Industry slowdown a wake-up call for authorities
Ukraine’s industrial production fell by a whopping 9.3 percent in May over the previous year, the State Statistics Service said this week
This is a sharp drop compared even to April, when industrial output dipped 2.2 percent for the same period. It also happens to be the worst since the 2008-2009 financial crisis.
The news made economists revise their macroeconomic forecasts for this year. Among them, Dragon Capital investment bank downgraded its expectations of economic growth to zero. By contrast, the nation’s government continues to operate on the assumption that the economy will grow by 3-4 percent this year.
Government needs to shift policy to face tough economic reality
The International Monetary Fund has insisted since the end of last year that the macroeconomic indicators on which Ukraine’s budget is based are unrealistic, and should be revised. This remains one of four sticking points between the international lender and Ukraine in talks about a new loan program.
The deal is currently looking more distant than ever, while the need for IMF support grows by the day.
The only people who remain blind to this need are, paradoxically, the ones who are supposed to be watching the economy closest: the nation’s own government.
In fact, by now it’s pretty clear that the Cabinet lives in denial of the financial problems it will inevitably face in the near future.
At a recent conference in Kyiv Prime Minister Mykola Azarov went out of his way to deliver the "we’re fine" message and call the IMF’s advice unsound. Finance Minister Yuriy Kolobov also said, Ukraine "has no urgent funding needs and will not tap external markets immediately."
Moreover, Azarov added that Ukraine won’t cut budget spending by "following the advice of others."
"We need a differentiated approach. The advice fits nations where debt is 120 percent of GDP, (but) is not good for countries with a debt of 32-33 percent of GDP," the prime minister said.
It is true that Ukraine’s public sector debt - despite fast growth — remains relatively low by international standards. But other key indicators of economic health are not so rosy. Gross external debt stood at $136 billion, or 77 percent of estimated GDP, at the end of the first quarter, according to the central bank.
Low sovereign debt is what the government has relied on heavily to muddle through this year, and the general market assumption is that it will continue to do so until the presidential election in 2015.
The Finance Ministry has borrowed $5-5bn on external markets by the summer. Another $5.6 billion was borrowed on domestic markets. The money went to cover significant external payments, as well as the gaping budget deficit.
Of course, the borrowing rate has been way higher than what the IMF would offer.
Amazingly though, the authorities have been saying in unison that they don’t need the IMF, with the president leading the chorus with the most irresponsible and unjustified of comments.
This week he said that "the demands put forward by the IMF today are unacceptable for us. This is an increase of the level of payments for gas. We cannot agree to it because it can have negative social consequences for the population."
The president’s statement shows he knows very little about the IMF proposals, as well as the true cost of the populist subsidies for utilities. Instead of the targeted subsidies for low income groups that the IMF suggests, the nation doles out billions of hry vnias each year to cover everyone’s utility bills, ending up wasting a bigger proportion of this expense on bigger (and richer) consumers of gas.
Moreover, the president continues to insist the budget is "fulfilled by 100.6 f percent" and that "it is desirable" to increase social spending.
Each of these presidential comments causes a flurry of responses from various economists along the lines of "this guy is from a different planet."
The same message, but in more politically correct terms, was sent to us last week by Leszek Balcerowitcz, the father of economic reform in Poland, its former central bank governor and prominent economist.
"Ukraine has a very high spending to GDP ratio of 46 percent. There is only one country (in the region) with a higher spending ratio — Belarus," he said at ABC Ukraine and Partners, the government’s investment conference in Kyiv.
He says that cutting spending is Ukraine’s only way forward, since raising already high taxes is out of the question. Moreover, he made it quite clear that Ukraine’s dismal state of finances has nothing to do with its economy.
"Economic growth is not an intellectual problem, it’s a political problem," he said. "It often happens that important reforms are initially unpopular, but if you don’t reform, you will remain unpopular forever," said Balcerowitcz.
Perhaps, for once, the government should listen - if even for its own sake.