Page 74 - bne Magazine August 2022

74 Opinion
bne August 2022
COMMENT
Issuing money is no solution: Ukraine’s economy needs other support options
National Bank of Ukraine Governor Kyrylo Shevchenko in Kyiv
National Bank of Ukraine (NBU) Governor Kyrylo Shevchenko’s column about the risks of continuing the monetary financing
of the state budget and how to minimise them.
The monetary financing of the budget deficit will not stabilise the economy in the long run. We should seek other ways to minimise the fallout from the war.
At the onset of the full-scale war, Ukraine’s only option was
to let the NBU conduct the monetary financing of the state budget deficit so that the country’s critical needs could be met.
Compared to other ways of meeting budget objectives, the printing of money is a rapid response that makes the burden of the war easier for the people and businesses – in the short run.
In the long term, however, taking the monetary financing approach cannot keep the economy afloat. To mitigate the adverse economic and social consequences of the war, the authorities should use methods that optimise the state’s finances.
Time is of the essence
As Russia unleashed its full-scale invasion of Ukraine,
a combination of factors expanded Ukraine’s budged deficit: Tax revenues decreased due to the physical destruction of enterprises and the occupation of territories, the disruption of production and logistics chains, and a drop in economic activity, income and consumption.
Significant defence, humanitarian and social needs led to an increase in budget expenditures.
Initiatives to reduce the tax burden on businesses also played a role.
This has led to a situation in which the possibilities of financing the state budget from traditional sources are minimal, and the need for funding grows with each day of the war.
UKraine is funding its war with Russia by printing money. National Bank of Ukraine Governor Kyrylo Shevchenko says it has to stop. / NBU
Desperate times require desperate measures. All available means of financing must be mobilised. The NBU is in the thick of this process.
To repel Russia’s military aggression, the NBU has deployed the monetary financing of the state budget deficit, providing funding for critical government expenditures in limited amounts. This has made it possible to support Ukraine’s defence capabilities and ensure the uninterrupted operation of critical infrastructure and the public finance system overall.
Had the NBU, in this time of hardship, decided against financing the budget deficit, the state’s financial system could have come to a halt.
Monetary financing, however, is an option that can buy Ukraine some time but that cannot resolve its economic and budgetary problems. Yet the government has actually been increasingly relying on the NBU to issue money to meet the budget’s needs, and this type of financing has gradually turned into the main source of covering the budget deficit.
Despite having slowly shifted into wartime operation mode, the economy has developed a chronic craving for more and more monetary financing: The UAH20bn that was issued
in March turned into UAH50bn in April and May each, and another UAH105bn was provided in June.
Not the best model
The state’s economic policy is currently faced with a clear task: redistribute the economy’s resources to meet the priority objectives of a country at war. The monetary financing of the budget cannot ensure such a redistribution.
By issuing money, the NBU does not create new economic resources but only moves available resources around through the inflation tax. This burden is shouldered by those earning hryvnia incomes as their value declines in real terms (retirees, recipients of fixed salaries). This directly increases poverty.
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