15:47 16.08.2022

NBU governor reiterates call on govt to cut state budget deficit, minimize its financing via money emission

4 min read
NBU governor reiterates call on govt to cut state budget deficit, minimize its financing via money emission

The war with Russia is turning into a protracted battle of attrition, so it is necessary to reformat economic policy priorities for a long game, including taking decisive measures to reduce the state budget deficit and its non-equity financing, Governor of the National Bank of Ukraine (NBU) Kyrylo Shevchenko has said.

"Despite the unpopularity of such complex decisions, now more than ever it is important that the government takes political responsibility and finds ways to reduce the budget deficit, minimize the emission financing of the deficit," he wrote in a column on lb.ua.

According to him, since the beginning of the full-scale war, the state budget deficit has expanded significantly and by the end of the year it could reach 25% of GDP (if international grants are deducted from budget receipts).

"Unfortunately, despite all the efforts of the Ukrainian authorities and our partners to attract military and financial resources from abroad, this international support is only enough to partially finance the budget deficit," Shevchenko said.

He said that in such a situation it is possible to finance the deficit from the reserves of the past, spending the accumulated international reserves, and in this way Ukraine has already reduced them from $31 billion to $22.4 billion in seven months.

"This source will not be enough for a long time. In addition, you always need to have an emergency reserve in case the worst scenarios come true. Moreover, the rapid decline in reserves will cause additional demand for the currency and accelerate a full-fledged balance of payments crisis," the governor of the NBU said.

The second option is to continue emission financing, the volume of which has already reached UAH 255 billion since the beginning of the war. This means "simultaneously robbing citizens because of the depreciation of their savings and hryvnia income," Shevchenko said.

According to him, in this option, going beyond the planned limits – UAH 30 billion in the remaining months of this year and UAH 200 billion next year – is fraught with the country sliding into a catastrophic spiral of inflation-wage devaluation, which Ukraine already went through in the 1990s and from which the poorest citizens suffer the most, the collapse of financial stability and the loss of control over economic processes.

The governor of the National Bank added that even the current 22.2% of consumer inflation for the year is a reduction of almost 1/4 of the real incomes of citizens, and taking into account forecasts for its growth to more than 30% and a decrease to 20% in 2023, according to a moderately optimistic forecast The NBU means that the purchasing power of the hryvnia has almost halved in three years.

As an alternative, the governor of the National Bank again called on the government to raise rates on state borrowings, emphasizing that despite the growth of payments in the future, this option is much safer than those listed above in terms of its consequences.

Additionally, Shevchenko recommends a transparent redistribution of resources that the economy is able to generate to the most priority areas: a controlled reduction in the budget deficit by cutting non-priority spending and raising taxes, which will have the least negative effect on the recovery of economic activity.

"Decisive measures are needed to reduce the budget deficit. However unpopular they may look, their conscious and controlled application is the most effective option for adapting the economy to a war of attrition and providing a basis for victory. Therefore, the authorities need to take responsibility and make unpopular decisions, honestly explaining to the public the need for appropriate steps," the governor of the NBU said.

He added that it is very important not to procrastinate on this, as the larger the imbalances accumulate, the more difficult and painful future decisions will be.