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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 

Posted on the website: 2005-03-22

Comments on this article:

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Summing up 2006 it is already possible to speak, that for US dollar it was one of the best periods. We shall recollect even the end 2004 beginning of 2005 when its rate has sharply gone downwards in relation to practically all leading world currencies

The forecast of the IEE #8 (47).

In political relations between Yushchenko and Timoshenko eccentric events must happen to May 2006 (the Forecast on Hlebnikov Part 3)

Forecast IEE #7 (46). Europe: simultaneous growth of risks and sociopolitical pressure
The increase in the discount rate by the European central bank (ЕCB) in 2006 will cause a growth in the risks in the economies of incorporated Europe
The forecast of IEE #6 (45). Exchange risks of the world in 2006
afraid, that in the second half of 2006 the dollar exchange rate in the world exchange markets can fall to 30 % - 45 % in relation to ...
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After year 2006, the economy of Ukraine will step in a phase of its first serious economic crisis
IEE Forecast (15). American economy will absorb the world capitals like a powerful pump in 2005
Even today we may predict the result of a FRS experiment on driving of the American economy from " a soft patch " at the beginning of 2000
IEE Forecast. If there are no innovative priorities, the habitation market will become a risky point of the fund for business and investors.

The real estate sector is a small drop, and but for economy it reflects the bitter history of Ukraine, and (without exaggeration) all the CIS history.

IEE Forecast (13). Investments outside of systemic innovations go "nowhere": on the lot of oil and dollar
World prices for oil and dollar exchange rate will be "the valve of constant pressure " for economic growth
IEE forecast and comment (II). If the discount rate will raise, dollar will strengthen
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IEE forecast and comments. On a sudden problem of " canceling of the obligatory sale of 50 % currency proceeds"
Political risks in management of economy do not weaken in Ukraine. That can provoke an economic crisis even in a short-term prospect (after 2006)
IEE Forecast. Dollar, oil, steel, and the global innovational system will influence the world dynamics
Factors, which will influence economic dynamics in the nearest future
IEE Forecast. Ukrainian economy is most likely to remain excessively dependant on tools of economic policy in 2005
Most likely, innovative processes, capable to bring Ukraine forward at any commodity or technological sphere will not start in
IEE Forecast. The World Economics Will Run a Fever For Some More Time
According to leading economist's opinion, continuous decrease of long-term rates in the world's most developed countries is one of the greatest puzzles in the financial world today. The problem is important for the USA, and other national economics
IEE Forecast. The World Economics Will Run a Fever For Some More Time
The world economics will run a fever for some period (5-10 years). It will suffer decreased production effectiveness, raised consumption of oil in China, price fluctuations for fuel. After that, we will experience an unprecedented and grand innovational project. The project will change the quality of all the world economics, absorb all the free capital, and increase long-term yield.
IEE Forecast: Growth of a dollar exchange rate can cause growth of the external economic risks for Ukraine
As to the internal factors, which compensate specified risks, it is necessary to carry significant potential of economic growth to them due to activization of internal consumption. It is a question of activization of the factors removing restrictions on ways of incomes growth of people, of fine and average business.
IEE Forecast. In economic there can be a slow economic growth with the crisis periods
The deficiency growth of the account of current operations in the USA is connected first of all with smooth and deep downturn of a discount rate.
IEE Forecast: on a dollar exchange rate, OPEC conference, and session of FRS board, Bush's speech and meeting of G7.
Events of this week will leave the trace in 2005 World discussions
IEE Forecast
The committee for Federal Reserve System (FRS) in the USA (FOMC) will raise a discount rate for 0,25 % having brought it up to the value of 2,50 % at the next session, which will take place on February 1-2, 2005.
IEE. In the coming year the price for gold will continue to grow
Gold already would seem ceased to carry out function of money, again in the price because of the monetary markets dynamics.