The NBU has bought UAH 50 billion of war bonds since early April. As a result, the NBU holds a portfolio of UAH 70 billion in military domestic government debt securities as of 28 April.
Higher volumes of war bons bought by the NBU in April are primarily due to higher budgetary needs, as the tax changes were introduced and international funding reduced. In contrast to March, this time the budget revenues were not financed by early tax payments by businesses or transfers of dividends by state-owned companies, while a decline in economic activity due to hostilities restricted them significantly.
Overall, according to the Ministry of Finance, the budget needs about USD 5 billion per month. The NBU will continue to provide only limited financing for the critical expenses of the government on a residual basis. Ukrainian businesses and households keep on paying their taxes and donate large amounts to support the Army and as humanitarian assistance. In addition, households and businesses are gradually increasing their portfolios of war bonds. Ukraine receives further support from the international community, but arranging new financing takes time.
Today, the NBU’s support to the budget remains a necessary evil, considering vast humanitarian, social, and defense needs. However, the central bank’s position on financing remains unchanged: support from the NBU cannot be the main source of financing government expenditures.
In view of this, it is necessary to intensify market borrowings through the issuing of domestic government debt securities by the Ministry of Finance, in particular at the expense of the banking system. If proper efforts are made to intensify the issuing of domestic government debt securities, the banking system has the potential to significantly increase portfolio of such instruments. As of 27 April, funds on banks’ corresponding accounts totalled UAH 46 billion and investments in the NBU’s certificates of deposit stood at UAH 188 billion. It means that the banking system liquidity (balances on bank correspondent accounts and investments in certificates of deposit of the NBU) grew by UAH 72 billion since the outbreak of the war of aggression to reach over UAH 230 billion.
Intensified borrowings in the market will reduce the need for monetary financing by the NBU, which will mitigate risks for macrofinancial stability and allow the NBU to maintain confidence in the central bank actions.
As declared, the NBU will strive to completely abandon the financing of the state budget deficit and will do it as soon as the risks of imbalances in the fiscal sector ease. Meanwhile, the NBU will work closely together with the government in order to help the country raise financing from international organizations and partner countries.
Should the government require more funds to finance its critical expenses, the NBU will make separate decisions regarding the viability of new purchases of domestic government debt securities.
On 8 March 2022, the NBU Board decided it would purchase government-issued war bonds, if needed. In addition, the government laid out the core principles of such transactions: transparency, limited size of purchase, use of funds raised to meet only critical expenditures.
The Verkhovna Rada of Ukraine has amended the laws in order to enable these transactions between the NBU and the government. Specifically, the Verkhovna Rada has decided to temporarily waive Article 54 of the Law of Ukraine On the National Bank of Ukraine, which forbids the NBU to make loans to the state.
Respective changes were also stipulated in NBU Board Resolution No. 43 On Purchase of Domestic Government Debt Securities (War Bonds) During Martial Law, which was passed and took effect on 8 March 2022.
The NBU has acquired military domestic government debt securities under an agreement with the Ministry of Finance of Ukraine. The central bank has not included these purchases into the summary of its weekly auctions to sell these securities.