In times of crisis, society should rejoice at least some small islands of stability in the state, but the criticism of the National Bank of Ukraine (NBU), which ensures macroeconomic stability in Ukraine, does not decrease. Too high a discount rate slows down economic growth. Significant amounts of hryvnias in banks, but outside of deposits, are solid risks. Implementation of the International Monetary Fund (IMF) beacons will be prioritized over any other initiatives. And the risk of emission will remain as long as the war continues, no matter what anyone says. There are always many questions for the head of the National Bank of Ukraine (NBU), and now there are even more of them. In the first part of the conversation with the current Chairman Andriy Pyshnyy, ZN.UA learned about the implementation of the cooperation program with the International Monetary Fund (IMF) and its impact on our economy, the risk of a return to the issue, plans for currency liberalization and the current relations of the National Bank of Ukraine (NBU) with the Ministry of Finance of Ukraine.
— Andriy Hryhorovych, it wouldn't be us if we didn't start the conversation with problems. Already in July, Ukraine can undermine successful cooperation with the International Monetary Fund (IMF). Almost two thousand amendments have been submitted to the draft law, which returns the usual system of taxation of individual entrepreneurs. Therefore, there is a risk that we will not have time to adopt these changes, which are an obligation under the memorandum with the International Monetary Fund (IMF). Will it significantly affect our relationship with the Fund?
— At the end of May in Vienna, as part of the first review of the program, we successfully conducted a mission with the International Monetary Fund (IMF) and reached an agreement at the staff level. Our commitments and arrangements are reflected in the updated letter of intent and the corresponding memorandum on economic and financial policy. The bill you mentioned is a structural beacon, so its implementation is a mandatory parameter of the agreements.
At the level of the Ukrainian ruling team, there is a 100% awareness of the importance of cooperation with the International Monetary Fund (IMF) and a clear understanding of what issues need to be resolved in order for it to be successful. The main and basic thing is that the program with the International Monetary Fund (IMF) is very necessary for Ukraine. This is not just a $15.6 billion program, but a four-year financial support package. It combines financial resources, loans and grants, decisions on restructuring.
In total, the amount of this financial support under the base scenario is $115 billion. However, there is also a negative scenario, according to which the need for financial support is estimated at 140 billion dollars. So there are no illusions, but there is a clear understanding of the importance of adhering to the fixed conditions.
And although the National Bank of Ukraine (NBU) does not directly participate in the negotiations with the parliament, which concern only the fiscal block, I know that both the government and the Ministry of Finance of Ukraine are currently focused on solving this problem. Therefore, I am optimistic that a decision will be made that will ensure the implementation of our agreements with the International Monetary Fund (IMF).
— Is your optimism a calculation that a special procedure will be used during the review? Is this a calculation that the International Monetary Fund (IMF) will be lenient with our non-compliance with the deadlines?
— I do not know by what procedure the review will be carried out in the Verkhovna Rada of Ukraine. But I am optimistic that a solution will be found. Everyone perfectly understands how important it is. By the end of June, we expect the Board of Directors of the International Monetary Fund (IMF) to approve the results of the first review of the program, and therefore Ukraine to receive the next tranche of financing of about $900 million. And we are not talking about leniency at all – it is a question of the ability of the Ukrainian authorities to fulfill their obligations. Of course, individual technical points can be discussed, but without changing the essence.
— Look, if such a problem arose with the taxation of Individual entrepreneurs, then imagine what kind of opposition can be expected at the end of the year, when, according to the memorandum, Ukraine will approve the Revenue Strategy, which is designed to increase the overall level of fiscalization in the country? Taking into account the experience of Ukraine's implementation of memoranda with the Fund, there are certain fears about further success.
— I will be frank, there is certainly room for concern, at least historically. After all, there has not been a single successfully completed program with the International Monetary Fund (IMF) in the last more than two decades, if I remember correctly. After all, something always stood in the way of this.
However, there was no program that had such a key strategic importance to our existence and our path to victory. This is a key point that will provide additional arguments, calm political battles, help find the right words, bring to consciousness and force to negotiate. At least that's what I want to think and I think it should be.
