I was saddened to read that, according to Stepan Kubiv, first deputy prime minister of Ukraine, the Ukrainian government wishes to limit central bank independence. At a time when the country needs more checks and balances on the actions of its politicians, there is a real threat that they will, in fact, be reduced. The debate between central bankers and politicians is a recurrent global theme, but Ukraine’s current economic environment makes it a particularly crass place to have it. Even when the debate has taken place in developed countries such as the United States (I think particularly about Paul Volcker, chairman of the Federal Reserve under the Carter and Reagan administrations and Alan Greenspan when he was chairman under Bush Sr.), I wholeheartedly side with the central bankers.
It is worth noting that Kubiv governed the National Bank of Ukraine for a short, sharp four months in 2014 when he gave Hr 68 billion hryvnia of refinancing to visibly collapsing banks without any serious oversight. Needless to say, many of those banks – Delta Bank, PrivatBank, VAB Bank, Kievska Rus, Ukrkomunbank, Financial Initiative, Zlatobank, BG Bank, VBR, Cambio, Eurogazbank, Finance and Credit, Fortuna, Diamant Bank, Porto-Franco, Sofiyskiy, AKB, UPB, Petrokommerts, PtB, Aktiv Bank, Terra Bank, and Unison – (to name a couple) have collapsed and more of the nation’s money was squirreled away offshore.
Rapid and unpredictable inflation is possibly the gravest near-term risk to the wealth of Ukrainians. Letting the Ukrainian government take decisions over money supply and interest rates would probably lead to money printing, lower interest rates and…rapid and totally unpredictable inflation. As we move into an environment of monetary tightening in developed nations the effect of looser monetary policy in Ukraine would be amplified and the effect disastrous. The monetary policy of the National Bank of Ukraine since 2015 has been a highlight in Ukraine’s recovery and a vital driver of the economy’s stabilization.
Right now, more than ever, the National Bank of Ukraine needs to continue to build on its credibility. Dovish monetary policy is only a reality for Ukraine if two conditions exist side by side. Firstly, the global business cycle does not come to an end as interest rates normalize and, secondly, foreign capital returns to Ukraine. The National Bank of Ukraine cannot influence the first condition and can only lay the foundations for the second through sound monetary policy.
The government would, therefore, be better leaving the National Bank of Ukraine alone and spending its time working out how to increase its checks and balances rather than decreasing them. Without them, the second condition will never be met as investors turn their attention elsewhere. Such checks and balances come in the form of a real anti-corruption drive with properly resourced law enforcement that can pursue corrupt politicians and their stolen assets across the globe and a push for competition to rid the economy of rent seekers and monopolists. It is time for the Ukrainian government to stop rearranging the deck chairs and decisively grab the helm.
