Ukraine inflation warning issued
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Emerging Markets

Ukraine inflation warning issued

IMF spells out response plan as political gridlock deepens

Rampant inflation threatens to derail Ukraine’s economy unless urgent political action is taken, experts have warned.

The alarm is being sounded as the paralysis gripping the country’s political establishment obstructs any movement towards a strategy or consensus on how to deal with the economic peril.

The IMF this week warned Ukraine of the drastic consequences of failing to tame inflation. “There is still time” for political action, “but it is getting shorter and shorter”, Balazs Horvath, head of the IMF delegation in Ukraine, said.

Outgoing EBRD president Jean Lemierre also warned yesterday that the country’s policy-makers must zero in on the inflation threat or face economic consequences : “if attention is not high enough there could be an undermining of the support for reform,” he said.

Rapid inflation across emerging Europe is worrying policy-makers – nowhere more so than in Ukraine, where year-on-year inflation hit 30% in April, nearly double the rate of a year ago.

Prime minister Yulia Timoshenko, speaking at the Ukrainian business forum in Kiev yesterday, claimed progress on the issue. “The first 10 days of the fifth month of the new government have seen positive achievements,” she said.

In the first quarter of this year, Ukraine’s consumer prices rose by 9.7%, the highest in the CIS, while Russia’s rose by 4.8% and Kazakhstan’s by 2.5%, according to the CIS statistics committee.

The IMF’s Regional Economic Outlook for Europe, published in April, said that the impact of food price increases on headline inflation is greater in emerging Europe than in the EU – mainly because food makes up more of household consumption and because food inflation has been exacerbated by local supply shocks.

Horvath told Emerging Markets that controls on spending and earnings are desperately needed, followed by structural reforms – and for that, political consensus is vital. “The choice of the political class is to decide whether the adjustment will be in the form of a soft landing, under conditions of the application of macroeconomic programme, or a hard landing, in a disorganised way. But it will be resolved one way or another.”

Horvath and Martin Raiser, economic counsellor at the World Bank’s office in Kiev, wrote a joint article in Ekonomicheskie Novosti yesterday that warned: “Ukraine is at a crossroads, and inaction could cost her dear.” The main cause of Ukraine’s inflation – currently the highest in the former Soviet Union except for Kazakhstan – is that “internal demand significantly exceeds supply”, the two officials argued.

The overheating had built up for some years, during which “the rate of growth of real wages outstripped that of productivity”; social transfers, including pensions, had risen at an “unacceptable” pace; and there had been an “explosive” growth of money supply and credit, boosted by big capital inflows underpinned by a de-facto fixed exchange rate.

Horvath and Raiser called for: a tighter fiscal policy, with proceeds from privatisation and other surplus budget receipts being saved and not spent; a reduction in social transfers “by targeting them more precisely”, while preserving budget support for the most vulnerable sections of the population; and breaking the wage-price spiral, with public sector wage growth and the minimum wage being kept to single figures. They argue for increasing Ukraine’s ability to use monetary policy tools, by gradually increasing exchange rate flexibility and introduce inflation targeting.

Although the international institutions’ officials decline to comment on Ukrainian political matters, their warnings strike a sharp contrast with the anti-inflationary proposals tabled by Timoshenko supporters in parliament. These aim to curtail retail trade margins on some products, to abolish import duties on meat and to apply WTO standards to some food products.

These are the “anti inflationary measures” in whose name members of the Bloc barred president Viktor Yushchenko’s access to the podium when parliament opened on Tuesday.

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