Wednesday, March 11, 2015

Ukraine unofficially has 272 percent inflation - The Washington Post

Hyperinflation is always and everywhere a political phenomenon.

It happens after wars or revolutions, when governments have to print the money they need because there's not much of an economy left to tax—which brings us to Ukraine. It had a revolution, it has a war now, and it's all but broke. Inflation is officially 28.5 percent, but, according to Johns Hopkins professor Steve Hanke, it's really more like 272 percent. And that's only going to get worse as long as Ukraine's currency does.

It's hard to overstate how challenged Ukraine is. Its economy has actually shrunk since communism ended in 1991. Or since 1992. Or even 1993. That's because communism never really did end. Ukraine just traded party bosses for oligarchs. Sure, it privatized companies and introduced markets, but Ukraine didn't shed its Soviet-era corruption or inefficiency. There was barely any rule of law, tax rates had to be jacked up to make up for all the wink-wink, nod-nod tax evasion, and, as a result, even more of the economy entered the shadows. The IMF estimates that Ukraine's underground—and non-tax-paying—economy is as much as 50 percent of GDP.

Now Ukraine's not-so-cold war with Russia is destroying the little that's left. It's not just that Ukraine has lost the factories in the rebel-held east that make up a quarter of its industrial capacity. It's that it can't afford to fight a war against what is still its biggest trading partner—Russia. The only way for Ukraine to pay its bills is to dip into its reserves. But those have dwindled down to $6.42 billion, only enough for a little more than a month of imports. (Three months worth is considered the absolute least you can get by with). So Ukraine has done what all countries do when they've run out of money: go to the IMF. It's announced a $17.5 billion bailout in return for tough reforms, including cutting energy subsidies for households. But even that won't be enough to stop Ukraine from defaulting on its debt—or, if you're feeling more polite, restructuring its bonds. Those have already fallen to less than 50 cents on the dollar in anticipation of the nonpayment to come.

In short, Ukraine doesn't have any foreign currency and doesn't have the ability to earn any more. And that means there's nothing left to support the value of its currency, the hryvnia—so it doesn't have much anymore. Ukraine had been pegging it at 8 per dollar before the war began, but was then forced to let it slide down to 16 per dollar, where it tried to re-peg the hryvnia. This failed. Ukraine didn't have the dollars to prop up its currency for very long, and when it belatedly admitted this, the hryvnia collapsed. Then it collapsed some more after the latest peace deal fell apart. So Ukraine's central bank has done the only thing it could do: everything. It made its capital controls even stricter, banned currency trading, then reversed the ban on currency trading but begun intervening directly. It's worked a little. Well, at least the hryvnia has rebounded from a low of 33.5 to now 27.2 per dollar. But that, as you can see above, is still a 70 percent fall from the start of 2014.

Complete story at - Ukraine unofficially has 272 percent inflation - The Washington Post

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