Zelensky criticizes NBU for strong hryvnia exchange rate

Ukrainian President Zelensky expressed his annoyance
that Ukraine’s local currency was not devalued during 2H19 and 1H20 at a
meeting with local businessmen in Chernivtsi on July 8, the liga.net news site
reported. “It is true that enterprises failed to receive millions due to the
strong hryvnia and had to be closed. We have been fighting with that from the
beginning of my term, from the summer (of 2019),” the president said. “Everyone
around us said we have an independent bank. Yes, and we support the
independence of the NBU. But we told everyone, ‘How are we supposed to live if
our budget is even based on an exchange rate of UAH 30/USD?’ … We were told
that these are market conditions, the bank is independent, etc.”

Recall, Ukraine’s updated 2020 state budget is based on
an assumption of an average UAH/USD rate of 29.5, while in 1H20, the average
rate was 26.0, or 13% stronger. Due to the stronger hryvnia, Ukraine’s budget
revenue from imported goods (duties and VAT) in local currency is
underperforming (1H20 customs collections are 21.4% below plan).

In other news, Ukraine’s Security Service (SBU) issued
a July 8 statement calling upon the NBU’s former top managers “to refrain from
ambiguous comments and take care of Ukraine’s national interests.” It deemed
unacceptable former governor Valeria Gontareva’s “calls for the IMF to freeze
cooperation with Ukraine in the event NBU independence is lost and even
consider demanding the repayment of previous loans”. Gontareva, who lives in
the U.K. now, spoke to the centralbanking.com news site on July 6, and her
comments were cited by Ukrainain media on July 8. The IMF’s tranches “were
issued under the agreement that there would be central bank independence and
economic reform,” Gontareva told centralbanking.com. “If those conditions are
no longer effective, the IMF should say Ukraine must pay its aid back,” she
added.

Recall, former NBU Governor Yakiv Smoliy submitted on
July 1 a resignation letter complaining about political pressure.
In two days, Ukraine’s parliament dismissed Smoliy. On June 9, the IMF approved a new SBA
loan program with Ukraine and disbursed the first tranche, worth USD 2.1 bln,
under the program. Commenting on the program’s initiation, the IMF stressed
three times in its press release on the necessity to preserve the institutional
independence of the NBU.

Alexander Paraschiy: Among the key
demands of the president and several ministers of the NBU – expressed publicly
in recent month – are to increase inflation (from 1.7% yoy in May up to 9%, as
planned by the budget for end-2020), to weaken the hryvnia, to cut further the
key policy rate, and to initiate quantitative easing. Under the governance of
Smoliy, the NBU rejected most of such demands, and this affected negatively the
performance of the state budget. Now the president has the chance to appoint an
NBU governor who will be “more cooperative” so that the NBU’s policy will
change from targeting inflation in the 4%-6% range to targeting higher
inflation and weaker currency, in line with what the cabinet has “forecasted.”
In the mid-term, such a review of targets could lead to large imbalances,
including high inflation and currency shocks. At minimum, such risks make
Ukraine’s local currency bonds unattractive to investors right now.

The SBU’s comments on Gontareva might look funny to
international observers, but they are yet the latest source of concern for us.
For instance, the SBU could draw its attention to this very news analysis
(provided somebody translates it into Ukrainian or Russian) and “warn” us
that our comment on local bonds, in the previous paragraph,  threatens
Ukraine’s financial stability. Such “warnings” by a law enforcement
body, overstepping its bounds in a democratic society, weren’t made in Ukraine
even under the Yanukovych administration, known for its autocracy.