Ukraine is pulling out the big guns to stimulate the nation's depressed economy, with plans for a $48 billion stimulus and additional attempts to boost industry and employment. But experts warn the demand-driven model is not sustainable and could stir up trouble with the International Monetary Fund.
The new state program will spend Hr 380
billion ($48 billion) in 2013-2014, Prime Minister Mykola Azarov
said, while announcing the program on Feb. 27. While the specifics
are not yet clear, if approved, the law would involve investments
into such sectors as agriculture and aerospace, and would likely be
managed by a new state bank.
Ukraine entered the new year in
recession, which is projected to last until mid-2013. Authorities
hope the new stimulus will spark up the engine, lifting industrial
production, agriculture and the IT sector in 2014 by 10, 25 and 35
percent, respectively.
The opposition is not buying it.
Speaking at the opposition leader Arseniy Yatseniuk said: “I
carefully read the state program – it does not include a single
concrete policy suggestion in the economic, social or other spheres.”
Others worry that this could clash with
IMF demands, undermining the current discussions about a renewed $15
billion loan program. For one, the international lender is already
worried about Ukraine’s budget deficit, which jumped from 4.3 percent
to 5.5 percent last year (including the Naftogaz deficit).
Moreover, the financial institution’s
tough stance on liberal politics means they are unlikely to take
kindly to what are essentially protectionist measures.
Ukraine faces record $10.5 billion
foreign currency debt redemptions this year, much of it to the IMF.
“I’m a bit skeptical, because they
have no money, and the program represents an old, outdated approach
to policy making,” said Ildar Gazizullin, senior analyst at the
Kyiv-based International Center for Policy Studies.
Moreover, a new proposal to mandate
state companies to purchase locally shows the typical protectionist
streak, Gazizullin said, adding that Ukraine had already stirred up a
lot of bad blood after trying to renegotiate hundreds of tariffs with
the World Trade Organization.
“There’s a very small room for
manouvering,” he summed it up.
Yet falling industrial production is
driving authorities to heavy-handed tactics. A new program approved
by the Cabinet of Ministers for 2013-2014 will require that 80
percent of transport be purchased locally.
While a boon to domestic producers,
this will likely increase costs for Ukraine’s cities. Speaking to
business daily Kommersant, Lviv mayor Andriy Sadovvy pointed out that
the West Ukrainian hub needs to buy 40 tramways, but that Ukrainian
ones cost $1.35 million, while used ones from the West can be bought
at $ 15-55,000 and can still run for years.
At 37 percent of gross domestic
product, Ukraine’s public debt is still at a comfortable level. The
big question, however, is whether the government will be able to
continue tapping the Eurobond markets to repay its creditors in
dollars. Moreover, even fast-rising government revenues were unable
to keep up with expenditures.
Yet the economy’s dependence on
consumption growth is arguably the biggest problem. This was
particularly clear in 2012, when the Euro 2012 football championship
and election-linked handouts drove retail sales up by over 15 percent
while inflation came out at around zero for the whole year.
A recent report by international
financial giant Morgan Stanley found that only consumption kept the
country afloat in 2012, and would remain a major driver for the next
two years. Underpinning the trend are rising salaries – public
wages went up from 18 to 29 percent in 2012, well above the average
15 percent, according to the report.
Meanwhile, the number of jobs has been
falling for the past six months, with a rise in unemployment hidden
only by the increased use of part-time working solutions. This makes
the rise in salaries all the more suspect, with experts pointing to
shortages of skilled labor as the biggest driver.
The whole program is unsustainable,
warns Gazizullin. “I don’t see any reasons for wages to grow like
last year,” he said. If everything is down, there are no grounds
for salaries to support the current level of spending, he argued,
“the only hope is in investments, and perhaps exports.”
Kyiv Post editor Jakub Parusinski
can be reached at [email protected]
