NBU Governor Andriy Pyshnyy's exclusive interview with Interfax-Ukraine

Text: Dmytro Koshovyi

 

– One of the main tasks at the IMF-WB Spring Meetings this year is to find the money for a quick recovery in 2023, Prime Minister Denys Shmyhal and Finance Minister Serhii Marchenko said. WB President David Malpass estimates the current shortage of such funds at USD 11 billion. A ministerial roundtable – the focus of Ukrainian-themed events at the meetings – was dedicated precisely to this issue. How can the NBU help resolve it?

– Prime Minister, the Minister of Finance, and I attended these Meetings. It's not in the NBU's mandate to raise funds outright. Our purview is price and financial stability, but, and this is an important point, the NBU's presence in the talks on raising financial aid is what highlights to donors and decision-making stakeholders that the Ukrainian team is well coordinated and capable.

Technically, I'm under the impression that uncertainty and capability have been the most used words during the Meetings. Effective interaction between the government and the NBU in ensuring stability and meeting challenges reduces uncertainty and fuels Ukraine's capability to attract support. The reset of relations between the NBU and the Ministry of Finance has significantly increased the effectiveness of our efforts, both within the institutional mandates of either authority, and within the framework of joint activities and tasks, including the rejection of the monetary financing of the budget deficit from 2023 forward. A common language, which was missing for the most part of last year, has been found, and our voice has been heard.

The Ukrainian government must continue to demonstrate an ability to ensure results through its own efforts wherever possible. Aid will propel, but not replace, our capabilities. The NBU must maintain its resolve in ensuring price and financial stability, stand by the Ministry of Finance in filling the domestic debt market, and create prerequisites for a gradual return to market-based principles and regulatory policies.

During the roundtable, IMF Managing Director Kristalina Georgieva pointed out that it is incredible how the Ukrainian economy continues to generate budget revenues in wartime conditions, how smoothly the banking system is operating, and how monetary instruments are working and helping stabilize the situation... Even as the war grinds on, the Ukrainian debt market is functioning: in the first three months of 2023, Ukraine raised more than UAH 110 billion in the domestic debt market. We are already approaching the levels of last year, when we drew in UAH 164 billion. Almost one-third of this amount was raised by the Ministry of Finance in the last two months of 2022. For comparison: in September 2022, it attracted only UAH 900 million, but in January 2023, more than UAH 50 billion.

 

– To achieve this, however, the NBU increased the reserve requirements and allowed the banks to meet part of these requirements with domestic government debt securities.

– Yes, and this is rather acceptable. Reserve requirements are one of the NBU's monetary policy tools. Nor are benchmark domestic government debt securities unique in this regard.

From an overall perspective, this is precisely about striking a balance, understanding the goal, and perceiving the NBU's position and policy impulse.

We all strive to avoid hazardous monetary financing. We realize that issuing more money than planned would be a quick fix that would meet the current budgetary needs caused by the war. But at the same time, such a decision would pose an incredible threat to macroeconomic and price stability. The remedy must not be more dangerous than the disease. We have a commitment to find and use every possible available option, and if none are available, create a new option that would meet the budgetary needs without resorting to monetary financing to cover the shortfall.

The NBU's and the Ministry of Finance's positions were previously difficult to reconcile. "The domestic debt market is not functioning, we are not raising rates," the ministry would say. "No, rates must rise, we will force you to act," the NBU would retort. Everyone had their own arguments to present.

Personnel changes became an opportunity to correct mistakes and allowed our institutions to resume a dialogue that promotes constructive arguments and respect for each other's mandate.  We see that the government responds to our proposals. We observe the effectiveness of our joint efforts and stand ready to calibrate the solutions that strengthen our capability to ensure macrofinancial stability and attract the support of international partners.

Look at inflation: it started off at more than 26%, we predicted 23.6% for late Q1 2023, and now it stands at 21.3%. A disinflationary trend is obvious, and we have to make it permanent. This includes the impact of the absence of monetary financing, the receipt of international aid, and the perception of the NBU's policy.

Look at what is happening with the exchange rate. Of course, it's a combination of factors, but, to a large extent, exchange rate stability is due to the effectiveness of the NBU's monetary policy measures and AML/CFT actions.

