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Budget Deficits, Hyperinflation, and Stabilization in Ukraine: 1991-96

Robert S. Kravchuk, Ph.D.

Since gaining independence in 1991, the former Soviet republic of Ukraine has been plagued by persistent fiscal deficits and punctuated periods of rampant inflation. This article reviews and analyzes the causes for Ukraine's inflationary impulse, the descent into hyperinflation in 1993-94, its effects, and the subsequent drive to stabilization by 1996. The argument is that a substantial erosion of the inflation tax base left the Kyiv government with few options by late 1995 than to pursue stabilization. Falling revenues and robust expenditures Ò even in the face of the continuing output collapse Ò were exacerbated by a policy of lavishing large amounts of cheap credits on state enterprises. Having few options to cover the fiscal deficit, Ukraine in 1993-94 largely resorted to money creation. The result was that hyperinflation broke out in late 1993, its burden falling mainly on households, but also eroding capital of state enterprises. A three-year drive to fiscal and monetary stabilization ensued as inflation exceeded sustainable levels. Stabilization was largely achieved by mid-1996, permitting a currency reform in September.

Ukrainian Fiscal and Monetary Trends
Credit Emissions and the Inflation Response
Seigniorage and the Inflation Tax
Who Paid the Inflation Tax?
The 1996 Currency Reform
Inflation Dynamics, Stabilization, and Budget Reform
Conclusions
Major References
Footnotes

Appendicies:
Table A-1, Ukraine - Real Blanaces, Seigniorage, and the Inflation Tax, 1991-96.
Table A-2, Ukraine - Household Real Balances, Seignoiorage, and the Inflation Tax, 1991-96
Table A - 3, Ukraine - Enterprise Real Balances, Seignoiorage, and the Inflation Tax, 1991-96
©1997 President and Fellows of Harvard College. Hardcopy may not be reproduced or distributed without the permission of the Publications Office of the Ukrainian Research Institute of Harvard University. Online version may be downloaded for personal use only. No further reproduction or distribution is permitted without the permission of the Publications Office of the Ukrainian Research Institute of Harvard University. For inquiries contact the Director of Publications.


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