Because of what the regulator refused to print the hryvnia, will the country be able to cover the budget deficit without issuing and what other sources of funding are there.
The regulator decided to stop printing new banknotes to cover the budget deficit. What prompted the NBU to make such a decision, and where will the government get the money to finance the country’s needs?
Coverage of budget expenses without emission
The NBU decided to abandon the “printing press” this year.
“The National Bank will no longer resort to “dangerous” money printing to finance government spending in cash,” said Andriy Pyshny, head of the NBU.
This practice created huge risks for macro-financial stability, he said, when last year Ukraine was forced to print billions of hryvnias, for which the NBU bought government bonds from the Ministry of Finance. It was a quick cure, but very dangerous.
Oleksandr Okhrimenko, President of the Ukrainian Think Tank, explains that issuance speeds up inflation because it leads to a lot of empty money in circulation.
The head of the NBU said that the decision to stop printing money to cover state expenses caused a direct conflict with the Ukrainian government. However, it was exhausted, and the parties managed to come to an understanding.
“The NBU and the Cabinet of Ministers have agreed that the regulator will no longer cover the budget deficit by buying back government bonds (domestic government bonds). The Cabinet will more actively resort to loans in the market, raising rates, if necessary. The NBU will work on withdrawing excess hryvnia from the market in order to reduce inflation,” explains Ivan Nikitchenko, director of Crane IP Law Firm.
It should be noted that in fact the course towards the rejection of the “printing press” was taken back in January of this year. It was then that the NBU for the first time during Russia’s full-scale invasion of Ukraine did not launch a “printing press”. So since then, the state budget has been replenished without issuing the hryvnia.
Recall that the NBU spent the entire last war year issuing hryvnia. In the first months of a full-scale invasion – in large volumes, in the summer and beyond – in much smaller quantities. All this time, the regulator noted that monetization was not able to solve the problems of the economy and the budget, but the government continued to rely on the issue of money from the NBU, which gradually became the main source of financing the budget deficit.
Oleksandr Boltyan, an analyst at Esperio, says that last year the country’s financial sector got into a stressful situation, the safest way out of which was to fix the official dollar rate and issue the hryvnia. Otherwise, the devaluation of the national currency and inflation would be uncontrollable and catastrophic. The reaction of the NBU and the authorities to the beginning of the war was lightning-fast and commendable. It can be seen that the government was preparing for a negative scenario for the development of relations with Russia.
Now, according to the expert, we can say that everyone has adapted to what is happening. Now it is easier to calculate the risks from issuance, the demand for foreign currency in the country has become clear, and thanks to the constant relatively regulated financial support from the West, we can achieve budget sufficiency.
That is, it turns out that last year the risk of devaluation and a sharp increase in inflation in the country without printing money was higher than under the scenario chosen by the government.
Now the reason for the cessation of printing money is that already in January the budget was filled without emission.
IMF requirement or own desire?
Some experts believe that the NBU refused to print an additional hryvnia at the request of the IMF, others that this is the regulator’s own rate.
Recall that among the requirements of the IMF to open a new multi-year financing program is the rejection of emission financing (“printing press”). To fulfill this requirement, the fund has allocated 12-18 months.
Nikitchenko says that, most likely, the moment of emission financing of the budget was discussed at negotiations with the IMF. The objective of the Fund is to support macroeconomic stability in the country, and excessive emission always leads to an acceleration of inflation, that is, it runs counter to the tasks of the Fund.
Since Ukraine and the IMF are close to concluding the program, the Cabinet of Ministers will receive an additional source of funding and hopes to pass in 2023 without a strong need to raise money in the hryvnia market.
In turn, Boltyan believes that relations between Ukraine and the IMF in this case play the least role. In his opinion, the fund has repeatedly demonstrated its unwillingness to support our country in recent years, and the conditions that were put forward this year imply continued funding no earlier than 2024. Therefore, it is unlikely that Ukraine, in the presence of other financial flows, is guided by the terms of cooperation with the IMF. This means that the rejection of the “printing press” is the NBU’s own course.
Interestingly, at the request of the IMF, the NBU also plans to return to a floating rate.
The head of the NBU shared the strategy of the national regulator for the future.
“The goal now is to absorb excess liquidity by raising reserve requirements for banks and gradually returning to a floating exchange rate,” he said.
Among the recommendations of the IMF to the NBU, according to Okhrimenko, there are also: checking banks for the presence of problem loans, the requirement to increase the capital of a financial institution if it has a lot of problem loans, improving financial monitoring control, preventing excessive liquidity of the banking system and at the same time abandoning the containment of lending.
Can we manage without emissions?
The opinions of experts as to whether Ukraine will cope with the budget deficit without issuing the hryvnia are also divided.
So, Okhrimenko believes that it is impossible to do without the issue of the hryvnia while the war continues, otherwise there will be no funds to finance the army. Without the issue of power, there will not even be any way to pay salaries to the military, not to mention other expenses for the war.
Also, without emission, the risk of delays in payments to state employees increases, it is possible to refuse indexation of pensions and benefits for low-income segments of the population.
Boltyan says that if we talk about the threat of delaying payments to state employees, then it always exists, and it’s not just about emission. The main reason is that if the intensity of hostilities is intensified, then it will be necessary to immediately revise budget expenditures in the direction of increasing the share for defense activities, and then any payments in the country will be reduced.
Recall that last year the total amount of expenditures from the state budget amounted to 2.227 trillion. UAH We are talking about the financing of wages, the purchase of goods and services, as well as social support for citizens, debt servicing.
In turn, Okhrimenko believes that whether the NBU will issue the issue or not depends on whether the US and the EU will provide us with the funds that they promised. If yes, then the emission will not be needed. If money is not given or given, but in a smaller volume, there will definitely be an emission.
According to Boltyan, according to optimistic forecasts, without worsening the military situation in Ukraine, we will continue to cope with the budget plan without issuing the hryvnia, and our Western partners will help us with this.
Victoria Hadjiradeva