Let's go back to today's meeting (the conversation took place in Washington, D.C., on Wednesday, 12 April – Interfax). I'm aware that the Minister of Finance and the Prime Minister are the ones who are actually spearheading this part of the money-raising effort. Although the Program has my signature on it, the global task of raising funds is not the NBU's direct mandate. But money is only allocated to countries that have demonstrated their capability to put it to effective use. And this is where the NBU, an independent authority that is one of the key participants in this process and that is in charge of price and financial stability, plays a definitive role. We provide precisely what creates the basis – stability – and the Ukrainian government complements it with its capabilities, and international partners can see that. We ensure what allows the President and the Prime Minister to say, "Look, Ukraine is capable of doing this." And an important response that we are hearing is, "Yes, we see that it is."

And by the way, this is what has laid the groundwork for the Extended Fund Facility. Imagine for a second that we don't have a signed memorandum with the IMF. What would be the meaning of these meetings and conversations?

As I said earlier, the NBU's independence is a goal, but at the same time it is also a valuable resource. So, now we are using this resource with the most possible efficiency for the country. And I will do my best to ensure that we continue to do it.

 

– Today's roundtable focused on the significance of involving international private investors in the recovery process, and they are interested in repatriation. It is important that no additional restrictions be imposed on capital movements. The memorandum with the IMF outlines a strategy of how these restrictions will be phased out. For example, there already exists a compromise about the repatriation by nonresidents of interest payments on domestic government debt securities, but not about the principal amount. Can confirm to investors today that the worst restrictions are already over? And that the NBU can guarantee certain minimum conditions for such a movement of capital?

– I can guarantee that the NBU will work to ensure price and financial stability. And that it will do so in a responsible and efficient manner. And that the central bank's actions will be decisive and timely. Administrative restrictions are not a target model for the NBU. It is a forced step sideways that was applied as part of an emergency package at the outbreak of the war. We adhere to market fundamentals and policies. They are what kept the market stable at the point of entry into this crisis and ensured a margin of safety while under martial law. We therefore intend to bring back elements of normality, depending on the prerequisites that we are currently working to create. 

Repatriation, insurance of military and political risks, reduction of security risks, and financial stability are really important for the private sector... That is, repatriation is one of the conditions. It's a necessary condition, but it's not a sufficient condition.

We are working on a liberalization strategy, but we are deliberately silent about when a revision of restrictions will take place. There is no deadline for the lifting of administrative controls. Everything depends on the emergence of the right prerequisites. But we have been clear and vocal about the exact prerequisites that make it possible to talk about the introduction of a floating exchange rate and a return to the free movement of capital. 

Such prerequisites involve tying up the liquidity surplus that has recently emerged. We talked about this a lot during our briefings on the outcomes of monetary policy decisions. The liquidity surplus is unevenly distributed and is mostly sitting in current accounts. We are also interested in increasing the value of hryvnia-denominated assets and therefore encourage the banks to act responsibly and offer deposit terms that would encourage households to make deposits of three months' or longer maturity. Why? Because when transitioning to a gradual reduction of administrative restrictions, as well as before introducing elements of a flexible exchange rate, we must be sure that this liquidity overhang will not undermine exchange rate stability. 

At the same time, you are right in that the memorandum has a separate paragraph – essentially a structural benchmark – that stipulates the development, by the end of June 2023, of a strategy for currency liberalization and a gradual rollback of administrative restrictions. Work on the strategy is already underway.

The market is currently balanced solely by the NBU's presence in it, and the problem of unprecedented current account balances remains relevant. We are working to resolve it. We are seeing a shift, but it is too early to talk about results. Accordingly, the transition to greater flexibility in this aspect is not a matter of the near future.

But let's go back to the repatriation of income. It seems to me that it is correct to speak not about the ban on repatriation, but, on the contrary, about its gradual reopening. The right connotation is important. That is why we have not rejected repatriation. Quite the opposite is true. We have reopened one of the channels, an opportunity to repatriate the part of the income that nonresidents earn by investing money in domestic government debt securities. It is also an additional incentive to support demand in the domestic debt market, which is a prerequisite for abandoning monetary financing and which will protect international reserves from being depleted. These reserves are being replenished exclusively by international aid. 

Yes, international reserves do stand at an eleven-year high of USD 31.9 billion, but it is not economic recovery that has brought them there. We are seeing an improvement in the supply-and-demand balance of the FX market. We are detecting tentative positive macroeconomic signals, but this tendency has yet to acquire all the attributes of a sustainable trend. As the war grinds on, risks persist, but it is the minimization of their impact, and effective risk management, that will build the foundation for a renewal of regulation and the return of foreign private investors. 

