Ukraine’s national bank governor talks targets

Q: The National Bank of Ukraine [NBU] introduced a floating exchange rate and inflation targeting in 2016. How happy are you with the transition?

A: The figures speak for themselves. We achieved very fast disinflation. Year-on-year consumer price index inflation dropped from 43.3% in December 2015 to 12.4% at the end of 2016, which means we hit our target for 2016 of 12% plus or minus three percentage points.

This is the result of proactive, forward-looking policy. In order to be able to target inflation, the NBU has conducted numerous reforms of the decision-making process, analytical support, monetary instruments and communication areas.

We were faced with a lot of doubt about whether inflation targeting and a floating exchange rate could really work in Ukraine. But there are no viable alternatives. The flexibility of our exchange rate helps the Ukrainian economy to accommodate shocks. And we have proven that this strategy works. 

Q: How important are ‘other monetary policy instruments’ as mentioned in your 2016-2020 guidelines? How frequently do you make use of them?

A: Our monetary policy relies on our key policy rate as the main instrument. Currently it is at 13%. Other monetary policy instruments have a supportive role and we try to only use them in exceptional cases. 

At this stage, we need to rely on foreign exchange [FX] intervention quite frequently to accumulate international reserves and smooth excessive volatility of the exchange rate. But we assume that the NBU’s role in the FX market will diminish in the coming years.

Q: Is fiscal policy supporting your inflation targeting approach sufficiently?

A: Last year we mostly avoided having to finance fiscal and quasi-fiscal needs by issuing money. Energy sector reforms in particular enabled the NBU to cease supporting Naftogaz. State-owned Oshchadbank and Ukreximbank were capitalised without the monetisation of bonds by the NBU.

An exception was made for PrivatBank after it became state owned. However, this did not have any significant impact on the inflation rate. The funds were used for provisioning and replenishing cash desks and cash points to ensure continuous customer service.

Furthermore, the NBU and Ministry of Finance continue to discuss the re-profiling of the NBU’s portfolio of domestic sovereign bonds, worth about Hrv383bn [$14.1bn]. The re-profiling operation would not only help to reduce the burden on the state budget through an extension of maturities and the debt service schedule on domestic sovereign bonds held by the NBU, but would also contribute to efforts by the Ministry of Finance to pursue a prudent fiscal policy consistent with the NBU’s inflation target.

The re-profiling would involve the conversion of the NBU-held domestic sovereign bonds into inflation-indexed hryvnia-denominated bonds with longer maturities, which would see the ministry repay the new liabilities to the NBU over a longer period of at least 30 years, but all of this is still currently under discussion. 

Q: How are you looking to raise your international reserves from $15.5bn at the end of 2016 to your 2017 target of $21.3bn?

A: In 2017 our international reserves will increase to $20.8bn thanks to continued active international co-operation. This year, Ukraine is expected to receive four tranches totalling about $5.4bn from the International Monetary Fund. In addition, we expect Ukraine to receive two last tranches of EU macro-financial assistance worth $1.3bn.

Also, we plan to continue replenishing our international reserves by buying foreign currency when there is excessive supply of foreign currency at the interbank FX market. Recently we had to revise down such plans to lessen the impact of the ban on trade with certain areas of Donetsk and Luhansk oblasts on the FX market.