A Report On Inflation In Ukraine From 1993 To 2019
Ukrainian inflation levels fluctuate in very unpredictable manners which can be seen throughout its history. As in 1993 where the inflation level was at 4.73 thousand percent which then dropped to -0.235 percent by the beginning of 2013. Currently, the inflation levels in Ukraine are around 10.952 percent greatly proceeding that of the world average, 3.6 percent. The varied and shocking inflation levels in Ukraine are immediate consequences of governmental decisions, crisis, imports from Russia, and trade. The inflation level target goal according to the Ukrainian government is 5 percent in comparison to the world average goal of 2-3 percent, demonstrating the difficult situation of Ukrainian inflation rates.
1993
As of 1993, the inflation level in Ukraine was at its peak of 4.73 thousand percent. This had a multitude of causes such as its liberalisation from the Soviet Union (1922-1993), extreme increase in the price of natural gases and oil prices, and the loose monetary policy implemented by the government under a planned economy. Yet in addition, this greatly affected all the economic agents; producers, consumers and the government such as the implementation of coupons, a grand drop in GDP and private income, and finally the introduction of private currency in 1996.
Causes
As a member of the Union of Soviet Socialist Republics, Ukraine was under a strict planned economy, as all their resources were allocated and decided by the Russian government, through centralised planning. Thus prices were unable to the functions of equilibrating supply and demand as they would in a free market economy, meaning that all regulated prices were constantly below equilibrium, often causing shortages in goods and services. Which can often be perceived in images from 1990's of empty store shelves as well as humongous lines of individuals waiting to enter in-front of stores. Subsequently, after the liberalisation (the cancelation of price controls as well as limitation of Russian governmental influence) caused a sudden equilibration of supply and demand thus starting an increased inflationary process of 4,530 percent. Yet the liberalisation of Ukraine was only partial, meaning that the economy stayed as a planned economy yet now under the Ukrainian government and state. This consequently caused prices of goods to rise by 250% whilst wholesale goods (goods which are not as gravely regulated) were able to raise by 740%.
This was heavily augmented by the enlargement of natural oil and gas prices, since Russia, the main Ukrainian supplier of energy, increased the prices of oil, thus causing the price index to heavily increase leading to the rise of inflation. This created a great shock as in beforehand energy prices were considerably low, which caused Ukraine to purchase extensive amounts of technology from the USSR.
Now it is clear, that the main cause of the grand inflation of 1993 was caused by the loose monetary policy in Ukraine. This means that the Ukrainian national bank (established in 1991) allowed the state to arrive at a deficit, as it began to print money loosely instead of borrowing it. The NBU to invest such money into state owned enterprises, thus the (invaluable) money later entered the market. Such printed money inevitably lowered the value of the currency, because of augmentation of inflation leading to the fall in the value of Ukrainian goods.
Consequences
This made Ukraine the very first country that had over hundred-fold annual price level which was not caused by war. After such grand alteration of Ukrainian economy caused by the immense inflation, an opportunity for arbitrage was created, meaning the ability to purchase inexpensive goods in Ukraine and later sell them in countries of the ruble zone which were at a higher level of liberation. Thus to prevent other countries to buy the cheap Ukrainian goods, the government decided to implement coupon-karbovanets that replaced Soviet ruble, which was in circulation alongside rubies. Such coupons were thus shared amongst the Ukrainian people, allowing them to purchase goods and services, yet after a while, the supply of coupons was a lot larger than needed to serve the economy thus making the coupons invaluable.
It was then nearly impossible to make any long term predictions or decisions in Ukraine at the time because of the unpredictable and immense inflation present at the time, which had great effects on the countries economy. Accordingly, severe measures were implemented, which allowed for inflation to regress to 376.746 percent in 1995.
1994-2008
In 1994 inflation levels in Ukraine were much lower than that of 1993, at 891.188 percent and through the years further diminished so that by 2008 they were at 25.226 percent. There was a multitude of causes for this immense lowering of inflation levels such as the 1998 Ukrainian crisis, acceleration of worldwide economic growth, etc. Whilst the consequences ranged from the implementation of the Ukrainian currency Hryvna to the growth of private production.
