Several renowned economists call on Ukraine to change economic strategy
MOSCOW. Aug 15 (Interfax) - A prolonged crisis is becoming increasingly likely, a prospect that calls for a readjustment of Ukraine's macroeconomic strategy, nine renowned international and Ukrainian economists believe.
"Unless altered, this course will result in a major economic crisis," Ukrainian media outlets said, citing recommendations issued by the London-based Center for Economic Policy Research (CEPR).
This crisis marathon requires "prudence and caution in public finances, a durable nominal anchor, a resilient financial system, a careful management of external balances, and flexibility and efficiency in the allocation of scarce resources. Various branches of the government must coordinate their efforts to this end," the economists said.
The authors of the document are Torbjorn Becker from Stockholm School of Economics, Barry Eichengreen, Maurice Obstfeld and Yuriy Gorodnichenko from University of California - Berkeley, and CEPR, University of California - Berkeley, former European Bank for Reconstruction and Development chief economist Sergei Guriev, now with Sciences Po, Simon Johnson from Massachusetts Institute of Technology, Tymofiy Mylovanov from Kyiv School of Economics, Kenneth Rogoff from Harvard University, Beatrice Weder di Mauro from Graduate Institute, Geneva.
The economists believe that, first, the Ukrainian government must mobilize more resources to improve its fiscal position. The aim should be to increase the collection of tax revenues and for remaining shortfalls to be financed preferably through external aid, but if not, through domestic debt issuance, with much less reliance on printing money.
"Controlling and raising the effectiveness of nonmilitary spending is critical for keeping public finances sustainable. Ukraine's allies should radically increase economic aid and accelerate its disbursement," they said.
Second, according to the economists, there is an urgent need for a durable nominal anchor.
Heavy reliance on money printing to finance government deficits has been unavoidable in the first months after February 24, "but if the current reliance on money finance is sustained, inflation, already over 20%, could easily drift much higher. The aim should be for relatively low inflation," they said.
In a time of national mobilization, the main responsibility for attaining price stability falls on the fiscal authority, which can strongly influence inflation through the tools it chooses to raise resources from the domestic private sector, they said.
"The government should aim to enhance national savings rather than rely on monetary financing from the central bank. In coordination with fiscal authorities, the central bank should implement a flexible framework to support macroeconomic stability. A managed float of the exchange rate is consistent with this goal," they said.
Third, external imbalances should be addressed through a combination of strict capital outflow controls, restrictions on imports, and some flexibility in the exchange rate, as well as a comprehensive standstill on external debt payments, the economists said in their recommendations.
"Fourth, although governments [during a crisis] usually take over the allocation of resources, Ukrainian circumstances call for more market-based allocation mechanisms to ensure cost-effective solutions that do not overburden the state capacity, exacerbate existing problems (such as corruption), or encourage (untaxed) black market activities," they said.
To this end, the aim should be to pursue extensive radical deregulation of economic activity, avoid price controls, and facilitate a productive reallocation of resources, they said.
"The government will have to make some difficult choices [...]," the economists said.