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Data published by the National Bank of Ukraine on the balance of payments in January-April 2022 show dramatic changes in currency and financial flows between residents and non-residents of Ukraine, as well as certain imbalances that require adequate response of macroeconomic regulators.

In January–April 2022, the current account surplus amounted to USD 3.2 billion, while in January – April 2021 there was a deficit of USD 0.4 billion. The current account surplus was fueled by an increase in current transfers due to grants received from international partners and humanitarian aid, as well as a decline in repayments of dividends and interest payments on loans to non-residents. On the other hand, the goods and services trade deficit increased from USD 0.6 billion to USD 1.6 billion with a radical reduction in both exports and imports. Expenditures of Ukrainian migrants abroad increased imports and thus affected the trade deficit.

For 4 months of 2022, the value of exports of goods from Ukraine decreased by almost 12%, and the value of imports – by 14% compared to the same period last year. The decline in Ukraine’s export is explained mainly by the fall in ferrous and non-ferrous metallurgical exports, food, including exports of grain, oils, fats and food industry products, as well as chemicals and machinery and equipment exports and mechanical engineering. Exports of services from Ukraine increased by 5.3% for 4 months, but the positive dynamics was due to indicators in January and February, and in March and April there was a significant decline in exports of services.

Table 1. The main aggregates of Ukraine’s balance of payments for 4 months of 2021 and 2022, million USD.

 January-April 2021January-April 2022
Current account-4463 185
   Goods (net)-1 936-1 292
   Services (net)1 333-349
   Compensation of employees (net)4 4984 166
Investment income (net)-5 777-2 700
   Current transfers2 1064 090
Financial account273-7 313
   Direct investment (net)2 14399
   Portfolio investment (net)1 326-1 040
   Foreign credit and loans, liabilities-4182 188
   Trade credits, assets-488-5 232
Foreign cash outside the banking system-1 544-3 582
Overall balance-166-4 123

Source: compiled by the author according to the National Bank of Ukraine.

In the structure of Ukraine’s merchandise imports, non-energy imports fell the most (in April, the rate of its decline was 51% compared to April 2021). Among the components of non-energy imports, the largest rates of fall were in imports of wood and wood products, metallurgical exports, machinery and equipment and chemicals imports.

Income from compensation of employees received by Ukrainians from abroad have decreased moderately since the beginning of the war and in January–April 2022 it amounted to USD 4.2 billion, compared with USD 4.6 billion in January–April 2021. On the other hand, the outflow of currency under “investment income” item decreased even more. This was due to both a decrease in the return on foreign direct investment and the introduction of foreign exchange restrictions after the start of the war.

This year, one of the most significant items of supporting Ukraine’s balance of payments was foreign grants and humanitarian aid – USD 4.1 billion. It is almost twice as high as it was last year. In the balance of payments, grants and transfers in kind are included in the “secondary income balance” section of the current account.

In general, the main items of outflow of foreign currency from Ukraine in January-April 2022 were:

  • trade credits provided by Ukrainian exporters to importers (USD -5.2 billion);
  • purchases of foreign currency by residents of Ukraine and its growth in non-bank turnover (USD -3.6 billion);
  • payments of interest and dividends by residents of Ukraine (USD -2.7 billion);
  • export and import of goods and services (USD -1.6 billion).

According to the above data, this year has seen a huge increase in the amount of trade credits provided by residents of Ukraine to non-residents – from USD 0.5 billion for 4 months of 2021 to USD 5.2 billion for 4 months of 2022. This situation shows the reluctance of Ukrainian exporters to return foreign exchange earnings to Ukraine, which is not surprising for the conditions of the wartime economy. But the persistence or deterioration of the situation with non-return of export earnings to Ukraine is likely to encourage the Government and the National Bank of Ukraine to strengthen the system of foreign exchange regulation.

However, January-April saw a significant inflow of foreign currency on the following items of the balance of payments:

  • balance of compensation of employees of non-resident residents (USD +4.2 billion);
  • current transfers from non-residents (USD +4.1 billion);
  • obtaining foreign loans by the general government sector (USD +2.2 billion).

As for the financial account as a whole, the net outflow of funds on this account in January-April 2022 amounted to USD 7.3 billion, while for the same period in 2021 there was a net inflow of USD 0.3 billion. The net recipient of funds on the financial account of the balance of payments was the public sector of the economy, which received USD 1.7 billion (net) against USD 1.3 billion for January-April 2021.        

