‘I Fear Simple Solutions in Complex Conditions’ – Head of Ukraine’s Central Bank

The head of Ukraine’s central bank, Andrii Pyshnyy gave an interview to Ekonomichna Pravda, the country's leading economy based media outlet on Monday, Aug. 12. 

Kyiv Post shares the highlights of the conversation, where this key policymaker talked about internal debt, stabilization of the economy during the uncertainty of Russia’s full-scale invasion, hryvnia depreciation, and loans for business in Ukraine. 

The central bank’s focus shifted from shock to stabilization

• Ukraine's central bank – the National Bank of Ukraine (NBU) – imposed a fixed hryvnia-dollar interest rate right after Russia invaded Ukraine in February 2022 in an effort to battle shock. Over the last 10 months, NBU switched to a managed flexibility of exchange rate – the FX rate is no longer fixed. Still, NBU actively compensates the structural deficit of foreign currency in an exchange rate corridor. 
• To avoid the society’s tendency to give up savings in the national currency, NBU motivated banks in Ukraine to raise deposit rates. Government bond rates also increased. 
• The hryvnia weakened by 12 percent after this managed flexibility of exchange rate came into action, but inflation for 2024 is forecasted to be no more than 8.5 percent. So, Ukrainians can still save in hryvnia and not be afraid they will lose. 
• The central banks successfully defeated the multiplicity of exchange rates in 2022-2023, when “the difference between the cash and official rates reached 20 percent, and now it's just 0.6 percent”, Pyshnyy said. 
• The NBU even tolerates the hryvnia weakening a bit, as long as inflation is under control. The key task is to maintain the ability of Ukrainians to buy the same amount of goods and services in a year’s time  that they can buy now. 
• The FX rate should regain its role as an absorber of internal and external shocks. Society’s attention should draw back to inflation and the central bank is working to return to inflation targeting. 

Internal debt and new taxes. 

• The NBU will not comment on the fiscal design of the new tax policy, but it supports the concept of raising taxes. Parliament should discuss the design quickly and effectively. 
• Since the beginning of 2024, the volume of government borrowing through bonds has already exceeded Hr. 200 billion ($4.84 billion), and in all currencies, nearly 300 billion $7.3 billion). The rollover rate is 135%. This was achieved, in particular, thanks to macro-financial stability.
• The Ministry of Finance is looking for Hr. 500 billion ($12.5 billion) for the end 2024 budget, out of which Hr. 120 billion ($3 billion) should be gained through new taxes, Hr. 164 billion ($4.1 billion) through new government borrowing. The state banks should play a key role in it since they form a bigger competitive advantage due to non-market reasons – allocating salaries’ of the military and state liquidity. 
• The fiscal easing [aka “printing money to finance the state budget” – Kyiv Post]  is the last step the NBU will ever take, only after realizing all other strategies have failed to reach Ukraine’s economic goals. 
• Negotiating new government borrowing with banks is a tough decision. 
• Pushnyy says, “But I want to say that I fear simple solutions in our very complex conditions. Sometimes there is a temptation to take a shortcut to achieve the desired outcome as broadly as possible. When I hear that we should consider alternatives to reviewing and expanding the tax base in the form of devaluation and inflation, I wonder: have you seen even one successful country that has taken this path?”.
• NBU’s focus on combating tax evasion also lies in untaxed profits from the gambling industry in Ukraine. NBU previously limited card-to-card transfers and implemented maximum limits on such transfers between individuals since it saw gambling using these transfers to hide profits from the tax institutions. Legislative changes should also be made – which the NBU is negotiating. 

Selling state-owned Sense Bank and Ukragazbank

• NBU does not have information about negotiations to buy Ukraine’s state-owned banks, nor information as to whether the Hungary-owned private bank OTP is negotiating to buy Sense Bank. 
• “Anything can be sold; it depends on the price and conditions. The important aspect is not to undersell and to remain transparent while having a clear strategic vision for the development of the state banking sector, considering the context created by the war,” Pyshnyy said. 
• One thing is clear about the central bank’s approval for any possible bank merger and acquisition:  zero tolerance for any Russian presence. 

The cost of money for business in Ukraine and loans

• The business lending rate in hryvnias has decreased by 5 percentage points over the past year. Net hryvnia corporate lending has increased by 20.5 percent, according to NBU’s estimates. 
• The share of the 5-7-9 credit program [the presidential concessional loans program most popular in Ukraine since 2021 – Kyiv Post] has decreased in new loans from about half to a third. The two-thirds of the new portfolio is market lending. 
• The "5-7-9" program should focus specifically on investment projects. [Now it’s more common for working capital financing – Kyiv Post].
• The lack of lending increase is the lack of solvent demand – companies are postponing the decision to invest due to security risks and uncertainty, some of them have enough liquidity, and some think they can’t afford a new loan. 
• Currently, the average interest rate on loans to legal entities in hryvnias is at 15 percent. It is at the loan rate of a pre-war 2018. 
• NBU is working on a bill that will provide a legislative model for insurance against war and political risks. Pyshnyy wants it to be implemented by the end of 2024. 
• Businesses and individuals submitted loans for energy generation capacities generating 50.4 MW overall, from the beginning of June up to August 5, 2024. 
• Banks and the central banks are now learning to adjust their policies to provide lending to military enterprises – it requires concentrating expertise and adhering to requirements for restricted access to classified information.