President Leonid Kuchma signaled on Thursday that Ukraine will reject the advice of Western governments and international lenders and follow Russia's lead by combating financial crisis with Soviet-style economic tools.
In a special address to parliament, Kuchma called for printing money and greater government control over the economy and the National Bank, saying those measures are the key to Ukraine’s economic growth.
Kuchma said Ukraine’s economic decline since the country gained independence in 1991 has reduced the economy by 2.4 times and ‘exhausted all resources.’
Kuchma blamed the decline on oversized state budget deficits and the National Bank’s monetary policies, which he said have been ‘artificially restricting the hryvna rate’ and depriving the economy of money.
‘Economic growth is impossible in such conditions,’ Kuchma said.
In an economic argument borrowed from Russian critics of tight monetary policies, Kuchma blamed reduced economic activity on the low amount of cash in circulation and said the remedy is controlled cash emissions.
Kuchma complained that Ukraine has one of the lowest levels of cash to gross domestic product in Europe – 13.6 percent.
‘Money ceases being the means of payment,’ he said. ‘The absence of turnover money makes barter the only possible means of payment.’
Kuchma said parliament must pass a law giving the government greater control over the National Bank’s policies.
In the $2.2 billion loan agreement it signed with the International Monetary Fund in early September, the Ukrainian government promised to adopt a law ‘that ensures the independence of the National Bank’ by the end of this month.
Kuchma said he was against direct emissions of cash, but called for a revival of direct government borrowing from the National Bank, which amounts to the same thing.
The IMF agreement stipulates that the National Bank will refrain from emissions other than through purchases of T-bills and will gradually phase out those purchases over the three-year period that the loan agreement covers.
Kuchma also railed against the government’s financing of the budget deficit through a T-bill ‘pyramid.’
‘Servicing this pyramid cost over $1.5 billion of the [National Bank’s] currency reserves, and at a certain critical moment currency reserves were practically depleted,’ Kuchma said.
Kuchma said domestic banks need to focus on loaning to producers rather than ‘speculation’ on the currency market.
Kuchma said Bank Ukraina should be nationalized and turned into an agricultural mortgage bank. Both IMF and World Bank loans are conditioned on the government’s selling its existing shares in commercial banks and refraining from directing commercial bank loans, a practice that has left Bank Ukraina awash in bad debts to the agricultural sector.
In other parts of his speech, however, Kuchma took a distinctly liberal tack, calling for a low budget deficit, lower tax rates and an end to restrictions on trading in the national currency.
He said the hryvna should be allowed to float freely rather than be artificially supported within the National Bank’s currency band. The resulting devaluation would aid Ukrainian exporters, he said.
If the government and parliament agree with Kuchma’s call to let the hryvna devalue, it will blow up all economic and monetary predictions for next year. The 1999 state budget assumes the hryvna rate next year will average four to the dollar. Experts say a freely floating hryvna could drop to around 15 to the dollar.
Kuchma said the government’s practice of funding its oversized budget deficits with T-bills had led to a situation in which most budgetary revenues are being used to redeem the bonds that were sold earlier to cover previous budget deficits.
He said in 1996 those payments took up Hr 3.2 billion, last year they were Hr 8.3 billion, and this year they have already run over Hr 10.8 billion.
‘Our joint actions have to be directed to bring down this financial monster through limiting the budget deficit,’ he said.
Kuchma never reconciled the two opposing trends in his speech.
The speech seemed tailored to leave both those who see Ukraine’s salvation in lower budget deficits and those who favor increasing state subsidies through printing money feeling as if the president were on their side.
Indeed, the address was so riddled with contradictions that some in the audience suggested it was a hodgepodge of texts by different speech writers reflecting the opposing lines of economic thinking represented within the presidential administration.
At one point, Kuchma said the government must cancel all tax privileges to ensure greater budgetary revenues, and at another, he called for agricultural producers to be granted holidays from all taxes except contributions to the pension fund for the next three years.
In one part of his speech Kuchma promised Ukraine would create equal conditions for domestic and foreign investors, and in another, he called for stricter policies toward non-residents on the Ukrainian securities market.
‘The majority of non-residents are here to receive a super-profit and disappear without a trace.
Unfortunately, the Finance Ministry and the National Bank realized this too late,’ he said.
After complaining at length about the lack of cash in circulation and repeatedly calling for cash emissions, Kuchma said the money supply shouldn’t grow any faster than it did in 1997.
After blaming the National Bank for freely spending its hard-currency reserves and preventing growth with tight monetary policies, he said the National Bank shouldn’t be made a scapegoat for the current financial crisis.
Also, in contradiction to many previous statements that Ukraine needed to create favorable conditions for the return of money from the shadow economy to legal business, Kuchma called for legislation preventing the use of shadow-economy money in privatization and said the government and Security Service needed easy access to banking information, particularly on anonymous bank accounts.
Such contradictions caused confusion among parliament deputies, many of whom did not understand what exactly Kuchma was offering as his new plan of reform. Most deputies refused to comment at all, including the usually outspoken opposition leader Yulia Tymoshenko and the usually press-friendly Greens leader Vitaly Kononov.
Rukh deputy Oleksandr Lavrynovych, one of the few deputies who would comment, gave a lukewarm response.
‘There were some positive ideas in the address, such as cutting state expenditures and privileges and administrative reform, but I did not see any new ideas,’ he told Reuters.
Communist Party leader Petro Symonenko said the speech showed that ‘both the president and the government have understood the collapse of their economic policy and need to show that they are taking extraordinary measures to save the country.’
‘But I am sure they will not implement any measures,’ he added.
Oleksandr Ilyashkevich of the opposition Hromada faction said the speech was ‘all … just preparation for … a serious devaluation of the hryvna.’
Others commented on the political value of the speech rather than its economic nuances.
‘This sounded more like a speech of a presidential candidate rather than the speech of a president,’ said Socialist Party leader Oleksandr Moroz, who is expected to be one of Kuchma’s strongest opponents in the 1999 presidential election. ‘He did not take any responsibility for what’s happening in the country.’
Some of Kuchma’s former allies were even more critical. Dmytro Tabachnyk, former chief of the presidential administration, said he would not comment on the speech but would tell the most recent joke.
‘With great interest, the president acquainted himself with his speech at the podium,’ Tabachnyk said.
