The project KRYM Vladimir Fedorin talked with the Deputy head of the National Bank of Ukraine Dmitry Sologub.
– What will be the economic growth in 2019?
– The economy will grow at a slower pace than in 2018. Growth will slow from 3.3% to 2.5%. But this is a minor change. Ukraine will continue to emerge from the severe crisis, which was in 2014-15.
– We are so deeply fell in 2014-15 that the low growth rate at the exit of the crisis look very mysterious. How to explain it?
– Many countries find themselves in deep crisis, is not always possible to get out of it. Venezuela, Argentina… There are different scenarios out of the recession – sometimes a sharp rebound, but sometimes slow recovery. And the crises are different: the balance of payments deficit, devaluation, weak domestic financial system… in addition, we lost the foreign partner, which was tied 25% of exports. Plus the war. Not many countries could from this situation to get out. And we get. Still not a complete victory, but something. I say this not as a civil servant and as an economist.
What is necessary for true victory?
– People often ask: can Ukraine’s economy to grow at 8-10-12% per year? After all, 15 years ago this was. But then the global economy looked different. Until 2008 remained the super-cycle of commodity prices. The cost of raw materials grew at a wild pace thanks largely to China, which grew by more than 10% per year.
Raw doping positive effects on our economy. Besides, after crisis of 90-s Ukraine had a lot of spare capacity, there was cheap gas, etc. All this led to growth.
But there is one important word – sustainability. You grow by 14% in one year, and then fall. China has shown resistance over many years. Yes, his pace of development is slow, but they are stable. So for me, as an economist, the question is not so much whether it is possible to ensure 10% growth in one year, and we are able to ensure sustainable development and that this needs to be done?
Answer. A new super-cycle of raw materials prices is hardly possible. If you look globally, there was one region with the potential of explosive development in Africa. But there are no preconditions to ensure that Africa will rapidly industrialize and grow as China or South-East Asia 10-15 years ago. The probability is not zero, but low – up to 5%. Hence, the sources of growth must be sought within. And they are.
Background to the development of the deshadowing and structural reforms. They are unlikely to give a jump from 3% to 10%. But if to speak about today’s economic model, the 3.5% growth is our maximum.
It could be worse
– How can we evaluate structural reforms over the past five years?
One of my favorite examples is the energy. If we analyze how much in 2012-13 was paid by Ukraine for imported gas, will get about $25 billion in reserves to $35-40 billion the Country has spent an amount comparable to two thirds of the reserves. Now this figure is $2-2. 5 billion. the Value of imports almost offset by income from the transit. In the oil and gas sector still has many problems, but the situation is incomparable with 2013.
– Got off the needles?
– You might say. The fiscal deficit of Naftogaz was in 2013 year, as I recall, up to 50% of the total fiscal budget deficit. It was an economic black hole. Since then, there have been so radical changes, they will be included in the textbooks on Economics.
– How has seriously reduced the energy intensity of the economy?
– Gradually decreases. I haven’t seen recent data, but the trend is visible in the consumption and General imports. According to a study by the World Bank, conducted in 2011-12, Ukraine was the most backward from the point of view of the intensity region. I don’t think she was the most progressive, but the gap with developed countries is gradually declining.
As for the other sectors. Take for instance the field of public procurement. Using system Prosaro this problem has been solved.
To solve the problem or improve the situation?
– I think correctly – to improve. It was one of the most corrupt spheres in Ukraine… and the financial sector. For decades, the state banks were used to Fund groups that have political interests. And this, so to speak, the “business model” was able to break.
– And who is now in control of the state banks?
– In the two banks are independent Supervisory boards. Two they are in the process of formation. The national Bank regulator. There are different models of management of state-owned banks. For example, in Russia the Central Bank is the owner of both banks and the regulator. Our system is more correct: the controller and the owner still needs to be different entities.
PrivatBank example, I think, quite positive. The Supervisory Board assists the financial institution to improve their results. And this is reflected in the statistics.
From 2009 to 2016 the government spent on recapitalizing Oschadbank, Ukreximbank and PrivatBank nationalization of $15 billion In the first phase, our task was to improve corporate governance of these institutions. The next step is to reduce the state’s stake in the banking system. For this, banks should be attractive to investors.
– Despite these successes, we are growing slower than its neighbors – Poland, Slovakia, Romania, Georgia… Doctor, what is wrong with us?
– I agree, there are problems. But if we compare the macroeconomic situation in the country now and in 2013, we will see a huge difference. Yes, in 2019-2020 will have a large enough repayment of the loans. But with the proper level of macroeconomic policies and cooperation with the IMF, the problem is solved. As for the low growth rate, it is rather a political-economic perspective…
– Borders with richer neighbors we are open and active people leave. That’s the problem.
– Can watch on our neighbors. Well Poland is growing, but for some reason, despite Brexit, poles emigrants from England will not be returned. The situation when the borders are open and there is continuous labor migration, I would call the new normal. This factor will affect the economy. We in the National Bank realized this somewhere in 2015-2016. Will not solve the problem without increasing the potential growth rate of the economy.
You now I once again ask the question – how to do it?
– Be sure to ask. But you agree that the 3-3. 2% growth is an existential threat to Ukraine?
Yes. But not in the short term and in the medium.
The formula of salvation
– What do we do?
– Ukraine has the potential. We understand this, if you look at the state-owned enterprises, the situation with the land market, a state-owned banks. When markets are monopolized and there is no competition, there are so-called “curvature”. Take the land market. In Ukraine it is possible to sell the land? You can, but in gray, the shadow diagrams. But when the market is grey, shadow, he seems to be curved.
