You're reading: National Bank of Ukraine’s plan: More inflation

Ukraine plans to inflate its way out of economic troubles. As National Bank Governor Valeriya Gontareva said on Jan. 16, the monetary base will increase by 27 percent this year.

This
means turning on the money printing press.

As
inflation almost reached 25 percent last year, more cash in the system brings
another risk that the hryvnia, Ukraine’s heavily devalued currency, will keep
losing its value. The National Bank expects this year’s inflation to exceed 17
percent.

Ukraine
has a pitiful track record of tackling inflation. Hyperinflation
destroyed the kupon, a currency that country had in 1992-1996, prior to introducing
the hryvnia.

Lack
of understanding of the macroeconomic issues by the members of parliament that
they showed during Gontareva’s
Jan. 16 visit to the Verkhovna Rada
has become the subject to jokes
of financial analysts
. Executing the money printing policy in a country
whose parliament tends to be populist when it comes to serious financial
discussion is questionable.

“Yes,
emission (printing the money) should take place,” said First Deputy
Finance Minister Igor Umansky in an interview
with LB website
. “But money should come to the economy not
through banks, but through the state budget.”

“Let’s
see how they supported public spending in the United States and European Union. Did the central banks
help the budgets? Yes, at a huge scale!” he emphasized.

However,
it looks like Umansky has a very special understanding of how money printing
programs, known as “quantitative easing” or QE, went in the developed
economies

In the
U.S., Federal Reserve kept buying government bonds from the holders at a rate reaching
85$ billion a month at some point, to push the investors place more money in
real business, through loans to entrepreneurs and consumers, rather than government-backed
debt securities. Meanwhile, high inflation was not a problem at all – country
rather stood at a risk of deflation.

When
the European Central Bank announced a carbon copy of American QE on Jan. 20, it
planned pretty much the same – spending 1.1 trillion euros ($1.24 trillion), or
60 billion euros a month ($68 billion) of newly printed money to buy the euro
zone’s bonds, excluding Greek ones which are too risky. Again, this will free
more money to be lent to the businesses and will spur the inflation that is
needed to achieve sustainable economic growth.

Basically,
programs of both Fedreserve and ECB bring the money to the system through the
banks, not through the budget. Different from what Umansky of Finance Ministry
says.

Kyiv Post associate business editor Ivan Verstyuk can
be reached at [email protected].