IEE forecast and comments. On a sudden problem of " canceling of the obligatory sale of 50 % currency proceeds"

The decision-making on a canceling of obligatory sale of 50 % currency proceeds is rather progressive. It was expected for a long time.  The obligatory sale was twice introduced as an anti-recessionary measure in 1990th. It met insufficient offer of foreign currency, has settled itself and became rather formal. Today, in conditions of dynamically increasing volume of bank operations, and also growth of export more than for 50 % of gross national product, Mezhbank foreign currency offer is sufficient. Banks buy and sell currency more or less freely. This can be proved by growth of currency reserves of National bank in Ukraine.

We consider, that canceling of norms, and maximal liberalization of the currency and monetary markets is that vector which our central bank should aim at. For it is desirable to reduce great costs in economy as much as possible. It promotes innovative processes, like the increased monetary offer promotes the interest rates for traditional economy in the market.  (Its relative share in Ukrainian economy, by our estimations, makes more than 98 %).

However there is a problem as for canceling of obligatory sale of 50 % currency proceeds. For there is difference, what institution starts canceling these half sales? For the national bank may start it, and the government or its structures may also start it. And not only whether the government starts, but also any slight nuances of this initiative are important. The government can ask, recommend paying attention, or ask to understand the urgency of some governmental programs. The central bank should have an opportunity to fulfill or ignore this request. From the experience we know, that countries with "rigid" distribution of functions between central bank and the government (where central bank is responsible for monetary offer) show the greatest effectiveness in national economy. 

The President, and the Verhovna Rada can influence a policy of the central bank only by selecting personnel and only due to the Constitution of Ukraine. Also by consultations, recommendations, wishes, and a developed legal national and economic strategy.

However the government should not have the right to come to the internal monetary markets independently (but may come to the foreign) with the purpose to attract funds for financing deficiency of the state budget. The only exception is the use of the central bank as the main agent in the open monetary markets. It is caused by that circumstance, that nobody should prevent to the central bank to support balance in the monetary markets and the balance of payments of the country.

In all civilized countries this right and functioning of the central banks are protected by Constitution. Ukraine is not the exception. It is very good, that in due time founders of the Ukrainian Constitution have fixed this positive experience of the advanced countries at the main law of the country. For from time to time politicians or the governments may encroach for it.
Which important national interests are protected by the Constitution?

It is well known, that the monetary market is the key market in national economy. Its role and influence for other markets is difficult to overestimate. It is proved, that if all the markets are in balance, and monetary is rebalanced, all other markets will become rebalanced too. And, on the contrary, if all the markets are not in balance, and monetary is balanced, other markets will inevitably come to balance.

The monetary market is extremely sensitive and dynamic not only for economic forces. The psychological factor is even more significant. Therefore the central bank should have an opportunity of free, independent, and operative management of the monetary offer. It also should explain its policy. It should use any opportunity to level wrong understanding of its policy by the market.

The activity of the central bank in the USA (headed by A. Grinspen) is a good example of such policy. It is so transparent, that today no serious forecaster doubts, that soon (at session on March, 22nd, 2005) the committee for open FRS markets in the USA will raise a discount rate for 0,25 %, up to 2,75 %. All the market expects this change of a discount rate. The deviation from these parameters can be caused only because of sharply changed circumstances.

The monetary market influences the income dynamics of all institutional sectors of economy through a rate of exchange. Therefore, if in gross national product the greater share belongs to export, any manipulations with a rate of exchange can cause growth of risks for decrease in incomes. Accordingly, the rates of growth of gross national product (i.e. risk to cause an economic crisis artificially) will also decrease. For example, the policy offered by some government representatives for sharp growth of a rate of exchange of national currency in spring 2005 will cause the reduction of external consumption of Ukrainian products by 2006. If not to compensate such reduction by a proper growth of internal consumption, it will lead to total economic crisis.
Therefore the main criterion of currency policy should maintain the balance of payments and stability of the monetary markets.

It is possible to understand the reasons of the government anxiety as for too big external consumption in cumulative demand of production of Ukrainian economy. Such distortion of demand increases risks for import of crisis. However, as we see, the cumulative demand should be changed not by manipulations with a rate, but by reforming of national economy on the basis of a systemic innovation. Creation of national innovative system and on this basis providing of system innovations would allow increasing incomes of households and firms. This is a primary factor of improving of internal consumption. It would allow creating new sectors, and even branches of economy.

Besides, it is important to create market mechanisms in order to align incomes of people. That would also stimulate internal demand and growth of people's welfare. Foreign experience, first of all that of the USA, helped to solve this important problem.

As the analysis shows, the role of the central banks of countries becomes more and more significant. In economic policy and strategy the central banks were made even to the governments, and in a lot of cases their role was defining. That is why in Ukraine, too, the understanding of necessity to change the accents of the operating institutionalism is developing.

I. P. Makarenko 
IEE

Posted on the website: 2005-03-22