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13 November, 00:00

The true reason for soaring prices is the government’s incompetence

Not for the first time Ukraine’s price increases in basic goods and services are explained by the need to carry out reforms in major sectors, the power industry and public utilities. Meanwhile, none of the previous such price jumps has resulted in any normalization, with the populace almost always having to tighten their belts, paying for the obvious incompetence of the authorities.

The Ministry of Statistics reports the cost of the consumer goods basket to have averaged a 1.1% increase - knowing that such official estimates are trusted by few if any, considering that the communication and electricity rates have risen by 20% and 18%, respectively, and that certain housing and municipal services now cost twice as much. The Ministry of Economy predicts that this will not cause serious inflation. Maybe so, but one has to be sure that this increase will be the last one to endure, and most importantly that it will indeed facilitate economic reforms. The Day turned to experts and their findings, unfortunately, show that nothing good awaits our long-suffering populace.

Oleksiy Plotnykov, Ph.D. (Economics), believes that Ukraine’s entering the price increase phase caused by a fall of the hryvnia’s exchange rate and ineffective performance by the power and related industries will by all means have a negative effect on living standards. “On the one hand, this will result in increasing the costs of goods and services, because every such price includes the cost of electricity being consumed. On the other hand, raising electricity charges will cause further inflation, in the first place affecting pensioners and other underpaid strata, people who have to count their daily budget by the kopiyka,” he says.

Ukraine’s electricity costs (4.5 cents per kW/h before May increase and 5.5 cents after) are approximately two times lower than those in Germany and three times those in Japan. In other words, evening them out was in a way unavoidable. However, Dr. Plotnykov specifies that every such decision on increasing rates should be made at the right time. “Why is the issue of municipal costs easier to endure in Russia? Because the populace cannot and does not have to pay 100% of the rates. Of course, prices must be evened out, but this must be done considering what people can actually earn.”

A similar opinion is expressed by Volodymyr Dubrovsky, a consultant from the Harvard International Development Institute: “The cost of living will, of course, increase, but so will nonpayment for electricity. The populace actually has very little money to spare, so the government should not count on a good return from increased rates. There will be lots of debts and little cash on hand. In principle, electricity charges should go up, but this process must be regulated by the market.”

Considering that Ukraine has no electricity, gas, or public utilities markets, any such price increase will depend on the monopolist’s (in this case the government’s) arbitrary will. “However, granting the power industry people their reasoning,” says Mr. Dubrovsky, “and if a given sector is indeed unprofitable, even then increasing prices will not necessarily improve the electric stations’ financial standing. The high ratio of barter and the confusing payment schemes will not disappear with soaring prices. At the same time, precisely this practice makes the power industry look so unprofitable.”

As for the actual reasons for the latest price increase, Mr. Dubrovsky believes that this is an “arm-twisting policy aimed against the populace, calculated to support industrial enterprises that are consuming energy uneconomically and not paying for energy supplies. To make them use this energy effectively and improve their output, one has to aim such a price increase precisely at these enterprises [to make them pay for their mistakes]. After all, the current price increase should not affect the inflation rate, because it will eventually cause additional monetary intake.”

It is also possible, however, that the populace will not suffer from this price increase as much as our experts believe. A poll carried out by the National Academy’s Institute for Econometrics shows that the population’s real incomes (i.e., unofficial revenues) tend to grow, while their take-home wages decline. In a word, people seem to have found a way to deal with their incompetent government and are not likely to go on paying for its mistakes.

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