In Ukraine, where tax evasion is a norm rather than a deviation, honest taxpayers are at a disadvantage. Institutional weakness of Ukraine requires a tax system that is as simple, straightforward and non-discretionary as possible – argues Volodymyr Dubrovskiy, expert of the LEV USAID project and the RPR.
Category: Financial System
Over the last ten years, the growth of the consumer price index (CPI) was quite high – over 11.3% per year. As we already noted in Part 1, this was the result of soft fiscal and monetary policies. This year the average annual CPI is likely to reach its highest levels since the year 2000, climbing to nearly 50%. At the same time, the current agreement with the IMF calls for cutting the budget deficit and notably limiting the money supply – measures which clearly have an anti-inflationary impact.
Why did hryvnia fell so much in 2014 and yearly 2015? Who should be blamed for it? Many Ukrainians seek answers to these basic questions.
The National Bank of Ukraine announced its intention to cancel requirement for registration of inbound loans, in place since 1999. As a temporary measure, the registration duty might shift from the National Bank (the responsible personnel have been notified of pending firing) to Ukrainian commercial banks. Another option might be replacing the registration with disclosure requirement.
Inflation is always a hot topic in Ukraine – from hyperinflation in the 1990s and demand-driven price level growth in the 2000s to the present day and even the future – one of the main reforms outlined in the memorandum with the IMF is the shift towards inflation targeting. In February 2015 the CPI inflation, already quite high, accelerated further – to 34.5% year-to-year, the highest figure in two decades.
The IMF released details of its Extended Fund Facility (EFF) program for Ukraine. The program has a number of good elements. As VoxUkraine discussed before, the program provides much needed foreign currency so that the National Bank of Ukraine can tame the panic and stabilize the hryvnia. As a part of the deal, the Ukrainian government promised to do a significant fiscal consolidation.
The obvious reason to support the IMF Agreement is that it provides vital relief to the critical state of foreign reserves of Ukrainian central bank. The foreign reserves of the country have fallen to a crisis level of $5.6 billion (as of end-February 2015) as foreign currency has drained away under the pressure of debt repayments, trade imbalances and speculative outflow of hard currency. However, an even more important aspect of the IMF Agreement are the conditions imposed which relate to the reform of Ukraine’s economy.
The next few weeks and months are likely going to be critical – ensuring the reforms are passed and implemented, the IMF money begins to fill Ukraine’s coffers and, most importantly, the cease fire holds and peace talks begin. But if I were a betting man, my money would be on Ukraine to pull through and steer clear of the abyss.
A recent blog, which was republished by several Ukrainian outlets, suggests Ukraine now faces hyperinflation, estimating the annual inflation rate is 272% and the monthly inflation is 64.5%. VoxUkraine believes that the method used by the author of the blog to estimate inflation is inappropriate and misleading when applied applied to Ukraine.
The National Bank of Ukraine (NBU) tightened capital controls on February 23, 2015. The central bank introduced these additional administrative measures in response to violent fluctuations in the value of hryvnia. The NBU claimed that there is no fundamental reason to have an exchange rate of 30 hryvnias per U.S. dollar. Is Ukraine the first country to implement temporary capital controls in similar circumstances? Certainly not! Capital controls were used extensively in the World Wars I and II. In addition, there is evidence that capital controls helped Malaysia during the Asian crisis in the 1990s.