Significant support for Ukraine by international partners after the start of Russia’s military invasion has changed the structure of the inflow of funds on the financial account. In particular, according to the Ministry of Finance of Ukraine, from February 24 to June 1, 2022, the Government received USD 6.6 billion gross external financing (mostly official). The most significant amounts of funds came from the IMF – USD 1.41 billion; from EU – USD 1.4 billion; from the USA – USD 0.99 billion; from the European Investment Bank – USD 0.72 billion; from the World Bank – USD 0.64 billion; from Canada – USD 0.39 billion; from France – USD 0.33 billion; from Germany – USD 0.16 billion.

The most needed grant (non-refundable) assistance to Ukraine was provided by: the United States – USD 0.99 billion; Great Britain – USD 0.13 billion; Italy – USD 0.13 billion; EU – USD 0.12 million; Denmark and Norway – USD 0.02 million. This form of support for Ukraine shows the sincerity of the intentions of our international partners and their real help to Ukraine in a very difficult period for our statehood. In contrast, lending money at a time when our country is suffering enormous destruction and losing human lives is a very symbolic support. In everyday life, it is difficult to imagine a situation where a decent and virtuous person “helps” another person who has suffered from robbery or violence, offering him/her a loan with interest.         

Increased sovereign credit risks since early 2022 and Russia’s military invasion have blocked access of Ukrainian residents to external commercial loans. In particular, the negative balance of portfolio investments for 4 months amounted to USD 1 billion, and liabilities of other investments – USD 2.2 billion. In general, the financial account outflows totaled almost USD 9 billion and was generated by private sector outflows. This indicator signals an extremely high risk of credit operations or foreign investment in the war economy and shows the inevitability of reorientation to attract mostly external official financing.

The Government of Ukraine receives official credit resources at preferential interest rates, which are not related to the borrowing rates for Ukraine on the international capital market. Interest rates on official loans have no relations with interest rates on hryvnia instruments in the domestic financial market. Therefore, the increase in the NBU key policy rate from 10% to 25%, which the NBU Board explained by the need to improve the balance of payments and reduce pressure on the hryvnia exchange rate, has nothing to do with reality and will not affect foreign exchange flows between residents and non-residents of Ukraine.

The current account surplus of Ukraine’s balance of payments (USD 3.2 billion) and the significant negative balance of the financial account (USD 7.3 billion) formed a negative balance of the consolidated balance in the amount of USD 4.1 billion. This negative balance was covered by net IMF loans (USD 0.5 billion) and foreign exchange interventions from Ukraine’s international reserves (USD 3.6 billion). The decline in reserves was not critical: as of May 1, the volume of international reserves amounted to USD 26.9 billion, which provided financing for imports for 3.9 months.

However, it should be noted that the general balance of payments deficit demonstrates Ukraine’s lack of sources of external financing, which requires intensifying the government’s efforts on the diplomatic front, as well as reducing the growth in foreign assets in the form of trade credits to nonresidents and the accumulation of foreign cash outside the banking.

The official exchange rate of the hryvnia has not changed since the beginning of the Russian invasion, and the cash exchange rate devalued by 15% for a few days in May. The fixing of the official exchange rate of the hryvnia by the National Bank of Ukraine after the start of the war was quite justified. It allowed keeping the value of critical imports and prevented a sharp devaluation of the hryvnia under the influence of psychological factors. Nevertheless, the actual inability of the NBU to ensure the introduction of a fixed exchange rate regime and the transition to multiple exchange rates in the economy raises acute questions about the professional qualities of the NBU leadership.   

On the other hand, it should be considered that the increase in annual inflation to 16.4% in April 2022 and the projected annual inflation rate of 20% show the possibility of periodic revision of fixed exchange rates or the introduction of a crawling peg regime. This approach seems justified in the context of preventing a real revaluation of the hryvnia and further losses of international reserves. The new values ​​of the fixed exchange rate should not deviate significantly from the previous ones in order not to offset the achievements of fixed exchange rate.

Adjusting the nominal exchange rate to the new values ​​of the real exchange rate will allow avoiding such destructive consequences as stimulating Ukrainian consumer demand for imported goods, slowing down domestic production through channels of reducing exports and increasing imports. This is extremely necessary when domestic production has already been affected by numerous shocks as a result of the war, and the occupation of the part of Ukraine and the destruction of infrastructure by the aggressor have already caused enormous damage to the Ukrainian economy.

Tetiana Bogdan, Doctor of Economics, Scientific Director of the Growford Institute