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State of Ukraine’s Financial Sector and NBU’s Actions to Support Its Uninterrupted Functioning under Martial Law

State of Ukraine’s Financial Sector and NBU’s Actions to Support Its Uninterrupted Functioning under Martial Law

The Ukrainian banking system remains stable and liquid even at the time of the martial law

Retail clients’ account balances with the largest banks have increased from the start of the war to 28 February, in particular as a result of large payments received to bank clients’ accounts at the end of the month, including wage payments. The outflow of deposits is restrained by the accessibility of cashless transactions and limited operation of banks in some regions.

Banks have a cushion of high-quality liquid assets that is sufficient to maintain all cashless payments and retail deposit repayments, even under current difficult conditions.

An additional safety cushion for banks is the traditional secured refinancing and blank refinancing provided for up to one year that was introduced by the NBU (blank refinancing should not account for more than 30% of retail deposits). Since the hostilities started, as of the morning of 3 March 2022, 29 banks have used blank refinancing to the total amount of UAH 20.2 billion (less than 3% of retail deposits). When needed, the NBU also supplies cash to banks without limitations.

At the same time, to maintain proper liquidity of the banking system, the NBU Board has decided to:

The NBU takes all the necessary measures to ensure uninterrupted cash and cashless payments and support continuous functioning of Ukraine’s banking system under the martial law. At the same time, the NBU urges Ukrainians to give preference to cashless payments when purchasing goods and asks operators of retail trade networks and fueling stations not to reject cashless payments.

The operation of Ukraine’s foreign exchange market has been limited since 24 February

The official exchange rate has been fixed and a number of temporary FX restrictions have been introduced. Authorized institutions were forbidden to trade in currency valuables, except for some cases. In particular, the restrictions do not apply to transactions to purchase goods of critical imports according to the list approved by the Cabinet of Ministers of Ukraine and FX transactions needed for mobilization and other national security and defense measures.

In addition, the NBU has banned international FX payments. Making settlements and withdrawing cash using payment cards abroad and a number of other transactions are an exception to this ban.

These measures are necessary to support the reliable and stable functioning of the financial system of Ukraine and ensure the maximum capacity of the Armed Forces of Ukraine and uninterrupted functioning of critical infrastructure.

After the economic situation normalizes, the FX market will return to full operation as soon as possible, and FX restrictions will be brought back to pre-war levels. However, this process might be gradual.

State finance system is functioning without interruptions

Government payments are made without limitations under the martial law. The liquidity buffer is sufficient for financing expenditures and repaying liabilities.

First, many Ukrainian companies continued to pay taxes to the state budget, and some of them even paid taxes in advance. According to the Ministry of Finance of Ukraine, the general fund of the state budget received UAH 104.6 billion in February 2022, which is equivalent to exceeding the revenue plan by 29.3%, or UAH 23.7 billion. Given the planned deficit of UAH 66.2 billion, the general fund surplus was UAH 13.1 billion in the first two months of 2022, and the surplus of the state budget of Ukraine was UAH 24 billion.

Second, the NBU urgently transferred a part of its distributable profit in the amount of almost UAH 19 billion to the State Budget of Ukraine in order to provide the financing needed to maintain the functioning of the state at the time of martial law.

Third, international organizations and partner countries undertook to allocate large amounts of financing to reinforce Ukraine’s defense potential, support its economy, and address humanitarian issues. The total pledged international financial, technical, and humanitarian support stands at the equivalent of more than USD 15 billion, we estimate. That includes over USD 5 billion in funds that will go directly towards the state budget. In particular, the EU will allocate EUR 1.2 billion in macrofinancial aid to Ukraine. The World Bank Group responded as well. The IMF is expected to provide financing. Many democratic countries have expressed their support.

Funds on NBU accounts raised from organizations and individuals, both from Ukraine and other countries, are an additional source of financing of the needs of the Ukrainian army. In particular, as of 2 March 2022, more than the equivalent of UAH 6 billion was transferred to the special account that the NBU had opened to support the Armed Forces of Ukraine. Of this amount, the NBU has already provided more than UAH 1.6 billion for military needs.

Moreover, on 1 March, the Ministry of Finance of Ukraine offered military domestic government debt securities, which allowed to raise UAH 8.1 billion to the state budget.

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