Yes, the implementation of this program is not easy, but it is not too difficult either.
It defines what exactly will make us stronger, fuel our resilience and ability to resist on the way to victory. And this is almost a verbatim quote from one of the paragraphs.
I don't know if you noticed, but the word "victory" is mentioned twice in the text of the memorandum. It was in this wording that the memorandum passed through the Board of Directors of the International Monetary Fund (IMF). And this was a separate point of our discussion with the mission. And the word "restoration" is mentioned about a hundred times in the memorandum. This is, in fact, the context, which, in my opinion, will force everyone to calm their passions one step before the decisive moment. Everyone should be interested in this. We need this program because it is about today and tomorrow. It is like a beacon that guides many stakeholders.
— Here I cannot help but mention the column of a well-known analyst who expressed the opinion that the program was given to us by the Fund only so that we could repay our previous debts to the International Monetary Fund (IMF).
— Such commentators consider this program in an unacceptably narrow context. This is a program about the unification of the donor platform of the free world around Ukraine and the formation of an unprecedented financial package of support on the horizon for four years.
I constantly emphasize that the horizon of this financial package is exactly four years. Do you know why? Because during these four years the Group of Seven (G7) countries and others have to go through their political cycles. This is a very important point. These are democratic countries, and we should be concerned about ensuring the sustainability of program support in the face of possible changes in political configurations during this period. Therefore, public fixation and political assurances regarding these obligations are fundamentally important for us.
— Is it some kind of umbrella from political risks?
— A global framework that will determine the logic of decision-making both in Ukraine and in partner countries. Therefore, yes, we were given a program in order to give something back. And it was given to us with the understanding that the Paris Club would restructure Ukrainian obligations. And also with the understanding that Ukraine will receive 42 billion dollars of financial support this year. And this program allows us to talk with our partners not only about the adequacy of funding, but also about its rhythmic and timely receipt. Because we need money exactly when we need it, and in sufficient quantity. You have to talk about it honestly, openly and quite loudly. It was the irregularity of funding last year that provoked the emission to which the National Bank of Ukraine (NBU) was forced to resort in order to cover the needs of Ukraine.
Currently, we have been living without emissions for six months – this is also an achievement of this program and the previous Monitoring program. After all, it was there that we recorded our strategic agreement with the Ministry of Finance of Ukraine to avoid monetizing the budget deficit this year.
Therefore, you can look at this problem narrowly, or you can open your eyes wide and thus understand everything better.
Recently, I often mention such a concept as a keystone, that is, that which holds the vault of the entire structure. In our case, the International Monetary Fund (IMF) program is exactly that. Thanks to this, this arch of financial protection is held above our heads. It gives us the opportunity today to talk about the victory, about the counteroffensive, about the restoration of economic growth, and about many other things.
However, one must look at the wider context. We have finally received subjectivity, absolutely deservedly, and this subjectivity must be converted. Ukraine has now formed an absolutely unprecedented level of trust and cooperation with the International Monetary Fund (IMF). This cannot be reduced solely to interest and tranches. This is a chance that we deserve and must take advantage of.
— Have you already mentioned the issue, is it possible to return to it this year or next year? Especially given the constant proposals to liberalize taxation and reduce the tax burden?
— We are currently following a strategic plan to avoid monetizing the budget deficit this year. This is not an easy task in the conditions when the consolidated budget will have a record deficit of more than 26% of GDP. Even greater than last year, when it was 25.5% of GDP. Almost a third of the economy has been lost. The war continues. But for almost six months we have covered the needs without monetization.
But in what way? We succeeded in what seemed impossible even last year, namely to restore the financing of the budget deficit at the expense of the domestic debt market. As of today, Ukraine has attracted more than 190 billion hryvnias in the domestic market from the placement of bonds of the domestic state loans of Ukraine. For the whole of last year, it is 164 billion hryvnias. Ukraine has also already attracted almost 20 billion dollars of foreign support. Despite the difficulties that objectively exist and will exist in the second half of the year, the government manages to ensure a sufficient level of replenishing the budget at the expense of both tax and non-tax sources.
