Ukraine’s government is struggling to control spiraling inflation which poses among the biggest current threats to the economy.
Ukraine’s government is struggling to control spiraling inflation which poses among the biggest current threats to the Ukrainian economy, economists said.
Inflation was 5.7 percent in January (2.9 percent) and February 2008 (2.8 percent), according to the State Statistics Committee.
While President Viktor Yushchenko, and the opposition, both blamed Prime Minister Tymoshenko’s government and urged its leaders to take decisive measures, experts expect inflation won‘t slow down in the next few months.
“Unless the budget deficit is not eliminated, the inflation rate will increase,” said Kyiv economist Oleh Soskin, referring to the 2008 budget’s projection for a $3.8 billion deficit, or excess spending, in 2008.
Rising natural gas import prices, as well as world food prices, contributed to the 17 percent inflation last year and play a significant role this year, economists said.
In Ukraine, where disposable income is very limited, food prices account for 52 percent of the consumer price basket.
The price for sunflower oil rose 9.0 percent in February, while meat prices rose 3.7 percent and fish prices increased 2.2 percent.
Political instability, coupled with politicians’ promises of higher social spending, exacerbated domestic conditions, observers said.
In January, an inflationary factor was Tymoshenko’s program to return millions in bank deposits lost in the Soviet collapse, said Andriy Yermolayev, director of the Sofiya Center for Social Research, which is linked with the opposition Party of the Regions of Ukraine.
Even the mere perception that consumers will have more money triggers price increases in the Ukrainian economy, economists said.
“There’s a strong link between inflation and the money supply,” Soskin said.
“If the amount of money in circulation rises from social payments or bank debts increase, so will prices.”
The gas crisis was a political, inflationary factor in February, Yermolayev said. Kyiv pre-term elections caused March inflation and the battle for the State Property Fund will extend instability into April, he said.
Economists fear inflation could swell this year to more than 20 percent, significantly higher than the Cabinet of Ministers’ forecast of 9.6 percent or the National Bank of Ukraine’s 15 percent prediction.
Government officials admitted they will likely adjust their forecast, but caution that doing so this early in the year could dent consumer confidence and worsen the situation.
Different economists propose different remedies.
“A good method of controlling inflation is to control wage increases,” said Oleksandr Zholud of the Kyiv-based International Centre for Policy Studies, financed by George Soros’ Open Society Institute, adding that nominal incomes swelled by 30 percent last year.
The Tymoshenko government kept grain export quotas in place, partly with the goal of restraining bread prices, and imposed export quotas on sunflower oil to keep those prices down, with little success.
Economics Minister Bohdan Danylyshyn even suggested extending such administrative economic methods to meat and diary products.
The government could restrain utility prices to help ease the pain, he added.
Zholud said it might be necessary to control prices a bit, but doubted the effectiveness of administrative measures alone, adding any anti-inflation strategy must reduce social payment increases.
Deputy Economics Minister Anatoliy Maksiuta said prices could decline in the summer if the country reaps its expected harvest.
“Usually when the harvest begins, the food prices fall,” he said.
Other economists left this possibility open, adding it is too early to provide a reasonable forecast for this year’s inflation.
