2008

COOLING THE OVERHEATED ECONOMY

Year 2008 becomes one of the inflation record years for 2000’s in Ukraine. The first half of the current year was marked with consumer price inflation of 15,5%. GDP deflator of five months reached almost 32% and prices of industrial production has grown on 29,4% from this year’s beginning. Ukrainian authorities made a range of decisions concerning economy in spring and early summer 2008. Most of all, that was big revaluation of national currency hryvnia with increase of its exchange rate for US dollar (5% nominally, 10% really). Limitations of the National Bank for reserves of commercial banks for provision of middle and long-term loans should be also mentioned since these have dramatically diminished volumes for retail crediting. Simultaneously the National Bank has set limits for bank capacities to make loans. There are no serious opportunities to lower inflation of producer prices since costs grow on. Inflation of consumer prices is stimulated with significant growth of the population incomes. Efforts, which can influence inflations, are limited by monetary tools. But in fact current inflation should be stopped only with decrease of the state budget expenditures. Since the government is not going to do so, it is hardly possible to stop inflation till the end of the year, although a range of tools will be applied to reach price stability. Inflation of consumer prices will get higher than 20% and producer prices inflation will reach 30%-35% for the end of 2008. Until recent regulatory efforts, deficit of foreign trade balance (export and import) was virtually compensated with inflow of foreign investments, while demand for and proposition of foreign currency were quite balanced. Revaluation of hryvnia has not hit exporters crucially. However general price increase, not only domestic producer prices inflation, strikes them. Moreover, in future export of Ukraine’s key traded groups may face definite problems caused by production capacity constraints. They are current decline of investment demand (seen in decrease of construction activity and slowing down growth rates for production used for investing) and also decline of consumer confidence because of high inflation. Whatever the economy growth will remain high and there are no perspectives of stagnation.