On poverty and a monkey with a pair of glasses

Despite the fact that the state has got all the tools necessary to ensure economic prosperity, unfortunately, we do not see any prosperity
Date: June 9, 2017

Despite the fact that the state has got all the tools necessary to ensure economic prosperity, unfortunately, we do not see any prosperity. One of the reasons is that in Ukraine, we are used to the argument "the state is a bad owner, let us sell everything". In reality, though, it is a little bit more complicated than that: the state can be compared to that monkey from the famous fable, that is just not aware of the power she is holding in her hands. International experience both from the West and the East confirms: the more (smart!) support the economy receives from the state, the faster its ascendance to the heights of the global economic rankings.

In Ukraine, industrial production is shrinking rapidly. The key reason is the virtual absence of proper market lending. All the growth supposedly demonstrated in the banks' statistics, according to the market players and experts, just represents refinancing of the loans previously given out or substituting the loans in foreign currency for the loans in hryvnia. The bankers, however, do not give out new loans. Real lending has been shrinking, including in the current year.

You would think that, at this point, it would be reasonable for the state to intervene and support the financial system, helping swing the pendulum. But this is not what is happening. I see at least four areas where work is necessary in order to improve the situation and get the country out of the abysmal poverty.

1. Managing toxic assets

We should, to the extent of our ability, help the banks reduce the share of non-performing loans. Unless we do this, we should not even be dreaming of effective economic growth. "The crazy purge" did not help. The share of non-performing loans, according to NBU´s official data, has reached over 55%. It is great that the Ministry of Finance is proposing to start working with the toxic assets of the state-owned banks but we have to help all financial institutions. Unfortunately, the law on financial restructuring passed recently is not enough.

It is great that the Ministry of Finance is now searching for other mechanisms and is actually going to apply international experience for the creation of a toxic assets management agency. But it is worth mentioning that in early 2015, at the height of the crisis, we organized parliamentary hearings and proposed using this tool back then. The price we will pay for the time lost could be more bank failures and additional multi-billion budget expenditures.

2. The state-owned banks as a tool for reform

The fact that more than a half of the banking system is now in the hands of the state can help speed up reforms. The Ministry of Finance together with National Bank of Ukraine now enjoy an unprecedented influence on banks. With a coordinated policy, within a transition period of 2-3 years, they could stimulate the population´s returning money to the banks, achieve a significant increase in the share of the cashless payments and gradually reduce interest rates. But not through prohibitions and pressure, but by introducing smart incentives and convenient services.

Positive leadership experience of PrivatBank and some successes of Oschadbank will be of great use. Further advance Privat24, increase accessibility of the payment terminals, expand the Kyiv resident card idea to develop other convenient solutions with the banks providing certain administrative services.

It has to become easy and convenient for the people to even declare income and pay taxes through a bank. All this could be organized by the Ministry of Finance in cooperation with the tax administration, the customs, and other government agencies. Take into account the Estonian experience. Private banks will have to follow the state-owned banks' leadership.

Also, using the state-owned banks, we can significantly reduce the cost of cashless transactions. It should be profitable for people to go cashless. With the reduction of the tax burden and other reforms, we could get a significant part of the economy to come out of the shadows.

3. The state-owned banks as a tool for development

We support the goal to improve corporate governance at the state-owned banks. But this tool, without properly setting the goal, will not yield any results.

A huge group of Ukrainian and foreign experts including the Japanese expert Masaru Tanaku, adviser at the Ministry of Finance believes that in the future, the state-owned banks should not be competing with the private banks. They should transform instead into effective tools for achieving long-term national goals.

As the depth of our crises and the poverty of Ukrainians is grounded in the technological degradation of the national economy. We export more and more cheap raw materials - coal, unprocessed timber, simple chemical products and metal.

Without systemic, long-term efforts of the state, we will not be able to compete in our own market even with the Chinese manufacturers of shovels or plastic canning lids. I am not even talking about the plans for expansion in the world markets for our machinery or complicated electronics exporters. We have to ensure at least partial state support that all our competitors enjoy from their governments.

So, the key strategic reason for the existence of the state-owned banks should be stimulating economic growth and transforming the structure of the economy through cheap loans to Ukrainian enterprises with sufficient level of technology and added value.

4. Monetary policy: it is time we got rid of deposit certificates

The scale of operations with National Bank deposit certificates has some abysmal consequences for the economy. The gradual reduction in interest rates should not calm us down. These still demotivate banks from lending to the real sector. Compared to the inflation rates and the price of the funds that the banks can obtain in the market, these interest rates remain quite high.

The volumes of deposit certificate transactions, still unnaturally high and significantly higher than the volumes of new loans, confirm that. For instance, in just one day, on May 25 of this year, NBU sold to the banks an equivalent of 10 billion hryvnias in deposit certificates. 46 banks took part in these transactions, which is a half of the surviving banking institutions.

Advocates of the policy present a ´strong´ argument in its defense. Supposedly, the banks have no one to provide loans to. Such a position could be expected from the bankers, but not from the state actors that NBU management and representatives of the Government supposedly are. In response, I have to ask the following question: "And what have we done to create the right conditions?" At least the conditions similar to those that once were created in Japan, South Korea or China?

From the analysis of the memorandum with IMF, the experts conclude: monetary policy may further be limiting economic growth.

Considerable number of specialists, including those among the Council of NBU, believe that in order to stimulate exports and import substitution and hence, overcome the deficit in the balance of payments against the backdrop of a weak investment climate, it is necessary to gradually and intelligently use the mechanisms of the monetary expansion through increasing the volumes of structured refinancing for banks.

To put it simply, we are talking about targeted provision by NBU of cheap loans to the banks for investment loans to the businesses. Such monetary policy must be supported by the budget programs designed to stimulate growth as part of the government industrial policy.

Fiscal policy also has to incentivize our high value-added exporters, as well as import substitution and development of the real sector in the territory of Ukraine. Those should be the ones to benefit from the liberalization, and not those siphoning capital from Ukraine. As they used to joke once about China: there is no way one can get the money out, unless they are in the form of Chinese manufactured goods.

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It is crucially important for all of us – the parliament, the government, the new management of NBU - to cooperate in the most constructive manner possible and find common ground, unite diverse thoughts and elaborate a common action plan to get the country out of the abysmal poverty. Our common efforts have to be reflected in the draft Monetary Policy Guidelines for 2018, the updated development strategy for the financial and banking sector, daily actions of NBU and, if necessary, in the specific bills that we will elaborate together. The Committee is ready to provide a platform for this professional discussion.


Source: obozrevatel.com
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