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Ukraine: Central Bank Chief Causes Concern As He Falls Victim To Politics

Ukraine looks set to get a new National Bank chairman this week if parliament, as expected, replaces Volodymyr Stelmakh after two years at the helm. The man President Leonid Kuchma is proposing is Serhiy Tyhypko, a leader of a pro-Kuchma parliamentary faction. The move comes after Kuchma and other top officials criticized the bank's strict monetary policy for putting a stranglehold on the economy. But others have high praise for Stelmakh and say they're concerned at what they see as erosion of the bank's independence from political interference.

Prague, 27 November 2002 (RFE/RL) -- Fresh from appointing a loyalist as the country's new prime minister, embattled Ukrainian President Leonid Kuchma is seeking to put another friendly face in charge of Ukraine's central bank.

On 25 November, Kuchma nominated Serhiy Tyhypko, leader of the pro-presidential Trudova Ukraina parliamentary faction, for the post. If, as expected, parliament approves the move this week, he'll replace current National Bank Chairman Volodymyr Stelmakh halfway through his term.

Kuchma's desire to replace Stelmakh has surprised few observers. Dogged by allegations of corruption and claims he approved radar sales to Iraq in violation of a UN embargo, the Ukrainian president has been facing persistent opposition calls that he resign.

Earlier this month, parliament approved the president's appointment of another ally, Viktor Yanukovych, as prime minister. Many see this latest move as a further attempt by Kuchma to prop up his support in parliament and head off opposition attempts to remove him.

Officially, there is no ouster at the central bank -- Stelmakh "asked to resign." But officials have made it increasingly clear in recent weeks that they wanted the central-bank head fired on economic grounds.

Two weeks ago, then-Prime Minister Anatoliy Kinakh called for Stelmakh's ouster on the grounds that the central bank had strangled economic growth through high interest rates. Kuchma himself made the same criticism shortly afterward.

But the National Bank under Stelmakh has won praise from other quarters. The International Monetary Fund says the bank has done well to keep inflation down and the currency stable.

Emmanuel van der Mensbrugghe, assistant head of the IMF's European II Department, said: "We've been very pleased with the conduct of monetary policy. The central bank has successfully brought down inflation quite sharply. Inflation in 2001 was 6 percent, and this year inflation will approximate zero, so that by any standard [these] are very positive developments. At the same time, the central bank has increased its level of international reserves, which are also required, so its conduct of monetary policy has indeed been quite successful over the last couple of years."

Van der Mensbrugghe called the move to replace Stelmakh "unfortunate." "For us the key issue is to safeguard the independence of the central bank. In order to fulfill its mandate of preserving price stability, it is important for the central bank to be independent, so it's unfortunate that because of the recent political developments it was considered feasible to change the head of the central bank. We think that creates an unfortunate precedent. It's not a question of commenting on the professional capacity of the two individuals concerned because we highly esteem both of them as professionals, it's just regrettable that politics got involved in this aspect of economic policy," van der Mensbrugghe said.

Petro Poroshenko, head of the parliamentary Budget Committee, said he believes the decision was politically motivated. "I'm sure that there are no serious criticisms of Stelmakh's work. It's a great pity that the National Bank is now a place of bargaining of political interests. It's not an institution that should be involved in these processes. The outcome for the financial and economic system could be ruinous," Poroshenko said.

Economists stress that it's important to keep a country's central bank independent. Politicians -- and not only in Ukraine -- are notoriously keen on pressuring central banks to make decisions that might boost their own election fortunes in the short term but may harm the economy in the long run.

Typically, they demand lower interest rates to keep business happy, a weaker currency to boost exports, or extra money in circulation to plug holes in the public purse. The problem is, this can be a recipe for inflation to spiral. And in Ukraine's case, this would undo one of the Ukrainian National Bank's chief achievements of the past few years.

Stuart Hensel, an analyst with the Economist Intelligence Unit in London, said that these are exactly the sorts of pressures Stelmakh has been under -- but resisted -- for more than a year. He said the shots lobbed at Stelmakh have been an effective way for the government to deflect criticism from its own poor performance. "The reason why growth has slowed in Ukraine over the last year for instance is far more a result of government policy than of central-bank policy. It's a result of insufficiently fast restructuring within the Ukrainian economy and insufficiently fast deregulation of the Ukrainian economy, and that's very much within the government's remit. In terms of what the central bank is supposed to do, it's done it very effectively. And that is to keep the price level stable and to keep the currency stable, and that has been unprecedentedly well done in Ukraine over the last year," Hensel said.

Hensel said he believes Tyhypko won't tinker too much with the bank's strict policies yet, but he sees increasing political influence down the road. "He's unlikely to want to overtly show that he is changing policy as a result of his new appointment. I think he would be quite careful, especially at the outset to indicate the central bank remains extremely independent from the government. But over the longer term, I think there is now a greater risk of central-bank policy being politicized," Hensel said.

The parliament is expected to vote on the National Bank changes today or tomorrow.

(RFE/RL's Ukrainian Service contributed to this report.)