Deputy PM calls for limiting central bank monetary policymaking

Stepan Kubiv, who holds the combined positions of
Ukraine’s first deputy PM and economy minister, called upon restricting the
mandate of the National Bank of Ukraine (NBU) in monetary policymaking,
Interfax-Ukraine reported, citing his statement during the Cabinet of Ministers
meeting on Feb. 21. In Kubiv’s opinion, monetary tools – such as the key policy
rate, inflation target, and monetary aggregates – should be set up annually by
the Council on Financial Stability. “We shouldn’t build one or another institution
independent from the state, the government, the parliament,” he said. At
the same meeting, Kubiv also called for increasing the role of state-owned
banks in economic development.

Established by President Poroshenko in 2015, the
Council on Financial Stability includes the top representatives of the NBU,
MinFin, the National Security Commission, the Commission on Financial Services
and and the State Deposit Guarantee Fund. The council’s decisions are limited
to recommendations.

Evgeniya Akhtyrko: Kubiv’s
proposal contradicts Ukrainian commitments to the IMF, which did a lot to
secure greater institutional independence for the NBU in recent years. That
does not mean his statement can be ignored – some of his ill-conceived ideas
were implemented before. For instance, it was Kubiv’s idea to spin off the
natural gas production asset of Naftogaz in September 2017, a decision that
violated the covenants of Naftogaz to the EBRD and the government’s commitments
to its Western partners. Fortunately, Western pressure prompted the government to drop its decision. That said,
we believe that Kubiv’s proposal to limit the NBU’s independence won’t be
fulfilled for as long as Ukraine maintains its relations with the IMF and other
IFIs.

Kubiv’s position reflects a particular faction in
Ukrainian politics that favors a non-market approach to resolve economic
policy. Members of this faction, reflecting a certain post-Soviet mentality,
repeatedly attack the current NBU policy of keeping the key policy rate at what
they allege is a high level. In their
opinion, it is the central bank’s high interest rate, not high inflation, as
the primary factor preventing financial institutions from lowering their
interest rates for commercial loans.

Sharing such non-market approaches, the National
Bank’s Council (the NBU’s governing body that develops the fundamentals of the
monetary policy and controls its implementation) called for “the creation of
favorable conditions for restoring (banking) crediting in Ukraine” in
December. The idea is that financial institutions should generate low-interest
loans for big investment projects in the real economy. However, this approach
doesn’t explain how to compensate the losses financial institutions would
endure while originating loans with below-market interest rates.

In our view, there is no other way than to put that
burden on the state budget, either by interest rate compensation mechanisms or
recapitalization by the state. Even if implemented, cheap loans are not likely
to help launch big investment projects as real sector enterprises always
emphasize that it’s not the lack of borrowing but unreformed regulatory
environment and overwhelming corruption (especially in the court system) that
prevent them from going big.