The Parliamentary Committee on Finance and Banking chairman Nickolay Azarov told ‘Economicheskie izvestiya’ about his vision of the economic policy that should be implemented in Ukraine.

- Social payments from the budget are currently the main reason of price increase. How long could a double rise in population’s profits relative to the economic growth rate be conducted?

- A challenge of priority between development and consumption is age-old for any government. It is even compared to the tale of eggs and a hen. However, consumption cannot advance without economic development of the country as a whole. It is just as difficult as to ensure high rate and high quality of development without appropriate improvement of consumption pattern. These two priorities cannot be contrasted with each other. But a source of financing these priorities is one - the gross domestic product of the country. It is constant and unique source.

For this reason credits and receipts from privatization are temporal and can be used only for development purposes, for solving long-term challenges facing the society. Consumption and development share ratio may vary in every period of time. It depends not only on some matters encountering the society in a specific period of time but also on a vast amount of internal and external factors. If the state’s security comes under threat, consumption should be diminished.

- But the government will scarcely suggest decline in consumption. You, as the Minister of Finance, also increased consumption.

- Yes, but such rise should be limited. Hungary could be used as an example, where rigid economy of budgetary funds and temporal restriction on profits advance imposed by the government enabled economic growth and cut debt obligations (the so-called Bokros stabilization program).

Responsible policy should be focused on reducing gap between the population’s profits growth rate, GDP and labour productivity. This is obligatory for ensuring both economic and monetary stability. In Ukraine consumer way of living is persistently popularized. Prolonged election campaign, permanent promises of general wages increase, budget welfare payments of many thousands and immediate redemption of depreciated savings confuse the society.

- Attractiveness of such policy is quite understandable, especially in the country which has not recovered from a decade of downturn.

- Meanwhile its consequences are still observed just in the sphere of savings: though investments in fixed assets are expanding, they still remain at the level of 1994 crisis, while slump in personal consumption has been already overcome. On the whole, one of key challenges for modern state economic policy is vagueness of strategic priorities, striving for economic breakdown in all directions simultaneously. It is impossible. Moreover, with entry into the World Trade Organization (WTO) the process of looking for directions of breakdown is aggravating. Import becomes cheaper and it strongly hits domestic producer. At that, export imptrovement obtained with joining the WTO does not directly affect GDP growth and economy modernization. The income received by the exporters spoils them and restrains investment in production upgrading.

- And do you see opportunities of break-through for our economy?

- In our time we saw break-through in establishing a knowledge economy. The education level of Ukrainian citizens is still high. Scientific institutes are strong. Therefore founding another Silicon Valley in our country seemed to us quite a realizable business.

But when Yulia Tymoshenko came to power these undertakings appeared completely abolished. The new government also canceled all investment programs in the budget. In fact all funds, that we assigned for development, are redistributed for consumption. Thus, the new government openly declared about its unwillingness to focus on economy development.

- But even if we prepare high-qualified engineers, they will leave abroad anyway. We have already obtained for ourselves a status of raw materials appendage of the European economy...

- You might be right. Let us then glance at the WTO as a sphere where we should search for a break-through. Ukrainian black soil is the most fertile in Europe. And if the government makes resolute steps and launches the land market, then billions of investments will flow into domestic agriculture. A number of regulatory acts needs to be passed to establish the land market. But from the moment of their acceptance domestic agriculture with low expenses on labour remuneration could become the most competitive in Europe.

- In your opinion, how dangerous is the present inflation rate for the country’s economy? What methods should be applied to contend against price increase in Ukrainian realities?

- We should clearly understand that political processes will have considerable influence on state of affairs in the economy and primarily on price stability. That is, prices will increase. However, anti-inflation policy conducted by the government and the National Bank of Ukraine should prevent slowdown in the economy development. Inflation is a social and economic phenomenon caused by disbalance between demand and supply. Applying monetary measures to inflation which has unmonetary pattern may entail deceleration of the economy growth. And it will only exacerbate the situation.
This is a warning for the government which tries to shift all responsibility for carrying out anti-inflationary policy to the National Bank. The National Bank has pursued quite a rigid monetary policy (monetary base diminished by 5%) in January. However these measures appeared to be obviously insufficient to affect inflation essentially. At the same time considerable decline in growth rate of industrial production is already observable.

- So what should be done to tackle high rise of inflation?

- As for demand, co-ordination of monetary and budgetary policy, especially its social constituent, should be reached. The proceeding policy of people’s profits swift growth, not backed with economic growth, will entail balance deepening at current account of the balance of payments. At the same time it is necessary to originate policy that will extend supply, expand output of commodities and services and improve their quality. And it involves carrying out structural reforms. Unfortunately, in conditions of chronic pre-election marathon it is almost impossible to implement. It requires will and responsibility of politicians, utmost consent of power and opposition for putting such policy into practice.

It is of special importance on the current stage, when all signs of global economic recession are obvious. Mortgage crisis in the USA, liquidity crisis of the largest world banks, financial losses, steep advance in prices on fuel and food, instability of reserve currency, unstable political environment are formidable harbingers of global economic crisis. For the Ukrainian economy, which has just revived after the most terrible slump (unprecedented in world economic history), global economic crisis may inflict a death-blow. And how we wished not to believe it (but responsible politicians should examine not only optimistic scenarios of course of events but the worst-case ones as well), we should prepare the country and people for possible ordeals.

- What inflation rate could be virtually retained according to the 2008 results, if you base on tendencies occurring at the beginning of the year?

