IS "STRONG MONEY" IDEOLOGY COMPATIBLE WITH WEAK GOVERNMENT?

All attempts of the Cabinet to overcome the financial crisis have proved abortive to date. Moreover, themeasures being taken beget new problems and discrepancies. Most people in Ukraine cannot grasp the objectives or motivation by which the institutions of power abide, so they address their grievances and questions to the single institution which is called upon to secure  the national currency's stability, the National Bank. The fact remains that Ukraine is suffering from a bad case of economic crisis and its financial problems are among its manifestations.

The Financial Times points out in one of its recent issues that the threat of financial collapse is still present in Ukraine, adding that not only the Cabinet and NBU are the ones to blame, but also IMF and other creditors. The World Bank is not that pessimistic. It agrees that debts are being effectively restructured and the hryvnia rate "smoothly and flexibly" lowered, yet WB departmental head P. Siegelbaum declared last week that the crisis will not be mitigated without essential economic reforms.

So how does the National Bank of Ukraine influence the crisis? Can it really stop the devaluation? Is it worth struggling for "strong money" with the rich and the famous showing no will for reforms? These and other questions were discussed by The Day's round table involving NBU Governor Viktor Yushchenko, his macroeconomic policy adviser Viktor Lysytsky, and press service head  Dmytro Rikberg.

"For several years NBU and the Finance Ministry has repeatedly announced Ukraine's premiere on the Eurobonds market, yet the Cabinet  has turned down proposals from such reputable investment companies as SBC Warburg and JP Morgan to secure 3-5-year Eurobonds at 9-11%. Instead, the government accepted short-term and more expensive loans from Nomura and Merill Lynch. Why?"

"Let me explain the NBU tactic at the time. After studying the international monetary market situation early in 1996, we decided  that the Japanese  market offered the best loan opportunities for Ukraine, so we negotiated them and reached appropriate agreements. It was also necessary to determine the Ukrainian borrowers: Finance Ministry or NBU. It was very important because it had direct bearing on costs and confidence... We wanted NBU to act as the borrower. Instead, a commission was appointed, made up of officials from seven or eight government institutions. Finally, the whole matter was placed under the Finance Ministry's jurisdiction and it proceeded to work out different projects, including the ones you have mentioned. But then NBU had practically nothing to do with them. In certain transactions NBU was  reduced to the role of an operator or depository. However, regardless of who did what, all of us ought to have shown much better performance, in terms of organization, borrowing ideology, market strategy, and orientation."

"What makes a national currency stable? In our case it is obvious that a rigid monetary policy cannot keep the hryvnia from dropping, isn't it?"

"Do you know why our central bank is National, not State? Because a stable currency is badly needed by the government, corporate business, the man in the street, and politicians. Money is the only true criterion of our work and there is only one structure that can determine the parameters of this stability and changes in the cost of this money and all goods, in terms of the economic policy of the year and budget deficit. It is the central bank. Of course, budget programs and economic parameters are to be coordinated with political structures. But then the National Bank steps in to develop the relevant vehicles and tools to secure the implementation of goals that are set by political structures, not the bank.

"NBU is aware that monetary policy alone cannot keep the national currency stable. One can practice an excellent monetary policy, but in the presence of a large trade gap or state finance mismanagement with the attendant payments deficit a country is doomed to hyperinflation. The same applies to fiscal policy, and so on.  The monetary policy is nothing more than just a backdrop for economic processes.  Everyone should finally realize that the National Bank does not create money: the National Bank functions properly only if industrial output goes up and there are regular gold and currency revenues.  If these conditions are not in place, then...

"Regrettably, Ukraine has not been spared the effect of  certain causal dependencies, as a weak national currency caused an uncontrollable deficit, emission did weak currency, followed by another emission... I think that this bitter lesson has been learned  by a very large part of Ukrainian society, including quite a few politicians. Therefore, proposing another  emission under the circumstances  is unthinkable. We can confidently state that the negative processes were  not triggered off by emission and this is not the problem we are faced with."

"Is everybody firmly convinced that inflation is a road leading nowhere? How about the President and his statement when in conference with leading economists? He said no one can be sure now that the National Bank will keep the currency corridor intact or that this strategy is the only correct one. Actually, he hinted that there are other opinions about the NBU foreign exchange policy. What do you think?"

"Whoever says that emission does not necessarily mean inflation is wrong. In 1997, NBU resorted to emission, but did it in synchronized, carefully measured doses. You are not likely to remember any exchange rate jumps, although we know that there were some. Our synchronized monetary policy made a great many people trust their national currency and last year we registered almost one billion increments in bank deposits. In other words, 45% out of every NBU emission turned into cash, yet only several weeks later would this money return to the banking system where it would be channeled into financial markets, particularly the government securities one.

"NBU has every reason to state that the current devaluation level is a very substantial response  to both external (Russian and world) factors and internal ones. In terms of balance, this response is arithmetically sufficient. We have already responded to trade and debt disproportion. The only remaining factor depends on us only. Let me recall of past world financial tragedies, I mean George Soros' analysis. Which of the countries suffered the worst? Those that hoped to overcome the crisis by letting the exchange rate loose. A boom would follow and the government would discard the method of conserving critical phenomena, but the response to the situation would no longer be like thependulum which gradually slows, shortening the amplitude. On the contrary, the crisis would become like a concrete-piercing shell, penetrating the nation's economic walls. We are still under the illusion that once we let go of the exchange rate things will eventually straighten out by themselves. Unfortunately, realities prove otherwise.