But, despite this, our needs are colossal. Only direct expenses for combat capability support reach half of all expenses of the general fund of the state budget. The war continues. We do not know what the military campaign of the second half of the year will be. We believe that it will be successful. At the same time, a successful counteroffensive requires sufficient and timely funding.
We hope that our joint efforts, which were implemented during the first half of the year, will be equally successful during the second half of the year. We see the unrealized additional potential of the domestic debt market.
We note some interest, including among non-residents, in medium-term bonds up to three years. Attractive from the point of view not only of their profitability and coverage of reserves, but also of the investment line. This would be impossible if we did not manage to ensure exchange rate stability and increase the attractiveness of hryvnia assets – do you remember how many conversations there were about this?
— Of course. Without an agreement with the representatives of the Ministry of Finance of Ukraine, this was an unattainable goal. Have you already agreed?
— Indeed, it was an element of tension between the fiscal and monetary authorities. Well, the situation has changed. The representatives of the Ministry of Finance of Ukraine and the representatives of the National Bank of Ukraine (NBU) began to hear each other better and understand the essence of mutual mandates. Currently, the average interest rate for domestic state loan bonds is 18.77%. The government has received another source, at the expense of which its needs are covered. We were able to avoid unwanted challenges, because forced emissions are a challenge, especially for a weakened economy. After all, despite last year's record emission of 400 billion hryvnias, we entered a stable disinflationary trend.
The main mandate of the National Bank of Ukraine (NBU) is to ensure price and financial stability as a guarantee of sustainable economic growth. This is the basis for the rest of things, including the revival of lending, which we are already beginning to see little by little.
Even at the global level, people are increasingly speaking more and more loudly about the need for interaction between the monetary and fiscal authorities, the need to build effective communication, to build effective channels for conveying the monetary impulse generated by the National Bank of Ukraine (NBU), to form a common field of expectations, and to reduce uncertainties.
It is impossible to do all this if you do not have the appropriate quality of communication, and there is no appropriate respect, trust and perception of the National Bank of Ukraine (NBU) and its arguments.
— How long will this period of warming last, because the conflict of interests is embedded in the very essence of your mandates?
— I proceed from the fact that macro-financial stability is not only a direct mandate of the National Bank of Ukraine (NBU), it is a resource whose value is well understood in the government. These are macro conditions, which are a mandatory element in the composition of factors that Ukraine seeks to attract investors and without which the London conference would have a completely different connotation. And obligation in this case is the key word!
— In the picture of state finances that you described, I do not see a place for a change in the taxation system that would involve lowering tax rates.
— I would like colleagues from the Ministry of Finance of Ukraine to answer questions about fiscal policy, that is their sector of responsibility.
— Then the Minister of Finance of Ukraine will simply come to you regarding the emission issue.
— My colleague from the fiscal department, Serhii Marchenko, has repeatedly made statements that the strategic task of the Ministry of Finance of Ukraine is to avoid monetary financing of budgetary needs. The National Bank of Ukraine (NBU) not only welcomes the statement, but also shares the aspirations and contributes to the achievement of the goal as much as possible. Therefore, I will take courage and say on behalf of both of us: we are not striving for different things, we are striving for what our signatures stand for: macroeconomic, financial and external stability, in order to strengthen Ukraine's potential on the way to victory.
Fiscal consolidation is one of the exercises that makes it possible to maximally cover its necessary needs with the possible resources available to the state budget. What, accordingly, will not be covered must be financed through the domestic debt market and the program of international financial support.
The memorandum with the International Monetary Fund (IMF) is based on a concept that provides for the maximum concentration of efforts in the fiscal and financial spheres at the first stage. Everything that supports our potential must be mobilized. Everything related to reform, tax liberalization, possible reduction of rates, are structural reforms of the budget and tax sphere, transferred to the second stage of implementation, which should begin only after the security risks are allowed and stability and sustainability are ensured.
— So tax reforms should not be expected until the end of the war?
