Economy for the Week

Last week was not marked by many official economic developments but teemed with hearsay and forecasts. In the Parliament cloakroom the main topic was whether the hryvnia would drop to six to the dollar by mid-December, and the discussion organized by the Market Reform Center and Friedrich Ebert Foundation, having nothing to do with the gossip, nonetheless convinced one and all that the suggested scenario will actually be played out.

The short history of the Ukrainian crisis began at the end of 1997 when the Cabinet suddenly discovered it could not afford to pay off Western investor fleeing the Ukrainian market. The crisis was put off using fresh foreign loans and an issue of domestic bonds. The next upsurge of the crisis fell in the spring of 1998 when the hryvnia again tottered (there were too many hryvnias after converting previously borrowed foreign cash), and when domestic investors began leaving the market. It was then the National Bank's reserve was put to use and the IMF was begged for help under its loan program. The next August upsurge was greeted by a Cabinet bereft of confidence and reserves. True, it bullied the Ukrainian banks and the remaining unwilling foreign creditors into agreeing to deferred payments, whereupon it was solemnly announced that the government had endured the hardships and won.

However, the experts who gathered last Monday to discuss "The Discrepancies of the Financial Crisis in Ukraine, its Nature, and Ways to Overcome it" viewed this victory in an altogether different light. Moreover, Viktor Pynzenyk, People's Deputy and former Deputy Premier, said that "the period of relative quiet is temporary" and that people in Ukraine should "prepare for the worst." Of course, such forecasts coming from a politician may not sound impressive to some of our learned readers. And the same was true of one of the participants in the discussion, Deputy Chaika who accused Messrs. Pynzenyk, Suslov, and Lanovyi (they all took part) of being involved in the crisis. All this made expert views even more interesting, since the experts hold no office in any executive branch structures. In this case, expert opinions were voiced by Valery Heyets, director of the Institute for Economic Prognoses, Volkhart Vinsentz Ph.D. and member of the German Consultative Group with the Ukrainian goverment, and Oleksandr Suhoniako, head of the Association of Ukrainian Banks.

To demonstrate that Ukraine is in a permanent state of crisis, Mr. Heyets cited statistics relating to effective yields in various sectors of the economy from 1992 through 1997. He believes that this state finance dynamism compared to the rest of the economy gives one a full picture of the reasons for the crisis and ways to overcome it. Thus, the nonfinancial sector, including industrial enterprises, accounted for a mere 5% in 1997 of what they were in 1992. The financial sector, after the 1993-94 upsurge (233% and 131% respectively), registered 22.8% in 1997 of their 1992 level. The household sector - i.e., individual incomes - dropped to 42% of what they were in 1992. The state administration sector is the only one never to have shown lower incomes: 130% in 1993; 143% in 1994; 136% in 1995; 124% in 1996; 112% in 1997. What does all this mean? "Compared to all the other sectors," says Mr. Heyets, "the state administration sector that has never produced anything of value has never experienced any crises; it has rather created them for the other sectors." He also thinks that over the years of "reform" in Ukraine no one has taken a serious approach to overcoming the financial crisis; rather, efforts have been made to cushion its aftereffects. The Institute for Economic Prognosis's estimates show that the government will spend 4.7% of GDP to service the domestic public debt and 7.3% for the external debt, and this considering that the government has no stable income source in the form of revenues of industrial enterprises translated into budget revenues.

The other participants in the discussion, each in his own field, agreed with Mr. Heyets on the main point - to get out of its crisis Ukraine must activate the real, not virtual reality economy. Only then will the government receive real budget revenues, not figures on paper, and will be able to pay its even more real debts. Otherwise, the crisis will become endemic, depending not so much on peaks in paying government debts as on the strain on the money-printing machines. Unfortunately, the experts agreed that the government does not offer an alternative.

Summing all this up, the Ukrainian government should not think that it runs the country; as always, the country is run by the laws of economics, and these laws say our future does not look good. Before long the government will work to get inflationary incomes (for want of any other), the National Bank's resistance to hryvnia devaluation will be broken (NBU is still resisting, although perhaps not as actively as at first), inflation will approach 20% monthly (something we have almost forgotten), in the end leaving the government with a worthless hryvnia, privatized National Bank, and all the rest with their dollars.

Finally, Herr Volkhart Vinsentz was asked by The Day last Thursday to share his version of the temporary nature of the foreign exchange quiet. "The worst thing would be if everybody continued pretending that nothing has happened while debts continued to snowball. The budget is apparently unable to meet the government's many commitments, and it is as apparent that the limits of what is going on are set on the national frontier, because people abroad are not inclined to take part in this game. Thus, if nothing changes, yet another crisis will happen. In other words, everything depends on whether or not any efforts are made to liquidate this "virtual reality economy." If not, everything will depend on the patience of Ukraine's creditors: Russia, IMF, and other donors." And how long the Ukrainian people will put up with such leadership, I might add.

"Incidentally, the next installment of the IMF loan may be provided later than scheduled," Presidential Adviser Valery Lytvytsky told the Ukrainski Novyny Agency on November 23. "We can and must receive this installment," he added. It is interesting to note that the IMF mission left Moscow last week without granting Russia its longed for loan of $4 billion. Of course, the $78 million for Ukraine is no comparison to $4 billion for Russia, but the amount is not the point. The point is what kind of economy is to be sustained by this money.
 

By Iryna KLYMENKO, The Day