Initial projections for 2008 by the National Bank of Ukraine estimate annual inflation will be at 14.8% for the year, a significant increase on the 9.6% they had earlier calculated. Perhaps more worryingly, market analysts say that Ukraine will witness inflation rates of 7% to 12% in each of the next seven years, something that could seriously hamper the country’s EU aspirations.
Last year Ukraine witnessed soaring inflation of nearly 17%, the highest since a rate of 25.8% was recorded in 2000 when the economy was still struggling to come to terms with the impact of the 1998 Russian crash. This increase was particularly visible in the country’s supermarkets, where a dramatic increase in the price of basic foodstuffs hit ordinary Ukrainians hard and forced many to stop buying fruit in favour of more basic bread and milk products.
Inflation on the menu
To remain profitable, local food businesses, including fast food snack-bars, cafes and restaurants, have had to raise prices by anything from 25% up to 50%. This has led to a huge rise in the price of eating out in Ukraine. Visitors to Kyiv restaurants have recently been confronted with New Year price hikes on a wide range of well-established menu items, undermining Kyiv’s claim to offer a reasonably low cost of living.
“The rate of price growth is really very considerable. What was yesterday thought of as a high price is regarded today as average. It scares me. Restaurants might soon begin to lose their clientele. These rises cannot last forever,” says Roman Naumenko, the General Manager of the GoodZone Hotel in Dnipropetrovsk.
The blame game
New Prime Minister Yulia Tymoshenko has predictably blamed the previous government of Viktor Yanukovych for what she slammed as the current “record inflation rates”, referring to the situation as a “governmental crime.” She has urged her Cabinet to work out a precise plan of anti-inflation measures complete with set deadlines designed to stop inflationary processes in their tracks.
Unsurprisingly, Inna Bogoslovska of Yanukovych’s Party of Regions denied these allegations, claiming that the inflationary trend currently hitting the country was inevitable, given the fact that the previous government was prevented from adopt the necessary anti-inflationary laws due to what she termed as “the bullying actions” of Tymoshenko’s party when in opposition in 2007.
Buying votes, flooding the market
Bogoslovska also pointed the finger at Tymoshenko’s 2005 government and its role in sparking inflation via a policy of increasing social payments. She branded this as a populist move which “paved the way for inbalances in economy and led directly to inflation.” Fellow Party of Regions MP Iryna Akimova added that Tymoshenko’s commitment to pay back lost Soviet-era savings in the form of an estimated USD 4 billion in compensation would cause another wave of inflation.
Tymoshenko, meanwhile, has denied these allegations and pledged to lower inflation to less than 10% in 2008.
However, Standard & Poor’s Ratings Services recently reported that the decision to incorporate payouts of lost savings liabilities into the 2008 budget, at a cost of just under 3% of GDP, could further stoke demand pressures in an economy that is already overheated. “The new government’s populist approach to fiscal and quasi-fiscal policy runs the risk of exacerbating the loss in purchasing power it purports to address, while undermining Ukraine’s recent impressive economic performance, with negative implications for sovereign creditworthiness,” the ratings agency stated.
Fuelling price rises
Ukraine’s inflation woes can be traced to a number of interconnected factors. Igor Burakovskiy, director of the Kyiv-based Institute for Economic Research and Policy Consulting sees oil and gas price growth as the driving force behind the trend, which is also tied to soaring prices on public utilities and food products.
Burakovskiy is critical of Yanukovych and his government’s failure to determine inflation factors impartially and identify the correct mechanisms to combat them. However, the expert stressed that the last government alone cannot bare full responsibility for the country’s current inflation crisis, pointing to the fact that growing inflation has been in evidence since 2004, when a rise in social payments exceeded production growth rate. “As a result, demand began to exceed supply, which, in its turn, has led to the growing prices,” says Burakovskiy.
The social payments Burakovskiy refers to were widely criticised at the time as a transparent attempt to garner support for then-prime minister Viktor Yanukovych’s bid for the presidency, and marked the first in a long line of generous social hand-outs that have been closely tied to election campaigns. The resulting increase in disposable incomes has inevitably had an impact on prices for everyday goods in particular.
Vasyl Yurchishin of the Razumkov think tank in Kyiv echoes this sentiment, saying: “Pension and wage increases, as well as other social payments, which have been raised by successive previous governments, have paved the way for further price growth while doing nothing to improve quality.”
The regular reshuffling of administrations has been more to blame for price rises than any specific negative policies, claims economist Viktor Lisitskiy. Regular election campaigns coloured by competing populist promises over the past four years have resulted in a distinct lack of reform in many spheres across the economy, including agriculture, he contends.
Among the key problems driving inflation, Lisitskiy cites a lack of mechanisms to prevent food price increases in the event of poor harvests or drought. He recommends the creation of state grain reserves from which grain could be sold when needed as one of the mechanisms to prevent food price hikes in response to low seasonal supplies, but points out that with governments changing on an annual basis there is little room for the implementation of such long-term measures.
“Rapid government changes have prevented the authorities from working out any mechanism of market control over food prices. To record significant progress in this area any government would have to work for three to five years,” says Lisitskiy.
Taming the beast
Economists feel that the economy is currently in need of structural and institutional reforms aimed at increasing competition and efficiency, but are divided on whether this will be enough to tame the current raging inflation and create a more stable economic climate. “We should not expect miracles. The government is doomed to focus on the day-to-day problems of running the country. But if they are genuinely serious about wanting to be remembered as a government of reformers they should also try and prioritise effective anti-inflation measures,” Burakovskiy stresses.
If the government, working together with the National Bank, manage to implement an efficient anti-inflation programme that brought the rate of inflation down to below 10%, this would represent at great economic success story, he states.
Burakovskiy also warned that the new gas price of USD 179.5 for 1,000 cubic metres represents another test for Ukraine’s economy and its ability to avoid ruinous inflation in 2008. “Cheap oil and gas are things of the past, and we should learn to live with these new conditions, whether we want them or not, or whether we consider them fair or not,” he says. This will mean looking at the way both the Ukrainian state and the country’s heavy industry utilise their gas and oil supplies, and introducing policies which target more efficient consumption.
Rising energy prices, crises in world financial markets and soaring food prices throughout the world are just some of challenges that Ukraine is facing in the coming year, as it wrestles with its own inflationary fears.
In that respect, Ukraine can truly be said to have integrated into the global economy, as it is facing the kind of problems that have been identified in economies throughout the world. “The epoch of cheap food and everyday goods is finally over, and mankind has entered into an age of soaring food prices,” states Yurchishin.
Last December the UN Food and Agriculture Organisation warned that 37 countries faced food crises with food prices rising by up to an unprecedented 40% in the past year alone. Rising incomes will cover part of the shortfall in Ukraine, but as more and more cash is pumped into the economy, there is a danger that the country will find itself trapped in a spiral of price hikes, effectively serving to devalue the hryvnia and reduce the spending power of ordinary Ukrainians.
