Ukraine Pledges Bank Stimulus Amid IMF Loan Extension Talks
Ukraine is readying a monetary and fiscal push to spur lending as the country seeks to extend a frozen International Monetary Fund loan before it ends this year, central bank Governor Serhiy Arbuzov said.
The Natsionalnyi Bank Ukrainy and the Finance Ministry are considering measures including inexpensive refinancing for lenders to stimulate the economy, Arbuzov said in an interview in Tokyo, where he was attending the IMF’s annual meetings.
The economy grew 5.2 percent last year, is losing steam as Europe’s debt crisis curbs demand for its exports such as steel. Arbuzov said he met Ukraine’s 20 biggest banks on Oct. 9 and urged them to boost lending to industries including agriculture, infrastructure and mining. Ukrainians go to the polls in parliamentary elections this month.
“The banks that agree to cheap lending and that are participating in the national economy will receive refinancing,” he said Oct. 12. “We’re going to try to do that on an almost automatic basis. The banks that listened to me carefully will be able to profit from this, and very significantly.”
The hryvnia has has weakened 1.3 percent against the dollar this year and traded at 8.1430 per dollar at 12:58 p.m. in Kiev, compared with 8.1373 on Oct. 12.
Banks will be able to receive cheap refinancing from the central bank, even as interbank rates are climbing, while as much as 100 percent of companies’ loan interest payments may be subsidized by the Finance Ministry, Arbuzov said.
Ukraine is trying to restart a frozen $15.4 billion IMF loan. After talks with Ukrainian officials in the U.S., the Washington-based lender is sending technical missions to the former Soviet republic to discuss prolonging the credit, Arbuzov said.
“It’s possible we may reach some positive changes before the very end of the program,” he said. “Should we reach an agreement, the current program may be prolonged just after the elections.”
Ukraine turned to the IMF after its economy contracted almost 15 percent in 2009 following the collapse of Lehman Brothers Holdings Inc. Its bailout loan, the second in two years, has been on hold since March 2011 because the government refuses to raise household energy costs to trim the budget deficit.
The country would “definitely” prefer to extend the current program than begin talks on a new one, Arbuzov said. “We’ve fulfilled too many of the conditions of the current program to start talks over again from the beginning.”
Gross domestic product advanced 1.5 percent from a year earlier in the first eight months, Prime Minister Mykola Azarov said Sept. 19. Policy makers still have time to boost growth to 2 percent by the end of the year, Arbuzov said.
The current-account may end the year with a $7 billion deficit, though capital and financial inflows would be big enough to offset it, he said.
The IMF has urged Ukraine to allow a more flexible exchange rate for the hryvnia, which is pegged to the dollar. The central bank plans to implement a more liberal currency regime, Arbuzov said.
“We’re constantly moving toward that target,” he said. “I absolutely don’t think that the rate is fixed. It moves.”
Ukraine isn’t any closer to adding the ruble to its reserves, though the possibility still remains because of the country’s deep trade ties with Russia, Arbuzov said.
“We can’t add this currency to the reserves ourselves without reaching an understanding with the IMF,” he said. “They’re not against it, we just haven’t gotten that far in our talks and we haven’t received any recommendations from them. We still don’t entirely know to what extent the ruble’s volatility will benefit the Ukrainian economy.”
Policy makers are also hoping to convince the public to stop buying foreign currency to hedge against risks of a devaluation of the hryvnia, Arbuzov said. The Finance Ministry is offering dollar-denominated bonds to the public as an alternative to bank deposits, he said.
“Our main task, alongside the Finance Ministry, is to get the public to stop following exchange-rate policy and leave that to exporters and importers, the professionals,” he said. “The people of Ukraine, like the people of Europe, should be more worried about inflation, the cost of money, than on how the exchange rate is formed.”
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