Budget Deficits, Hyperinflation, and Stabilization in Ukraine, 1991–96

Abstract

Since gaining independence in 1991, the former Soviet republic of Ukraine has been plagued by persistent fiscal deficits and punctuated periods of rampant inflation. Having few options to cover the fiscal deficit, Ukraine in 1992–94 largely resorted to money creation. The result was that hyperinflation broke out in late 1993, its burden falling mainly on households, but also eroding the capital of state enterprises. Falling revenues and robust expenditures—even in the face of the continuing output collapse—were exacerbated by a policy of lavishing large amounts of cheap credits on state enterprises. This article reviews and analyzes the causes of Ukraine's inflationary impulse, the descent into hyperinflation in 1993–94, its effects, and the subsequent drive to stabilization by 1996. It concludes that a substantial erosion of the inflation tax base by late 1995 propelled the government to pursue stabilization through an IMF‐sponsored program of fiscal restraint. A two‐year drive to fiscal and monetary stabilization ensued. Stabilization was largely achieved by mid‐1996, permitting a currency reform in September.