Government loans and hryvnia exchange rate: What's wrong with Ukraine's National Bank

Author : Taras Kozak

Source : 112 Ukraine

From the beginning of 2019 until July 29, the bond certificates portfolio with foreign investors grew from 6 to 2,8 billion USD
11:17, 3 August 2019

Open source

As an investment banker and economist, I closely monitor the activities of the two bodies that have the greatest influence on the macroeconomic situation in our country. This is not the president or even the Ministry of Economic Development and Trade of Ukraine. I believe these are the National Bank of Ukraine (NBU) and the Ministry of Finance of Ukraine.

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They have a lot in common. Both institutions have carried out (and continue to carry out) serious internal reforms. All memoranda with the International Monetary Fund should be signed by the heads of the bodies. The Ministry of Finance and the National Bank play key roles in the Financial Stability Board.

However, unfortunately, they cannot yet agree on such stability. The mutual misunderstanding has spilled out today. The reasons for the dissatisfaction were yesterday's placement of government bonds by the Ministry of Finance at 680 million USD (foreigners bought the lion's share) and the current morning subsidence of the interbank dollar rate below UAH 25 per dollar.

Some are dissatisfied with the fact that the state lends too much money (16-17% per annum), others are dissatisfied with overly expensive hryvnia (in the exchange rate and percentage terms).

Although I traditionally protect the National Bank from attacks by its enemies, this time I am on the side of the Ministry of Finance:

  1. The Ministry of Finance expensively attracts budget funds

My position: yes, it’s expensive, but in the current conditions it’s impossible to make it cheaper. The Ministry of Finance has a very open loan policy. A public debt management strategy has been announced, borrowings are being carried out transparently, information on debt holders, on dates and amounts of repayments is open.

The Ministry of Finance should raise funds to the budget with a certain lead because due to the low dollar exchange rate, the import of VAT to the state treasury has declined.

Related: Economic growth in Ukraine restrained and non-permanent, - World Bank

The Ministry of Finance should ensure uninterrupted financing of all planned expenses, especially social and security issues. If there were not loans, we would not be able to pay pensions on time.

The Ministry of Finance should ensure uniformity of expenses throughout the year, otherwise, at the end of the year, we will have unpleasant swings in the hryvnia exchange rate.

The Ministry of Finance cannot raise funds much cheaper, because the discount rate set by the National Bank is now 17% per annum. Banks (and their customers) can super-reliably receive the same 17% per annum on 2-week NBU certificates.

Moreover, the forecast of the discount rate for 2019-2021 (published by the National Bank) shows that banks will have high incomes from deposits. Why then should they buy more risky government bonds with less profitability?

The Ministry of Finance should attract long loans because in 2020 the state should repay the largest amount of debts. If you sell securities with a maturity of up to 1 year, then the burden of re-lending for the next year will increase.

Related: Dollar devaluation: What does this mean for Ukraine?

  1. The hryvnia exchange rate is growing too fast

In my opinion, this growth is too fast.

From the beginning of this year until July 29, the bond certificates portfolio with foreign investors grew from 6 to 2,8 billion USD, i.e. by 2,5 billion USD. This means that the country has obtained this money for the purchase of government securities. During this time, the National Bank’s net purchase of currency reached the level of 2,168 billion USD, that is, the NBU did not even redeem all this “hot” currency, but at the same time lowered the exchange rate from 28 to 25 UAH per dollar.

In its defense, the National Bank explains that it does not oppose trends, but only smooths out short-term peaks. I believe that the inflow of funds from international speculators (they are the ones who primarily buy government bonds) cannot be considered a trend. Neither macro indicators of our economy, nor positive structural changes in international trade stand behind it.

Related: IMF cuts forecast of world economy growth by 0.1 percent

Therefore, it would be advisable to buy out “speculative hot dollars” without changing the hryvnia exchange rate for foreign currencies. In an extreme case, revalue the hryvnia by 1% for a purchase of $ 1 billion.

  1. The discount rate is too high

National Bank lowers interest rate too slowly (only be 1% since the beginning of the year). And according to the baseline scenario, it will decrease by another 1.5-2% by the end of the year.

Undoubtedly, the NBU monetary policy committee members have more information to make a decision. Of course, the issue of future inflation is the main factor in setting the rate.

However, it looks like the National Bank dreads the fire. After all, political risks (election year) have not been realized, the IMF is rather supportive of Ukraine’s new government, inflation is higher than the target, mainly because of administrative decisions that the rate has no influence on.

At the same time, the negative impact of high rates on the economy is obvious. Government bonds provide high returns to the banks. Without increasing lending, the latter vigorously report revenue growth of 30-50%.


Yes, there are other reasons why banks ignore the real sector, and these reasons are outside the NBU’s influence. Thus, in a dispute between the Ministry of Finance and the NBU, I would award the victory to the Ministry of Finance with a score of 3: 0.

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