1.The Tymoshenko government fails to manage price growth!

Facts

Inflation keeps rising in 2008. Prices on consumer goods and services in Ukraine grew by 2.7% in February 2008 as compared to January. Inflation has reached 5.7% since the beginning of the year, 12-month inflation (as for February of the last year) being accelerated to 21.9% (in January it was 19.4%).

Comments

As in the previous months, inflation is primarily forced by rise in food prices. In February food prices increased by 4 pct, having caused the 82% growth of monthly inflation.

Consumer inflation remains at a rate of over 2 pct sixth months running. It means high price growth inertness, kindled through synergy of considerable internal/overseas demand and increasing producers' costs (on energy resources, workforce, etc.).

Inflation at a rate of 1.5-2 pct per month is likely to remain until the beginning of the summer. The favourable prospects of new harvest give hope for relative deceleration of inflation growth rates/low deflation as for summer months. Meanwhile, consumer price dynamics in subsequent months will depend considerably on success of co-coordinating anti-inflation moves of the NBU and government in the first half of 2008.

It is not the time to discuss the efficiency of the authorities' anti-inflation actions yet. The government does not demonstrate political will to support the NBU moves by economic policy instruments, directed on mitigating inflationary pressure. The government actions do not fit the current situation.

The anti-inflation program has failed to be approved. Ratification of such document is a clear signal to economic agents on priority of governmental actions to hamper price growth. Under conditions of high inflation expectations the present authorities prefer to keep silent: people do not have a clear vision of how the government is going to curb growing prices.

The 2008 inflation forecast remains to be unreal. Consumer price growth only as for the 2 months results exceeded half of official prognosis of inflation for 2008 (9.6%). The doubtful governmental prognosis entails even greater mistrust and people's expectations for inflation growth. The economic agents require reliable information rather than optimistic one. Deliberately unreal price limit undermines trust in anti-inflation actions of the authorities, and reduces their efficiency.

The government's initiatives are focused on proposals of hampering price increase administratively. Various draft decrees of the Cabinet of Ministers of Ukraine, which extend the government's opportunities of adjusting prices and food producers costs, as well as impose technical barriers on food export, are directed thereon. This policy is of little success: in February 2008 sunflower-seed oil kept on growing with the highest speed (+9 pct.) due to licensing restrictions embodied by the government.

Amendments to the 2008 draft budget, testifying to the government's course on toughening fiscal policy and reducing budget deficit to 1-2%, have not been made. Vice versa, the CMU pursues the policy of lavish budget expenses through increasing officials' salaries by 45%. The 2009 budget declaration is being passed, in which the government insists on increasing the 2009 budget deficit to 3% of the GDP.

New gas agreements with the Russian Federation, that undermine the price stability of gas supplies for 2008, are being initiated. Having destroyed the previous scheme of deliveries, Tymoshenko did not manage to agree on new purchase principles of the imported gas for Ukraine on conditions, at least, not worse than those existing early in the year. Nowadays both the business and the people lack clear-cut guarantees of gas price stability until the end of 2008. Such vagueness strengthens the costs inflation: during February of 2008 producers costs grew by 3% (+25.6% annually).

Taking into account the abovementioned tendencies, unless the coordination of the authorities' anti-inflation measures is improved, which is admitted by the NBU as well, then the optimistic high-case inflation rate will amount to 15-16% as for the year performance, whilst the pessimistic one may exceed 20%.

Unfortunately, it should be mentioned: fighting inflation has not become a basic priority of the authorities, as it is stated in the governmental program 'The Ukrainian breakthrough'. The government keeps on just watching how high inflation undermines purchasing power of citizens, eats into their savings.

Obtaining short-term political benefits, the Tymoshenko government plunges Ukraine further into inflationary spiral. Such policy threatens macroeconomic stability and leads to worsening of the people's real welfare.

2. The Tymoshenko budget policy is a way toward economic collapse and inflation growth!

Facts

The government fails to fulfill undertaken political obligations: the time for introducing to Verkhovna Rada draft amendments to the 2008 state budget law expired on March 1, 2008. The submission of such document was one of the basic conditions for signing the budget law by the President of Ukraine and the speaker of Parliament. Recipients of pensions and social benefits, payments to whom are calculated on the understated inflation rate basis, along with local budgets, indemnifications of gas tariffs to which are estimated according to lower purchase prices for imported natural gas, are exposed to threat.

Meanwhile the government is engaged in plans of preparing the next year draft budget. On March 5, 2008 the CMU approved the annual budget declaration - a document that determines basic directions of the 2009 budget policy (the CMU decree #160).

Comments

The key provisions of the budget declaration prove the following:

The budget policy of expansion will be pursued by the state: the document envisages the 2009 budget deficit at a rate of 2% of the GDP, adjustment to 3% of the GDP being possible. It aggravates inflation risks in medium-term outlook.

The decrease of tax pressure is postponed: the GDP rate which is suggested to be redistributed through the budget has increased to 32%. It is higher than the 2007 rate. The government protracts accepting the Tax code, plans for its elaboration are put off to 2009.

The support of traditional sectors is maintained: reinforcement of state support of particular sectors of the economy is planned: aircraft construction, space industry, defense industry.

The government does not intend to meet the undertaken pre-election obligations. The declaration envisages continuation (rather than termination!) of reimbursing the USSR Savings Bank deposits.

The government introduces superficial upgrading of interbudgetary relations: The CMU continues to declare doubtful pledges, such as imposing the property tax.

Lack of medium-term course: unlike the previous budget declaration, the government did not even try to link directions of the 2009 budget policy with a medium-term prospect. Although the government declares conformity of the budget declaration with the governmental program, the latter was approved only by the government. It lacks clear-cut priorities, tasks and aims, and has contradictory positions.

The budget declaration is a document that shows the intentions and priorities of the Tymoshenko government in the framework of the 2009 budget and tax policy. As it is evident from the declaration content, the government admitted in public its failure to meet the undertaken pre-election obligations. People should not expect promised indemnifications in full amount of the deposits by the end of 2009. Business should not hope for tax pressure decline and improvement of tax administration. Local budgets should not look forward to their opportunities for earnings being enhanced. The government continues not to notice impending inflation risks and does not hurry to be engaged in the fight against price growth. On the contrary, despite the NBU calls to toughen the budget policy and reduce the budget deficit, the 2009 rate is only increasing. Thus, the authorities' political responsibility to the citizens, constantly mentioned by the prime minister, remains to be a myth.

The society entrusted its votes to the Tymoshenko Bloc politicians so that they solve their specific problems. Failing to accomplish their pre-election pledges, the government cheats the voters, freely using a credit of their trust. However, as it is well known, there are no free lunches in an economy. The government can manipulate numbers, but cannot circumvent objective economic laws of development. As one could become certain in 2005, Tymoshenko’s insufficiently elaborated budget and tax policy generates risks for Ukraine’s stable growth, boosting inflation sparking, the investment climate worsening, and citizens’ real welfare decline.