WHO IS REALLY TO BLAME FOR RECORD-HIGH INFLATION IN UKRAINE?

Inflation in Ukraine was 3.1 percent in April and 13.1 percent from January through April. This was the highest inflation rate of any former Soviet state, twice as high as in Russia. The Yulia Tymoshenko government drafted the state budget for 2008 based on the expectation that annual inflation would reach 9.6 percent. In early April, however, the International Monetary Fund forecast that Ukrainian inflation would reach 20 to 22 percent by December.

Ukraine used to have four-digit inflation after the break-up of the Soviet Union in the early 1990s, but fiscal discipline and economic reform lowered inflation to an annual average of 5 percent from 2001 to 2003. Inflation was again high in 2007, at 17 percent, and Tymoshenko blamed that on an erroneous economic course of her predecessor, former Prime Minister Viktor Yanukovych. She promised to lower inflation in 2008, but it is clear by now that she will not deliver on her promise.

President Viktor Yushchenko’s team says that Tymoshenko is stoking inflation by pursuing populist social expenditures. Yushchenko, who views Tymoshenko as his main rival in the 2010 presidential election, suspects her of buying popular support. Tymoshenko’s critics forecast that she will resign closer to the election, blaming the bad shape of the economy on her opponents who, she will say, torpedoed her reform efforts.

The Tymoshenko cabinet argues that fiscal discipline is tight and that social spending is not so high as to affect inflation seriously. Tymoshenko says that Yushchenko spoils everything by preventing her from directly steering the country’s economy, thwarting her privatization plans and telling the regional governors to ignore her instructions.

With regard to inflation, Tymoshenko says that the situation is not bad at all. When the inflation statistics for April were released, she spoke about a slowdown in inflation, as the April figure of 3.1 percent was lower than March’s 3.8 percent. “When we came to power,” she said on May 7, “we promised society to curb the inflation that Ukraine inherited from the previous cabinet within five to six months. April statistics show that that slowdown has begun.”

Tymoshenko said that the prices of more than 20 basic foodstuffs had dropped in April. In particular, she said that from April 2007 to April 2008 the prices of sugar, vegetable oil, and dairy products had “stabilized.” The State Statistics Committee, however, reported that prices had increased for sunflower oil by 114 percent, for sugar by 26.8 percent, and for dairy products by some 40 percent. On the average, food prices in Ukraine had grown by 47.4 percent during this period.

Yushchenko’s economic adviser Oleksandr Shlapak said that 3.1 percent was an “extremely high” inflation level, higher than at the beginning of 2008. Yushchenko called the price trends “appalling.” “No one can be reconciled with the fact that they have become 13 percent less well off in the first four months of 2008,” he said. Yushchenko called on the government to come up with a national plan to fight inflation.

The chief of Yushchenko’s secretariat, Viktor Baloha, issued a statement saying that Tymoshenko was unable to deal with the negative trends. He recalled that April was usually quiet in terms of inflation, as the rate was zero in April 2007 and -0.4 percent in April 2006. Baloha accused Tymoshenko of depleting state coffers by allowing meat and sugar to be imported without customs duties in order to contain inflation, and by ordering that salaries and social benefits be raised in September rather than in November, as planned. Baloha suggested that Tymoshenko was “preparing to resign with the prospect of an election” ahead. The government, he said, “will certainly count the increased wages to its credit as the greatest blessing for the people.”

First Deputy Prime Minister Oleksandr Turchynov is less optimistic about inflation than Tymoshenko. Speaking at a press conference on May 7, he accused five unnamed regional governors of “sabotaging” the government’s anti-inflation measures by refusing to sell cheap foodstuffs from the state reserves. He said that the five had been summoned to Kyiv for “a serious conversation.” Yushchenko, however, instructed them to ignore the government’s invitation. Earlier this year, he decreed that all regional governors should coordinate their trips with the presidential office.

Tymoshenko complained that her cabinet was effectively cut off from the governors’ offices, as Yushchenko did not allow the governors to attend a single sitting of the government in the last four months. Speaking in Kyiv on May 12, Tymoshenko rejected the rumors about her imminent resignation. On May 13 the Yulia Tymoshenko Bloc prevented Yushchenko from delivering his annual address to the nation by blocking the parliament rostrum in protest against parliament’s failure to pass anti-inflation laws.

Anders Aslund of the Washington-based Peterson Institute for International Economics claimed in an article for Project Syndicate that Yushchenko, rather than Tymoshenko, was to blame for high inflation. He said that the central bank, subordinated to Yushchenko, had insisted on pegging the national currency, the hryvni, to the weakening U.S. dollar, effectively stoking inflation. Aslund said that Yushchenko “seems more interested in harming Tymoshenko politically than in capping inflation.” (Channel 5, May 7, 13; UNIAN, May 7, 12; www.president.gov.ua, May 8; www.project.syndicate.com, April 2008).