At a meeting held on 28 February 2017, the Council of the National Bank of Ukraine (hereinafter – the Council) heard a report on the activities of the Board of the National Bank of Ukraine (hereinafter – the Board) in 2016. Following this meeting, the Council has approved an assessment of the Board’s performance on the implementation of the Monetary Policy Guidelines in 2016 and Recommendations to the Board and the Cabinet of Ministers of Ukraine
NBU Board members, Head of Ukraine the National Securities and Stock Market Commission, representatives of the Ukrainian parliament, the Ministry of Economy, heads of banking associations, representatives of the civil society took part in the Council’s meeting.
“Today’s meeting has shown that despite financial and economic challenges faced by our country, the NBU managed to mobilize all resources available and achieve its main target set out in the Monetary Policy Guidelines for 2016. However, the NBU is currently facing even more difficult tasks of ensuring price stability in Ukraine, maintaining the stability of the banking system and putting the economy on the growth path. Back in 2015, real GDP fell by 9.9%. It is obvious that it is impossible to deliver sustainable economic growth without price stability and the stability of the banking system. Annual real GDP growth of 2.2% in 2016 paves the way for the recovery of economic growth in the upcoming years. I strongly believe in the NBU’s ability to gradually restore price stability and fulfil its main statutory function,” said Chairman of the NBU Council Mr Bohdan Danylyshyn.
During its meeting, the Council emphasized that an analysis of global trends, macroeconomic data and materials submitted by the Board gave grounds to conclude that monetary policy was implemented in line with the set targets. This was evidenced not only by the attainment of the announced inflation target, but also progress in addressing a wide range of issues, which signals that the necessary macroeconomic prerequisite are in place to put inflation on a firm downward path without posing any risks to the recovery of the economy's growth potential/
The Council acknowledged that in 2016 headline inflation was down to the target level consistent with the inflation targets approved by NBU Board Resolution No. 541 of 18 August 2015 On the Monetary Policy Guidelines for 2016-2020.
However, the Council pointed out that the banking crisis continued into 2016, with the number of operating banks shrinking from 117 to 96. The nationalization of CB PRIVATBANK PJSC in late 2016 allowed for a quick containment of the problems faced by the country’s largest bank but fell short in finally resolving them and identifying all the factors that drove the largest systemic bank into insolvency.
The current account deficit deteriorated sharply from a deficit of USD 0.2 billion in 2015 to a deficit of USD 3.4 billion in 2016, reflecting a more than threefold increase in the deficit on trade in goods and services This, along with the country’s low sovereign rating and high external debt, makes Ukraine highly dependent on new external borrowings, including financing under the IMF EFF.
Upward adjustments of energy and utility tariffs helped stabilize the financial standing of power generating companies and energy providers while reducing the burden on the state and local budgets. This move helped reduce their persistent dependence on internal borrowings.
Despite the achievement of monetary policy targets in 2016, the risks remain that the momentum of reforms will slow amid uncertainty over the global macrofinancial environment.
Furthermore, there are risks that headline inflation will accelerate in 2017, driven by higher producer price inflation and a recovery in consumer demand.
In 2016, the FX market saw signs of stabilization. In particular, the depreciation of the hryvnia exchange rate slowed significantly. Currency depreciation risks remain elevated due to the structural imbalances and rigidities of the domestic economy in the context of the unstable external environment.
With the FX supply exceeding demand in the FX market, the NBU purchased foreign currency to replenish international reserves. However, the NBU’s FX purchases restrained the appreciation of the hryvnia after episodes of the currency depreciation.
Significant systemic risks faced by the domestic economy are a major hurdle hampering efforts to boost bank lending.
When implementing monetary policy, the NBU used monetary policy and financial instruments applied by central banks.
During the meeting, the Council approved recommendations to the Board and the Cabinet of Ministers of Ukraine, reviewed the findings of internal audits of NBU structural units conducted in 2016 and addressed other issues related to current activities of the Council.