NOW IT STARTS!

In an apparent attempt to meet the President's wishes, the NBU cut the discount rate on May 24 by 5% from 50 to 45% per annum. It is more difficult to fulfill the other recommendation - to soften economic requirements for export loans and long-term loans to banks as well as to speed up the restructuring of the banking system and intensify coordination with the Cabinet of Ministers in pursuing its monetary and currency policy.

However, these wishes also are by no means new in official policy. It will be recalled that only recently all sector ministries demanded in chorus that the NBU resort to a monetary emission on favorable terms. Now the picture is fundamentally different. Ministerial officials, especially "political entrepreneurs," have clearly understood that there are no goods which cannot be bought in a market (or even semi-market) economy. There are only prices at which they cannot be bought. Thus it is not at all necessary to demand that the NBU print new hryvnias, it is far more important to secure reasonable prices for the money reserves already existing in the banking system. For all banks are not so conscientious as the Ukrayina Bank which used to issue loans to the agrarian-industrial complex at 30% annual interest and is now trying to put its finances in order.

The Economy Ministry forecasts 19% inflation this year. In January-April, prices rose 5.9%. According to the President's logic, the credit rate should not exceed, say, 16%, 20%, or 30% by September. Is the President aware of there being, in addition to the inflation rate, other criteria and standards for interest policy? In particular, the fact that any administrative encroachments on the balance of supply and demand on the money market are bound to inevitably provoke a still deeper general economic crisis in the future, which in fact happened after forcing through a policy of rate-cutting in the fall of 1997.

It is known that the strength of any national currency is guaranteed by the central bank's ability to maintain the credit-related interest rate at a level exceeding the rate of inflation. But let us assume the NBU has agreed to the government's reasoning that the inflation rate in 1999 will be under 20%. Even if so, it would be extremely risky to lower the discount rate for the simple reason that the inflation index is an important, but still not the only, factor affecting the rate's value. A no less important benchmark for any central bank (including the NBU) is the level of market interest rates for commercial bank loans and deposits, as well as the level of revenue from government securities. And if the officials were eager, they could easily learn from banking statistics that commercial interest rates do not follow blindly fluctuations in the NBU rate, but react sensitively to the overall condition of the economy and, in particular, to the levels of financial and general economic risk in Ukraine.

As of now, various sectors of the financial market show a wide gap between the prices of money resources, with the difference between the most "market" (bank loans to residents) and the most "non-market" (the NBU refinancing rate) exchange rate being at least 80%. Approximately the same corridor is being maintained by commercial banks between the rates on resources attracted (deposits) and all kinds of loans to enterprises and banks. The NBU discount rate is now holding back the hryvnia's spillover into the currency market, but it hardly keeps the banks from lending for production. Loans are not issued for other reasons, well known to all officials. So it would be far more advisable for Cabinet and Presidential Administration officials to handle the true cause of high interest rates, high financial and systemic risks, and thus create the natural conditions for bringing down the price of money.