And if it all, sorry, in the bushes, it’s not of course affect the pricing. Pricing affects the level of investment… Investor is not aware whether in such a system 10 years to invest. What will happen in 10 years? The situation is similar with state-owned enterprises.
– Talked about this five years ago. But something always interferes to change the situation, isn’t it?
– Something is changing. Here we talked about Naftogaz, he’s changed.
Just ran out of money. If Naftogaz has not changed, the dollar would now cost 600 UAH.
Maybe. This suggests that it’s good to make the hard decisions when things are bad. You are standing on a precipice, looking into the abyss, grasping at the last straw and in the end something good to do.
– NBU ceased to be a fiscal lifesaver for the government?
– And you, Vladimir, you think?
– I asked a specialist.
– Perhaps it would be strange if I said, “No, he didn’t. If we get a Finance Minister, we immediately open the suitcase and give as much money as he wants”. We, as grandiloquent as it may sound, love Ukraine and believe that you need to do something to help the economy. And practice of fiscal dominance in Ukraine and other countries to anything good never led.
– Since Ukraine has ended the era of “fiscal dominance”?
– Over. The objective of the National Bank is price and financial stability. While fiscal dominance is a direct threat to stability. The country must live within its means.
– The next question that everyone is interested in: what will happen to the hryvnia?
– If the current policy of the National Bank, the hryvnia will definitely not be fixed. Stability in this case implies that the fluctuations are not very large.
20 years the country lived with a fixed exchange rate. It would seem that all is well, it is possible to plan something… But the problem is that fixed exchange rate leads to the emergence of macroeconomic imbalances.
If we take the three currencies – the hryvnia, the Polish zloty and the Czech crown and look at the chart for the years 2001-2016, we will see that in the short periods of the hryvnia against the U.S. dollar was much more stable than the Koruna or the zloty. But if you cover the whole period, of course, the extent of devaluation of the hryvnia is much more than the crown and the zloty.
– When Ukraine inflation will fall to 2%?
In the world there are only few countries for which inflation is still a serious problem. In this group, I’d call it a basket case, includes countries such as Venezuela and Zimbabwe.
The other group includes Ukraine, Turkey, Ghana, Argentina – here high inflation, but not hyperinflation.
There are still quite a large group, where inflation was once a problem but it’s solved. I’m not talking about developed countries and developing, including post-Soviet: Armenia, Moldova, Belarus, Russia… If we can avoid crisis, fiscal dominance, and other threats, we in this company are also gradually fall.
– But this process can be accelerated for rapid suppression of inflation.
– Nothing comes for free. It is theoretically possible for rapid disinflation. How to do it? To raise the interest rate of the NBU, for example, up to 40%. Then inflation will fall to 5% or even 3%. But economic growth will slow down considerably because there is no credit, etc.
Over the past three years, the process of disinflation was naturally and steadily. We must not forget that in April 2015, consumer inflation was 60%, that is, we have gone from 60% to 9%. At some stage it was even 6%.
– More rapid disinflation could become a signal that the economic authorities are serious, to create preconditions for the economic boom.
The only way to economic boom, is, first, the continuation of macroeconomic policies to stabilize inflation, reduce the budget deficit and level of debt. And secondly, structural reforms. It’s hard work.
There is no magic suitcase from which you can get something non-trivial. All on the surface: the de-offshorization of the economy, the reform of state-owned banks, land reform, privatization.
The de – offshorization… We understand that today, offshore is 80 percent not that other, as a way to protect the business?
You’re right: I forgot to mention judicial reforms – ownership rights should be protected. In the offshore business is not only minimizes taxes, and protects property. Ukrainian institutions need to become more inclusive. Then I could refer to Acemoglu and Robinson (Daron Acemoglu and James Robinson – American economists, the authors of the book “Why are some countries rich and others poor. The origins of power, prosperity and poverty” – approx. ed.).
– Our audience – not only students of the Kyiv school of Economics. How do you translate this into plain language?
Inclusive institutions create a comfortable playing field for all, allowing you to be involved in economic processes to the wider population. In contrast, their exclusive institutions taking away resources from society, creating a comfortable environment for only a small group of people. Everything is interconnected: the offshore, the judicial system and other institutions.
There is such a parameter: the ratio of investment to GDP. In Ukraine to 2014, it hovered somewhere at the level of 18-20%. For example, in China under high growth rate above 40%. It is believed that for a country like Ukraine the normal rate is about 30%. During the crisis year 2014-15, this ratio fell below 15%, now it went back to about 20%. How can I increase this figure? To develop the institutions, and it’s hard.
The experts from time to time say: let’s do it like in Slovakia – will reduce all taxes and we come to Hyundai and Sony, will build a factory and all will be well. This discussion sounds ridiculous, because there Ivan Miklos (Slovak reformer, Deputy Prime Minister of Slovakia, Minister of economy and Minister of Finance from 1998 to 2012 – approx. ed), who did it all, and says: “we were wrong”. And he answered: you know nothing, you remember nothing.
Imagine yourself in the place of the management of corporations Siemens and General Electric. Before us is 120-140 countries where you can go with investments. Do changes in the fiscal environment, the government, which will work via 12 months, will be for managers a major factor in the decision-making about a 20-year investment? For them, the important factor is the environment, infrastructure.
And here Slovaks at the time, managed to create the right environment.
– In Slovakia, by the way, recently put the richest Slovak. This is the question about institutions.
– Yes, we have a situation with the judicial system and the rule of law is very complicated. This problem is faced not only investors, but also the national Bank, when forced to withdraw certain banks from the market.
– Is it possible the acceleration of economic growth without a change of political elite?
– If the global economy starts to grow faster, Yes. But is it realistic?
– A very honest answer. Thank you.