National Bank of Ukraine head again urges govt to cut budget deficit

MOSCOW. Aug 16 (Interfax) - The economic policy priorities need to be adjusted for a long game, and resolute measures need to be taken to cut the national budget deficit and its non-monetary financing, National Bank of Ukraine Governor Kyrylo Shevchenko said.

"Difficult decisions of the kind are not popular, but it is more important than ever for the government to assume political responsibility and find a way to cut the budget deficit and to minimize its non-monetary financing," the Ukrainian media quoted Shevchenko as saying.

The budget deficit has grown a lot since February 24 and may reach 25% of the GDP by the end of this year (if international grants are excluded from budget revenue), he said.

"Regretfully, despite the efforts of the Ukrainian authorities and our partners to draw funding abroad, the international support can only partially finance the budget deficit," Shevchenko said.

Under these circumstances, the budget deficit could be funded with the Ukrainian forex reserves, which have dropped from $31 billion to $22.4 billion over the past seven months, he said.

"This source won't last, besides we need to have contingency reserves for the worst-case scenario. What is more, the swift reduction of reserves will provoke an additional demand for foreign currency and will accelerate a full-blown crisis of the balance of payment," Shevchenko said.

The other option is to continue monetary financing, which has reached UAH 255 billion since the beginning of the crisis, which means "robbing citizens through the depreciation of their savings and income in hryvni," he said.

In this case, actions beyond the limits, which are set at UAH30 billion in the remaining months of this year and UAH200 billion next year, may plunge Ukraine into a catastrophic spiral of inflation and devaluation of salaries, which already happened in the 1990s and which hurt the least prosperous citizens most, besides a collapse of financial stability and loss of control over economic processes, Shevchenko said.

Even the current 22.2% consumer inflation per year cuts the real income of citizens by approximately a fourth, while the forecasted inflation of over 30%, followed by a decline to 20% in 2023 by the moderately optimistic forecast of the National Bank of Ukraine, means that the purchasing power of the hryvnia will practically halve over three years, he said.

As an alternative, Shevchenko again urged the government to increase government borrowing rates and said that the future growth in payments would have much milder consequences than those mentioned above.

Shevchenko also recommends a transparent redistribution of resources that could be generated by the economy for higher priorities: cut the budget deficit in a controllable manner by decreasing non-priority expenditures and raising taxes, which will have the least negative effect for the recovery of economic activity.

"There is need for resolute measures to cut the budget deficit. No matter how unpopular they may seem, their informed and controllable application would be the most effective variant of the economic adjustment. Therefore, the authorities should assume responsibility and make unpopular decisions, while honestly explaining the need for such steps to society," Shevchenko said.

It is very important not to waste time, as the bigger imbalances are, the more difficult and painful the future decisions would be, he said.