LET’S MAKE A DEAL GOVERNMENT INCOMPETENCE IS THE REAL CAUSE OF RISING PRICES

This is not Ukraine’s first price rise justified by the necessity of reform in the system-creating sectors of energy and utilities. None, however, have led to normalization of the financial status of these realms, and all the while the people always have to pay for state’s economic illiteracy.

According to the Ministry of Statistics, the price of the consumer subsistence basket of products grew 1.1% between April 7 and 17. However, it is hard to say to what extent we can trust the official figures here. Even when communication and energy prices grow 20%, natural gas 18%, certain utilities 50%, this will not spur inflation. As a matter of fact, we could accept this forecast, if we were sure that this will be the last rate hike and actually do something to help economic reforms. However, according to experts The Day turned to for comment, there is not much hope for that.

The country’s price increases were caused by the hryvnia’s fall on foreign exchange markets and the ineffective work of energy enterprises. This, according to doctor of economics Oleksiy Plotnykov, will surely affect living standards. “On one hand, it will lead to price increases, since the production cost of any goods includes energy. On the other, energy rate increase will give new impetus to inflation. The first to suffer from this will be pensioners and the poor who will have to tighten their belts even more.”

Note that energy prices in Ukraine (4.5 cents per kW/h before the increase in May and 5.5 after) are half the price in Germany and a third of that in Japan, so to some point price leveling was unavoidable. However, Plotnykov said, the right time should be found for every price increase. “Why is the situation better in Russia? Because people there cannot afford and do not pay 100% for communal services. Prices of course should be leveled, but coordinated with people’s real wages.

Consultant of the Harvard Institute for International Development Volodymyr Dubrovsky also supports this view: “The cost of living will surely increase along with energy debts. People do not have much money, which is why the state should not expect much more revenue. Debts will rise, but not much money will flow into the state budget. Actually, the energy prices should grow, but this process should be regulated by market.”

If the country does not have an energy market, gas market, communal services market, then any price increase will depend on the monopolist, in this case the state. “However, if you consider that the energy sector is really unprofitable, in this case even a rate increase is unlikely to change the financial situation of the power stations. The dominance of barter operations and complicated account schemes will not die out with the price increase.”

As to the actual cause of the last increase, Dubrovsky thinks that the state intends to support enterprises which do not pay and ineffectively consume energy at the expense of people. “There is more sense in increasing energy tariffs for enterprises, in order to force them save energy and streamline their production processes. But in the end, the current prices increase will not have much influence on inflation in general, because it will not lead to additional money income.”

However, the Ukrainian population may suffer less, than our experts predict. According to a poll by the Institute of Economic Forecasting of the Ukrainian National Academy of Sciences, the actual (understand this as unofficial) monetary income of the population has a tendency to increase while real wages and salaries tend to decline. In other words, people have found their own answer to their government’s incompetence and are likely to stop paying for its mistakes.

Drawing by Anatoly Kazansky, The Day