Some thoughts on the specifics of the dialogue between the National Bank and the government
The financial front is no less important than the military one. Especially when we talk about a protracted war. Everyone certainly agree with this logical statement. But when it comes to specifics, there appear many different interpretations.
The most acute in this context is the question of the role of the National Bank of Ukraine in financing the war and restoring the country. What should be the policy of the NBU to bring victory closer?
Andrii Pyshnyi’s aspiration to build a new dialogue between the National Bank of Ukraine and the government deserves full support – this is something that the National Bank under the leadership of his predecessor Kyrylo Shevchenko was sorely lacking.
The priorities of the new Governor of the NBU do not cause any objections either. They include: macro-financial stability, the effectiveness of macroeconomic policy, constructive negotiations with our international partners, and access to funding.
“The total required funding is USD 38 billion. We will work to gain this financing in an effort that all authorities should join,” said Andrii Pyshnyi in his speech on October 10.
The fact that the head of the National Bank of Ukraine is looking for sources of budget financing is a great progress, especially compared to the position of absolute detachment of his predecessor.
However, even the President of Ukraine is involved in the search for external resources. In his speech at the International Expert Conference on the Recovery, Reconstruction and Modernisation of Ukraine, which took place in Berlin at the end of October, President Zelenskyi emphasized the need to mobilize USD 38 billion to cover the budget deficit next year and USD 17 billion for priority reconstruction (Fast Recovery Plan), therefore he called on international partners to establish a “financial Ramstein”.
Foreign aid is, of course, good, but there is one nuance. The Fast Recovery Plan (mentioned USD 17 billion) relates to the reconstruction of social, transport and energy infrastructure facilities in the liberated territories.
And what about, for example, industry, which feels the consequences of attacks on energy facilities most acutely? The reality is that the industry will not be able to do without attracting domestic resources. Representatives of Ukrainian business say this directly. In addition, these resources are needed not sometime in the future, but yesterday.
Here let us mention the above-mentioned speech of the new Governor of the National Bank of Ukraine. More precisely, one priority mentioned by Andrii Pyshnyi as the NBU Governor, which was “lost” by the press service. It was as follows:
“And, of course, it is a stable banking system as a guarantee that the credit support of the Ukrainian economy, Ukrainian businesses was… is… and it should be”.
Let us try to recall the last time when we could hear such unconditional support for lending to the economy from the Governor of the National Bank of Ukraine.
However, after the speech was edited, “credit support of the Ukrainian economy” somewhere… disappeared. The final press releases of the NBU and the Office of the President on the presentation of the new Governor of the NBU contain only “preservation of a resilient banking system”. But we know from our own experience that stable banks can operate without lending to the economy.
Ten days later after the NBU Governor’s speech, his Deputy Sergii Nikolaichuk, speaking at an International Conference at the National Bank of Poland, expressed much less confidence in business lending prospects:
“The banking system has enormous potential in the process of country’s reconstruction. When it is capitalized and liquid, it can become a powerful credit channel for corporations, small and medium-sized businesses. Therefore, as the economic situation stabilizes, the NBU intends to assess the quality of assets and conduct a stress test of the banking system. And based on the results, together with the banks, the NBU will develop and implement plans to restore their capital”.
It means that the banking system may or may not become a powerful credit channel? And when can this happen, if the National Bank of Ukraine plans to assess the quality of bank assets only “as the economic situation stabilizes”? It is safe to assume that not every business will live to see this bright future.
Notice how smartly the categorical wording “it was, it is and it should be” (credit support) in the speech of the Governor of the NBU turns into a completely neutral and non-binding “may become” in his Deputy’s speech.
Back in May, Joseph Stiglitz advised that Ukrainian authorities should focus on how to provide cheap money for business. According to the Nobel laureate, “this should be the highest priority task”.
The National Bank of Ukraine has “heard” the authority and… has raised the key policy rate from 10% to 25%. By the way, the regulator still hasn’t explained to the public the logic of raising the rate to 25%. Why 25% and not 15%, 20% or 30%? Discretion must have some reasonable limits.
If the projected inflation was taken as a benchmark for determining the key policy rate (the current level at the beginning of June was much lower), then the National Bank of Ukraine should specify the central banks that currently use such mechanistic approach. Here is a hint: there are practically no such central banks.
The unpleasant truth is the absence of full-fledged lending to the economy in the foreseeable future with the key policy rate of 25%. Notably, the NBU predicts that the key policy rate will remain at 25% until mid-2024.
The “5-7-9%” program is not a panacea. Firstly, not every business meets the requirements for participation in the program, and secondly, banks have recently begun to lose interest in it. The reason is delays in interest compensation from the state.
No matter how seditious it sounds from the point of view of adherents of the simplest version of inflation targeting, but to fulfill the “unconditional” priority of the new Governor of the National Bank of Ukraine (regarding credit support of the economy), the key policy rate will have to be reduced much sooner than predicted.
Finally, the “design” of monetary policy should be changed: the rate on deposit certificates at 23% is something beyond common sense. It literally kills the chances of the state and business to attract domestic resources, and also causes huge losses of public funds.
The balance of mobilized funds is constantly growing and has already reached almost UAH 300 billion. The NBU’s interest expenditures on deposit certificates (actually, they are budget revenues that failed to be collected) only in October exceeded UAH 5 billion (since the beginning of the year –UAH 26 billion).
To better see the scale of losses, it is enough to mention one figure from the speech of the Prime Minister at the expert conference in Berlin. Speaking about the priority needs of the state, Denys Shmyhal noted that “we have been able to allocate almost EUR 125 million for fast recovery”.
However, only in October, the National Bank of Ukraine paid banks about EUR 145 million (according to the official exchange rate) for keeping funds on deposit certificates (actually, for inactivity). As they say, further comments are unnecessary.
In conclusion, we would like to support the priorities of the new Governor of the National Bankof Ukraine, but warn against the excesses of the executor. Since, the NBU Governor’s intention to build a new dialogue with the government may remain an intention if the regulator’s staff continues to openly blackmail the government.
The most recent example of inappropriate way of building a dialogue can be found in the Summary of Key Policy Rate Discussion by the NBU Monetary Policy Committee, published on the last day of October. In particular, it is about unacceptable rhetoric addressed to the Ministry of Finance in the issue of setting interest rates on government issued bonds in the primary market.
Recently, the National Bank of Ukraine has developed a specific style of communication with society, which is difficult to to call a dialogue. Sometimes it borders on outright bullying, as, for example, in the case of the formulation of “moderately tight monetary conditions” regarding the key policy rate of 25%.
Dialogue implies respect for the interlocutor.
P.S. The press service of the National Bank of Ukraine should pay more attention to the words of its head, and the editors should finally learn that the abbreviation “centrobank” has a non-Ukrainian origin and is historically associated with the central bank of a completely different country.
Mykhailo Dzhus, Head of the Monetary Markets Department of the Growford Institute