Last Wednesday the International Monetary Fund announced that it expected average annual inflation in Ukraine to hit 20-22% in 2008, a significant rise from earlier predictions by the international financial body. The IMF also said that year-on-year inflation in December 2008 would reach 17%. “I have to say there is an unusual amount of uncertainty about this forecast,” admitted Robert Ford, IMF mission head for Ukraine. “If you ask me in two months’ time, my forecast may be different.” Earlier, the IMF predicted annual inflation of 10.6% in 2008.
A similar forecast was released by Standard&-Poor’s, a ratings agency, one day earlier. “By the end of 2008 inflation will most likely reach 20%, though much depends on natural factors, specifically on this year’s harvest,” commented Frank Gill, Director of European Sovereign Ratings at S&P.
Even if factors such as the strategically crucial annual harvest are favourable, the current rapid increase in the state’s expenses (which is not the only factor related to the forthcoming presidential election campaign), especially of those related to rising wages and pensions, will further sustain the surge of prices for services and fuel the salary-price spiral.
Undermining the export trade
”All the political parties of Ukraine are equally responsible for the policy of regulating expenses and, correspondingly, for the inflation problem,” said Gill. As a result of the current wave of rising prices, inflation may undermine the competitiveness of many Ukrainian non-raw-materials exports, which would be one of the main reasons for a predicted GDP growth slowdown from 7.3% in 2007 to 5.4% in 2008, according to Gill.
Annual inflation in 2007 hit 16.6% and the government of Prime Minister Yulia Tymoshenko has pledged to contain the figure this year to 9.6% through measures it has promised to unveil soon. Ukrainian and international experts are sceptical about this pledge, with most predicting a rate for the year of 12-15%. Year-on-year inflation stood at 21.9% in February after month-on-month rises of 2.7% in February and 2.9% in January.
Inflation as a political weapon
President Yushchenko has criticised his former Orange Revolution ally, accusing her of failing to combat inflation and urged her Cabinet to review the budget and reconsider numerous social payment policies which he has branded as risky and economically unsound populism.
“Inflation is something that always exists. The question is what kind of inflation. Whose fault is that the first two months of the year took up 60% of projected annual inflation? Inflation rates in January-February oblige the government to form a new budget and to protect those people who have suffered from it,” the President said.
Opposition leader Viktor Yanukovych agreed with the President, predicting 20% annual inflation. “What kind of policy is this when prices are growing every day, eating away at people’s earnings as a result of subsidies from this populist government? Who needs such a policy?” he asked, avoiding reference to the pension increases introduced by his government on the eve of his 2004 bid for the presidency which have been widely accused of being contributory to the wave of social spending promises which have fuelled inflation in recent years.
A dubious legacy
“The inflation rate is one of the determining factors for estimating the state budget for the next hear. When the budget discussion was launched last summer, nobody could imagine that (then-Prime Minister Viktor) Yanukovych would leave inflation at the record level of 16.6%,” said Kostyantyn Kuznetsov, an analyst with the Kyiv-based Razumkov Centre for Economic and Political Studies. “The ever optimistic Tymoshenko underestimated the real state of affairs when she pledged to keep inflation at 9.6%. This unrealistic expectation, as well as the mistakes of the previous government, has led to the need for the budget to be reviewed,” he added.
Kuznetsov noted that his organisation has no plans to review its forecast of annual inflation from its current 16% and assumed that the IMF changed their forecast from 10.6% to up to 22% because even this respected financial institution “could not foresee” such factors as the gas and petrol price hikes – “which is further evidence of the huge influence of Russian business on Ukraine.”
Symptom of sick government
Growing prices will be the main challenge facing the government when combating negative public perceptions of the efficiency of Tymoshenko’s activities as PM, Kuznetsov stressed. “Inflation in itself does not exist independently. It is the result of the unsuccessful deed government actions in terms of external and internal factors. We cannot withstand world financial crises or unstable world oil prices, but if our government conducts the necessary reform, supports small and medium businesses, combats corruption, along with a good harvest, we can expect that inflation will be tackled,” said Kuznetsov.
