The CIS's struggle with inflation demands hard decisions - and fast
Strong monetary policies must be combined with budget adjustments to control the inflation galloping across the former Soviet Union, economists warn.
Ukraine, where year-on-year consumer price inflation (CPI) was at 26% in September, down from a peak of 31% in April, is the focus of concerns. The economy is overheating, aggravating the effect of rising food and energy costs. Observers fear that political leaders are too busy with political infighting in the ruling coalition – which collapsed on September 16 opening up the possibility that President Yushchenko will dissolve parliament and call fresh elections – to devote sufficient attention to monetary policy.
Russia strikes a contrast: the central bank, supported by finance minister Aleksei Kudrin, is defending an inflation target of 11.8% for this year, revised upwards from 10.5%. With government support, it is “prioritizing the battle with inflation above other aims”, Kudrin told a briefing on August 21, in response to questions about rouble exchange rate adjustments.
Monetary policy has been tightened by increases in the bank refinancing rate, which is now 11%, and in minimum reserve rates for bank deposits. Chris Green, senior economist at VTB Europe, says he expects “further monetary tightening” to be combined with administrative pricing and the introduction of price-fixing legislation towards the end of the year.
No consistency
Such a coherent policy approach is notable by its absence in Ukraine. Public- and private-sector economists say more needs to be done to synchronize monetary and fiscal measures. Ruslan Piontkivsky, a Kiev-based World Bank economist, points out that fiscal spending has fallen in recent months. The only big extra item was for flood relief in western Ukraine.
If this spending rate is preserved, the budget will be in a small deficit or a small surplus – “although a big surplus is desirable”, Piontkivsky says. “But this is not only a fiscal problem: there is a big monetary problem. Credit growth was running at 70%, and has now slowed down to 60%. Monetary policy has been loose: look at the growth rate of monetary aggregates and the interest rates. In the spring, the refinancing rate was 16% with inflation at 30% – a negative real interest rate. More needs to be done on the monetary side.”
Edilberto Segura, chief economist at Sigma Bleyzer, a Ukraine-focused investment company, says that the government moved in the right direction with adjustments of the hryvna exchange rate in May. But he warns against complacency: “Inflationary pressure comes from very high increases in expenditure on pensions and other benefits earlier this year, but fiscal policy is not the only major factor. Monetary supply and the availability of banking credit is a big problem.”Ukraine expects a further 80–100% rise in the price of imported central Asian gas in January. “Fuel price increases must be passed on to the population,” Segura believes.
Elisabetta Falcetti, senior economist covering Ukraine at the EBRD, argues that the central bank is doing its best – despite being constrained from allowing the hryvna to fluctuate more freely against the dollar – and that the real problem is a lack of coordination between monetary and fiscal policy. “The government is running a surplus, but social spending and public-sector wages are increasing. This aggravates the inflationary pressures caused by credit expansion.”
She cautions that, while Ukraine’s good harvest has brought food price inflation down from its high point in May, producer price inflation is rampant: it hit 47% year-on-year in July, stoked by wages and the costs of oil, gas, coking coal and other industrial inputs. “We are not expecting a sharp disinflation this year.”
Central Asia
In central Asia, inflation is lower than Ukraine’s, but the effects are more immediate. The poverty impact in Tajikistan and Kyrgyzstan, the poorest former Soviet states, are being monitored closely by the World Bank and other development institutions.
In Kazakhstan, central Asia’s largest economy, consumer price inflation was running at 19% in August. Ralph de Haas, economist at the EBRD, says: “Inflation has come down since last year, but not by much. The central bank hopes to get inflation below 10% this year; I think that is unlikely.”
Kazakhstan does not share Ukraine’s credit expansion problem – largely because in the wake of last year’s credit crunch, international markets have been almost completely closed to its banks. Food prices make up 40% of the Kazakh consumption basket, and the issue remains extremely politically sensitive. In August the government lifted an export ban on wheat in response to the good harvest, but imposed export bans on rapeseed oil and other products.
The CIS's poorest states, Tajikstan and Kyrgyzstan, with CPI of 25% and 32% respectively in the year to June, are by far the most vulnerable to increases in the prices of imported foodstuffs. In Tajikstan, cold weather has disrupted food supplies, and there were reported water shortages in the spring planting season.