HAS UKRAINE DODGED THE INFLATIONARY BULLET?

As in Russia, the exchange rate in Ukraine has dropped sharply since the August 1998 financial crisis. The hryvnya, which was trading at US$1 = 2.1 in August 1998, had fallen to US$1 = 5.6 on June 9. But despite this depreciation inflation has remained under control. Year-on-year consumer price inflation, which was 7 percent in August 1998, has remained below 30 percent since then. This is despite the fact that consumer price inflation in Russia–Ukraine’s largest trading partner–had risen to 127 percent in mid-1999, and that world energy prices have risen sharply since then. Although Ukrainian inflation in year-on-year terms was running at 29 percent during April-May, monthly inflation rates are now moderating. Consumer prices rose only 1.7 percent in March and 2.1 percent in April. This stands in sharp contrast with the 4.6 percent increase in consumer prices reported in January.

Ukraine’s inflation trends during 2000 result from three key factors: the hryvnya’s on-going devaluation (the exchange rate was at US$1 = 4.5 hryvnya as recently as October 1999), drastic increases in fuel prices (due both to rising world oil prices and domestic fuel shortages, due in part to temporary stoppages in Russian gas exports to Ukraine), and a loosening of Ukraine’s monetary policies ahead of the presidential election in November. Officially, Moscow’s cut-offs were a response to Ukraine’s past record of nonpayment for oil and gas deliveries. In reality, these stoppages were also a method to pressure Kyiv into accepting debt-equity swaps which would transfer ownership in some of Ukraine’s most attractive enterprises to Russian energy companies.

Despite these improving trends, year-on-year inflation rates are unlikely to drop below 20 percent before 2001. Beyond this, the ongoing liberalization of prices for key utility services, and the hryvnya’s anticipated downward trend needed to keep Ukraine’s trade balance in line, could well keep inflation in double digits through 2003. Still, compared to the high inflation rates which dogged Russia during much of 1998-1999, Ukraine’s inflation performance looks quite impressive.

A possible relaxation of fiscal and monetary policies in the second half of 2000, in response to growing social pressures regarding payments of wage and pension arrears, poses a possible risk to this scenario. Inflation could also accelerate if the government fails to reach an agreement on external financial support with the IMF, and the National Bank prints money in order to generate the cash needed to make debt-service payments due in 2000.

NATO-UKRAINE COOPERATION ADVANCING.