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Opinion: reducing of government spending as way to evade default

December 2, 2014

Economist Ilarionov about processes that may lead Ukraine to default

Opinion: reducing of government spending as way to evade default

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.

Economic situation in Ukraine is not very favorable today and it is getting worse. During the last month exchange reserves decreased for nearly $4 billion so that today their value slightly exceeds $12 billion.

Andriy Ilarionov names 3 ‘if’ of Ukrainian default: if current economic policy continues, if the rate of decline of reserves remains the same as in the last month and if Ukrainian government does not take urgent measures to prevent the developing crisis default of Ukraine will become inevitable.

What is needed to prevent default?

The main source of economic turmoil is the invalid size of budget deficit. The state budget deficit currently stands at about 10% of gross domestic product. If to take into account off-budget subsidies the deficit reaches 15%. Such state budget deficit leads to the fact that from%2 to $3 billions are spent on financing it from the exchange reserves. This problem should be solved in the nearest weeks.

The government should focus its efforts at solving of the most urgent problem and this should become the solution of a much more long-term problem – cutting of government spending.

According to the last data from International Monetary Fund the share of Ukraine’s public expenditure is 53% of GDP. There is no another post-communist country with the same high level of spending.

It is necessary to reduce government spending to at least 20% for successful development of passing to the stage of fast economic growth. So that two thirds of current government spending should not be administered through state.

Previously we have informed that President Poroshenko has signed a decree to grant Ukrainian citizenship to 3 foreign experts.


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