2 March 2018, the National Reforms Council has approved for consideration of the Verkhovna Rada of Ukraine motions of the National Bank of Ukraine (NBU) to the Draft Law On Currency that will become a uniform framework law on ensuring FX regulation and providing FX supervision.
Effective FX regulations are based on the Cabinet of Ministers’ Decree On the System of Foreign Exchange Regulation and Control dated 1993 became inefficient and hinder capital inflows to Ukraine.
First, outdated legal framework makes it impossible to shift to liberal principles.
Second, current legal framework on FX operations is complicated, intricate and contradictory.
The NBU believes that the Decree and a number of relevant regulations should be replaced with the Law On Currency. The uniform framework law on FX regulation will make it transparent, simple and clear for households, businesses and banks, and will enable the NBU to promptly and effectively respond to fluctuations in balance of payments and market conditions.
If the Law is adopted, Ukraine will be able to convert to a new, liberal, look-through and up-to-date model of FX regulation suggested by the NBU. Please be reminded that the NBU presented the concept of this model and the conversion roadmap on 1 December 2016.
This model gives green light to FX operations based on the principle ‘everything that is not explicitly forbidden by law, is allowed”. This means that any operations in domestic and foreign currencies between residents and between residents and nonresidents can be transacted without any restrictions.
The regime of the free movement of capital means that there are no FX restrictions and therefore there is no need for FX control as an oversight instrument of compliance with these restrictions. Instead, foreign exchange supervision will be primarily responsible for compliance with FX legal framework.
With the free movement of capital in place, procedures will be informative rather than permitting as it is now and serve for the purpose of statistics (such as BOP calculation).
In line with the liberal FX regulation model, FX restrictions will be implemented only to counteract or prevent a crisis and applied for a short term (not more than six months).
This approach to FX regulation corresponds to the international practices and EU integration ambitions of Ukraine. Under the EU association agreement, in 2021, Ukraine should initiate negotiations with EU on the mew FX rules. Having signed this agreement, Ukraine has assumed the liability to ensure the free movement of capital. Thus, when drafting the Law, the NBU task force - with the participation of experts engaged by the European Commission as part of EU-FINSTAR - took under advisement EU Council Regulation 88/361.
Furthermore, the Draft Law On Currency was endorsed by international financial institutions, businesses, the banking sector, the expert community, MPs and state agencies that took part in deliberations with the NBU of the Draft Law after it was presented to the general public on 9 August 2017.
Later, the Draft Law was backed by the National Reforms Council and will be brought up for consideration of the Verkhovna Rada of Ukraine.
According to the NBU’s motion, following the adoption of the Law On Currency by the Verkhovna Rada of Ukraine, the transition period of six months will be required to bring the NBU regulations in line with the new Law. Afterwards the Law will come into effect.