Yushchenko Warns Ukrainian Budget Deficit May Weaken Hryvnia
Ukrainian President Viktor Yushchenko said the government’s swelling budget deficit may trigger a further weakening of the hryvnia and accelerate the pace of inflation, already the fastest in Europe.
The hryvnia has slumped 45 percent against the dollar in the past year, making it the world’s worst performer among more than 170 currencies tracked by Bloomberg. It was trading at 8.5345 yesterday in Kiev, compared with 8.5169 the day before.
The deficit is planned at 100 billion hryvnia ($11.716 billion) this year and 155 billion hryvnia in 2010, or 12 percent of national output, according to Yushchenko, putting at risk payment of the next installment of a $16.4 billion International Monetary Fund loan. The central bank may have to sell bonds to help cover the shortfall, racking up debt as the former Soviet republic endures Europe’s deepest recession.
The budget deficit for 2009 and 2010 “is the main threat to hryvnia stability,” said Yushchenko in an interview at the presidential office in Kiev yesterday. “The source for covering the state budget gap is government Treasuries, bought by the central bank. So, if it supports the 100 billion-hryvnia deficit with sales, what kind of inflation and what kind of exchange rate should we expect?”
Yushchenko, 55, was Ukraine’s central bank governor when the currency’s value against the dollar evaporated in 1998-1999.
Hryvnia Stability
A sinking hryvnia would make imported goods more expensive, and push up the inflation rate, 15.3 percent in August. A weaker currency also makes loans in foreign currencies harder to repay for the government, businesses and consumers, delaying recovery.
Ukraine was the first country in eastern Europe to secure a bailout from the International Monetary Fund aimed at helping it avoid default and stabilizing the hryvnia. The IMF has injected more than $10.5 billion into the Ukrainian economy and banking system, though it’s withholding the next $3.8 payment until the government accedes to its demands on the budget.
The loan was approved on concerns the global recession would undermine the banking system, prompting the central bank to impose control over 13 lenders and sell one to Russia. The government had to bail out three banks which ran out of cash. Twelve banks are now in the process of liquidation, according to the central bank.
Ukrainian individuals’ loans denominated in foreign currency totaled 183 billion hryvnia, compared with 71.64 billion hryvnia denominated in the national currency, according to the central bank.
“If Natsionalnyi Bank Ukrainy sticks to a tough, adequate monetary policy, the hryvnia is bound to be stable,” Yushchenko said. “Another billion hryvnia printed on the market will destabilize the situation.”
During the interview, Yushchenko also said the battered economy may take two years to recover, even if the budget is approved at the IMF’s behest. Gross domestic product plummeted 20.3 percent in the first quarter from a year earlier. The economy may shrink as much as 12 percent this year, according to the Economy Ministry, the worst performance since 1995.
Filed under: finance by Wolf