— Let me remind you that the program with the International Monetary Fund (IMF) stipulates that a high level of security risks will remain for 18 months. That is, it will capture 2024 as well, at least its first half year.
Currently, we must do everything to consolidate resources, ensuring the functioning of all critical elements: defense, public finances, financial system, energy, etc.
At the same time, there are basic elements that both we and the government must develop in preparation for a quick start to recovery. In the National Revenue Strategy, I am convinced, there will be answers, if not to all, then to most of the questions regarding the further development of the tax system.
After all, because of this, we now take a very serious approach to any proposals related to new expenses or loss of budget revenues. On the contrary, it is about restoring taxation to the level that existed before the war and about strict control of spending. The war continues, and with the war there are risks that we must be prepared for.
A specialized working group responsible for replenishment of the domestic debt market has already started working on the basis of the Financial Stability Board. We are also working on a mechanism for the so-called coverage of temporary risks of possible cash gaps in the budget.
— What kind of mechanism will it be, if not emission is used?
— The coordination process is ongoing. In fact, it is a short-term bridge (loan. – J. S.) to cover the risks associated with the non-rhythmic inflow of international financial aid, which provides for quick coverage of the need on the terms of repayment upon receipt. This is a tool that is advisable to keep just in case.
Importantly, there is a certain hierarchy in covering the financial gap. First of all, international financial support. Domestic resources, including domestic borrowing and government deposits. And only if these methods of coverage are insufficient, then such mechanisms as bridge or emission are used.
I consider it an achievement that everyone now has a clear understanding that emission financing of the budget is not a solution to the problem. Emission as a tourniquet will save your life today, but will cause significant damage if not abandoned in time.
— We see certain inflationary successes and we hope that the downward trend is fixed for a long time. What will happen to the discount rate? There are experts who have been calling for its reduction for a long time.
— The discount rate currently plays an important supporting role. After the full-scale invasion, as is known, National Bank of Ukraine (NBU) was forced to fix the exchange rate, which became the nominal anchor for the economy. Actually, exchange rate stability is probably one of the main factors that allows us to enter a stable disinflationary trend.
However, we understand that living under administrative constraints, where inflation targeting is not applied and the exchange rate is fixed and stable, can seem comfortable. Yes, this phenomenon is sometimes inconvenient, but still comfortable for many people. However, this comfort is deceptive and dangerous, and it is necessary to return to market mechanisms and tools under the first best terms and without delay, until the economy, business, and financial sector have lost the skills of adaptation and flexible behavior.
One of the strategic tasks for us is currency liberalization, i.e. a gradual easing of currency restrictions in the presence of clear prerequisites and controlled by consequences. Over time, they lose their effectiveness, on the contrary, they can cause the strengthening of market deformations, the shadowing of the economy, the diversion of resources to non-productive use, while hindering productive business activity.
We want to move in this direction in a limited and consistent manner. Therefore, we are not talking about when it will happen, but we are already talking about the fact that we are working on creating the prerequisites for this – and this is one of the priorities of the National Bank of Ukraine (NBU).
Among these prerequisites is the preservation of the sufficiency and protection of gold and foreign exchange reserves, because we understand that for quite a long period the market will be balanced exclusively due to the interventions of the National Bank of Ukraine (NBU).
Another important prerequisite is the strengthening of the effectiveness of the discount rate, this is the same transmission that will soon scare children, as politicians often talk about it. The discount rate should increase its influence, gradually regaining its role as a nominal anchor, and at the same time as inflation targeting. It is also not an easy exercise, and it will require time and a whole set of measures aimed at restoring the usual operational design of monetary policy. After all, due to the record surplus of liquidity and its dangerous concentration on accounts, the National Bank of Ukraine (NBU) resorted to unconventional approaches to the question.
— In general, significant liquidity is not so bad.
