The National Bank of Ukraine bought UAH 70 billion of war bonds on 9 May 2022. Yields on war bonds purchased in June were floating and linked to the key policy rate, meaning that price conditions of the issue were close to market terms.
The growth in the NBU’s budget financing in June was related to persisting high budget needs and a decrease in revenues on the back of lower taxes, weak borrowing from the market, and a slowdown in official financing. Ukraine receives further support from the international community, but arranging new financing takes time.
Higher yields on other hryvnia bonds issued by the Ministry of Finance following the latest change in the key policy rate will allow more borrowing from the market, thus minimizing risks to the fiscal sector.
Banks have a large potential for increasing their portfolios of domestic government debt securities, taking into account their liquidity. As of 9 June 2022, the banking system liquidity:
- in the domestic currency was UAH 192 billion, of which UAH 149 billion were placed in certificates of deposit and UAH 43 billion held in correspondent accounts
- in foreign currencies amounted to USD 7.5 billion, which included USD 6.3 billion on banks’ nostro accounts.
An increase in market borrowing by the Ministry of Finance will allow to reduce the NBU’s purchases of war bonds through monetary financing. This will reduce the pressure on the hryvnia exchange rate and inflation and will contribute to maintaining the macrofinancial stability and trust in the government and the NBU.
On the other hand, if no steps are taken to increase market borrowing, risks to macrofinancial stability will persist, which will make the NBU keep its key policy rate high for longer in order to neutralize them.
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 minimal.
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 June 2022, the NBU holds a portfolio of UAH 190 billion in war bonds. Specifically, the NBU purchased UAH 20 billion of war bonds in March, UAH 50 billion in April and May each, and UAH 70 billion since the beginning of June.
The yield on war bonds purchased in March, April, and May was 11%. Changes in the terms for determining yields on war bonds purchased by the NBU in June were introduced by the resolution of the Cabinet of Ministers of Ukraine No.659 On Amendments to Paragraph 1 of Resolution of the Cabinet of Ministers of Ukraine No. 156 dated 25 February 2022 dated 7 June 2022.