"About the NBU stand under the circumstances. If our economic factors were not blocked we would have no reason to be all out to defend the hryvnia. Talking of things beyond NBU's control, a system of counterweights is being used to just contain the situation. This is number one. Number two: those upholding different strategies refer to the 1992-93 policy, all those committees for tenders and other things, but none seems to remember that the Ukrainian banking system knew no depositors or global creditors in 1992. Just imagine: tomorrow all Ukrainians with their three billion hryvnias worth of deposits will be told that there will be no restrictions on the exchange rate from now on...  I don't think that this is a problem faced by the National Bank only. We will overcome it once we realize the true value of the depositor and combine all our efforts."

"Could you say exactly whether the existing foreign exchange procedures will be retained? Or maybe the National Bank is working on a multiple rate vehicle (export-import-interbank rate), as is the case with Russia? How long will hard currencies be allocated on the Ukrainian interbank monetary market, especially considering that bidders are said to have to bribe their way to tenders?"

"Let me ask you something in return. Why do you think the National Bank refused to control contracts as such? Why did we have to adopt precisely this approach? If we understand the reason why all this is being done, that the very factor damaging the exchange rate is a category that can be shifted in time, contained, and disposed of as a factor, let us roll up our sleeves. If we agree that this factor is there to stay, woe unto that central bank which tries administrative procedures. We will be taken  hostage by that very instrument and the outcome of such policy will be disastrous. Remember: we have three times changed the norms of compulsory reserves and four times stock exchange payment procedures. We could see the effect of every such decision. But the trouble is that a number of factors are being formed beyond our control, enhancing or weakening our efforts. As for the NBU tactic, we understand that our bank is probably the only such executive institution. It is too early to say whether this means our victory or defeat. Today, we proceed from the understanding that by adapting the debt-servicing market to this situation, containing and regularizing government spending and budget disproportion, preventing the nonresident from pressing the hryvnia, and renewing the stock market, we stand a pretty good chance of getting out of the crisis without considerable damage. On the whole, the components correctly suppressing  hryvnia demand by 70-80% are outside the National Bank, but we must adhere to an appropriate ideology.

"Modeling economic growth is no problem in macroeconomics. Economics is an interesting science, in that it has a linear dependence between causes and effects. If we want to show dynamism, there are components that can guarantee it by 70%. Remember Czech Premier Vaclav Klaus three years ago with his 10 commandments addressed to governments seeking economic reforms? No one will ask you about the structure of your productive forces or whether your country uses money or pebbles as legal tender. No one will want to know, because you are not unique. You live in an economy with its linear ties, as anywhere else in the world: from privatization to liberalization to exchange rate to deficit...  Who or whatever you are, you must pass through the models of all these interconnections.  Do not think for a moment that today's reforms are anything new under the sun. The very same projects existed two years back."

"People who have lost all hope to see their enterprise start working ever again are not likely to be convinced by your argument. You can spend hours telling them about how good the hryvnia is and how important it is to keep it. They won't be impressed, because what you are talking about is just one section of the vast economic field. The monetary component of reforms does not make up for their absence in the other sectors. So if you insist on there being reforms, just because there is the hryvnia, you will serve as a smoke screen to conceal all the other negative phenomena. You will become an attractive sign over an empty store. Are you prepared to play this role?"

"No, I am not."

"Let us picture a situation. Suppose there is a real avalanche and you are forbidden to work in the banking system. Instead you can be: (a) an artist in France, (b) a banker in Germany, or (c) President of Ukraine. Which would you choose?

"How about a (d)? I would need it. You see, every individual has certain values and likes that they adhere to till their dying day. An individual tends to think individually, not like all the others. I think that being a patriot and a true citizen of one's country comes first. I hold this as an important value, so the first two opportunities would be discomforting, mildly speaking. As for the third one, this subject is nonexistent for me.

"Apparently, you try to see everybody through the prism of an official post, it is your who-is-who criterion. I think that one's official position is a very important characteristic, but it can never fully answer the question of who is who. Personally, I find preserving my Ukrainian spirit, my attitude to Ukraine and its people of far greater importance. Of course, I have personal preferences that are not determined by my current post. They are much simpler. I have a certain mission which I must accomplish. Call the NBU Board at 10 even 11 p.m. You will find all its 90 members in the office. We often finish work at 1.30 am. Perhaps we can't work effectively enough during the day or maybe circumstances make us stay after hours. Nevertheless, we all feel dedicated and are happy after we carry out a project  professionally.  At a certain stage one feels  that one must be professionally dedicated, simply because acting unprofessionally is embarrassing. This is our National Bank team spirit. For me, doing my duty is the most important thing. I don't get much in return in terms of remuneration or understanding, and I don't expect to be thanked profusely in the end."

 EDITOR'S NOTE:

The reader may find himself under the impression that Mr. Yushchenko left certain things unsaid, certain ideas unvoiced. The Day's journalists present at the round table had this feeling, too, the more so that quite a few straight questions received no straight answers. For one thing, we could not find out what pessimistic scenarios are being developed by NBU; what steps are being taken to solve the problem of the banking system's "superliquidity"; what lies in the offing for Ukraine if the government's budget and fiscal policy are not balanced...  It was from the tone of Mr. Yuschenko's answers, rather than from what he actually said, that we realized: the National Bank and its Governor had now considerably more opponents (including very influential dignitaries) than last year. Evidence of this is the growing politicization of debates about a stable national currency and strengthening the legal framework of the financial system.

The monetarist principles upheld by Viktor Yushchenko's team would be regarded as the central bank's only possible ideology in any other country, except Ukraine where the executive and the legislative branches cannot come to terms about reforms and the central bank and the real sector operate in different "historical" modes. Here the concept of "strong money" proves objectively unnecessary for society. So where is the way out?  How long will the two incompatible notions - strong money and weak government - have to coexist?