April 22, 2008
With 7 percent annual GDP rise Ukraine has been one of the fastest growing economies in Europe during the last few years. Now these positive developments have come under threat. The economy shows severe signs of stress. Inflation has reached 26 percent in March 2008, higher than anywhere else in Europe. The current account deficit is likely to exceed 6 percent of GDP in 2008, signalling a loss of international competitiveness, and interest rates are strongly negative in real terms. The economy is bound to slow down to about 5 percent in 2008-09, though still a respective growth rate.
Fighting inflation should be the priority.
To that end, the central bank should raise the interest rate and abandon the peg of the Ukrainian currency, the Hryrunia, to the US Dollar.
In the medium-term, Ukraine should seek to link its currency to the Euro, which implies aligning its monetary and fiscal policy to the Euro-zone. The EU is its most important trading partner. The forthcoming free trade area with the EU will further strengthen bilateral trade links.
In parallel, the government should convince the unions to restrain their demands for higher wages, which have traditionally exceeded the rise in productivity. That will only succeed if there is a plausible prospect of curbing inflation. A better harvest, after the disastrous one in 2007, might help.
Last not least, the government should relieve business from bureaucratic constraints and tackle overdue privatisation. But these are medium-term tasks, for which the present political climate does not seem propitious.