NBU Annual Report 2023: From Strategy of Survival to That of Recovery

The NBU has released its Annual Report 2023, which summarizes the most important results and changes in Ukraine’s macrofinancial system during the second year of the full-scale war.

"The year 2023 saw the incredible resilience and adjustability of the Ukrainian economy and financial sector. The NBU as a regulator, the financial system as a whole, participants in the banking and nonbank sectors, and the payment market came through last year aware of their responsibility to Ukraine and its people. Despite the war, Ukraine managed to move from a strategy of survival to that of recovery, exceeding all expectations," NBU Governor Andriy Pyshnyy said.

Even as the full-scale war grinds on, the NBU remains committed to its mandate to ensure price and financial stability, the keys to achieving sustainable economic growth. The central bank’s comprehensive efforts in 2023 made it possible to ensure macrofinancial stability, the smooth operation of the banking system and the capital markets’ critical infrastructure, and further development of the banking and nonbank sectors, as well as to increase the domestic currency’s credibility with Ukrainians. All of this laid a major cornerstone for strengthening Ukraine economic sustainability.

Resilient hryvnia and its credibility

During 2023, inflation slowed from 26.6% to 5.1%, having come close to the NBU’s target (5%). This was made possible by the central bank’s consistent monetary policy aimed primarily at maintaining exchange rate sustainability. International reserves rose by 42% to USD 40.5 billion in 2023 thanks to external financing. Such a level makes it possible to properly safeguard the sustainability of the exchange rate. 

A major component of maintaining exchange rate sustainability was the regulator’s successful efforts to keep hryvnia-denominated instruments sufficiently attractive. This, in particular, was facilitated by a consistent and balanced interest rate policy. Having been hiked by 15 pp to 25% in a single move in June 2022, the key policy rate remained unchanged until July 2023 and then was gradually reduced as the right conditions emerged. The rate cuts did not make hryvnia-denominated savings any less attractive. Furthermore, since the beginning of last year, the NBU has applied additional tools: it has significantly increased and differentiated the required reserve ratios and introduced three-month certificates of deposit for the banks. The CDs are conditional on how successfully the banks build up their hryvnia retail term deposits with maturities of at least three months. 

As a result, the growth in interest rates on hryvnia term deposits accelerated significantly during H1 2023. These additional instruments also made it possible to restrain the decline in interest rates on long-term hryvnia instruments even after the NBU switched to an easing cycle of monetary policy in July 2023. The attractiveness of hryvnia savings amid subdued inflation expectations contributed to the growth in the hryvnia’s credibility with the public. In 2023, the annual pace of growth in hryvnia retail term deposits hit a more than a decade’s high of 37.2%, restraining FX demand. In spite of the full-scale war, the dollarization of retail deposits edged lower by 2.0 pp.

The well-planned switch to managed flexibility of the exchange rate in October 2023 did not erode the NBU’s efforts to maintain the attractiveness of hryvnia savings. The FX market situation remained under control. The FX market’s depth increased threefold from early October through late 2023. The difference between the cash and official exchange rates was minimized to 1%–2%, down from 10% in early 2023. Both factors increased the FX market’s resilience to temporary factors.

Financial stability and development of banking and nonbank sectors 

In 2023, the banking sector continued to be sustainable, operationally efficient, and well capitalized, as evidenced by the NBU’s resilience assessment. The banks made UAH 83.2 billion in net profit and accrued UAH 76.6 billion in income tax at an increased rate of 50%. Retail and corporate deposit inflows continue. That includes term deposits. The banks’ liquidity remains high. Retail and corporate lending is growing, particularly outside of government support programs, an uptrend facilitated by lower interest rates.

To further fortify the satisfactory state of the banking system, the NBU is gradually reinstating the "pre-war" and introducing new regulatory requirements for the banks. Among other reasons, this is being done to facilitate a successful implementation of EU standards. The central bank initiated active work on the Lending Development Strategy and efforts to resolve the problem of “wartime” NPLs and introduce a fully functional war risk insurance system, all of which will stimulate further growth in lending.  

Improved security conditions in Ukrainian-controlled areas allowed nonbank financial service providers to resume their operations there. The total volume of term life insurance premiums rose by 20% in 2023, and NBFIs made 70% more loans to households than in 2022. Meanwhile, the NBU continues to make holistic efforts to improve the health and transparency of this market. Although the number of its participants has declined, the growth in the volume of assets indicates an improvement in quality. 

The regulatory overhaul of the nonbank financial services market and the payment market, pursuant to the new laws on financial services, insurance, and credit unions, helped boost market transparency, as did the incorporation of responsible lending principles into legislation. The NBU also continued to take active part in the development and implementation of state sanctions policy, including to prevent russia from tampering with Ukraine’s financial sector.

Business continuity amid missile and cyber attacks 

With the full-scale war dragging on and the aggressor continuing to launch regular strikes against Ukraine’s critical infrastructure, the country’s financial system has been able to retain its sustainability and stability and operate in continual mode. 

The foundation of such resilience was laid by the successful implementation of the POWER BANKING project, which was intended to ensure that the banks worked smoothly even in emergencies (during blackouts, cyber attacks, or when connection was down). POWER BANKING spans more than 2,370 bank branches all across Ukraine. The branches are equipped with alternative energy sources and backup communication channels and stand ready to work and render financial services under any circumstances. 

Another important achievement in 2023 was the migration to a new generation of the NBU’s System of Electronic Payments (SEP). On 1 April 2023, the system started operating on the basis of the international standard ISO 20022 and is available for interbank payments 24/7. Considering the future integration of the Ukrainian and European financial markets, this and other measures laid the groundwork for our country to join the Single Euro Payments Area (SEPA).

Macrofinancial stability is the basis for economic recovery 

The preservation of macrofinancial stability amid a gradual easing of monetary policy and of the FX restrictions helped revive economic activity and step up hryvnia lending. In 2023, real GDP grew by 5.3%, significantly surpassing expectations and most forecasts by both Ukrainian and international institutions. 

Having taken a long break, hryvnia corporate lending also rebounded in H2 2023 after business activity picked up and the financial performance of companies improved. Between June and December, the volume of net hryvnia corporate loans went up by 7.7%. The net portfolio of hryvnia retail loans had been rising in volume over the last three quarters of 2023, with the growth of 20.3% recorded for the year.

Strategic tasks of the NBU for 2024 

The NBU has no intention of losing pace in 2024. The central bank’s strategic tasks include:

• maintaining control over inflationary processes through a prudent and consistent monetary policy, ensuring the attractiveness of hryvnia assets, and protecting exchange rate sustainability.
• mobilizing external and internal resources to support the country’s capacity, an effort that involves fostering revenues to the budget and raising the necessary international assistance, as well as further developing the domestic debt market.
• thorough implementation of commitments, in particular to the IMF and the EU. Effective efforts that will strengthen the resilience of our economy and financial sector are the best argument for our international partners to fulfil their own commitments.
• continuing to reform the financial sector in line with the country’s European integration vector.
• easing FX restrictions and developing lending.
• ramping up sanctions pressure against russia and making further progress in the use of frozen russian assets in favor of Ukraine and the withdrawal of international banks and corporations from the russian market.

Read more in the NBU’s Annual Report 2023.