NBU must stimulate economic growth

The state is losing its ability to influence the economy. National Bank is turning into a borrower rather a lender. In the meantime, the country is degrading towards abysmal poverty
Date: June 15, 2017

Head of the Parliamentary Committee on Financial Policy and Banking, Radical Party

Imagine 10 billion hryvnias. To make it more visual, this can be compared to a huge 23-ton truck stuffed with 500 hryvnia banknotes. What could be done with this amount money?

As an option, one could build at least three modern buildings for the child hospital Ohmatdyt, even if we overestimate the costs of the contractors' services, or two modern sunflower oil processing plants with a processing capacity of up to one million ton of seeds per year. Finally, one could build a hundred new schools or 75 kilometers of autobahn quality roads.

I think those examples allow you to see that, in Ukraine's economy, there are quite a few decent causes 10 billion could be used for.

Now imagine that one day, National Bank takes these 10 billion hryvnias from the economy and deposits them. This money would no longer work and create new value, and National Bank would be paying interest to the banks for those billions.

This was exactly what happened on May 25, 2017: the regulator sold certificates of deposit worth 10 billion hryvnias to 46 banks with an 11% interest. Half of Ukrainian banks opted for securing passive income in the form of 11% interest payments from National Bank, instead of lending 10 billion hryvnias to the population.

And this is happening almost daily: the day before, NBU sold certificates of deposit worth 21 billion hryvnias. National Bank has been 'playing' with deposit certificates for several years now. The market experts and the members of the Parliamentary Committee on Financial Policy and Banking have more than once expressed concerns that this would not lead to good outcomes. The problem is not with the tool here, rather with the scale of its use.

Quantitative evaluation of such policy confirms that it has a direct destructive impact on the country's economy.

Certificates of deposit have become especially popular among banks starting from March 2015 when the interest rate reached 27%.

The scale of transactions made using this tool is unprecedented. Just as is the interest rate that National Bank has paid for using this resource. The amount of interest paid to the banks amounted to 17.8 billion hryvnias only in 2015-2016. To put it simply, NBU has 'printed' this money and passed it over to the banks, to have them keep their funds in its 'drawer'.

These funds could have been allocated towards supporting the banks experiencing temporary difficulties related to the financial crisis, lending to the corporate sector and stimulating economic growth. Instead, they were 'burnt', providing passive income for the banks.

Of course, certificates of deposit can be used as a tool to consolidate money supply and reduce pressure on the currency market. However, this is not the only tool for this and, for sure, not the right tool to use for such long periods of time and on such scale.

Despite the gradual reduction in the interest rates of certificates of deposit, the mechanism is still popular among the bankers.

In the context of the unstable process of economic recovery, when the banks are struggling to search for solvent borrowers, NBU has created artificial 'greenhouse' conditions for them. And now the banks, without risking anything, get their guaranteed income.

The amount of loans in the economy is going down. It is now back to the level of 2005-2006. Taking out such a huge amount of cash has complicated the process of economic recovery. If we keep relying solely on the world market for raw materials, Ukraine will continue on its path towards abysmal poverty.

Advocates of the policy defend it with a shocking argument: supposedly, the banks have no one to lend 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: "What have we done to create the right conditions?" At least conditions similar to those that once were created in Japan, South Korea or China. Do they plan on changing this policy? Obviously, this is not the case. From the analysis of the memorandum with IMF, the experts conclude: monetary policy may continue limiting economic growth.

The specialists from the Kyiv National Economic University reached a conclusion that in 2018, National Bank will become a borrower rather than a lender in the banking system. According to the forecast for 2018, the amount of banks' debt may reach a negative of 52 billion hryvnias.

This is the difference between the balance of NBU's certificates of deposit and the refinancing loans. To put it simply, the plan is to keep taking the funds out of the economy and have them stuck at National Bank instead, idle.

A significant number of experts, in particular, among the members of the Council of NBU, believe that stimulating exports and import substitution and, hence, overcoming deficit in the balance of payments against the backdrop of a weak investment climate requires gradual and intelligent use of expansionary monetary policy mechanisms through expanding structural refinancing for banks.

Here, I refer to the targeted cheap loans from NBU to the banks, to be given out for investment loans to the businesses. This monetary policy should be supported by the budget programs stimulating growth as part of the government's industrial policy.

I hope that the president will take these issues into account when choosing a candidate for the post of the governor of NBU and that, together with the National Bank officials, we will start to gradually transform the policy to stimulate the growth of Ukraine's economy.

It is critical for us to establish the most constructive cooperation possible with the government and National Bank, in order to find common ground, reconcile different viewpoints and produce a joint action plan.

These efforts must be reflected in the draft Monetary Policy Guidelines for 2018, the updated strategy for the development of the financial and banking sector, actions of NBU and specific bills that we will elaborate together. It is time to take action before it is too late, as we are swiftly approaching the precipice.

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