Ukraine feels strain as inflation soars

Quote: Vasyl Kuznetsov, a cash-strapped Ukrainian pensioner, makes no bones about his views of spiralling food prices as he shops for groceries in Kiev’s Volodymyrsky market.
“This bazaar should be demolished and those responsible for these prices jailed,” says the 77-year-old, standing in front of a meat counter. “How can we survive and buy meat when it has doubled in the past year to nearly $10 per kilogram? Everything has gone up – cooking oil, my electricity and gas bills. I can’t even afford to buy meat for this week’s Easter holidays.”
While inflation is re-emerging as an economic threat around the world, it is hitting Ukraine particularly hard. At 26 per cent year-on-year, last month’s jump in consumer prices was Europe’s biggest and among the highest in the world, excluding crisis-stricken states such as Zimbabwe.
Among stable economies only Venezuela, with 29 per cent, saw higher inflation. Asia’s largest increase was Vietnam’s 11 per cent rise.
Ukraine is not unique in central and eastern Europe. Inflation is high in some of the European Union’s new member states, including the Baltic states (11-17 per cent last month) and Bulgaria (14 per cent). In Russia, the region’s biggest economy, it is 13 per cent. Hans-Jörg Rudloff, chairman of Barclays Capital, told a Russia business conference: “Inflation clearly is a bigger problem right now than the slowdown of economic activity around the world.”
Like other countries, the region’s high-inflation states also face rising global food and energy prices. But it is clear that domestic economic developments are adding fuel to the flames. Some neighbouring countries have so far managed to keep a tighter lid on prices – in Poland, last month’s inflation was just 4.1 per cent.
To an extent, Ukraine is a victim of its own success – its high inflation is partly a by-product of rapid economic growth, which has averaged nearly 8 per cent annually since 2000, despite the political upheavals associated with the Orange Revolution. Economic growth has been accompanied by rapid credit growth, with the money supply rising at 50 per cent a year since 2004 as companies boost investment and householders spend on everything from cars to kitchens.
Moreover, successive governments have struggled to control inflation in the face of pressures to boost public spending. This year, the government is budgeting for a 43 per cent social spending increase, including a 37 per cent pensions’ rise and a 32 per cent increase in the minimum wage. While overall budget deficits have been kept in check, thanks to soaring tax revenues, cash has flowed into consumers’ pockets.
These effects have been compounded by a foreign exchange regime under which the hryvnia is tied to the US dollar. To prevent currency appreciation against a fast-depreciating dollar, the central bank has bought dollars and sold hryvnia, importing inflation. The foreign exchange reserves are up from $9.5bn in 2004 to about $35bn (€22bn, £18bn).
As elsewhere in the region, the global credit crunch is now damping credit growth. Economic growth is forecast to ease this year to about 5 to 5.5 per cent and inflation to slow in the second half. But it may still end the year near 20 per cent – far above the official 9.6 per cent target.
The authorities are taking action, with the central bank raising the discount rate from 10 to 12 per cent this week, tightening bank lending controls and preparing to widen the hryvnia’s trading band against the dollar.
Meanwhile, the government is cutting the planned budget deficit from 2 per cent to 1.5 per cent of gross domestic product. The International Monetary Fund wants bigger cuts but, with presidential elections due in late 2009, politicians are loath to squeeze the economy hard.
“This government is taking action and has the experience to cope with the situation,” a senior government official says.
But Kamen Zahariev, Kiev head of the European Bank for Reconstruction and Development, says: “Inflation remains a huge worry for everybody.”
It is a particular worry for the poor, who are especially exposed to upswings in food and energy prices. Ukrainian food prices have risen even faster than general prices – climbing 42 per cent in the year to March. While other European countries are also seeing such effects, the impact is hardest in Ukraine since food accounts for a bigger part of household spending than in richer states.
So far, like Mr Kuznetsov in the market, Ukrainians are complaining about prices but not coming out on the streets.

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