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On November 22, 2021, the Executive Board of the International Monetary Fund completed the first review of the Stand-By Arrangement for Ukraine and approved an extension of it from December 8, 2021 to end-June 2022.

The Ministry of Finance of Ukraine, in its press release, modestly welcomed the decision of the IMF Board to allocate another tranche to Ukraine, “increasing” it by USD 1 million to USD 700 million. 

It also reported that “the funds from the IMF will be used to ensure macroeconomic stability and to finance the budget deficit.”

Nevertheless, the Ministry of Finance did not say a word about the terms of Ukraine’s cooperation with the International Monetary Fund (IMF) for the following seven months, leaving the intrigue until the publication of the Memorandum on Economic and Financial Policy.

The National Bank of Ukraine also welcomed the IMF’s decision and even outlined its own commitments within the Stand-By Arrangement for the future. Literally:

  • strengthening the central bank’s independence;
  • pursuing an inflation-targeting monetary policy aimed at achieving the inflation target of 5%;
  • overhauling state-owned banks and further implement corporate governance reform;
  • cutting public spending on failed banks;
  • reducing the banking system’s NPL ratio
  • strengthening the banking supervision system, the regulation of nonbank financial institutions, and more. 

We could be happy to receive USD 699 million in the near future and be done with it.

But, even without the Memorandum being published, we can see some dubious moments that do not allow us to fully “enjoy” the moment.

Let us take from the official press release of the IMF those commitments of the Ukrainian authorities for the future, which relate to the sphere of responsibility of the NBU. There are only two of them:

  • safeguarding central bank independence and focusing monetary policy on returning inflation to its target;
  • ensuring banks’ financial health, including through good governance, with the goal of reviving sound bank lending to the private sector.

At first glance, the priorities of the NBU (outlined in its press release) resonate with the IMF position. But, as they say, the devil is in the details.

One does not need to be a professional philologist to see the difference between “safeguarding central bank independence” in the IMF version and “strengthening the central bank’s independence” in the NBU version.

By a long stretch of the imagination, it is difficult to translate the word “safeguarding” as “strengthening”. Therefore, in this case, the NBU openly… exaggerates.

The most interesting thing is that there is no objective reason for such a substitution of concepts. Since after the latest amendments to the law on the National Bank of Ukraine (Law No. 1811-IX), it (represented by the Board of the National Bank of Ukraine) has become almost unachievable for control by Ukrainian society.

The NBU Chairperson reported that the norms introduced by Law No. 1811-IX were defined as a preliminary measure for the IMF Board of Directors to approve the first revision of the Stand-By Arrangement.

This is not hard to believe, as the IMF has no problems with monitoring the NBU’s actions: according to the technical memorandum of the Stand-By Arrangement, the National Bank provides to the IMF the reports on 34 positions on a daily, weekly or monthly basis. And this is only the formal side of control…

The focus of monetary policy on returning inflation to 5% is quite controversial, but here the positions of the NBU and the IMF at least coincide.

Other items from the NBU’s list on reforming the banking sector and reducing non-performing loans correlate with the IMF’s items on ensuring banks’ financial health.

However, according to the IMF, these commitments are rightly subordinated to a specific goal – reviving sound bank lending to the private sector.

It is noteworthy that the IMF experts use the word “reviving”, despite the rather dynamic growth of bank lending to the corporate sector (for 10 months hryvnia loans increased by 20.2%).

And this is hardly a mistake. The IMF is probably well aware that the revival of lending activity is largely due to the 5-7-9% program, which in 2021 provided loans of UAH 55 billion (as of November 22, 2021).

In addition, we can see from the Banking Sector Survey that the ratio of corporate net loans to GDP in the third quarter of 2021 was a paltry 10.2%.

Whereas, for example, in 2016 it was 20%, and in 2014 – 44.7%. And the current pace of lending is not enough to break this negative (downward) trend.

Therefore, we can be grateful to the IMF experts, who remind the Ukrainian authorities of the need to revive lending to the Ukrainian economy.

However, we will not find a single word about it in the above-mentioned list of commitments of the NBU.

Unfortunately, it seems unpleasant that for the Ukrainian central bank, reforming the banking sector and its own independence are not the tools, but an end in itself.

Summing up, we should recognize that USD 699 million from the IMF is better than nothing.

On the other hand, we should realize that this is much less than Ukraine has paid to the IMF this year on previously received loans: USD 1.3 billion of principal payment and about USD 0.3 billion of interest payment.

This is very little, if looking at the modest amount of the tranche through the prism of the needs of the country that (according to leading world media) in the near future may be invaded by an aggressive neighbor.

Mykhailo Dzhus, Head of Money Markets Department, the Growford Institute for Business.Censor.