Archive for March 19th, 2012

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New social spending, elections and Ukraine

March 19, 2012

Now a few days ago, you will remember that I wrote about the necessary government policy to stimulate housing and mortgages.  You will remember I questioned just how the government would get the banks to lend for 20 or 30 years at 10% when they currently and traditionally have lent for much shorter terms but at rates often close to 30%.

The question was how this could be implemented amongst private banks and what encouragement/coercion the government could use to make it happen.

That so far remains unclear, however we now have some idea of the additional money the government is going to provide to make it happen.  The answer is about UAH 10 billion from government.  Quite how this UAH 10 billion gets into and is taken up by the mortgage and banking system still remains unclear.

Another UAH 15 billion is required for other social programmes such as pension increases, which are to be fair, pitifully low.

Fortunately, if that is the right word to use,  these programmes being domestic programmes, are not dependent upon external monetary sources or loans which is just as well given the current impasse between the IMF and Ukraine which is likely to go on into 2013.  Quite possibly the IMF lending programme will simply not be restarted at all as neither side are prepared to move over the core sticking point of raising gas prices another 50%.

What will happen is that the UAH printing presses will be cranked up to produce to 25 billion or so needed to fund these government induced programmes prior to the next election, no doubt in the hope that it will turn into votes at the ballot box.

All very good and understandable until we think about the effect of dumping an additional UAH 25 billion in cash into the economy will have.  Now I am not an economist and only briefly studied economics as part of a business degree, however, my albeit rather basic calculations would suggest that in pursuing these policies and financing them by cranking up the printing presses, it will add an additional 1.2% to national inflation.

Yes that is a small amount, however the last official inflationary figures I saw for Ukraine stated there national inflation stood at 7.9%.  A scary figure but certainly not unmanageable.  If we add on my crudely calculated 1.2% then we are at almost 10% inflation for 2013 if all things remain constant in 2012.

Even that may not be so bad, except we all know the any governmental figures are never a true account of actual inflation, even if they are worked out via World Bank or IMF models.  Maybe especially so if worked out by those models!

Thus, considering what is likely to be close to an official 10% inflationary figure once these social programmes are introduced, and taking into account what is likely to be a sizable gap between them and the real inflationary figures faced by the average Ukrainian each day at point of purchase, the additional UAH allocated for pension increases will have to be close to a net 20% (or more) pension increase for the pensioners to come out ahead in any meaningful way due to this policy.

To be frank, a rise in pensions in excess of the real every day inflation rate, (as opposed to the official government inflationary figures), faced by pensioners seems rather unlikely.

I might very well be quite wrong in my calculations because as yet no opposition party has raised this issue in the public domain, however this is the Ukrainian opposition we are talking about and when it comes to challenging governmental policy, or heaven forbid having policies of their own,  they are incredibly inept and noticeable by their absence.

That said, it may very well be that if the opposition had a policy between them, it could very well have been the same policy, so pointing out any possible downside would not be in their interests either.  After all, with parliamentary elections 6 months away, would the opposition campaign on a platform against such increases?

Will I be proven correct?  Will my calculations stand up?  Will a well intentioned policy turn out to be counterproductive? – Let’s hope I’m wrong!

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