The National Bank of Ukraine has bought UAH 30 billion of war bonds in the fifth such purchase on 9 May 2022. Considering vast defense, humanitarian, and social needs, the NBU’s support to the budget remains necessary due to the war russia started.
The central bank’s position on budget financing remains unchanged: support from the NBU cannot be the main source of financing government expenditures. The NBU continues to follow the declared principles of such transactions: transparency, limited size, and financing only critical expenditures.
On the other hand, the NBU is taking effort to encourage market demand for respective securities. In particular, the central bank has:
- introduced new accounting models for nonresidents’ securities and widened the application of the link with the international depository
- eased approaches to assessing the value of domestic government debt securities, which serve as a collateral for refinancing loans
- authorized foreign investors to transfer abroad the funds received from redemptions or interest payments on domestic government debt securities made after 1 April 2023. The implementation of this requirement will stimulate nonresidents’ interest in purchasing domestic government debt securities, in particular using funds from scheduled redemptions and interest payments.
Ukrainian banks have the largest potential for increasing their portfolios of domestic government debt securities, taking into account their liquidity. As of 9 May 2022, banks’ liquidity amounted to:
- UAH 227 billion in the domestic currency, of which UAH 183 billion was placed in certificates of deposit and UAH 44 billion held in correspondent accounts
- USD 7.3 billion in foreign currencies. In particular, banks’ nostro account balances have remained almost unchanged since the start of the war and exceed USD 6 billion.
In view of this, today it is important to step up market borrowings through the placement of domestic government debt securities by the Ministry of Finance, including borrowing from the banking system. In particular, this can be driven by the Ministry of Finance raising rates on domestic government debt securities to levels that are more attractive for buyers. Current and forecast growth rates of consumer prices remain an important benchmark for determining these levels.
More active borrowing from the market will allow to minimize risks to the fiscal sector while maintaining the macrofinancial stability and trust in the NBU.
The NBU will continue to work closely with the government in order to help the country raise financing from international organizations and partner countries.
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 become minor. The NBU will continue taking separate decisions regarding the viability of new purchases of domestic government debt securities to finance critical expenditures of the government.
On 8 March 2022, the NBU Board decided that, if needed, the central bank would purchase government-issued war bonds by approving its Resolution No. 43 On Purchase of Domestic Government Debt Securities (War Bonds) During Martial Law.
The Verkhovna Rada of Ukraine has amended the legislation 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.
The NBU acquires war bonds under an agreement with the Ministry of Finance of Ukraine. The central bank does not include these purchases into the summary of its weekly auctions to sell these securities.
As of 10 May 2022, the central bank held UAH 100 billion in war bonds. In particular, the NBU’s purchases amounted to UAH 20 billion on 8 March, 12 April, and 20 April each, UAH 10 billion on 27 April, and UAH 30 billion on 9 May.