As the war against Russia enters its seventh month on Wednesday, Ukraine is stuck between a financial rock and a hard place as it seeks to stay afloat while fighting off Moscow’s invading forces.
Tax revenues have plummeted due to an economy in free fall while military spending has skyrocketed, leaving the government facing a budget shortfall of $5 billion (€5.02 billion) per month.
To make up for the lack of cash, the country’s central bank has effectively been printing money — buying government bonds to the tune of $7.7 billion over the past six months. The Financial Times reported that the printing presses effectively created $3.6 billion in June alone.
With the war now likely to drag on indefinitely, the country faces the prospect of runaway inflation and possibly even hyperinflation — very high and accelerating inflation.
That would further erode the value of Ukraine’s currency, the hryvnia, which has already dropped by about a third. Inflation is up to 20% and is on course to hit 30% by the end of the year.
Earlier this month, a report by the London-based Center for Economic and Policy Research (CEPR) urged a “decreasing reliance” on money printing, or seigniorage, warning that Ukraine would likely face much higher inflation, a currency crisis and even a banking crisis if it continued.
“Money printing makes sense at the beginning of the war, when there is a lot of chaos, and allows you to raise money very quickly,” report co-author, economist Yuriy Gorodnichenko from the University of California, Berkeley, told DW. “But it’s not a sustainable solution. If you keep doing this, you’re going to destroy the rest of the economy.”Click for the full article at DW