After a dramatic session that stretched into early Monday, Ukrainian lawmakers finally passed a budget bill amid concerns over its International Monetary Fund lending line and flat-lined economy. The bill takes modest but important steps to reduce energy subsidies and move toward a balanced budget. Advisors convinced the Ukrainian president that some short-term pain is needed to right an economy rapidly taking on water.
Short-term pain is indeed necessary, especially if it means reforming a corrupt and distorted economy, but the devil is in the details. Balancing a budget is no excuse for enacting bad policy, such as the government’s program to raise customs duties on nearly all imported products. Duties will be increased by 10 percent on products like tobacco, alcohol, and food. Most other goods will see a 5 percent increase.
This is poor policy by lawmakers for two reasons. First, already hard hit Ukrainian consumers are destined to feel the brunt of the hike, especially at the supermarket. While Ukraine is a net exporter of food, Ukrainians still rely on imports for nearly one-third of the food they consume. A 10 percent hike in import duties will be passed along to consumers who purchase imported products, such as fruit, vegetables, and meat.
These duty hikes will only compound lingering displeasure with food prices. A weaker hryvnia has increased import prices and domestic inflation, which was over 20 percent in November. An additional 10 percent duty on imported goods will make it even harder for Ukrainians to put food on the table.
Second, Ukraine’s move to hike import duties also sends a bad message to its European trading partners at the very moment it’s reaching out for help and acceptance. Ukraine signed an association agreement with the European Union back in March that called for increased “convergence,” of which increased trade and economic integration are a top priority. Raising duties on goods reduces Europe’s market access and runs counter to the spirit of the agreement.
Ukraine’s economic problems abound. Most solutions to the current mess require some sort of short-term pain. But as reforms continue, lawmakers must be careful to choose short-term pain that yields long-term benefits. Increasing trade barriers means short-term pain, but without many benefits.