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Vasyl Yurchyshyn: Government policies on supporting the economy prove ineffective

24.06.2011 | Text: Tetiana Ochymovska Komentari:

Experts view inflation is as prime driving force behind GDP growth

Mykola Azarovs team has reported new achievements as one of its assets: Ukraines economy is growing much faster than the forecasts, which allows for improving not only macroeconomic guidelines but also increasing social expenditures in the budget. Director for Economic Programs at Razumkov Center Vasyl Yurchyshyn told KW how independent economists view the situation

PH: from private archive

KW: What are the reasons for the improvement of GDP growth forecasts this year?

V.Y.: The increase in nominal GDP growth is quite easily achieved thanks to inflation. This year, price growth dynamics considerably differ from those of last year. In 2010, there was a deflation in April-May and prices were falling. This year, instead of the traditional decrease in inflation dynamics in April-May, prices grew by around 2%. Based on the results in May, the annual inflation indicator already reached 11%. Ukraine exceeded the limits of the much talked-about one-digit indicator of price growth that the government was so desperately trying to achieve. While the Cabinet presupposes that the trend of price growth will continue, the upgraded assessments of nominal GDP are fully logical. Moreover, thanks to inflation it can be increased by 5% and even 10%. Inflation risks this year are very high. It is also anticipated that housing utilities rates will be raised and the prices of gas will be revised. The situation on the oil market is still unstable, which may spark a further rise in the price of gas, meaning that transport services will also become more expensive. According to our forecasts, while the real growth of the consumer price index this year will be around 12-13%, the government will most likely try to manipulate the figures and the official inflation indicator will turn out to be much lower.

KW: How realistic is the forecast of a 4.7% growth of real GDP?

V.Y.: It is more than realistic. The other thing is that the planned 4.5-4.7% growth is very low compared to the huge decline that our economy showed during the financial crisis. With such a rate of GDP growth Ukraine will reach its pre-crisis level only next year and 4.5-4.7% is the indicator of the self-survival potential of businesses. It can be easily achieved provided that the government does not impede on its development. Declarations of the government of such basic growth rates mean that its programs for stimulating the economy are either not active or are simply ineffective. This indicates that our government simply does not know how to activate growth. Otherwise, it would set a goal of 6-7% GDP growth.

KW: Could the domestic economy grow by 6-7% this year?

V.Y.: Such growth could become fully real provided that the government stimulates business, introduces clear rules of the game and proposes a development program. This would let some businesses emerge from the shadows. According to some assessments, the ratio of shadow and official sectors in Ukraine at the moment is 50/50. If the shadow sector decreases at least by 10% per year and moves into the official field, it will add 1.5-2% to GDP growth, which in the end could produce an indicator of 6-6.5%.

KW: Is high inflation an obstacle for increasing the GDP growth rate?

V.Y.: The current growth of the consumer price index in Ukraine cannot be labeled as a risk to the economy. It is believed that investment prospects of a country can be undermined by an inflation level exceeding 1.5% per month, which is around 18% per year. I think that Ukraine is also past that stage. The current price growth indicator at 10-11% is not critical for the economy. On the contrary, inflation boosts the indicator of nominal GDP, which means an increase in proceeds to the budget. This means that the government can increase social expenditures, thereby preserving the image of a socially-oriented government.

The only negative aspect is that the government forces business to be oriented towards the inflation level planned by the budget (8.9%), which is much lower than the real figure. For business development, maximum openness and honesty of the government and the transparency of economic forecasts and indicators is of the utmost importance. In this case, the government would indeed be able to improve the indicator of real GDP and we would see economic growth not in nominal figures bloated by inflation, but thanks to actual growth.

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