All FX Market Restrictions to Be Lifted in Stages – NBU Report

Current safeguards in the FX market are relevant for maintaining macroeconomic and financial stability. At the same time, the National Bank of Ukraine (NBU) will continue the gradual liberalization of the FX market it started in 2016 after stabilizing the financial system and bringing the Ukrainian economy back to growth. These issues are addressed in the NBU Report on Introduced Safeguards drawn-up in line with the Law of Ukraine On Currency and Currency Operations. The report aims to keep the public up to date on the steps towards a complete freedom of executing currency transactions.

All restrictions still existing in the FX market were introduced by the NBU in 2016. The following events led up to the imposition of the restrictions:

• the accumulation of major macroeconomic imbalances in 2010-2013, including due to maintaining a fixed exchange rate of the hryvnia at the expense of international reserves amid a surge in external debt and a sizable excess of imports over exports
• the annexation of Crimea by Russia and the military conflict in the east of Ukraine in 2014-2015 resulting in the breaking of economic ties with the nongovernment controlled areas and significant losses to GDP
• trade restrictions imposed by Russia.

These events triggered several waves of substantial depreciation of the hryvnia accompanied by increases in demand for foreign currency and a deepening of its shortage in 2014-2015. In order to restore macrofinancial stability, the NBU expanded the range of FX market safeguards to prevent capital outflow and stabilize demand for foreign currency and currency proceeds.

By implementing such measures, Ukraine was able to resume economic growth. In 2016-2018, Ukrainian GDP grew at a steady pace. Consumer price inflation declined from 43.3% at year-end 2015 to 9.8% at the end of 2018. During that period, international reserves increased significantly and have since remained at the level of over USD 20 billion.

Despite the improvement in main economic indicators and the stabilization of the financial system, certain risks to the macroeconomic stability remain. Extending some of the FX market safeguards is necessary for the following reasons:

• existing geopolitical risks, including the escalation of the military conflict in the east of Ukraine and in the Sea of Azov and new trade restrictions by Russia
• major repayments of external debt in the following two years are fueling demand for funding
• global trade conditions are worsening due to a slowdown in the global economy, and protectionist measures
• international reserves are sufficient to meet the obligations of the government and the NBU but not sufficient to comply with the IMF’s composite metric
• the economy is still exposed to excessive exchange rate fluctuations in the FX market
• the dollarization of the banking system is high.

To continue strengthening the macrofinancial stability under such conditions, it is necessary to ensure the stable operation of the FX market and mitigate excessive fluctuations of the hryvnia exchange rate. The introduced safeguards lower inflation and depreciation expectations and improve trust in the hryvnia. This will foster price stability for stable long-term growth of the economy.

The NBU introduced all of the existing safeguards before 2016. Afterwards, the NBU did not introduce new safeguards in the FX market. Instead, the NBU eased or lifted safeguards it introduced during the economic crisis. In early 2019 alone, the NBU eased over 30 currency requirements. Specifically:

• It extended the period for making settlements under export and import contracts to 365 days from half as much, and lifted sanctions that required businesses to cease foreign trade for failure to meet this deadline.
• It canceled the requirement that businesses make hryvnia-denominated deposits prior to buying foreign currency (T+1).
• It increased the limit on repatriation of dividends from USD 7 million to EUR 12 million.
• It decreased the foreign-currency surrender requirement from 50% to 30%.
• It authorized the use foreign accounts by resident legal entities.
• It canceled the procedure for registration of external borrowings.
• It replaced sweeping foreign-currency control with risk-based supervision that operates on the principle “more risk, more scrutiny; less risk, less scrutiny”.
• It replaced individual currency licenses with a convenient system of e-limits that does not require NBU approvals.

For Ukraine, there is no alternative to continuing the liberalization of the FX market. The NBU’s final goal is free movement of capital without any foreign-currency restrictions. At the same time, existing safeguards ensure the consistency of the currency liberalization, which is one of Ukraine’s commitments under the IMF program.

The NBU will continue to gradually ease and lift safeguards as macroeconomic conditions improve, while taking into account the effects of lifted restrictions on the FX market. This will prevent adverse events in the real economy and the financial market, and foster economic growth.

For reference:

This report was prepared pursuant to Article 12 paragraph 4 of the Law of Ukraine On Currency and Currency Operations to inform the public on the motives behind introducing safeguards in the Ukrainian FX market.

The NBU introduces safeguards in the FX market in line with its mandate – as prescribed by Article 99 of the Constitution of Ukraine and Article 6 of the Law of Ukraine On the National Bank of Ukraine – to ensure the stability of Ukraine’s currency. At the same time, the NBU must prioritize achieving and maintaining price and financial stability in Ukraine.