Chart of Growth: Time to Be Bolder

2003 GDP real growth (8.5%) was 2.1 times higher than that forecast by the Ministry of the Economy (4%) and reflected in the budget. Is this accidental or normal? Unfortunately, Ukraine has been gripped, at least in the past five years, by the syndrome of underrated macroeconomic forecasts. The only exception was 2002, when the forecast was higher than the real growth of GDP. In all probability, after burning their fingers, the Ministries of the Economy and Finance chose to be overcautious and created an unjustifiably wide margin in the forecast for 2003. For some reason, the government defines this as sound conservatism and caution. In my view, this is a case of banal double insurance, to use a Ukrainian phrase. It is very helpful because, like in Soviet times, you can downgrade the planned targets and then report that you have exceeded them. In reality, this is not a mistake but intentional underrating aimed at deriving additional free-management income. The National Bank warned the parliamentary budget committee in November 2002 that such macroeconomic indicators as GDP and hryvnia rate were greatly underrated. The same approach lies in store with the 2004 budget. Unfortunately, not all planners feel the consequences of such forecasting. As to economic entities and budget managers, this brings them considerable discomfort. For in this case the movement of their incomes will be difficult to predict.

This country would benefit from more strenuous plans. The 2003 GDP growth confirmed the supposition that the business cycle in Ukraine will not end up in a slump or stagnation. This also applies to macroeconomic prospects for 2004. Ukraine’s business cycle is most likely to assume the graphic shape of a double peak. Changes will be made to the 2003 GDP index after monthly accounting reports have been studied (this is expected to be done in the first quarter). Quite probably, the 2003 GDP rise will reach a mark close to 9.4%. This allows us to claim that the 2000- 2003 average annual growth is approaching 9.4%. This means that, if Ukraine continues to keep up this dynamics, it can double its 1999 GDP in 2009 and restore the 1990 GDP level in 2015. The output achieved at 10-12% industrial growth rate (which has in fact been done) would make it possible to restore the 1994 GDP level and the 1990 industrial output level in 2005.

Yet, underrating macroeconomic funding caused a situation such that the financial system failed to check the unplanned inflow of incomes, and the remaining state funds in the National Bank are today 2.5 times larger than they were in 2002. This creates an inflationary overhang for the first quarter of 2004.

However, what was launched last year is not a slowdown but an accelerating inertia of growth — at least for the first quarter of 2004. The 2004 investment wave lays a sufficient groundwork for keeping up last year’s growth dynamics and will help to give a new impulse to boosting medium-term consumer demand. In 2004, this component of gross domestic demand will be reinforced after the income tax is cut and wages and pensions are increased.

Given a tenfold increase in the growth rate of consumer prices (8.2% against 0.6% in 2002), it is quite a good achievement that the discount rate of commercial banks was not only kept at the previous level but also reduced in the course of 2003 by 1.7%. At the same time, inflation was checked by a favorable economic situation as well as monetary and fiscal measures: the cost of the money furnished to commercial banks increased more (8.3%) than annual inflation (8.2%). A similar monetary policy will be pursued this year. It is planned to keep the discount rate at 7% or even cut it by 1-2% when the inflation rate declined to 4.5-5.5%, i.e., lower than was forecast. However, this seems a bit doubtful today because Naftohaz Ukrayiny is sending the economy a negative signal by raising prices on natural gas. What will also contribute to this is stronger legislative protection of creditors aimed at reducing those commercial banks’ discount rates which are considered payment for risks and bad loans. The government will continue the policy of an exchange-rate-related support of exports and simultaneously will work out and apply measures to keep up investment-related imports.