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. Last Updated: 07/27/2016

Low Ukraine Inflation Rate Jeopardized by Wage Debt

KIEV -- Ukraine's recent record low inflation rate is being threatened by a huge government wage debt, Western economists and diplomats said Tuesday.

"The inflation rate is very positive and shows that Ukraine is successfully following stabilization policies," said Michael Blackman, Soros International Economic Advisory Group manager. "But it's true the wage issue still has not been dealt with."

The Statistics Ministry said Tuesday that monthly inflation in July was 0.1 percent, the same as in June and the lowest since independence in 1991.

Deputy Economics Minister Viktor Kalnyk said last week inflation would rise to 4.2 percent in August, when a government-imposed increase in rents and utility fees takes effect, but would fall back in the following months.

However Ukraine owes about $1.5 billion in public sector wages to workers, along with pensions and student subsidies. Many industrial workers are still in the public sector.

Blackman said Ukraine should seek foreign aid to cover the wage arrears. "International funding assistance would not have the negative effect on inflation in the same way it would if they printed money," Blackman said.

Economists have expressed fears that Ukraine could send inflation soaring by issuing money to pay off wage debts, which President Leonid Kuchma has called the most serious problem facing his government.

"This inflation rate is the best that they have consistently done, but they could make a small mistake and it would be really bad. Everything's fragile here," said one Western diplomat who did not wish to be identified.

"The inflation trend is good, but people are not getting paid," he said.

Ukraine's receipt of International Monetary Fund credits, totaling $867 million for this year, depends partly on keeping inflation at a low level. Under its IMF agreement, Ukraine must reduce the annual inflation rate to 40 percent for the year from 181 percent in 1995.

Government ministers have pledged to reduce outstanding wages to a single month's salary by next month.