Monetary Policy in Ukraine in 1996-1999

Abstract

After hyperinflationary developments in 1993 the inflation rate was controlled and decreased to the level of about 10% in 1997 and 20% in 1998. Inflationary consequences of 1998 crisis were lower that one could expect. It proves the thesis about proper crisis management in Ukraine. Inflationary and banking sector problems were limited, although domestic currency devalued by 80% in 1998. This paper examines the profile of monetary policy conducted in Ukraine since the introduction of the new domestic currency - hryvnia. In the light of events at the end of 1997 (financial crisis in South-East Asian countries) and in August 1998 (financial crisis in Russia) the monetary policy had to be extremely flexible to preserve the financial stability. This paper also presents from the historical perspective how economic problems was accumulated eventually leading to the financial crisis. The analysis concludes the following: sources of Ukraine financial problems were mostly internal, crisis in Russia (the main trade partner) was only accelerating some processes, not causing them; the basic reason behind the financial crisis in Ukraine was unsustainable policy mix. As the monetary policy could be evaluated as tight, the fiscal policy was mostly expansionary. Evaluating the monetary policy in the context of existing legal framework and fiscal policy pressure we could say that the price stability has been preserved. As the fiscal problems are not solved and the banking sector is weak and underdeveloped, a new wave of financial crisis is still possible. Consequently, the fiscal reform is a must for Ukraine.