- As the government action plan has not been promulgated yet, reliability of forecast can be low. Analysts estimate this index in a range of 17-19%. But risks related to a strain on gas relationships with Russia have not been considered yet.

- What macroeconomic indeces of budget should be primarily revised by the Cabinet of Ministers? Will budget deficit reduction give any effect if take into account that compensations for Savings Bank depositors are allocated at off-balance sheet obligations?

- Actual budget deficit rate should not exceed 2%. This is my firm position. Besides macroeconomic parameters, it is also important that, according to some members of the present government, the next review of business climate have been planned. For example, it is stated that bills of exchange are assumed to be abolished. Given the multifaceted bill of exchange circulation we did not undertake such radical step. Unjustified withdrawal of enterprises’ money cannot be tolerated. By the way, customs office failed to wait for amendments at legislative level, and already in January it has practically ceased to accept bills of exchange. An issue of confining the taxation simplified system is also addressed. It is a very sensible market segment as well, which though does not yield substantial funds to the budget but satisfies demand both for products and services and for working places.

- By your estimations, will the balance of payments retain positive balance this year?

- The balance of payments depends not only on trade balance but also on external inflows of capital. In other words, thereupon in 2008 much will be up to investment climate, to what extent we will manage to maintain attractiveness of Ukraine for investors.

This problem disturbs not only us but other countries as well. For example, Russian Central Bank fixed net outflow of capital to the amount of $9 billion in January of this year. This is more than $7 billion withdrawn in August of last year after first signs of financial instability in the world. In view of crisis on international markets investors withdraw money from developing countries.

It should be a signal for us. We could face difficulties in capital receipts from overseas. Currency supply will diminish. Especially since the Ministry of Finance declares refusal from external loans. If the 2008 balance of payments is positive, it will still be of considerably smaller amount compared to the 2007 one.

- Do you see possibilities for trade balance and current account deficit rate decline and also possibilities for strengthening financial flow?
- The state should be interested in moulding competitive national producer. It will take more than a year. Given existent consumer preferences of the present government I do not see possible versions of overcoming trade balance deficit decline. The current prime minister’s policy has distinguished itself with turning Ukraine from a country with positive balance of trade balance in 2005 into a country with negative balance. Customs barriers decrease and backing steel import delivered a fierce blow to domestic manufacturers. National light and food industries’ produce was actually substituted by cheap items of import production, which in fact was dumping on the domestic market.

- Should business units prepare for credit cost increase owing to steep price advance?

- Unambiguously yes. Credit cost will grow because banks will take the inflationary risks into account. January results could lead to a false conclusion that everything is and will be all right on the market. In January credit volume increased by 2.2% - to UAH 436.1 billion, credits both for legal entities (by 1.8% - to UAH 276.4 billion) and natural persons (by 2.7% - to UAH 159.7 billion) being increased. But the January credits should not be comprehended as a model: decisions for them were made by the 2007 results. January decline in banks deposits growth rates and as a result limits for funds on conducting active transactions, including credit ones should be mentioned as well.

Dollar credit cost will grow as well because due to fund markets crisis banks encounter problems in obtaining necessary funds (to greater extent from external sources). If crisis events on international financial markets are continued, by the middle of 2008 our banks will not only lose possibilities for extending own resources through external borrowings but also run into problems of fulfilling current liabilities. Another challenge is that external borrowings obtained by Ukrainian commercial banks had mainly consumer focus and it boosted goods import.

- What kind of loans the government should carry out in the present situation — external or internal?

- Both internal and external borrowings require thorough treatment. For today the government should not consider internal market as the budget main funding source: it is not developed enough yet. On internal market the state acts as a competitor for business units and has more opportunities to strive for free resources. Both internal and external sources of funding are foreseen in the ratified budget. The Ministry of Finance’s challenge is to enter the market in time.

By the way, I have a question to the Minister of Finance Viktor Pynzenyk who is a permanent critic of our external borrowings. In 2005 he placed bonds on overseas markets in euro (EUR 600 million to be redeemed in 10 years with 4.95% coupon), declaring that this operation will save a considerable sum of money for the budget. At that it is no secret that dollar rate of exchange (to which our hryvnya is pegged) in relation to euro falls constantly, transaction costs rise in price accordingly. Does Mr.Pynzenyk acknowledge this loan erroneous?

- And do you agree with Viktor Pynzenyk’s opinion that it is necessary to limit external loans of state enterprises? Why such idea could emerge? Does it relate to risk of hryvnya devaluation and risks of state enterprises defaults?

- These statements differ from real actions. How could the external loans be constrained while simultaneously state company NAK ‘Naftogaz of Ukraine’ guarantees to the amount of UAH 12 billion written in the budget? That is the state actually becomes a guarantor post factum. As early as in 2005-2006 NAK ‘Naftogaz of Ukraine’ when winding up investment programs increased its own debt portfolio by almost $2 billion.


For sure, the state should actively regulate state enterprises’ borrowings. But debt funds should be used not for eating away or refunding previous loans but for development. Take, for example, necessity of upgrading infrastructure. An investor will think twenty times before investing in production (whether building of a new or modernization of existing one), if roads are bad and energy- or water-supply are unsatisfactory. The same concerns social infrastructure. State guarantees cannot be avoided here. Especially this question is actual in the view of preparation to «Euro-2012». In fact, if there is no infrastructure, there will be no championship. By the way, in my opinion, if a high inflationary dynamics remain in Ukraine, and processes related to property redistribution begin, we may forget about conducting «Euro-2012».