The root cause of Ukraine's tragic experience with inflation in 1992-4 was neither price liberalization, the collapse in output, monopoly pricing practices, nor rising energy costs. Rather, it was the government's policy of extending cheap, practically zero-interest budgetary and off-budget credits to enterprises. The analysis presented here has shown Ukraine's slide into hyperinflation in late 1993 to be a direct consequence of the government's credit policies. The flow of resources to the state from inflation reached its pinnacle in mid-1993, when the inflation tax base began to erode. The Ukrainian public changed its aggregate financial behavior in ways that frustrated and circumvented government policies, including shifting to hard currency. The inflation tax and seigniorage peaked at different times for households and enterprises. A major finding is that enterprises paid a major share of the inflation tax, especially during 1993; household monetary holdings having been depleted thoroughly by year-end 1992.
Stabilization became increasingly likely in 1995-96 as the government exhausted its options to continue financing fiscal deficits through inflation. Rather than the product of the government's will to stabilize the currency, the liquidation of Ukraine's inflation in 1996 was the result of the irresistible logic of inflation's progress. Further, somewhat ironically, in the absence of ample internal and external sources of financing (including the inflation tax), the government had no choice after 1994 but to pursue budgetary balance, as is evident from the trends in Table 4. The path of fiscal adjustment in Ukraine therefore led from rampant fiscal deficits, to hyperinflation, and finally to fiscal and monetary stabilization.