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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

One Hryvnia, Two Currencies

13 November, 2012 - 00:00

Events on the Ukrainian financial market are developing so fast and so unpleasantly that even a happenstance thought about the second anniversary of the hryvnia's introduction sounds like a joke. And how well it all began.

On September 2, 1996 the country began (and apparently still continues) to say goodbye to the coupon-karbovanets: no fuss, no panic, or buying up old products from store shelves. This action went so painlessly because it was nothing but the withdrawal of unearned profits. Moreover, there were just as many coupons on the market as it was possible to issue. Finally, for the first time people believed in the honesty of the government and NBU, and they did what the authorities told them.

The ambitious project of monetary reform was not limited to just changing the banknotes' appearance. Its second part had even greater scale — to reduce tax pressure, balance budgets, to revive industry. No one remembers now that in 1996 the experts put their hopes for a strong hryvnia on the program of economic growth developed by Pynzenyk's group and bungled by Lazarenko's. They considered that without economic revival monetary reform would be nothing but crossing five zeros off the banknotes. Such a prediction was blasphemy then, but now this is a real possibility.

A year ago NBU head Viktor Yushchenko spoke about the achievements of the post reform period. He declared that the monetary reform had done its job well, because the optimal parameters of monetary supply (with average 2.8%-3.1% per month) after the hryvnia's introduction made possible the renewal of industrial enterprises on one hand and to guarantee a stable anti-inflation policy on the other. The bet on a rational monetary policy, on turning entrepreneurs and businessmen into the consumers of this policy, should have been the main task of the NBU and government. Unfortunately, it did not. The salubrious tasks of the monetary reform such as creating a new resource basis for the economy and especially for various sectors of Ukrainian industry, able to compete on the market, remained on paper. The businessmen who remained the most powerful political force in Ukraine were never terribly interested in "real money," offered instead of "protectionism in the form of fetishized legislative norms".

Not seldom the NBU is accused of creating obstacles for the Ukrainian economy. But the real creator of such obstacles should be defined using a different criterion. The NBU reminded one and all that it was government's and Parliament's business to restructure economy. The government has made numerous announcements on its ability to carry out an active structural policy. But if the actual economic structure does not conform to the planned scheme, it means that either its management decisions were incorrect or its publicly announced plans were false.

Already last year it was clear that the economy had split into two disproportional and unequal layers: a progressing export sector and a stagnating domestic market. The export sector also split into a number of layers. Immediate manufacturers of exported products seldom were profitable de jure. Operation there never stopped because de facto these enterprises were unprofitable parts of bigger profitable corporations. Finally, companies controlling the directors and money flows of unprofitable enterprises made up the list of the few domestic consumers who had use for a stable national currency. That was the picture one year ago. But the economy underwent a metamorphosis by September 1998.

Financial complications started last October. The hryvnia remained unshakable although the economy continued to split into ever newer strata. The miracle of the hryvnia's stability was miraculous only to those who were denied access. Knowledgeable people understood everything and tried to warn others. In the middle of last year there was an attempt to pass a growth package (with cut wording) under a different title, but it failed. Then there were elections and, later, crisis. All the time the financial market remained stable only because the hryvnia mass was balanced by foreign currency loans. The NBU impelled the financial market as its currency reserves fell. By September 1998 currency and stock markets were adjusted so that one could hardly address them as markets. But let us return to the changes in the economy.

The government decided to start work when it turned out that industrial growth in 1998 would be measured in tenths and hundredths of the previous one. The remarkable battle during all of 1997 to fill state budget coffers made even worse trouble for actual producers and gave a boost to forming the "budget" sector of economy. Under different conditions such a division of the economy into budget, shadow, and intermediary would appear comical. But in our case the huge monetary mass serving these sectors prevents us from being skeptical. For example, the budget sector takes about 75% of all circulating money. This figure is impressive, especially, if you take into account that offices do not manufacture anything, and the monetary demand price here reaches 70% per year. Then, the shadow economy attracts about a half. That is not so bad because here goods are produced and the price of money does not exceed 20% per year in hard currency (about 35% in hryvnias). Naturally, the situation is the worst at the small and large manufacturing enterprises: there is no money let for them and the price is too high — 80%-100% per year against the 15% needed. But they also have found their own solution: barter operations account for 50% to 70% of their accounts.

In a word, summarizing the two-year hryvnia usage calls forth mixed emotions. A single national currency now exists in countless visages. And it is no surprise that there will be as many hryvnia types as there are NBU clients, if the National Bank is the only guarantor of financial stability. As for its mistakes, it has been political, not economic. If not only short circle of experts knew about the NBU's opposition to the rate introduced, the hryvnia's health would have been much stronger and less contingent on diminishing currency reserves.

 

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