On October 18, the IMF mission (which started on September 21) completed its work in Ukraine, which resulted in reaching a staff-level agreement.
This is the basis for program review by the IMF Executive Board and making respective decision on the next disbursement under the Stand-By Arrangement (USD 700 million).
The NBU press release informs that the discussions focused on, among other things, monetary policy issues, including the NBU’s actions to bring inflation back to the 5% target, as well as on phasing out the anti-crisis measures aimed at supporting liquidity of the banking system (obviously, it is primarily about abolishing long-term refinancing).
After completion of the mission’s work, the Head of the IMF mission Ivanna Vladkova-Hollar stated that as the economy recovered, one of the program’s priorities was to “safeguard central bank independence and focus monetary policy on returning inflation to its target.”
In this regard, a logical question arises: isn’t it too early to talk about the recovery of the Ukrainian economy?
According to the Ministry of Economy, in January-August 2021, real GDP grew by only 2.9%, while the decline for the corresponding period in 2020 was 5.7%. According to the Ministry, the current recovery growth does not allow one to talk about a full-fledged post-crisis recovery of the economy, it needs more time.
I would like to add that the recovery of the economy requires not only time but also targeted stimulus measures, including monetary policy. But, as we can see, the IMF mission has a slightly different position. Despite the fact that it contradicts the latest recommendations of the IMF on the reasonability of balancing the fight against inflation and financial risks (on the one hand) and support of economic recovery (on the other hand).
In the October issue of the World Economic Outlook, the IMF revised its project for Ukraine’s economic growth in 2021 from 4% to 3.5%, which is almost twice as low as the average for developing European countries (6%). The NBU went even further and lowered its project from 3.8% to 3.1%, while the 2021 budget was calculated taking into account the project of GDP growth of 4.6%.
Probably, this fact (deterioration of the GDP project) forced the NBU Board to refrain from further raising the key policy rate at the meeting on October 21 – the rate kept at 8.5%. Otherwise, its actions would look just illogical.
However, the NBU immediately warned that if any pro-inflation risks materialized, it stood ready to raise the key policy rate and deploy other monetary tools (it is interesting, which ones?) at the following meeting of the Monetary Policy Board (on December 9).
And although the NBU has kept its inflation forecast for 2021 at 9.6%, everyone understands perfectly well that there are many pro-inflation risks. It is enough to take into consideration the situation with gas prices…
In view of this, the NBU’s decision to keep the key policy rate at 8.5% should be interpreted as a kind of tactical step, which can hardly demonstrate that the National Bank is outside the “matrix” of inflation targeting.
Independent of the state
And here we come to the third “significant” event of recent days, which is not tactical, but quite strategic. On October 19, the Verkhovna Rada adopted the Law of Ukraine “On Amendments to Laws of Ukraine Concerning Certain Issues of Activity of the National Bank of Ukraine” (Draft Law No. 5850).
The law contains a large number of controversial rules, some of which may give an idea of the nature of the future monetary policy of the NBU.
First, the Law changes the definition of monetary policy. According to the new version, monetary policy is “a set of measures in the field of money circulation and credit, aimed at ensuring price stability by means of monetary policy instruments”.
Let us leave stylistic inconsistencies on the conscience of the authors, instead let us pay attention to the concept of “price stability”, which has a much narrower meaning compared to “stability of the currency of Ukraine”, as provided by the current edition of the Law on the NBU.
In addition, it is not clear how to reconcile this definition of monetary policy with Article 99 of the Constitution of Ukraine and Article 6 of the Law on the NBU. Unless, of course, the authors of the adopted Law provided for the possibility of declaring it unconstitutional on purpose.
Secondly, the Law deprives the NBU Council of the authority to analyze the impact of monetary policy on the socio-economic development of Ukraine, while leaving to it the function of monitoring the conduct of monetary policy. However, Article 1 of the Law on the NBU contains a rather large definition of the concept of such “monitoring”, which essentially means that the NBU Council will control nothing at all in the monetary sphere.
Thirdly, the NBU Council is deprived even of a theoretical opportunity to appeal to the Verkhovna Rada and the President in case of non-fulfillment or improper fulfillment of its decisions by the NBU Board.
It is also quite expressive that the norm that the National Bank supports the economic policy of the Cabinet of Ministers is removed from the new version of Article 52 of the Law on the NBU, unless it contradicts ensuring the stability of the currency of Ukraine.
Taking into account all the above, there is no doubt that as soon as the President signs the adopted Law, we will see a completely new National Bank, with a completely independent Board and a much more limited Council.
And then no one and nothing will prevent the NBU Board from demonstrating the full potential of monetary policy instruments in its “holy war” with inflation.
Founder and Chairperson of the Board of the Growford Institute Vitalii Lomakovych for Liga.net.