A prolonged war in Ukraine is becoming increasingly likely as there is no end in sight, this prospect requires a review of the country’s macroeconomic strategy.
In particular, the current set of policies based on the reduction of foreign exchange reserves and other temporary measures is becoming increasingly untenable.
A group of nine well-known international and Ukrainian economists warned, “A prolonged war is increasingly likely, a prospect that calls for a recalibration of the country’s macroeconomic strategy.
“Specifically, the current policy mix, which relies on running down foreign reserves and other temporary measures, is progressively untenable.”
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The Macroeconomic Policies for Wartime Ukraine, published by the London-based Center for Economic Policy Research (CEPR) stated, “Unless altered, this course will result in a major economic crisis that will cripple Ukraine’s ability to sustain its war effort over an extended period.”
“The marathon of this war requires prudence and caution in public finances, a durable nominal anchor, a resilient financial system, a careful management of external balances, and flexibility and efficiency in the allocation of scarce resources.
“Various branches of the government must coordinate their efforts to this end.”
The economists outlined their macroeconomic policies to put the economy on a sustainable wartime trajectory.
The economists said, “First, the government must mobilize more resources to improve its fiscal position so that the country can fund huge military expenditures and maintain basic public services in an economy ravaged by the war.
“The aim should be to increase the collection of tax revenues and for remaining shortfalls to be financed primarily through nonmonetary means: preferably through external aid, but if not, through domestic debt issuance, with much less reliance on seigniorage (printing money).
“Controlling and raising the effectiveness of nonmilitary spending is critical for keeping public finances sustainable.
“Foreign military aid remains vital, of course, and Ukraine’s allies should radically increase economic aid and accelerate its disbursement,” the report says.
It added, “Second, there is an urgent need for a durable nominal anchor. Heavy reliance on money printing to finance government deficits has been unavoidable in the first months of the war but if the current reliance on money finance is sustained, inflation, already over 20%, could easily drift much higher.
“The aim should be for relatively low inflation. In a time of national mobilization, the main responsibility for attaining price stability falls on the fiscal authority, which can strongly influence inflation through the tools it chooses to raise resources from the domestic private sector.
“The government should aim to enhance national savings rather than rely on monetary financing from the central bank.
“In coordination with fiscal authorities, the central bank should implement a flexible framework to support macroeconomic stability. A managed float of the exchange rate is consistent with this goal.
“Third, external imbalances should be addressed through a combination of strict capital outflow controls, restrictions on imports, and some flexibility in the exchange rate to avoid jeopardizing internal macroeconomic stability in the face of huge fiscal needs.
“A comprehensive standstill on external debt payments is essential,” according to the document.
“Fourth, although wartime governments usually take over the allocation of resources, Ukrainian circumstances call for more market-based allocation mechanisms to ensure cost-effective solutions that do not overburden the state capacity, exacerbate existing problems (such as corruption), or encourage (untaxed) black market activities.
“To this end, the aim should be to pursue extensive radical deregulation of economic activity, avoid price controls, and facilitate a productive reallocation of resource.”