation to engage in abuses). According to him, for some countries one of the above preconditions sufficed also, whereas both were at play in Bulgaria, Russia, and to a lesser degree in Ukraine.

There is hardly a resident in Ukraine who has not heard that the unbalanced budget is the cause of all troubles. Nor is there a single politician in power, who has not hoped at least once to bypass this postulate. In fact, one could generalize that the entire economic history of Ukraine is a sequel to attempts to gyp the economy, appropriating something one has not earned and never repaying what one has borrowed. Thus, since 1992 the country has never had a balanced budget, although the deficit-financing schemes, aimed at preventing expenses from outrunning revenues) have been regularly revised, which was in the end presented as the implementation of the market reform.

In the meantime, Dr. Dombrowski's diagnosis is relentlessly precise: fiscal deficit, in accordance with the axioms of the macroeconomic theory, has always produced and will continue to produce financial - and political - crises. True enough, the emission financing of the fiscal (and budget) deficit in 1992-1993 resulted in Ukraine's now classic hyperinflation. Its other, "nonemission" variant breaks up into several projects (tested in Ukraine at different periods): financing by domestic investors buying government securities (at the turn of 1996), financing by nonresidents, also buying government securities (1997), and the government taking out loans with nonresidents (1997 and early 1998). However, all these projects invariably encounter the Cabinet's inability to collect taxes, turning into another classical phenomenon: default (so far experienced only by Russia) or returning to the good old financing by central bank monetary emission, sidestepping default the Ukrainian way (autumn of 1998). Economist Dombrowski stresses that printing money under state contract sooner or later becomes the only alternative to a balanced budget, adding that Ukraine began its descent to emission not in 1998 (when the issue started being openly debated) but much earlier, toward the end of 1997. Hence, last year's fiasco with the nation's currency, growing inflation, drop in output, and declining individual incomes were all the inevitable result of the spineless, irresponsible budget policy invariably carried out in Ukraine.

There is no doubt that this year's budget deficit will have to be financed by a monetary emission, and that there will be a substantial budget deficit, especially in the summer, before the elections, no matter what is being said to the contrary by those on high. So how are they going to finance it? The official picture is as follows: in 1999 the Ministry of Finance plans to place bills of exchange and internal bonds worth Hr 2,120,000,000. Money market operators are more realistic. They believe that the government and National Bank need not wait for domestic or foreign investors to return to the Ukrainian market either, as the former do not trust the government and the latter will not even think of it. In a word, most likely there will be no "nonemission and noninflationary financing." "Nonresidents will never return, except perhaps the most reckless speculators. There is a very high probability of default on the foreign debt in the New Year and it will scare off people from the City (of London)," the Ukrainian News Agency was told by the head of the securities department of one of the banks that used to service a large number of foreign investors.

This prediction is echoed by IMF forecasts proceeding from realities, rather than guessing, as is customary in Ukraine. It maintains that the economic recession in Ukraine will continue next year, despite the efforts to overcome the financial crisis which progressing in accordance with the Russian scenario, according to the IMF World Economy Forecast published December 21, adding that in 1999 Ukraine's output could drop by 3.5% compared to 1.7% in 1998 and inflation increase from 11% to 32%. It also states that apart from reduced trade with Russia, the situation in Ukraine is affected by its unbalanced budget and inadequate reform. Despite the IMF-approved three-year loan program worth $2.2 billion, the Ukrainian economic development forecast is pessimistic," stresses the document.

However, the 1999 fiscal policy project composed by the National Bank of Ukraine does not look that disheartening. Still, the NBU Governor stresses that monetary policy can be optimized this year if the bank makes the government a loan by purchasing domestic bonds. "If despite the ongoing crisis we have the unique tendency of increasing public confidence in the hryvnia - as is the case now - we will never want more than 7%-9% annual devaluation," he says. In other words, the National Bank wants to stop financing budget deficit by emission. But who will ever let them?

Practical politicians in neighboring Poland have very strong doubts. Polish economists Stanislaw Gomulka and Marek
Dombrowski believe an optimistic forecast possible only in the presence of one factor: elimination of budget deficit (by comparison the National Bank proposes not to finance the deficit). Leszek Balcerowicz, former Premier of the shock therapy period and now Polish Finance Minister, goes even deeper. He is convinced that only radical budget (tax and social) reform can effectively cure the postsocialist economies of periodic crises. However, all this is a long way from us. Harvard International Development Institute consultants advise Ukrainian legislators to at least enact a law restricting the interest on government loans in this election year.

Of course, one could hope for the Deputies and voters to face realities and start reforming the conservatory - but don't bet on it.

By Iryna KLYMENKO, The Day