On 23 June 2022, the Financial Stability Council (FSC) discussed the analysis of the current situation regarding the state budget financing and systemic risks to financial stability arising from the NBU’s monetary financing of the state budget deficit.
In January–May 2022, the state budget deficit was wider than in the twelve months of 2021 and 2020 each. Budget revenues declined (in part due to the preferential taxation of imports), while expenditures increased significantly, primarily those on military needs and social programs. The government currently needs an estimated USD 5 billion in financing per month. Since russia launched its full-scale aggression against Ukraine, the NBU has been a prevailing source of funding for the government, but these funds cannot replace the financing of the budget deficit from other sources, such as international and market-based funding. The FSC members discussed the extremely adverse fallout for macroeconomic stability from the excessive monetary financing of the state budget deficit. Such consequences are most evident in the impact on the FX market. The released hryvnias are entering the FX market and putting pressure on the exchange rate.
To meet the demand for foreign currency, the NBU has been intervening constantly. The volume of the central bank’s interventions has been rising by the month, depleting international reserves. This drawdown of reserves is not being offset by international aid for now. If the NBU’s international reserves are depleted due to direct monetary financing, it will pose the risk of a significant depreciation of the hryvnia and a rapid acceleration of inflation. This in turn increases the risks to financial stability.
To minimize these risks, the FSC members identified the key steps to narrow the state budget deficit and reduce its monetary funding, specifically:
- optimization of public expenditures and limiting nonpriority and inefficient spending.
- additional increases in budget revenues, primarily from higher taxes on imports, excise taxes (including those on fuel), and rent payments. The authorities should take a balanced, fair, and differentiated approach to raising taxes.
- intensification of borrowing from the domestic market to finance the budget deficit.
- more efforts to increase the volume and predictability of the flows of international aid.
The FSC members agreed that the steps noted above must not contradict the principles of Ukraine’s cooperation with international donors and EU integration efforts. The FSC members also discussed the possibility of launching a new program of cooperation with the IMF. In particular, they agreed on the need to finalize, as soon as possible, the macroeconomic forecast scenarios and proposed economic policy measures and structural reforms that should inform such a program.
The following FSC members participated in the meeting: Kyrylo Shevchenko, NBU Governor, Serhii Marchenko, Minister of Finance of Ukraine, Svitlana Rekrut, Managing Director of the DGF, Yuriy Heletiy, NBU Deputy Governor, Yurii Drahanchuk, Deputy Minister of Finance of Ukraine for European Integration, and Rostyslav Shurma, Deputy Head of the Office of the President of Ukraine. Also in attendance were Denys Uliutin, First Deputy Minister of Finance, Kateryna Rozhkova, NBU First Deputy Governor, Sergiy Nikolaychuk, NBU Deputy Governor, Oleksii Shaban, NBU Deputy Governor, and Maksym Libanov, Member of the National Commission on Securities and Stock Market.
The FSC was established by a presidential decree in March 2015. The FSC provides a forum for the professional discussion of systemic risks to domestic financial stability.