Ukraine’s Economic Problems
Ukraine has lately been in the news for getting into a political crisis. It has been in trouble for a long time economically, says the Economist. In the past one month, the country’s currency, the hryvnia depreciated from exchanging at 8:1 to 10:1 with the American dollar. The economy of Ukraine began to grow on a sluggish note in the 1990s after the fall of the Soviet Union. There was a disturbingly limited access to financial markets, and the government spending was in excess of the available monetary resources. This resulted in hyperinflation. As a measure to curb the situation, Ukraine was forced to change its currency from Karbovanets to hryvnia that is used presently (Why is Ukraine’s economy in such a mess? par 2). Things started to look up for the country at the start of the 21st century thanks to high interest rates that saw capital flow into the nation.
The rate of increase in broad money was 35 % annually for the period between 2001and 2010. A credit growth that averaged 73 percent was observed in the years 2006 and 2007. However, the high inflation that accompanied Ukraine’s growth stifled it export competitiveness. The global economic crisis in 2008 diminished capital flows to Ukraine. It also made the value of the hryvnia to plummet. The central bank of Ukraine drained it reserves from $40billion to the present $12 billion in a bid to protect the currency (Why is Ukraine’s economy in such a mess? par 5). The depreciation of the country’s currency raises the debt burden. The fact that about a half of the public debt is in form of foreign currency makes the situation even worse.
The exports of Ukraine failed to do well, especially after the fall of the price of steel products in the global market. This made the GDP of Ukraine to fall by 15% in 2009. The IMF wanted to lend them $15 billion in 2010, but this loan was withheld after the country was found unwilling to honor the conditions put forth. The government has failed constantly to meet the public deficit targets. About 50 percent of the GDP is accounted for by underground businesses that don’t pay taxes. The country requires around $25 billion to pay foreign creditors and finance its current expenditure for this year. The foreign reserve has only $12 billion (Why is Ukraine’s economy in such a mess? par 8). A default is most likely. Ukraine is not so concerned about working on the economy right now but on managing the political unrest, that has made headlines globally. Ukraine leaders have been described as not willing to have reforms in the country and condoning of corruption. The economic problems of Ukraine therefore seem unlikely to end soon. Below is a graph showing how Ukraine has consistently lagged behind in terms of economic development compared to her peers (source: The Economist).
The sanctions threatened against Ukraine and Russia as a result of the alleged abuse of human rights during the political unrest will only serve to weaken the economy further. Russia’s claim on the Crimea region as a being a part of its territory has made Ukraine the center of controversy between former cold war adversaries (Harding par 6). The importance of political stability for growth and prosperity of the economy of any nation cannot be refuted. The political situation in Ukraine will need to be resolved first before it embarks on restoring its economy. It will be a matter of resolving the bigger problem first before dealing with the headache of a failed economy.
Harding, Luke. “Ukraine crisis: US will not recognize Crimea referendum, says ambassador.” the Guardian, 2014. Web. 11 Mar 2014. <http://www.theguardian.com/world/2014/mar/10/ukraine-crisis-us-crimea-referendum-putin-ambassador>
Unknown. “Why is Ukraine’s economy in such a mess?.” The Economist, 2014.Web. 11 Mar 2014. <http://www.economist.com/blogs/freeexchange/2014/03/ukraine-and-russia>