NBU Governor Kyrylo Shevchenko’s Flash Interview on Ukraine’s Economic and Financial Conditions and Fight against Russian Aggression

What kind of financing are we expecting from the IMF? What will be the outcome of the latest program review? Is it likely that the IMF will terminate Russia’s membership?

On 24 February, Russia officially unleashed a war against our country. The number one priority for us has since been to maintain the smooth and reliable operation of Ukraine’s financial system, the stable functioning of critical infrastructure, and the maximum support for the Armed Forces of Ukraine. And I can assure you that we are succeeding. Our second priority is to work with international financial institutions, central banks of other countries, and payment systems to ensure that they take action against Russia.

Unfortunately, this means that we are currently not prioritizing the reforms that Ukraine needs to implement in order to successfully pass the next reviews of its Stand-By Arrangement with the IMF. We will definitely resume the reforms after Ukraine has been liberated from the aggressor’s grip, but right now we have more urgent objectives to meet. This is precisely why Ukraine in March asked the IMF to close the current Stand-By Arrangement and grant our country financial aid under the Rapid Financing Instrument instead. 

The Fund responded quickly and has already set in motion the allocation procedure. As a matter of fact, the IMF Executive Board will meet today to consider allocating additional financing to Ukraine as part of the RFI. We sure hope that Ukraine will receive about USD 1.4 billion or SDR 1 billion (50% of the IMF member country quota). This is the most we can get under the RFI. 

The funds will primarily go towards the priority needs of the state budget and the balance of payments.

As for restricting Russia’s and Belarus’s membership in the IMF, we have been in contact with IMF Managing Director Kristalina Georgieva about that. We’re asking the Fund to first disqualify the Executive Director for Russia from participating in meetings of the IMF Executive Board. Our second request is to forbid Russia and Belarus to use the relatively recent SDR allocation, as we realize that these funds can and will be used to supply their armies and ramp up the scale of their assault on Ukraine. Third, we have asked the IMF to ban Russian and Belarusian delegations from taking part in the Spring Meeting of the IMF and the World Bank Group.

The sooner we manage to cut the aggressor off from the global markets and donors, the sooner will it stop attacking our cities and killing our people. The decisions by international institutions and companies to limit Russia’s and Belarus’s activities will not only help Ukraine now, but it will also send a powerful and clear signal for the long run. We hope that the IMF and other international institutions and companies will uphold our proposals.

How large do you estimate the drop in GDP is going to be?

Like I said, we currently prioritize keeping the financial system up and running. The NBU, financial institutions, and other authorities are making every effort to achieve this goal, day in and day out. And it appears that these efforts have been successful so far.

Regrettably, there are many things in wartime that we can neither influence nor predict with any practical probability. That includes GDP. The hostilities are now so massive and the shelling so lethal, that more than 10 regions of Ukraine have come under attack, as have parts of Kyiv. Combined, these areas and Kyiv produced more than half of Ukraine’s GDP before the war broke out. Of course, some businesses there continue to operate, but many have had to shut down. Connections between regions have been disrupted. Infrastructure is significantly damaged. Many people have been injured. This will have long-term consequences. An accurate forecast of GDP can be made only after the hostilities cease.

I can say that the impact of the war is uneven across sectors. The services sector has taken the most damage. At the same time, some sectors switched to manufacturing defense goods after the authorities imposed martial law. Those include the food and textile industries, machinery, the production of construction materials, and more. This may ease the economic fallout from the war somewhat.

Why did you decide not to raise the key policy rate?

We have postponed our key policy rate decision. With Russia’s large-scale aggression raging on and with administrative restrictions in place, we no longer deem it viable to use market-driven monetary instruments such as the key policy rate, because they would currently have little to no effect on the monetary and FX markets. With this in mind, we see no point in making formal decisions. We will definitely not engage in fake monetary policy. Unlike Russia, we will not pretend that we are living under normal conditions.

However, let me be clear about something: after Ukraine is liberated from Russian invaders, and the financial sector goes back to business as usual, we will redeploy the key policy rate and other monetary policy tools, as well as the floating exchange rate regime. The NBU remains committed to pursuing its inflation-targeting regime.

What is happening in the FX market? What are depreciation expectations?

The FX market is now operating under significant restrictions imposed due to martial law. Authorized institutions are in fact prohibited from trading in currency valuables, except in a number of cases. Most transactions in the interbank market, both to purchase and sell foreign currency, are taking place with the NBU’s participation. We have already seen some banks conclude some agreements, but those are few and far between.

Regarding the exchange rate, we have fixed it at the level of 24 February 2022, the day the Russians invaded. As for where the exchange rate will end up after the war, this will depend on many parameters, meaning that it is impossible to predict now. But I can reiterate that when the situation has gone back to normal, we will restore the full-fledged operation of the FX market as soon as we can, and we will lift the currency restrictions imposed in wartime. As soon as market-based monetary instruments become operational, the central bank will step into the market to smooth out exchange rate fluctuations and stabilize the situation by eliminating supply and demand imbalances. To this end, the NBU has USD 27.7 billion in international reserves as of 7 March 2022 (according to preliminary data), which is sufficient for the purposes noted above.

Significant volumes of international aid will help normalize the FX market conditions.

How much international reserves has already been spent?

Between the start of the war and 7 March, international reserves actually rose by 1.15% or USD 315.6 million. This increase was primarily driven the NBU’s purchase of foreign currency from banks (about USD 680 million) and the disbursement of funds from the International Bank for Reconstruction and Development (USD 60 million). As you know, Ukraine does not plan to stop meeting its commitments to creditors, so since the beginning of the war, the government has spent USD 342 million to service and repay FX-denominated debt. In addition, we have repaid a USD 100.5 million loan granted by Sveriges Riksbank.