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Opinion: Colossal governmental spending kills Ukrainian economy

December 2, 2014

Reduction of governmental spending to prevent spending of exchange reserves and default

Opinion: Colossal governmental spending kills Ukrainian economy

The President of the Institute of Economic Analysis and senior fellow at the Cato Institute Andriy Ilarionov said ruing press briefing at Ukraine Crisis Media Center that high level of governmental spending as a reason of bad economic situation in Ukraine. If the government does not take appropriate measures the country will not avoid default.

Ukraine has colossal governmental spending that does not correspond to level of its economic development, they kill economic growth and economics.

One of articles in governmental spending is huge energy subsidy that makes up almost 10% of gross domestic product. It leads to excessive consumption of energy resources. All the needs of the country might be solved with reduction of consumption of energy resources, competent policy on extraction of energy resources on the territory of Ukraine and some import. However, energy subsidies must be eliminated.

The next item of governmental spending is governmental procurement not related to the immediate needs of the state. These procurements, as Georgian economist Kaha Bendukidze has mentioned, might be reduced to 4% of GDP. Social benefits on the level of 17% are another item of high spending. Even countries with high GDP do not have such spending. Russian economist Ilarionov believes that that Ukraine needs global review of all governmental obligations.

According to studies of the Institute of Economic Analysis, optimal line of value of governmental spending for such countries as Ukraine and Russia is between 15% and 19% of GDP. If spending of Ukraine approaches to this level economic decrease in Ukraine will cease and there will begin an economic growth. However, if rate of decline of foreign exchange reserves remains on the level of the last month, Ukrainian reserves will be spent in three months.


Previously we have informed that high level of government spending may lead Ukraine to default.


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