The NBU will also do its best to reduce uncertainty, but not in terms of time and deadlines, but in terms of macroeconomic conditions and sufficient prerequisites. 

I am convinced that, in addition to repatriation, the private sector needs a sustainable macrofinancial and macroeconomic situation, a steady downward-sloping trend in inflation, and a stable banking sector that operates in a smooth way. 

Actually, the availabiity of an extensive IMF-supported program already reduces the level of uncertainty. Under the baseline scenario, the financial gap of USD 115 billion over the four-year horizon of the program will be covered by a package of financial aid from the countries of the donor coalition. It seems, there is enough new relevant information that narrows the uncertainty. Considering this and the possibility to repatriate the earned money, is it not worth investing in domestic government debt bonds, is it not worth looking at the market?

Agreements and arrangements entered into by Ukraine over the past six months, when carefully read, provide enough knowledge to predict the sequence of actions of the NBU, the government, the parliament...  Transparent insurance market and the market of nonbank financial institutions, diagnostics of the banking sector resilience, aligning the regulatory framework with EU requirements, the strategy for the financial sector development, corporate governance, insurance of military and political risks...  That is, if you take all these components together, then even despite the war, I believe, the private sector could think about starting moving towards Ukraine, given the investment opportunities. To this end, this message needs to be articulated very clearly and in a structured way. What I hear from my colleagues and the Prime Minister, who is the key speaker in this discussion, they understand this and convey it clearly.

 

-- While the war in Ukraine unfortunately continues, the financial world is not standing still. Many discussions at this year’s Spring Meetings were dedicated to green finance, digital currencies, and cryptocurrencies. Is there a risk that because of the war Ukraine may fall behind the world in the financial services sector?

This will not happen to Ukraine. Quite the opposite.  The war forced us to take decisive action and find creative solutions, and removed some obstacles. If you analyze our decisions over the past 4-5 months, you will see that despite the war we have unfrozen most projects and intensified processes. Nevertheless, there is a downside to innovation: operational resilience, financial stability and AML/CFT risks. However, they are not the stop factors but rather tasks we need to work on. 

For example, Ukraine is launching one of the most progressive mechanisms for testing software solutions aimed at implementing digital technologies, working with virtual assets, and fintech innovations, the so-called regulatory sandbox. The mechanism operating in Singapore, the UK, Switzerland, and the U.S. will be launched in Ukraine in April. It will allow to test solutions with a limited number of users keeping the risks under control, and develop technological and regulatory models. Solutions that will prove their viability and compliance will be quickly released to the market.

Over the past six months since I took office, I think, the NBU has held three or four very substantive and detailed discussions with the Minister of Digital Transformation Mykhailo Fedorov We go through the entire digital agenda: from the e-residency to virtual assets. For almost every issue on the agenda, we have a clear picture of what we are doing, which of the proposed products will “take off”, and what needs to be improved and sometimes rethought.

My third point is as follows. As part of our work with the International Monetary Fund, the NBU has requested a separate block of technical assistance related to virtual assets and digital technologies. The NBU is also reforming supervision to enhance the analytical component and combine expertise, including on digital technologies and the AML framework.

So there is no need to worry. Due to the war, Ukraine is even more acutely aware of the risks and the need to keep the perspective, to preserve the developments that are already turning Ukraine into one of the most digitally advanced countries. 

Another interesting fact is that Ukrainian Diia service was mentioned at almost every high-level meeting. In particular, during a meeting with the World Bank, its Vice President Anna Bjerde said that the World Bank sees an opportunity to use our digital platform Diia to strengthen capacity in issues related to supporting small and medium-sized businesses. 

We have an entry point: a multifunctional national platform and a proven functional ability to support millions of people with appropriate authorization and reporting. 

So, I am very hopeful that we will celebrate our Victory with a transparent payment and insurance market, confirmation of ultimate beneficiary owners of financial institutions, a completed diagnostics of the banking system's stability, agreed capitalization plans, adapted and viable bank strategies, and a national digital platform to access administrative services and state support programs for households and businesses.

But in general, yes, you're right, here at the Spring Meetings, we feel that our challenges are slightly different at the very least. 

