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60 I Eastern Europe bne September 2022
Classically the way to kill inflation is
to hike interest rates, but the NBU has already tried that, more than doubling rates to an extraordinary 25% on June 2, with little effect. Annual inflation in Ukraine accelerated to 22.2% in July, according to the State Statistics Service of Ukraine. Earlier in July, the National Bank of Ukraine said that inflation in Ukraine will reach over 30% in 2022, despite the rate hike.
Ukraine inflation y/y
tuted existing taxes with alternative taxes; for example, smaller busi- nesses were allowed to switch from VAT to a sales tax) and introduced holidays for various payments (e.g. mortgages, utility bills) to provide households and businesses with liquidity to sustain their operations
• Funding: The law was changed to allow NBU to print money and
completely. The exchange plummeted but acted as a brake on the crisis and absorbed the shock, as well as allowing the central bank to preserve its reserves.
Today, despite the problems caused by the war, the situation is not as volatile or panicked as it was in Moscow in Novem- ber 2014 and so the NBU has the luxury of being able to move more cautiously.
CEPR suggests a managed float of the hryvnia that strikes a balance between the costs and benefits of these polar cases of floating and fixing. Market forces will guide the exchange rate, but the central bank can limit daily fluctuations to something small like plus/minus 0.1% in a day. The NBU could also limit participants to just importers and exporters and let the market set the demand for FX trades.
“External imbalances should be addressed through a combination
of strict capital outflow controls, restrictions on imports, and some flexibility in the exchange rate to avoid jeopardising internal macroeconomic stability in the face of huge fiscal
needs. A comprehensive standstill on external debt payments is essential,” recommends the CEPR team. “There is a need for a durable nominal anchor. The aim should be for relatively low inflation and low seigniorage (money printing).”
CEPR seems to harbour the same mis- trust of the government that the US and EU do, which is reportedly holding up their disbursements of more fiscal sup- port. CEPR recommends that much of the spending of government resources should be done by the private sector.
“Although wartime governments 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,” CEPR wrote. “To this end, the aim should be to pursue extensive radical deregulation of economic activity, avoid price controls, and facilitate a produc- tive reallocation of resources.”
Source: UAH
The government is currently printing roughly UAH30bn per month, while
a sustainable level of printing would be less than 2% of GDP, says CEPR. “This is a relatively small sum that is extracted at the price of a high and accelerating inflation as well as regressive taxation and greater misallocation.”
Increasing interest rates further will not have any effect. The other way you can bring inflation down in times of crisis
is to float the currency. The NBU took several emergency measures to stabilise the financial system and cushion it from the shock.
• Banks: To protect domestic credit and payments, the central bank introduced capital controls and eased macroprudential regulations.
• The government raised the maxi- mum insurance limit threefold and, for the duration of the war, insured all retail deposits.
• Social support: The government suspended some taxes (or substi-
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directly fund the government, by buying Ministry of Finance bonds on the domestic market.
• FX: The NBU fixed the exchange rate at the pre-war level to forestall panic and provide a nominal and tempo- rary anchor.
“The government should aim to enhance national savings rather than rely on mon- etary financing from the central bank. In co-ordination 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,” says the CEPR team.
Central Bank of Russia (CBR) Governor Elvia Nabiullina did the same thing in the 2014 crisis when oil prices collapsed, leading to a very sharp fall in the ruble, which dropped from around RUB36 to the dollar to RUB80 in a matter of weeks. The CBR was already moving towards freeing the ruble by gradually expanding the trading band for the ruble, but she accelerated the process and freed the ruble