VoxUkraine experts believe temporary return to administrative regulation of currency transactions by NBU appropriate
A group of economists VoxUkraine believe that the return of the National Bank of Ukraine (NBU) to administrative regulation of transactions with foreign currency is appropriate.
According to a posting on the group's website, the primary reasons driving the observed collapse were (i) a strong confidence crisis, reinforced by the ongoing Russo-Ukrainian conflict in eastern Ukraine, lack of external financing and weak financial sector, and (ii) a critically low level of international reserves, precluding the NBU from any meaningful, credible intervention to stabilize the foreign exchange market.
"The announcement of a staff-level agreement with the IMF on a new $17.5 billion Extended Fund Facility (EFF) program, coupled with IMF Managing Director’s statement that the total package of external support to Ukraine would total $40 billion over the next four years, failed to strengthen market confidence. The potentially calming effect of the program was overpowered by the panic associated with cease-fire negotiations and military escalation in Debaltseve," reads the report.
The key date here is March 5th, when the IMF Executive Board will likely decide the fate of the new program. Since the program is frontloaded, the first tranche will be available immediately and will amount to $5 billion, helping shore up reserves and allowing the NBU to credibly intervene at the time of stress.
On the demand side, because squeezing hryvnia liquidity for several weeks might prove to be too costly, the NBU can therefore (i) re-introduce a range of temporary administrative measures and (ii) greatly expand its communication of all aspects of the EFF program once it’s approved and available to public.
"Obviously, any solution to the problem should aim at containing demand and increasing supply of foreign exchange," reads the report.
The temporary administrative measures might include prohibition of advance import payments, uniform verification and approval of all import contracts, above some low threshold, by the tax authorities and the NBU staff with, e.g., a one-week delay, introduction of a “critical imports” list and the power to reject claims for foreign exchange outside the list.
On the capital account side, the measures may include the freeze of any new lending in foreign currency to residents and non-residents, temporary moratorium on a range of payments to non-residents related to transfers of principal and interest due, payments of fees and commissions, transfers of dividends to foreign partners in domestic joint ventures, temporary restrictions on direct investment abroad for already approved individual licenses.