Causes
In August-September 1998 Ukraine went through a currency crisis, which was triggered but a multitude of proceeding acts such as the budget deficit, which was experienced by Ukraine since its liberalisation. Where as before discussed this issue was unsuccessfully attempted to be suppressed by printing money and government loans which thus caused hyperinflation throughout the country (see table 1 and graph 1 - 1993). A prime example of such loans was when the Ukrainian government borrowed 10.6 billion UAH in January-September 1996, where 95 percent was used for debt servicing. In addition, the sharp stop of capital income flow resulting in the collapse of stock and Treasury bill markets in September 1997. Subsequently, it was found that the countries accumulated debt exceeded that of the forgiven exchange reserve. Thus Ukraine had a grand issue of liquidating their assets (turning them into cash), which they tried to yet again resolve with the Ponzi scheme of financing: “borrow more and more in order to repay ones previous debt”. Yet after a period of time Ukraine was no longer capable of international borrowing as their debt-to-reserves ratio was too high.
Such actions along many others led to the currency crisis of 1998, meaning that there was a sudden nominal devaluation of the currency leading to a large alteration in real exchange rates. This led to the stagnation of inflation rates in Ukraine, whereas during the crisis GDP (gross domestic product) as well as private consumption had an immense fall reaching a similarly low level thus greatly affecting the economic situation. The restoration of the situation began quickly, as already in 2011 the inflation percentage lowered from 25 to 7 from 2008, yet the GPD level remained lower to that off before the crisis.
Consequences
The crisis which inevitably generated the drop in GDP and private incomes by around 20 percent in 1994, allowed for the introduction of the national currency: Hryvna or UAH as a replacement for the coupons of 1993. This was plausible because of the plunge of inflation levels of 1994 to 891.188 percent. Where one hundred thousand coupons were exchanged for one Hryvna. The effects of the newly acquired positive account balance led to the augmentation of forex reserves and Hryvnia in use. Accordingly, incomes grew tremendously, increasing by 45% solely in 2005, alongside the expansion of private loans to households, which doubled each year from 2005 to 2008, inevitably causing the augmentation of prices throughout Ukraine. Such an enlargement in resources prompted the expansion of private consumption. The growth of private consumption averaged to 10.8 percent a year between 2002 and 2008. This thus led to the increase of prices where imports and domestic supply were lower than demand, yet also led to the increase in inflation percent from 10 percent (2001) to 30 percent (2008).
2008 - 2013
As of 2008 inflation levels were at 25.226 percent, then had a drastic fall to -0.239 percent in 2013. This was caused by a multitude of speculated caused by debt paid in USD, the Ukrainian government as well as the 2012-13 recession. Consequently, the economy experienced grand ramifications such as the contraction of GDP levels, grand losses of money, and a deficit in Ukrainian trade.
Causes
In 2008, the Hryvnia fell by 38 percent in relation the US dollar. This was caused by the fact that a multitude of loans and debts were issued in dollars, meaning that as a majority of Ukrainian people are paid in Hryvna they were forced to use the weak exchange rate into USD thus paying a much larger dent them anticipated. Thus as of December 2008 to May 2009 Ukrainian banks were forbidden to accept requests of early withdrawals of bank deposits, which set the framework for the recession of 2012-13. Many individuals had diverse views upon the origins of Ukrainian issues, one of which was David Heslam of Fitch ratings who stated 'At the root of the problem is Ukraine’s inconsistent macroeconomic policy framework, as the authorities are aiming to defend the exchange rate while avoiding necessary fiscal tightening in the absence of adequate sources of non-monetary financing.” Whilst when in August and October 2009 the Ukrainians were polled to determine “Who bears the most responsibility for the difficult socio-economic situation in Ukraine?” Forty-seven percent stated that it was the President of Ukraine Viktor Yushchenko, twenty-two blamed Prime Minister of Ukraine Yulia Tymoshenko and seventeen percent blamed Verkhovna Rada (supreme council).
Two main diverse factors seemed to have caused the recession of 2012-13, were augmenting incomes increased prices, the low economic level decreased them. During the recession, the price growth over these two years was only 3 percent which is incredibly low in comparison to the 10.3 yearly percent increase from 2001 to 2011. The effects of the recession were ended when the foreign reserves (forex reserves; cash assets held by the NBU that are essentially present to balance international debt) which were spent to stabilise the exchange rate, causing the inflation to reach 24.9 percent in December 2008.
