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Speech by NBU Governor Kyrylo Shevchenko on the current state of the Ukrainian economy and prospects for development

Speech by NBU Governor Kyrylo Shevchenko on the current state of the Ukrainian economy and prospects for development

Dear colleagues,

I’d like to inform you that the NBU has decided to postpone taking any decision on the key policy rate. The key policy rate will therefore stay unchanged, at 10%.

Under current conditions, market monetary instruments have limited impact on the money and FX markets. As the NBU announced in March, the central bank will start deploying the key policy rate and other monetary instruments again once the monetary transmission channels become effective again.

Members of the Monetary Policy Committee discussed the current economic conditions and the economic outlook.

The banking system remains stable and liquid. Together with the NBU, other banks are putting up an effective financial defense under the extremely difficult conditions amid full-scale russian aggression. A stable functioning of the banking system is very helpful when switching the economy to operating in wartime mode.

Economic activity is reviving in the regions where it is relatively calm after the shocks suffered during the first weeks of war. Businesses are gradually reopening and rebuilding logistical pathways, overcoming wartime challenges. The share of companies that completely halted operations had dropped to 23% by early April after exceeding 30% in the first weeks of March. Consumption and production of electricity remain stable, while the number of open restaurants and their turnovers are increasing.

At the same time, Russia’s full-scale invasion of Ukraine has resulted in the physical destruction of many companies’ assets and infrastructure, and disrupted production processes and supply chains – while also increasing businesses’ expenses and forced immigration. Russian invaders are continuing to commit genocide in Ukraine.

The NBU estimates that real GDP could drop by at least one third in 2022 in the wake of the war. Inflation might exceed 20%, but it will remain under control thanks to the joint measures taken by the NBU and the government. These measures include:

  • a temporary fixing of the hryvnia exchange rate, which will limit the probable deterioration of expectations and a rise in the prices of imported goods
  • a decrease in taxes, including the indirect taxation of imports
  • fixing utility prices
  • the administrative regulation of prices for some foods and of fuel.

A fixed exchange rate and the retention of administrative restrictions on FX transactions will remain important prerequisites for supporting macroeconomic stability in Ukraine for some time. However, in the long-run these measures result in macroeconomic imbalances.

Therefore, when the economy and the financial system start to recover their normal functioning, the NBU will gradually return to inflation targeting with a floating exchange rate, and will stop financing the budget. Monetary financing, which is a forced and needed step during the war, cannot be the main source of budget revenues.

The NBU will continue to work closely with the government in order to help the country raise financing from international organizations and partner countries to revive the economy, meet budgetary needs and maintain sufficient international reserves.

I’m convinced that continued structural reforms, wide international support and Ukraine’s integration into the European Union will pave the way for the country’s rapid recovery.

We stand united, and we will win!

Glory to Ukraine!

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