The Inflation Tax

The National Bank of Ukraine’s Board, a constitutional body that shapes this country’s fiscal policy, was in session last Friday for the second time in the first ten days of December. This supposedly routine session was convened to discuss the performance of the banking system and the entire economy for the past eleven months. The NBU’s general economic department had drawn up for this occasion a reference note with endless figures and charts that illustrate all kinds of positive results of the year 2004. Unfortunately, this note is now only good for proving that there have been no objective reasons lately for what happened to our economy. Yet, as soon as the session was over, board chairman Anatoly Halchynsky and National Bank Governor Arsen Yatseniuk held a joint press conference clearly intended to pacify individuals accustomed to the mutually-beneficial cooperation with banking institutions but scared by some signals from the fast-depleting cash dispensers. According to Mr. Halchynsky, there are “clear signs that negative tendencies are on the decline, the slump has stopped, and some positive trends have come up on the money and currency market. The downward trajectory has come to a halt, and things look quite positive today.” He put this down to the NBU’s timely and apt actions.

The NBU board chairman also revealed that this body had rejected, in spite of bankers’ objections, the NBU’s intention to liberalize the process of keeping commercial banks afloat by financial injections, a process that has in fact made the aforesaid achievements possible and set the upper limit of refunding. Mr. Halchynsky said that while the main guidelines of the 2004 monetary policy provided for a 151-156- % rise of base money, the money ceiling (i.e., the possibilities of increased refunding) has now been reduced to 134-140%. This controversial step of the NBU Board is supposedly aimed at controlling inflation.

At the same time, one can reproach the Board for some shortsightedness. Was it worth announcing at this moment a forecast that inflation in this country will reach 12% by the year’s end (against December 2003)? Did the chief bankers of Ukraine think well over the consequences of this step? At least The Day’s experts are very doubtful of this. Still more skeptical they are about the Board’s outlooks of the gross domestic product (GDP) and inflation growth rate for the next year. The NBU Board believes the GDP will rise by 6-7% and inflation will be running at 8.5-9.5%. This negative ratio predetermines a drop in the living standards and makes it very difficult to pass the 2005 budget. For the current draft budget provides for a 30-% rise of revenues and expenditures. The projected high inflation reveals the intention to earn budgetary revenues by means of an inflation tax payable by the populace and businessmen. Is this an attempt to turn this country decades back?