Ukraine’s government and central bank are taking proper action to reduce inflation and can expect to see a decline in the rate from mid-2008, the International Monetary Fund said on Tuesday.
Two IMF representatives, in an interview with Reuters, also praised the central bank for allowing a degree of flexibility in the hryvnia currency’s movements on foreign exchange markets. Year-on-year inflation in Ukraine hit 26.2% in March. Government forecasts for the year still stand at 9.6%, though they are certain to be revised. Prime Minister Yulia Tymoshenko’s government has promised to introduce anti-inflation measures and the central bank this week raised its discount rate from 10 to 12%.
“I would point out that both the government and the central bank have been taking steps and many of those steps are, in our view, quite positive,” Balázs Horváth, the IMF’s permanent representative in Ukraine, said. He said Tymoshenko was correct in saying the rate could decline from mid-2008, provided the government and central bank worked in tandem. “I believe Tymoshenko is correct...if the efforts of the central bank and the government are sustained to tighten conditions and manage demand,” he said. “And more importantly, if the central bank and the government cooperate in an effective manner, then certainly it is possible to attain inflation that is significantly lower on a 12-month basis than it is at present.”
REASONS FOR INFLATION
The IMF, in a Regional Economic Outlook released on Tuesday, identified increases in government social benefits, excess demand, surging money supply and market rigidities as the main reasons for high inflation in Ukraine. On foreign exchange, Horvath said the central bank’s easing of a tight corridor for the hryvnia could only help the economy. “The recent steps indicate that the central bank has on some occasions allowed the exchange rate to move more than in the past and we consider as very positive steps in the right direction,” he said. The central bank has maintained a corridor of 5.0 to 5.06 to the dollar since August 2005, but it has allowed the currency to rise to 4.8-4.9 in recent weeks. The IMF and other Western institutions have long called for a more flexible approach. The IMF has said that diverging from the corridor will cause no harm to the economy and, rather, enable the central bank to pursue a more efficient monetary policy.
Dora Iakova, a senior IMF official dealing with Europe, said tighter control over money supply and more expensive credits would allow Ukrainian banks to improve efficiency. “A slowdown in credit growth is really desirable for Ukraine. Up until now, the goal of the banks has been just to gain a market share and there has been quite aggressive lending,” she said. “But from now on the emphasis will really shift to staying liquid, in good financial shape. And more prudent lending could be emphasized as opposed to just gaining market share.” (Reuters)