Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Ukraine and the IMF program Vasily Astrov The Vienna Institute for International Economic Studies (wiiw) 78th East Jour Fixe at the Austrian National Bank 26 February 2016
2 A short comment on... Exchange rate policy: Is flexible exchange rate appropriate for Ukraine? Fiscal policy: Is economic recession a right time to pursue fiscal austerity?
3 Why exchange rate matters Small open economy exports & imports of goods & services = 114% of GDP Direct impact on banking sector stability more than half of all loans denominated in foreign currency... and the burden of public debt 70% of public debt denominated in foreign currency
4 Currency composition of public debt end of 2015 Ukrainian hryvnia; 29,80% US dollar; 44,40% Japanese yen; 0,40% Canadian dollar; 0,40% Euro; 5,90% SDR; 19,10% Source: Ministry of Finance.
5 Conditions for flexible exchange rate/inflation targeting Present in Ukraine? Deep and liquid market for foreign exchange No Effectiveness of classical monetary policy tools: interest rates and open market operations Alternative monetary anchor No No Reasonable (and credible!) inflation target No
6 Currency depreciation fuelled inflation Nominal exchange rate, UAH/USD CPI, in % 30 70 Energy tariff hike 60 25 50 20 15 Switch to flexible exchange rate 40 30 Exchange rate nominal, UAH/USD 10 20 Consumer prices 5 Fixed peg 8 UAH/USD 10 0 0 Jän.13 Jul.13 Jän.14 Jul.14 Jän.15 Jul.15-10 Source: wiiw Monthly Database incorporating national statistics.
7 which eroded purchasing power of households 10 Retail trade turnover, 3-month moving average 5 0-5 -10-15 -20-25 -30-35 Jun.13 Sep.13 Dez.13 Mär.14 Jun.14 Sep.14 Dez.14 Mär.15 Jun.15 Sep.15 Dez.15 Source: wiiw Database, State Statistics Service of Ukraine.
8 Share of forex-denominated loans vs. non-performing loans 60,0 50,0 40,0 30,0 Share of forex-denominated loans of non-financial private sector, in % of total Share of NPL, in % of total loans 20,0 10,0 0,0 Source: National Bank of Ukraine.
9 Public debt, 2002-2015 as % of GDP 90 80 70 60 50 Government debt Government-guaranteed debt Total public debt recession and devaluation recession and devaluation 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* * Estimate Source: Ministry of Finance.
10 Some conclusions Fixed exchange rate at 8 UAH/USD under Yanukovych was not sustainable Downward adjustment was needed But: flexible exchange rate led to excessive depreciation and ultimately extensive capital controls A better alternative would be some degree of ER fixation For that: substantial forex reserves are needed!
11 Budget deficit, 2002-2015 % of GDP General government budget, deficit (-) / surplus (+) 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5,0-6,0-7,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015: estimate Source: wiiw Annual Database incorporating national statistics.
12 IMF-imposed fiscal austerity 2014: even keeping budget deficit constant at 4% of GDP required a sizeable consolidation effort because of recession (automatic stabilizers!) 2015: budget deficit was reduced by 3 pp of GDP in spite of even deeper recession public sector wages and pensions largely frozen despite 43% inflation Plus: cuts in energy subsidies (some 3 pp of GDP in 2015)
1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15* 13 Real GDP growth year-on-year change in % 9 6 3 0-3 -6-9 -12-15 -18 * preliminary Note: From 2014 without Crimea and from 2015 without Crimea and parts of Donbass. Source: State Statistics Service of Ukraine.
14 Budget expenditures, as % of GDP 40 35 30 25 20 15 10 5 33,6 33,4 36,9 Social security and welfare Education Culture, arts and sports Health care Housing and communal services Environmental protection Economic activity Public order, security and judiciary State administration Defence Debt service 0 2013 2014 2015 Total expenditures Source: Ministry of Finance.
15 Some conclusions Fiscal imbalances are not at the root of the current crisis (unlike e.g. in Greece) Public debt as a share of GDP has risen dramatically, but for other reasons Nevertheless: IMF demands pro-cyclical fiscal policy Main victims are health, education, pensioners... This will likely erode public reform support Alternatives: less austerity / change expenditures structure (e.g. more ambitious debt restructuring)
16 Thanks for your attention!!! Tipp: How to Stabilize the Economy of Ukraine, Background study prepared by wiiw, April 2015 free pdf-download from: www.wiiw.ac.at