The Council of the National Bank of Ukraine (the NBU Council) held a meeting today. Following the meeing, in the performance of its statutory mandate and its compliance with regulatory requirements, the NBU Council of the National Bank of Ukraine has approved an assessment of the NBU Board’s performance with regard to the implementation of exchange rate policy and FX regulation. The NBU Council also approved recommendations to the NBU Board and the Government of Ukraine. In addition, the NBU Council approved the Regulations on special committees established at the NBU Council, notably the Committee on Monetary Policy and the Committee on Ethics, Remuneration and Appointments, and reviewed amendments to other regulations covering the activities of the NBU Council.
In opening the meeting, Chairman of the NBU Council Mr Bohdan Danylyshyn said: "It is worth mentioning that given that in 2015-2016 when the Council was non-operational, an assessment of the NBU Board’s performance with regard to the implementation of exchange rate policy and FX regulation has not been carried out since April 2015. In order to avoid the repetition of ineffective practices , we need to analyze those episodes and develop recommendations to the NBU Board based on a comprehensive analysis and ensure effective control over their implementation.
In early 2015, Ukraine’s international reserves failed to meet the reserve adequacy criteria. Ukraine has gradually built up international reserves thanks to financial assistance from the IMF and other international donors.
However, objective and force majeure destabilizing factors of non-monetary nature caused a sharp depreciation of the hryvnia in 2015 – by 50% over the year. As a result, inflation surged to over 40 percent in 2015.
In view of the heightened risks and uncertainty, as well as situational and large fluctuations in the supply of, and demand for foreign currency, the NBU put in place a number of temporary administrative FX restrictions. These measures helped improve somewhat the situation.
The NBU Council acknowledged that the FX market showed signs of stabilization in 2016. As a result, depreciation pressures on the hryvnia eased. As situation in the FX market improved, the NBU gradually phased out administrative FX restrictions.
However, the FX market experienced episodes of turbulence, especially in late 2016 and early 2017. During these episodes of turbulence the hryvnia came under depreciation pressures.
The stabilization of the foreign exchange and money market contributed to the abatement of underlying inflationary pressures. As a result, headline inflation fell sharply to 12.4% in 2016.
At the same time, the NBU Council pointed out that an improvement in the FX market conditions and inflation expectations enabled the NBU to intervene by purchasing foreign currency to replenish international reserves. However, these currency interventions kept the hryvnia from appreciating further and halted the disinflation trend. In addition, there are no grounds to say that the fundamental economic prerequisites are in place for the FX supply to exceed the demand in the FX market since the current account returned to deficit since July 2016. In fact, household savings are the major source of net FX supply in the FX market.
Starting from February 2017 the situation in the FX and money markets has improved, with inflation and depreciation risks subsiding. Meanwhile, certain FX restrictions that had remained in effect for a long time, and hence became inefficient, were relaxed with a delay given their low effectiveness. The NBU Council recommended that the NBU Board finalize FX regulation taking into account the current state of the economy and today’s challenges.
Further measures aimed at relaxing FX controls will be intended to prevent upsetting the equilibrium in the FX market, taking into account risks. The risks include possible escalation of hostilities in the east of Ukraine, a trade blockade imposed on the non-government controlled areas of Ukraine, uncertainty the quality and pace of structural reforms and a worsening of the global commodity market conditions. These risks have brought into focus the need to:
- create appropriate conditions to hedge FX risks through further development of currency risk hedging tools and the use of standard currency risk hedging tools – futures;
- intensify efforts to prevent unproductive capital outflow through the use of tax instruments and by taking measures to bring the economy out of the shadows.
Further, it is urgent to streamline foreign exchange legislation, including by improving the foreign exchange regulation system.
The Resolution of the NBU Council and Recommendations to the Board will be published in the coming days on the NBU’s website.