Government Gives Orders – Will the National Bank Obey?

Recall that two years ago the previous Verkhovna Rada was also unable to approve the NBU balance for 1995. In June 1997 its report for two years, 1995-1996, came up for consideration. Then as now, the financial balance as such was of little concern to Parliament.

Change of Decorations

A strategic objective and the primary task of the central bank in any market-oriented financial system is to create the background for smooth work by commercial banks, financial institutions, businesses, and organizations. Naturally, this objective cannot be achieved without, first, maintaining balance of the financial system and a stable currency, and, secondly, reliable operation of the banking sector.

Accordingly, the 1997 National Bank Performance Report included data on the bank’s activities in the currency and stock markets, in regulating the banking system, emission policy, etc. It should be noted that the logic in Viktor Yushchenko’s presentation did not actually differ from last year’s. But the response by People’s Deputies to the NBU Governor’s report was now totally different. A year ago, two issues were of major importance to them: how and to whom the National Bank should report and when interest rates for loans to enterprises would fall. On its part, the National Bank did not mind the soonest possible establishment of its legal status, was concerned with banks’ lacking credit risk insurance funds, and poor protection of the banking system from unscrupulous borrowers.

One cannot say that in 1998 these problems have ceased to exist. But the background for the reception of the NBU report has changed.

The financial and political crises have drastically shifted the appraisals of the National Bank performance to the plane of personal complaints and categorical accusations. Hence, the contrasts: from searching for criminal underlying ideas in decisions adopted by the bank to demands for a no-confidence vote on all and everything. Even speeches “to the point” showed a surprising unanimity: should the hryvnia be stable or devaluated by 50%, should inflation grow by 10% for all 1997 or by 25% in the last few weeks, only the National Bank was to blame. In short, the very subject of the discussion in the session hall of the Verkhovna Rada, the NBU report, was apparently irrelevant.

However, the report is a very interesting and meaningful document. If all the parliamentarians, not only the profile Verhkovna Rada committee could appraise it professionally, they would discover quite a few interesting things. For instance, they would learn that the National Bank does not pursue its own monetary policy, but only keeps the monetary proportions adopted by the Cabinet and the Verkhovna Rada. What were the major macroeconomic trends to which the Bank responded with its monetary policy? These include the inflation index — 10.1% (adopted by Parliament); GDP dynamics (3% decline), which depends on fiscal and investment policies (determined by Parliament and the Cabinet), rather than the parameters of monetary policy; and the budget deficit (6.7% in 1997 and approved by Parliament). Since the adverse balance in 1998 was $5 billion, the country was objectively (and not because NBU malice) a pure importer of foreign capital and for current functioning needed a further increase in foreign financing. And whose fault is it that Ukraine imported more than exported, with the negative balance being kept at a level of $4.2 billion? Some people think that this resulted from establishing the hryvnia exchange rate too high. Now they say the rate was again devalued, but will the balance of payments become favorable? The country’s dependency on imports has already reached 44% of GDP, and the share of energy supplies accounts for 80% of total imports. Thus the balance is not likely to be favorable until Ukrainian goods become competitive, but domestic prices will grow for sure.

Also, information about the emission volume would become of some interest to the critics. The monetary policy viewed by the Deputies as too rigid, was in fact extremely soft (policy allocation was indeed rigid, but we will consider this later).

Thus, the money supply grew by 32% and production dropped by 3% in 1997. If the National Bank had followed a rigid policy, it would have been obliged either not to increase at all or to decrease the volume of money in circulation in proportion to the decline in production.

The NBU’s credit emission in 1997 was Hr 2.5 billion, of which 46% was spent to form hard currency reserves, 32% to buy securities, and 22% to maintain liquidity of the banking system. This was the general picture for 1997.

WHOSE BANK

IS THE NATIONAL BANK?

Since summer 1997, and especially in 1998 the NBU has, under Cabinet pressure, increased its share in government securities investment from 16% to 48%, and the emission to cover the budget deficit was 47%. In 1997, loans to the government made up 96% of its total credit emission. Thus, due to pressure from the executive the National Bank could direct only 4% of all emitted money into the living economy. According to Deputy Serhiy Teriokhin, this situation was caused by the government’s incompetence in tax collection, half-baked foreign and domestic borrowing policy, extraordinary budget deficit, limited financial market and, as a result, the need to cover the deficit through emission. Further, he summarizes: “formally in 1997-1998 the NBU was in the sphere of control by the President of Ukraine”.

Judge for yourself: government debt to the National Bank for the period of 1991-1995 is Hr 7.7 billion. Since the sources to cover the debt is still undetermined, and neither the NBU nor government has the funds to pay the debt, the bank is ready to accept writing-off the Hr 3.4 billion of unpaid interest, but proposes Parliament and the government settle the Hr 3.1 debt, restructuring it for a 20-year period. As of October 1, 1998 the government’s total debt increased to Hr 16.2 billion (of which Hr 8.6 billion or 75% of the total emission is associated with government bonds).

It should be noted that the government is a special NBU client. In 1998, the government several times was insolvent, and its debts were paid off by the NBU. Incidentally, the Russian crisis was, in fact, provoked by the refusal of the Russian Central Bank to pay government’s debts. Ukraine so far has managed to escape this lot. Is it good or bad? Dangerous! Last year NBU’s assets in hard currency halved, and assets in local currency were replenished by those of dubious quality. When some commercial bank is pursuing a too risky credit policy, NBU supervisors will snub it and even use the “rehabilitation” treatment. But the National Bank is not subject to rehabilitation, and it has no right to err. Since the National Bank is a national asset, it is not acceptable that it be held accountable in such a degree and, most important, in so legally undefined terms, for poor financial decisions by the government. What would the Parliament concerned with the destiny of the national heritage be supposed to do? Of course, adopt a law on the National Bank.