Ukraine presently has spare capacityi.e. negative output gap (PictureX gap). Thus the immediate requirement is to increase aggregate demand (AD)which will have succeeding affect on employment and inflation.
This should inprinciple drive the economic growth and pull Ukraine further away fromrecession. To achieve this as a short term challenge, three demand side policesare recommended below. A.
FiscalPolicyFiscal policy should be anchored togradually reduce government budget deficit to GDP which is currently at 3.1% ofGDP. The long term target should be below 1% of GDP but mid terms targets for2018 & 2019 should be kept at 2.5 & 2% respectively. This objectivewill be preliminary achieved by increasing capital investment spending inpublic infrastructure and decreasing current government spending. The othermajor contributor in controlling this budget deficit will be tax revenue.
Instead of tax cuts or tax raise, the government should focus on implementing& tightening existing tax administration to cover all loop holes in system.Focus should be to correlate increasing wage rate with increasing socialsecurity contribution. Any tax reforms or tax evasion schemes promoting taxsavings or special commercial tax treatment should be avoid for few years till2020.
The illegal activities like gambling and amber mining which are run by traditionalmafias should be legalized with higher tax bracket. This will provide necessaryadditional liquidity push to government revenues. Lastly revenue expenditure& spending details between central & local government bodies should beaudited to avoid accumulation of residual revenue at local levels. Any increasein revenues should be subsequently used to increase capital investments.
B. MonetaryPolicyThe monetary policy of Ukraine isfocused on inflation targeting framework which aims at setting quantitativegoals to reduce inflation. The inflation target for 2017 is 8% but at 2017 Q3 itis hovering at 12%. For future the medium level targets for inflation should beset at 6% & 5% for 2018 & 2019 respectively which are quite reachablelooking at global perspectives. To achieve this objective, holding stableprices and maintaining flexible exchange rate are the key priority factors. TheNBU should also tighten this inflation targeting framework by developing interbank market with help from liquidityforecasting & management.
Meeting these inflation targets are very vital inattracting global investments, establishing market credibility and stabilizing dollarization.If the inflation targets are derailed by market outlook or geopolitics shocksthen the key interest rate should be used as a tool to bring inflation within arealistic forecast with some margin of error. The importance of decreasing inflationrate and relaxing foreign exchange regulations will seen in increasing internationalreserves. These foreign currency reserves should be linked back to investing ininfrastructure, increasing liquidity in market and improving aging servicesectors (heath and education).