— Yes, in itself significant liquidity in the financial system is not a threat. In our case, we are dealing with a set of factors that led to the dangerous influence of liquidity surplus on exchange rate and price stability. In other words, the record volumes of liquidity that entered the banking system in connection with the financing of budget expenditures were concentrated not on time deposits, but on demand accounts. If this liquidity is not limited and secured by the conditions of a deposit with a fair rate, then, first, it quickly depreciates under the pressure of inflation. And secondly, it is worth noting that people, trying to save their savings in the absence of an adequate deposit offer, take their savings to the foreign exchange market, which creates a risk for exchange rate stability. Because of this, the National Bank of Ukraine (NBU) has always persistently pursued an increase in the value of hryvnia assets and deposit rates and an increase in the specific weight of term deposits.
After all, at the moment when we move to currency liberalization, this liquidity, which is not united in the banking system, as it usually happens in our country, will move to the foreign exchange market.
— Do you have an advice to prevent this from happening?
— After all, prerequisites are needed for this. Above all, it is important to have a sufficiently high level of gold and foreign exchange reserves, and in our country it has reached an 11-year historical maximum. This will further improve expectations and reduce the incentive to strengthen demand for the currency. And if necessary, we will have enough opportunities to maintain control over the situation. Well, good. We have to save it.
So, let's move on. A sufficient volume of liquidity is concentrated on deposits of three months or more instead of current accounts. It was not easy, it is not profitable for banks to offer an adequate interest rate, especially when there is an opportunity not to do it and remain highly liquid. The key rate was already 25%, but banks were in no hurry to raise deposit rates to it. Because of this, the National Bank of Ukraine (NBU) increased the rate and calibrated the mechanism for calculating required reserves. Since April, we have started using the same unconventional operating design. A certain asymmetric approach to determining the value of deposit certificates and interest rates paid by the National Bank of Ukraine (NBU) is supported by the introduction of three-month deposit certificates in relation to the amount of hryvnia term deposits attracted by banks.
As a result, we can already see that rates have increased significantly, that the level of time deposits in the structure of funds has crossed the 35% mark. Thus, they changed the trend. Well, good. However, this is not enough, we must ensure the stability of the prerequisites.
Therefore, in order to consolidate these trends, the National Bank of Ukraine (NBU) decided to leave the discount rate at the level of 25%.
Yes, we see that inflation is decreasing. However, we understand that this disinflationary dynamic will slow down in the next six months, well, at least because of tariffs for housing and communal services and the restoration of fuel taxation. It will have a certain inflationary effect and the destruction of the Kakhovka Dam. It is also worth noting that there is uncertainty regarding the operation of the grain corridor. There is an extension of the ban on the import of grain into the territory of five EU countries until September 15. After all, the war is still going on in our country. So, despite the positive trends, we should be cautious and even conservative.
The main positive thing is that our tools finally worked exactly as we expected, and even better than before the war.
— The transmission definitely sped up.
— Oh yes, finally. We see positive trends, we see areas of uncertainty, we see that the instruments of influence have worked effectively, and we want to clearly outline and record these achievements. This is necessary in order to continue easing currency restrictions, which, in our opinion, will be able to return to Ukraine those elements of stability, which, in fact, shape the ability of Ukrainian business to adapt and make the Ukrainian market attractive for private investors. We also want to have enough grounds and prerequisites for a gradual transition to greater exchange rate flexibility without difficulties and stress for the economy.
Thus, as you can see, the domestic debt market was restored, inflation was stabilized and reduced. In addition, it is worth noting that the value of hryvnia assets gradually increased, the transmission mechanism was established, the needs of the Ukrainian budget are covered by non-emission sources. All these are the foundations for taking the next step in terms of monetary policy.
The forecast of the National Bank of Ukraine (NBU) in the April forecast predicted that the discount rate reduction cycle would begin in the fourth quarter of 2023. Instead, at the June board meeting, we all agreed that we could start the downward cycle earlier if there was exchange rate stability and the disinflationary trend continued. In order to give more specific terms, we need a new macro forecast. We will present it in July.
Tomorrow, in the second part of the interview with the Head of the National Bank of Ukraine (NBU) Andriy Pyshnyy, read about the course of stress tests in the banking sector, the money laundering scandal through banks, the prospects for the nationalization of the former "Alfa Bank" and the struggle with additional commissions for accepting worn and tattered banknotes.