THE IMPACT OF THE DUTCH DISEASE ON THE COMPETITIVENESS OF THE ECONOMY: UKRAINIAN PRACTICE

Abstract

The purpose of the article is to analyse the practice of formulating Ukraine's exchange rate policy in the context of the impact of its miscalculations on the country's economy, in particular in 2011-2013, and to identify the causes of the Dutch disease. Another task is to investigate the possibility of the emergence of the Dutch disease due to the inflow of excessive volumes of currency from financial rather than raw material sources. To achieve this goal, the article uses both general scientific and special methods: historical and dialectical, analysis and synthesis, abstract and logical, generalisation, graphical and analytical, and statistical. In 2011-13, Ukraine found itself in a situation where budget expenditures significantly exceeded revenues, and the possibilities for public borrowing were limited. The problem of overcoming the budget deficit was solved by massive hryvnia emission. To prevent price stability from being disrupted in the run-up to the elections, the emission was bought back at the expense of foreign exchange reserves. This allowed the hryvnia to maintain a stable exchange rate of 8 hryvnia to one US dollar, but it led to a loss of foreign exchange reserves, which decreased from US$ 37.6 billion to US$ 15.5 billion over 33 months. At the same time, these years also saw a significant decline in almost all industries producing tradable goods. Against the backdrop of a steadily improving external environment, exports declined while imports increased. By continuously selling foreign exchange reserves, National Bank of Ukraine effectively compensated consumers of imported goods for about 10% of their cost, while Ukrainian producers did not receive such a subsidy. As a result, the exchange rate lost its regulatory function of balancing imports and domestic production, which caused an endogenous recession. This analysis has given the author grounds to argue that during this period Ukraine found itself in a situation of Dutch disease. The classical description of the Dutch disease attributes its cause to abnormal foreign exchange earnings from the sale of commodities with a high rent premium. However, the article shows that the same effect can arise from the inflow of foreign currency to the domestic market from other sources that are not backed by production efforts, in the case of Ukraine in 2011-13 – from the constant sale of foreign exchange reserves by the National Bank. In the period of post-war recovery, Ukraine may again face a situation of excessive inflows of ‘non-export’ currency. The experience of 2011-13 shows that even a relatively small imbalance of 10% of exports can have significant negative consequences. In this regard, the monetary authorities need to develop and be ready to implement a set of measures to protect the economy.