Consequences
In consequence of the 2008-9 world crisis, the Ukrainian GDP decreased by 14.8 percent and the exchange rate fell from UAH/USD 5.27 as of 2008 to 7.79 in 2008, even reaching 10 at the peak of crisis. Yet the inflation of 2008 lowered substantially by 2009 to 16 percent, and when the exchange rate was stable in 2010 the inflation lowered to 9.8 percent. In addition, the restoration of GDP was also seemingly quick as in 2011 the gross domestic product exceeded that of 2008. On the contrary, the Ukrainian NBU lost 7 billion UAH in the first quarter of 2009 in comparison to the 2.1 billion UAH profit made during that same period. Moreover, Ukraine’s State Statistic Committee stated that Ukraine’s foreign trade deficit of the first quarter of 2009 was equal to 419.7 million USD. As of November 2008, Ukraine petitioned to the international monetary fund (IMF) for a loan of 16.6 billion USD, which was granted to them alongside a second loan on February 2009 equalling 1.87 billion USD, to save the countries economy. The new recession which continues to today had started in the second half of 2012 when the inflation levels were off 0.569 percent. In order to suppress this, the government supports private consumption and has kept the UAH/USD a fixed change rate.
2019
The current inflation rate in Ukraine is much higher than often predicted at 10.952 percent compared to the 8.9 predicted inflation. Which is the result of the 2014-5 crisis, the war against Russia and the deficit of foreign trade. This has resulted in a multitude of consequences for Ukraine such as the change of incomes.
Causes
In consequence of the crisis of 2014-15, which was originated by the commencement of the Russian military operation in Crimea, on February 20th, 2014. This caused the 200 percent reduction in the value of the Ukrainian Hryvna, subsequently the Ukrainian goods and services to become inexpensive and greatly more competitive. Currently, the Ukrainian economy is slowly emerging from the crisis yet not much hope and confidence is exerted amongst the people at the cause of the ongoing war. As its economy reduced by 6.8 percent in 2014, causing the rise of inflation from -0.239 (2013) to 12.072 (2014), which went along the decline in GDP by 12 percent in 2015.
The ongoing war with Russia for five consecutive years has put extreme pressure on Ukraine’s economy, alongside the mistrust if the judicial system, ineffective fight opposed to the corruption and defeat in HR decisions, prevent the economy to run at its full capacity. As this causes Ukraine to be unable to attract international investments in addition to being incapable of operating the whole of the countries already scarce resources. Moreover according to the NBU as of January 2018, the deficit of foreign trade-off goods and services in Ukraine surpassed 10 billion USD and is increasing 1.5 times every year.
Consequences
In result of the ongoing war against Russia and Ukraine, one may perceive a multitude of reductions across the countries economy such as the fall in industrial output by 0.9 percent during the course of one year from 2.5 to 1.6 percent. On the other hand, the countries agriculture has enhanced by 8.2 percent over the last year, caused by the pleasant weather conditions, allowing for Ukrainian farmers to reach a record of 70 million tonnes of grains collected in one year. Moreover, the average income of Ukrainians has augmented by even 25 percent in October in comparison to the preceding year. Thought, simultaneously the inflation has deduced the real rising income level, as in November the inflation has risen by 10 percent during one year. The overall increase in salary has augmented the year average of monthly activity of the retail sector (often called the retail trade turnover), by 6.2 percent in January - November. Whereas the rising demand for real estate increased construction work by 6.3 percent. In addition, the Hryvna has augmented its exchange rate with the US dollar by 1.5 percent, reaching a USD/ UAH 27.22 year average. Even as Ukraine has not been in recession as of April 2017 when the World Bank declawed its economic growth of 2.3 percent, it still stands at a weak condition, as a result of many crises, and unexpected inflation levels. Though Ukraine has great potential to one day thrive on the basis of their rich farmlands, a well-developed school system, a grand potential in industry and large amounts of well-trained workers who currently flood other countries seeking work.
Future
Associations such as the National Bank of Ukraine has predicted that Ukraine’s inflation levels will by late 2020 reach the target goal of 5 percent according to the April 2019 Inflation Report. Yet it is quite uncertain whether Ukraine is capable of achieving such a low inflation level as the NBU had also predicted a 6.3 percent inflation for 2019 which (see table 1 and graph 1-2) is not accurate and rather too hopeful for the current unstable situation of Ukraine. it is clear that for the Ukrainian inflation levels to stabilise, the war between Russia and Ukraine must end so that Ukraine has full access to its resources and can concentrate on controlling its economic situation. There are four main ways to reduce inflation; monetary policy (the rise of interest rates to discourage spending), tight fiscal policies (higher income tax), wage control (limit wage growth) or monetarism (controlling the money supply, by adopting higher interest rates and reducing budget deficit). To my reserved opinion the monetary policy is one of the best solutions as fights the increasing inflation, yet without reducing the wages, importation and money supply which are all quite limited in their success during the 20th century.
