The current monetary policy cannot go on like this! This was the conclusion announced by Ukrainian President Viktor Yanukovych in a strict voice in December 2012 while describing the attitude of the economy to a credit-based diet, which de facto became one of the key elements in the battle of the National Bank for forex stability and low inflation in 2012.
Loans issued to legal entities in January-November 2012 rose by a mere 5.9%. Yet, loans extended to individuals shrank by the same 5.9%. High-quality clients migrated from one bank to another, being lured by crawling micro discounts on commission. As a result of such milling about, the growth of the total sum of loans in the economy over the 11 months was a mere 2.9%
LEAP-YEAR FACTOR
The president was right! Who would dare say he’s wrong? Ukraine’s GDP in the third quarter of 2012 dropped by 1.3% year-over-year, whereas growth in the first quarter was 2% and in the second it was 3%. At the end of the year it will remain positive, but not higher than 1%.
“Our economic growth target [for 2012] was about 3.5%. It would be good if the year ends with a positive figure,” Ukrainian Prime Minister Mykola Azarov said late in November.
Everybody understands this – the global crisis goes on. The price of imported natural gas remains high, and the effective demand for Ukrainian metals is declining: the National Bank of Ukraine reported a 13% decline in metal exports in the 11 months of 2012 year-over-year.
A good yield of grain and the favorable situation on the foreign food market saved the year. But hitting historic highs in grain exports was conducive to a general increase in goods imports in the 11 months by a mere 2%. Imports should be also taken into account.
In general, the country has seen a triple deficit. As a result of a smaller economic growth, the budget deficit in 2012 is expected at 2.6% of GDP, which is higher than the target fixed at 1.7% of GDP. The current account deficit in January-November 2012 was $12.443 billion, being 38% up year-over-year. The deficit of the balance of payments over the period grew by 41% year-over-year, to $3.336 billion.
The economy lost its credit support, and it started to submerge in recession. This happened when the neighboring Russia, which also faced the same negative impact from the global economic cooling, was about to start the fight against credit overheating: the amount of loans issued to individuals in Russia in 2012 could grow by more than 40%.
Ukrainians still remember other figures: the total growth of loans in 2006 was 71%, in 2007 it was 74.1%, in the crisis year 2008 it was 71.9%. Even in 2011 this indicator looked much better, being 9.6% up.
THE WAR OF PRIORITIES
Dura lex sed lex [Law is harsh, but it’s law]. In keeping with the amendments of the Law on the National Bank of Ukraine dated 2010, the central bank’s priority number 1 is price stability. The stability of the banking system goes second. Maintaining stable economic growth is only number three.
As a result of the NBU’s efforts in that direction, inflation in Ukraine in 2011 slowed to 4.6% from 9.1%, and consumer prices in January-November 2012 dropped by 0.4%.
To succeed in all three areas in the country with an open economy and a narrow domestic market is possible only under ideal conditions. In addition, the National Bank has another, not less important task, which is not stipulated in laws, – the targeting of the forex rate.
The point is not that households have accumulated up to $50 billion in cash, more important is that the devaluation of the hryvnia makes foreign debt servicing cost more. The total amount of state debt as of December 1, 2012, was $36.48 billion (gross external debt as of October 1, 2012, was $132.446 billion). In addition, the devaluation may lower the quality of banks’ loan portfolio and increase the cost of all imports: Ukraine January through October 2012 imported 27.7 billion cubic meters of Russian gas to the tune of $ 11.8 billion alone.
Thus, the circle is closed, as the devaluation of the hryvnia in the current economic paradigm will fuel inflation, and this will come into conflict with the NBU’s most important priority – pricing.
In late August, the National Bank provided UAH 3.8 billion in long-term refinancing: in two days the rate weakened from UAH 8.1305 to UAH 8.1875 per U.S. dollar. This experiment has revealed an unpleasant paradox: the president is right, but with the alternative model of behavior there is a question: who is to blame if the liberalization of monetary policy will be followed by the acceleration of inflation or by increased pressure on the forex rate without adequate economic recovery.
