The writer is governor of the National Bank of Ukraine
Six months ago, Ukraine woke up to the reality of a full-scale war being waged against it. We have been forced to fight the enemy on two fronts at once — in the battle zones and in finance — so that we can secure the resources to fight until we win.
Survival and victory require Ukraine to have a strong economic backbone and a reliable financial system. Thanks to tremendous efforts, we have managed to ensure the stable operation of the banking system. Customer payments are being made without interruption. We have prevented deposit outflows. In fact, hryvnia retail deposits have risen by 31.7 per cent, equivalent to almost $3.7bn, since the outbreak of hostilities. Lending to strategically important sectors continues. The hryvnia corporate loan portfolio has expanded by 6.5 per cent or nearly $1bn.
In addition, we have avoided monetary destabilisation. In August, year-on-year inflation in Ukraine stood at 23.8 per cent. Other countries have had far worse inflation during or immediately after a war. Think of Germany after the first world war, South Korea in the early 1950s or Serbia in the early 1990s. Taking into account the global trend of accelerating inflation, Ukraine’s rate of price growth can be considered an achievement.
Yet it is too early to relax. Ukraine has benefited from a safety margin accumulated before the war. However, international reserves have shrunk by almost 18 per cent since the beginning of the year. These have allowed us to bolster the economy, but they will not last long if we continue to burn through them.
As winter draws near, it is time for the state’s economic policy priorities to shift in a way that can accommodate a protracted war effort. This requires effective redistribution of domestic resources and strong financial support from abroad.
After years of pursuing a balanced fiscal policy and implementing reforms in monetary policy and finance, Ukraine faces a huge wartime budget deficit. This is inevitable for a country fighting a defensive war. To cover the gap, the government needs at least $5bn a month in funding, according to the finance ministry. By the end of 2022, the deficit may reach 25 per cent of gross domestic product, excluding international grants. History suggests there are limited ways to finance state expenditure in a war. National economic stability depends on how successfully the authorities combine these limited methods.
A simple solution would be for the central bank to issue money. But this would erode household savings, deepen crisis trends in the economy, fuel inflation and undermine social stability. Modern European history is full of lessons of the dire political consequences that can follow.
As an EU membership candidate, Ukraine knows that such action would hobble its prospects. The EU’s founding treaty expressly prohibits national central banks from financing their governments. Ukraine needs other sources of financial support for its economy.
What are they? First, Ukraine should revitalise domestic borrowing by issuing government debt on market-driven terms. The purpose is to shift the burden of financing the deficit to postwar times. However, this process should be structured so as to prevent public debt from continuing to rise in peacetime. Second, Ukraine should curtail the deficit by slashing non-priority expenditures and raising taxes. And third, international financial support for Ukraine should increase.
Russia’s strategic goal is to undermine Ukraine’s economic resilience. Financial assistance from our partners is therefore almost as important as military support. They have already provided Ukraine with more than $17bn in aid. We expect another $12bn by the year’s end.
The launch of a new co-operation programme with the IMF will send an important signal to creditors. The IMF has always stood by Ukraine in times of crisis. A four-year programme worth $17.5bn was set up in 2015 after the Russian occupation of part of Ukraine. This IMF support was part of a package of about $40bn in international financial aid for Ukraine.
Coupled with powerful sanctions against Russia, a similar assistance programme will help Ukraine endure and thwart the aggressor’s ability to bankroll its war machine. What is more, we believe the free world’s weak response to Russia’s annexation of Crimea and military aggression against Ukraine in 2014–2015 encouraged this year’s full-scale invasion.
Had the global community introduced an adequate sanctions package in 2015, this war might never have broken out and our current and future losses would not be so huge.
