IMF report focuses on the implications of recent financial turbulence and calls for reforms to sustain growth over the medium term for Ukraine
The International Monetary Fund has released its inaugural Regional Economic Outlook: Europe, predicting economic growth will ease moderately throughout Europe.
The REO report, presented simultaneously in London and Kyiv on Nov. 12, focuses on the implications of recent financial turbulence and provides advice on necessary reforms to sustain growth over the medium term, both for developed European economies and emerging ones, including Ukraine.
“Financial turbulence has hit Europe at a time when growth was showing momentum,” said Michael Deppler, director of the IMF’s European Department. To tackle financial turbulence, associated with unsettled credit markets, and sustain growth, governments have to introduce adequate policy responses, according to the IMF.
The report’s findings show growth throughout Europe at an average annual pace of 3.2 percent in 2008, up from 3.7 percent in 2007. The continent’s emerging economies is set to remain at 5.7 percent in 2008.
“Protracted credit market tightness constitutes a key downside risk to this outlook, especially for advanced economies,” reads the IMF report.
“While the broader financial system has continued to function well, money and credit markets remain tight.”
Risks for emerging European economies, though less affected by financial uncertainty because of their “limited reliance on interbank markets and complex financial products,” have also risen.
“The emerging economies outside the European Union should focus on reinforcing the foundations of financial development: low and stable inflation, good institutional quality, and the rule of law,” the IMF recommended in its report. “Creating a well-functioning government securities market, establishing strong corporate governance and creditor rights protection, and promoting the emergence of institutional investors would also be beneficial.”
Volatile inflation is one of the major threats governments of emerging economies will have to face in 2008, according to the report. As inflation continues to increase in Ukraine, the IMF forecast brings more bad news for the country.
Kostyantyn Kuznietsov, a leading economic expert at the Razumkov Center for Economic and Political Studies, a Kyiv-based think tank, said, “The underdeveloped equity market is one of the reasons for the recent high inflation rate.”
Excessive amounts of money circulating were caused by government social transfers, while the economy did not produce enough, the expert said. “People would invest in the equity market, but it’s not developed in Ukraine,” he added.
Oleksandr Zholud, an analyst at the Kyiv-based International Center for Policy Studies, also noted that Ukrainians spends money mostly on consumption, given the lack of investment opportunities.
“For people depositing money in banks is in fact the only way for investing money,” said Zholud.
“Creating a diverse class of institutional investors (including pension funds, mutual funds, and insurance companies) would greatly contribute to financial market development and liquidity,” the IMF report said.
The IMF described the Ukrainian securities market as still not liquid, while stressing its sustainable growth over recent years.
“The dynamics of the development of the securities market is quite active, but that’s because the initial size of the market was very small,” Zholud explained.
Institutional quality and the rule of law need to be strengthened in Ukraine, according to the IMF. Indeed, institutional weaknesses hamper the development of the entire financial system of Ukraine, experts agree.
“Institutional quality is very low in Ukraine, especially in defending property rights,” Zholud said.
Kuznietsov noted that low institutional quality results in capital flight to offshore accounts, thus leading to the development of a shadow economy. This, along with certain risks to Ukrainian export opportunities, threatens to undermine the development of Ukraine’s economy in the next few years, according to experts.
“Government policy concepts and approaches must be changed to embrace innovative technologies and support to small and medium business,” Kuznietsov said.
“If we don’t develop innovative technologies, we cannot talk about the competitiveness of Ukraine’s economy in the coming, say, three years.”
According to experts, economic restructuring and strengthening financial systems are crucial for Ukraine to provide adequate policy responses in the wake of expected financial turbulence.