For example, I discussed possible challenges related to inflationary processes with the President of the Deutsche Bundesbank. The monetary instruments and the arsenal of measures – the key policy rate, operational design, reserves, forward guidance...– are the same. The challenges, however, are completely different. Structural imbalances and a huge liquidity surplus related to the financing of budget expenditures: the transmission mechanism should operate not at the pre-war pace, but faster and more efficiently. For this reason, our decisions should be much more effective.

Despite the war, we will will keep following the current agenda of the whole world: financial stability and challenges of virtual assets and fintech, inflation, green finance, interaction of fiscal and monetary authorities, migration, and central bank independence. We are interested in all of these issues. On top of that, Ukraine is in the grip of war.

 

-- And the last question. A lot is said at these Meetings about the danger of fragmentation and the harm it is causing to global economic development. In this situation, Ukraine continues to call for additional trade and economic sanctions and for the exclusion of russian banks from the international financial system. How well are these calls being received now? Is Ukraine managing to promote them in the 14th month of the war? Can we say that there is healthy and unhealthy or right and wrong fragmentation?

-- A good question indeed. The challenges the world is now facing are truly extreme. On 24 February last year, russia’s full-scale invasion of Ukraine became a trigger for aggravating the problems of the global economy. Recession, energy crisis, forced slowdown of the "green agenda," increasing hunger in the southern countries, social unrest in democratic countries, and flourishing populism...The war might seem to have pushed the world toward fragmentation and strategic autonomy. Yes, the divide exists. However, the unity and accord in fighting evil are becoming more and more visible compared to the fragmentation. Moreover, some companies and governments are increasingly showing the ability to make hard decisions. Hard was the decision of the EU to get off the russian gas hook. The search for alternative energy sources was mostly an urgent, painful, and costly process, yet it helped Europe return to the path towards energy independence, laying the foundation for a sustainable model of energy security. Eventually, the entire European community gained a critical victory, bringing rather a strategic advantage in the fight against a common enemy than just a protection from the energy blackmail.

Noteworthy, these days one of the most popular words has been the word coalition: donor coalition, sanctions coalition, military coalition, tank coalition, aircraft coalition, and so on. That is, we are talking about unification, not the contrary. Some people keep trying to say that the world is not black and white. Why do such delusions continue to exist even as the extremely cruel and bloody war is grinding on? Everybody knows that this is a hybrid war and that our common enemy has made it hybrid by weaponizing misinformation and using it to beef up conventional arms. What is more, russia’s propaganda machine, bankrolled by mind-boggling multi-billion-dollar budgets and fueled by a huge arsenal of weapons of “psychological mass destruction,” is still achieving a lot of its goals. But as long as the war continues in Ukraine, in the very center of Europe, the world is actually black and white.

That's why I believe that the imposition of sanctions is, in fact, a unification. I am sad and hurt that Ukraine has become the catalyst for these processes. Today, during a roundtable discussion, one of the finance ministers said a really scary phrase: that the damage is so vast that it may take more than one generation to recover. This means that we are now measuring the loss caused by the russian aggression not in tens or hundreds of billions, but in generations. That is the real price. And it is very important that these people are here today, at this roundtable, discussing Ukraine, giving assurances, creating flows of financial assistance, and reflecting on the things that should unite the free world against the threat posed by authoritarianism.

If Ukraine is defeated, everyone will be defeated. Globally. Although the hostilities are taking place in Ukraine, the war is being fought at the global level. And it will have repercussions for everyone. Perhaps it will not be felt immediately, but in the foreseeable future it will lead to the collapse and the loss of democratic values – of everything for which the IMF and other international institutions function, and of everything that is enshrined in the charter of the united Europe and in the constitutions of free democratic states.

Insurance against domestic political risks, a stable macrofinancial and macroeconomic environment, a steady disinflation trend, and stable and uninterrupted operation of the banking system – we have no other choice, we have to do it and win. And organizations such as the International Monetary Fund and the World Bank should join us on this path of victory. They have already stepped on it and are already thinking about whether they are doing enough and where they can do more. The IMF program approved for Ukraine is one example. It is the first time that the IMF has approved a long-term program for a country in a state of extreme uncertainty, which required the Fund to change its financial guarantee policy. This makes the program truly unique. Thanks to Ukraine, a precedent has been set that other countries can follow. For the IMF, such a revision of its policy is a revolutionary thing.