Cooling Kiev

Quote: Policymakers seeking evidence of the dangers of inflation could do worse than visit Ukraine, where it stands at 30 per cent. No other country in Europe comes close. Its inflation rate ranks alongside Venezuela and Zimbabwe, among the highest in the world. This is not the company that Ukraine would like to keep as it joins the World Trade Organisation and pursues economic integration with the European Union. But unless Kiev acts urgently, it will run into serious economic trouble.
Ukraine has been particularly exposed to global increases in food and energy prices. Its food bills were inflated by a bad harvest last year while energy costs were driven up by gas price increases imposed by Russia, the dominant supplier.
With this year’s harvest outlook good, consumers can expect some respite during the summer. As food represents 60 per cent of the consumption basket, overall inflation should also slow in the next few months. But this alone will not save the Ukrainian economy: energy costs will continue to rise as Russia seeks to double gas prices to around $400 per thousand cubic metres.
Also, about half Ukraine’s inflation is due not to food and energy but domestic economic performance. Kiev is rightly proud of an economic surge that has seen output grow nearly 8 per cent a year since 2000. But until 2008 the authorities did little to slow the accompanying credit growth of around 50 per cent a year. And they did even less to limit public spending. Since before the 2004 Orange Revolution, successive governments have paid huge increases in public wages and social benefits. The overall budget deficit has been kept in check – but a torrent of money put directly into consumers’ pockets.
The onus now is on the government to cut public spending hard and reduce the deficit from a projected 2 per cent of GDP to around zero. Unfortunately, the political struggle that has hampered policy-making since 2004 still prevents coherent action. President Viktor Yushchenko blames Yulia Tymoshenko, the prime minister. She blames him. Both criticise opposition leader Viktor Yanukovich.
All three have their eyes on the 2010 presidential election. But none wants to push for the retrenchment urgently needed. Without action, that poll may not be worth winning.

http://www.ft.com/cms/s/0/4ccc02a2-2b42-11dd-a7fc-000077b07658.html

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