The National Bank of Ukraine deems it necessary to comment on the emotional statements made by the central bank’s ex-governor. The NBU’s position relies solely on data, facts, and assessments by international partners.
First, the results of the pursuit by the NBU of its mandate to ensure price and exchange rate stability are clear:
- After the initial shock of the war, inflation decreased and stabilized at about 5%.
- The situation in the FX market is sustainable. The market is becoming increasingly capable of balancing itself. The NBU has managed to avoid a rapid depreciation of the hryvnia.
- International reserves are at a sufficient level, providing an additional cushion should adverse scenarios materialize.
- The banking system is operating smoothly. It has considerable credibility with depositors and a high level of capitalization and liquidity. The NBU has managed to avoid massive bank failures and a substantial deleveraging. Since the beginning of last year, banks have been steadily increasing budget financing by purchasing domestic government debt securities. Since mid-2023, they have been gradually scaling up credit support for the economy.
The NBU’s monetary and exchange rate policy actions are based on the consistent implementation of its Strategy for Easing FX Restrictions, Transitioning to Greater Flexibility of the Exchange Rate, and Returning to Inflation Targeting developed jointly with IMF staff and world-class experts.
Second, the mention of possible budget losses that may reportedly result from the NBU’s monetary and exchange rate policy has absolutely no basis in fact. NBU experts have repeatedly clarified to the public the nature of the expenditures to conduct monetary policy and the formation of the NBU’s profits.
If the central bank’s policy had been aimed at generating profits to maximize budget revenues, this would have resulted in multibillion-dollar losses to the economy and households.
The NBU’s main goals are defined by the Constitution of Ukraine and expressly stipulated in Article 6 of the Law of Ukraine On the National Bank of Ukraine. The NBU’s primary goal is to achieve price stability. The second-most-important goal is to ensure financial stability. The third is to support economic growth, provided that doing so does not conflict with the previous two goals.
Estimating the effectiveness of monetary policy by taking the “accounting” approach of analyzing expenditures on liquidity sterilization instruments is a common practice pursued by pseudo-experts and politicians looking for ways to influence the central bank’s policy. What is rather surprising is that a person who used to run the NBU has also resorted to such rhetoric.
Third, the criticism of the “excessive” margin of safety (too high international reserves, too low inflation, high capitalization and profits of banks) ignores an extremely elevated level of uncertainty amid a full-scale war:
- The situation is stable but fragile. The delay in international aid inflows earlier this year fueled substantial anxiety. However, the FX market passed that period in relative calm thanks to a comfortable level of international reserves that serves as a buffer in case risks materialize.
- Ukraine’s international reserves are not excessive, considering that they rely on the sufficiency and regularity of international aid disbursements, and that the drawdown of international reserves depends on the inherently unpredictable course of the war.
- The overly subdued rate of inflation is largely the result of weather conditions that cannot be guaranteed in future. Specifically, last year’s extremely favorable weather brought about an ample harvest, and this year’s warm winter made it possible to start selling greenhouse products early on. Going forward, inflation is likely to pick up. The NBU must protect household incomes and savings from inflation in order to maintain the hryvnia’s credibility.
- The banking system’s capitalization is no luxury. Capitalization provides a cushion against unanticipated losses. It guarantees that banks will be able to finance an economic recovery through lending.
Fourth, the articulated recommendations on monetary and FX policy are downright harmful. Following them would most likely destabilize the monetary situation and trigger a large-scale currency crisis.
One such piece of advice mentions a rapid FX liberalization and suggests that the exchange rate should have been floated in mid-2022, and that the key policy rate should have been slashed from 25% to 10%. Such attempts at guidance ignore the environment that requires making policy decisions even as the full-scale war goes on, including the need to provide UAH 400 billion in monetary financing for the budget in 2022, the energy terror and the blackouts in winter 2022–2023, the lack of a cooperation program with the IMF for most of 2022, relentless uncertainty over the course of military operations and international assistance inflows, and other factors.
In mid-2022, Ukraine’s economy and people were just beginning to adjust to a new reality, and international reserves stood at their lowest since the onset of the full-scale war, at USD 22.4 billion in August 2022.
The world’s and Ukraine’s history offers multiple examples of crises wrought by central banks’ reckless policies and loss of credibility even under much better circumstances. Had the NBU started easing restrictions and cutting rates earlier and faster, Ukraine would have depleted its international reserves at a much quicker pace, because this is how the laws of economics work. As a consequence, Ukraine could have run itself into a full-blown currency crisis instead of facilitating a better business environment. An outcome like that would have dashed all hope of restoring lending, making rate cuts, or receiving investment inflows via currency liberalization.
Finally, Ukraine’s international partners have repeatedly emphasized the effectiveness of the NBU’s monetary and exchange rate policy.
Every statement made by IMF Managing Director Kristalina Georgieva when summarizing the IMF Executive Board’s decisions over the past few years has invariably reiterated the following conclusion: “Macroeconomic and financial stability has been preserved, reflecting skillful policymaking by the Ukrainian authorities as well as substantial external support.”
Consistent policy also came as an important argument in substantiating further support from international partners. Both Ms Georgieva and Mr Vahram Stepanyan, IMF Resident Representative in Ukraine, praised the NBU’s successful transition to the regime of managed flexibility of the exchange rate that had been accomplished under the Strategy. They accentuated the importance of making gradual progress towards easing FX restrictions when the necessary preconditions are in place. The same principle applies to making step-by-step cuts to the key policy rate.
The positive feedback and sincere admiration for the NBU’s work that fellow central bankers have shared with the NBU team at every meeting have been acknowledged in the international trophies the Ukrainian central bank received from Central Banking Awards and The Banker in 2023–2024.
Commenting on the situation in Ukraine, Alfred Kammer, Director of the IMF European Department, said that the achieved macrofinancial stability is critically important for national security. The NBU knows this better than anyone else. It is not for nothing that “ensuring macrofinancial stability under any circumstances” is one of the most important goals outlined in the NBU Strategy.