The National Bank of Ukraine strongly opposes Draft Law No. 5257 On Amendments to Some Legal Acts of Ukraine on Ensuring Transparency of the National Bank of Ukraine and Enhancing Its Accountability to the Public, regarding it as an attempt to roll back financial sector reforms and prevent the NBU from achieving its objective of lowering inflation.
Last week, the NBU turned to Ukraine’s President, Petro Poroshenko, asking him to support the NBU’s stance on this draft law.
Draft Law No.5257, initiated by MPs Mr O. Liashko, Mr S. Rybalko, Mr V. Halasiuk, Mr M. Poliakov, Mr L. Kozachenko, Mr M. Dovbenko, and Mr O. Lavryk, is intended to strip the NBU of its institutional, political, and financial independence. This move completely alters the substance of the revised law strengthening the central bank's independence and defining the segregation of responsibilities among its governing bodies as provided for by the recent amendments made in 2015, which were developed in accordance with recommendations of the IMF mission.
Given that the disbursement of the second tranche of the IMF loan of USD 1.7 billion was conditional upon the passage of amendments to the Law of Ukraine On the National Bank of Ukraine, the reversal of these amendments will pose risks of the loss of confidence in Ukraine on the part of the international community and could result in the termination of cooperation with the IMF.
The revised version of the Law of Ukraine On the National Bank of Ukraine is based on the internationally recognized principle of a central bank's independence, which has created the necessary conditions for the NBU to perform its core function of ensuring price stability in an efficient manner. This move will contribute to the creation of a positive image of Ukraine and help boost its investment attractiveness. The reversal of this law is inadmissible as it poses a threat to attaining the goal of price and financial stability in the country.
The proposals to amend the mandate and objectives of the NBU that have been put forward by some MPs are mere populism. The proposed amendments are intended to provide the NBU with a mandate to achieve and maintain exchange rate stability, which is inconsistent with the objective of ensuring price stability and Ukraine's current economic realities.
Any attempts to artificially control the exchange rate will lead to the build-up of macroeconomic imbalances, which will eventually trigger a surge in inflation and induce a deterioration of the welfare of the population. In this case, the central bank will able unable to influence the purchasing power of the population, which is closely associated with inflation rates, and therefore the welfare of the population. Ukraine has a negative experience in maintaining exchange rate stability, at the cost of depleting foreign exchange reserve buffers and accumulating public debt denominated in foreign currency. As a consequence of this policy in the previous years, Ukraine plunged into a deep economic crisis. The NBU does not rule out that a return to the policy of maintaining exchange rate stability could pave the way for a new financial and economic crisis.
A year ago, the NBU moved to inflation targeting, a monetary policy regime aimed at ensuring price stability. This monetary policy has no alternative since it is the only policy that can ensure the welfare of the population and maintain financial stability. The adoption of inflation targeting has enabled the NBU to bring inflation down from over 60% to single digits and restore macroeconomic stability. This draft law would jeopardize the current macroeconomic stability.
In addition, some MPs are seeking to extend the mandate of the central bank to include the function of ensuring maximum employment. Ensuring maximum employment is a positive task. However, this objective cannot be achieved through efforts of the NBU alone. The attainment of this objective will require joint efforts by all public authorities. The proposed amendments provide a tool for further political manipulations and make it possible to directly influence the decision making process at the central bank.
The NBU considers it inappropriate to approve amendments provided for by Draft Law No. 5257 and expects the Ukrainian President to express his opinion in this regard.