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18 August 2017
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Specter of stagflation from gov’t budget-inflation policies

curtailing of budget expenditures...

The curtailing of budget expenditures coupled with the government trying every way to curb price growth may lead to stagflation this year, according to Kyiv Weekly. Stagflation will put the national economy on the verge of a new crisis. Premier Azarov said that his government intends to hold inflation to a record low level by ensuring 5.0% GDP growth versus the 3.9% figured into the budget, and the 5.2% growth calculated for 2011. “All the government’s work is aimed at curbing inflation. This will lower the cost of money, which will mean lower interest rates on loans,” the premier promised. These optimistic forecasts are partially on target. According to the State Statistics Service, annual inflation slowed to 3.7% in January from 4.6% in December. However, the current price calm might not last too long. Over the next several months inflation should begin to pick up steam, while economic indicators should steadily dip. The main reason for this negative outlook is that the economy might be deprived of one of its driving forces, domestic consumption, which accounts for 70% of domestic GDP. Economists project that this year domestic consumption should grow by 4%, just half of 2011’s result. The dramatic drop will stem from cuts in social welfare payments. The 2012 national budget was approved for the first time with a special amendment allowing the government to adjust the amount of social welfare payments during the year “commensurate to the financial resources in the national budget and pension fund,” and there is no doubt Azarov’s team will be forced to exercise this right, as financing the 2% deficit worked into the budget is next to impossible. Furthermore, the low level of liquidity of the banking system could deal a blow to the plans of the Finance Ministry to attract funds on the domestic market. The country’s main financial body is even considering the possibility of looking for cash amongst the people as an additional source of financing. “The government is simply left with no other choice than to conduct a tough fiscal policy. There are no sources of financing the budget deficit, access to lending is restricted, the deficit of Naftogaz [state gas distribution agent] continues to grow all at once, with no improvements in the situation with the Pension Fund,” says Director of the Analytical Division of Raiffaisen Bank Aval Dmytro Solohub. In this troubling situation, investments into increasing industrial output is unlikely. Last year around 60% of investments were financed by companies themselves, but this year decreased revenues and increased tax pressure should bring internal investment to nil. The potential growth in external investment inflows also remains low due to the high cost of lending, the interest rates on which exceed the level of inflation. 

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