OUR TOO EXPENSIVE STATE

Earlier this month
the Ukrainian government passed a resolution
to double import duties
on over 600 types
of products, the main reason being an attempt to fill state budget coffers.

A week after the regular government session, which was conducted in an atmosphere of slight panic, the Western mass media reported the event. The relatively old information looked new and fresh in their interpretation. Unlike the Ukrainian government, they tied the rates increase directly with Ukraine’s worsening trade balance.

When a country has a negative trade balance, which means that imports exceed exports, there is still hope that foreign loans and investments will compensate. The same hope exists when the country has a huge budget deficit, for reducing budget expenditures can decrease it. The state may avoid granting loans to the economy or suspend payments to numerous budget organizations. The special feature is that the payments balance should remain even; in other words imported and exported monetary and product streamlines should be equal. This is why any information on balance disturbance can always be considered a signal that a financial crisis, which may lead to the bankruptcy of the regime, is on the way.

Until now Ukraine solved all its problems with the payments balance mainly with IMF assistance and thanks to its authority. In fact, the IMF is directly mandated to balancing the pay scales. Ukraine should follow all the IMF’s suggestions in order to have “balanced” relations with other countries and a stable financial situation inside the country. And the fact that the IMF has suspended financial aid to Ukraine does not eliminate the task of supporting its balance of payments.

This way, even if the government fails to gain control over the situation, the payments balance will go back to normal: the exchange rate will drop, prices will rise, and capital will start leaving the country. To prevent that, the government decided to raise customs fees on imports. State officials also hope this will prevent capital flight from Ukraine or at least decrease it. However, not everybody agrees that the struggle for balance should start here. And not only because it is impossible to cut the import flood under the conditions of a corrupt economy. The measure will be totally lost among the factors, which stimulate capital to leave Ukraine.

NBU chairman Viktor Yushchenko said, “Our state is too expensive and it has too expensive functions. And the market has only one way to express its protest against this: to hide in the shadows, which already manufactures about 50% of GDP, and in barter operations. The less money you have, the less they can take from you.” Since the authorities are interested in money and only that, withdrawing money from bank accounts closes the door to legal economic development. That is why neither administrative and fiscal measures nor fighting corruption will legalize financial flows and satisfy the state’s needs at the same time.

Direct monetary emission, conducted by NBU during 1997, constituted 30% of total money turnover. In the past such an injection of unsupported money would have led to a 100% inflation increase. How did the economy use this money, if industrial production continued last year? It turned out that the enterprises chose not to invest their additional income into legal production.

This year the situation is totally unique: the NBU issued Hr 1.6 billion during two months of 1998. From this amount of money Hr 960 million were used to cover budgetary expenses. It is no secret that budget planning in Ukraine starts on the expense side, which, according to Ukrainian legislation, cannot be fully covered by even two state budgets.

People are coming to understand what the “bad situation with the balance of payments” means. It means that the government will have to pay Hr 1 billion monthly during next few months. This cannot be suspended or postponed, because if Ukraine turns out to be unable to pay, all financial relations with it will simply stop.