Ukraine central bank promises to tighten monetary policy in the absence of IMF tranche

The National Bank of Ukraine (NBU) will resort to
tightening monetary policy and capping foreign currency operations in case Ukraine
fails to secure the next IMF loan tranche, NBU Governor Yakiv Smoliy told a
conference involving the central banks of Ukraine and Poland on May 31, as
cited by Interfax-Ukraine. An absence of IMF financing will result in growing
inflationary pressure, he said, and additional monetary policy actions will be
needed in order to curb it. Another option in this event is borrowing via
Eurobond placements, Smoliy said. “These will be somewhat more expensive loans
than previous ones … but this is definitely possible,” he said.

Evgeniya Akhtyrko: This is the
latest NBU warning regarding the possibility of Ukraine being left without IMF
financing this year. Recall, Ukraine’s parliament failed last week
to adopt the anti-corruption court legislation
that is needed to secure the critical next IMF loan tranche.

However, we remain optimistic
that the government will take the necessary steps to secure the loan tranche in
the following weeks, including approving the anti-corruption court legislation
that meets international standards. We also expect the current conflict between
PM Groysman and Finance Minister Danyliuk will be resolved.

In the event that everything falls apart, we expect
Ukraine will encounter much difficulty borrowing on the external markets,
contrary to the confidence expressed by Smoliy. Failing to secure the IMF
tranche will have many negative ripples, among them Ukraine’s ongoing
perception among foreign investors as a risky market that is failing to reform
and modernize itself.