When Yakiv Smolii was named governor of the National Bank of Ukraine, the country’s central bank, in March 2018, he unequivocally confirmed his commitment to continue the path of reforms while maintaining the entity’s independence. Having served at the bank since 2014, he has been instrumental in securing the country’s macroeconomic stability and strengthening the financial system since the revolution of dignity. Here, he explains the bank’s priorities and its strategy to achieve them
What will be the key factors in achieving economic growth over the next year?
According to our forecasts, GDP will increase by approximately 3.4 percent this year, and this will be largely due to the increase in private consumption, which will increase by more than 5 percent this year. This is a result of the constant and moderate increase of private income, which has come about because of new social standards introduced by the government and increased income from private businesses.
The main industries that will contribute to economic growth are the agriculture and metal sectors. We also expect that agriculture will increase more actively than other industries. Moreover, this year’s state budget foresees a great amount of public expenditure and investments in infrastructure, namely in the construction of roads, and we think that this will also contribute to the development of the construction industry. However, private consumption remains the main factor for the economic growth.
What are your main priorities?
My number one priority is to continue to build a great, effective and stable banking system that will aid the economic development of the country. How is this going to be achieved? First of all, we will focus on seven strategic targets: low and stable inflation, a stable, transparent and effective banking system, the restart of lending, effective financial market regulation, free movement of capital, financial inclusion, and the creation of a modern, independent and effective central bank. We designed this strategy together by analyzing the banking industry’s needs, the needs of the financial sector and the current and emerging trends in the financial system. However, one of the preconditions of the successful implementation of our strategy is the institutional independence of the National Bank of Ukraine. Our strategy sets out not only the targets we want to achieve but also the criteria.
What is the National Bank’s policy approach to capitalizing on positive external factors?
We consider the main priority of the state to be the continuation of cooperation with the IMF, both within the effective program, as well as in all future contracts or programs that will be signed between the IMF and Ukraine. The continuation of our cooperation with the IMF is an inevitable factor for Ukraine in order to continue our reforms. The National Bank of Ukraine has changed its monetary policy and shifted to a floating exchange rate, as well as our inflation targeting activities, and we consider that these factors contribute greatly to the sustainable development of Ukraine’s economy.
Our monetary policy at the moment is aimed at maintaining financial stability. The National Bank of Ukraine also works very hard on maintaining its FX reserves, and we are an active player in the Ukrainian FX market, where we purchase FX and direct it to our reserves. The National Bank of Ukraine is not a proper legislator, nevertheless, it is present within the legislative process, and we have recently introduced our approach towards a new FX regime that will be built with the new law on currency adopted by the Parliament this June. It will change the previous regime which was almost 25 years old and no longer suitable. The newly adopted law that we developed and introduced is based on the principle that everything is allowed except for some minor restrictions, unlike the previous system that says that everything is banned except for that which is directly permitted by the National Bank of Ukraine. We think that by changing the approach and philosophy of the currency market, we will contribute greatly towards the development of the business climate and the development of the economy in general.
The National Bank of Ukraine is responsible for further FX liberalization. During the crisis of 2014-2015, we had to introduce a number of restrictions, which we are gradually removing, but this largely depends on the presence of necessary macroeconomic preconditions. As soon as all of the macroeconomic preconditions are met, all of the restrictions will be lifted. However, as laid out in our strategy, our primary aim is to establish the free movement of capital. When we succeed in our FX liberalization objectives, no restrictions will exist for foreign investors, and we think that this will boost both the investments and the interest in investing in Ukraine.
How would you appraise the strength of Ukraine’s banking sector, and how prepared are Ukraine’s banks to meet international requirements, such as the adoption of the IFRS 9 Financial Instruments requirements?
In 2017, we completed the asset quality and capital requirement review for the banking system. As of 1 January 2018, the banking system is properly capitalized. Our capital adequacy ratio at the moment exceeds 18 percent, versus the normative ratio of 10 percent. That means that our banking sector is more stable than foreseen by the standards applied. We have taken a decision to conduct stress testing of the banking system annually in order to track the situation and have it under our control. We think that when our reforms are implemented, the banks will be stable enough to face any crisis at each moment of their existence.
The steps we have taken have already contributed to an increase of public trust in the banking system, and have led to banks becoming profitable. The banks that are currently operating have booked profits of 8 billion hryvnias for the first quarter of 2018. The increase of our credit portfolio and deposit portfolio is ongoing. With regard to IFRS 9 and its implementation, our banking system has shifted to the new standard from 1 January 2018, and we have not witnessed any considerable effect on banking performance or operational effectiveness.
The bank also acts as a regulator for the country’s financial sector. How does the bank protect financial consumers and investors?
At the moment, the National Bank of Ukraine only regulates the banking sector. With regard to nonbanking financial institutions, we only issue licenses to provide services related to the conduct of currency operations and money transfers without opening an account. The financial sector is regulated by a separate state authority, the Financial Services Commission. However, since June 2015, a draft law has been in parliament which foresees a split of this commission to divide its functions between the National Bank of Ukraine and the National Securities Commission. Once this law becomes effective, the National Bank of Ukraine will supervise financial institutions, namely insurance companies, credit unions, and bureaux de change. Another draft law on financial services consumer rights protection will, if it is passed by parliament, see the National Bank of Ukraine become the authority responsible for consumer protection.
Last year, the bank started working on a blockchain-based system, in order to create a cashless economy. What can you tell us about the efforts of the Bank to establish an e-hryvnia solution?
The cashless economy project is one of our top priorities. This project is aimed at tackling the shortage of cash in circulation. This is the area where new technologies can play a great role for the advantage and the benefit of all the stakeholders in Ukraine. The National Bank of Ukraine is very interested in all the financial technologies that are emerging at the moment globally, and blockchain is one of them. Ukraine holds one of the leading places in the world IT industry ranking, and the implementation and the application of financial technologies, namely blockchain will also play a great role in the outlook of our financial system.
Regarding the e-hryvnia, we have been working on this project for over a year. The e-hryvnia is going to become the substitute for fiat currency and will be exchanged both for cash and cashless money on a one-to-one ratio. It will basically be the analog of cash but in digital form. We remain very cautious with the rollout of this project, because we believe its success will influence the microeconomics and the liquidity of the banking system in general. We are also working very closely with other central banks that are involved in the development of digital currencies. We are still in a pilot mode, and as soon as the pilot is finished, we will consider the implementation of this project and its rollout.
What would you like to achieve this year, and what do you see as the biggest opportunities for the National Bank today?
My number one priority is to control inflation. At the moment our key policy rate is 18%, which is very high, but we think that this is an appropriate instrument in order to control inflation. Other goals I consider as my priorities include to restart lending and to achieve FX liberalization. However, lending may not be restarted without a solution to the problem of non-performing loans (NPLs) that at the moment exceed 56 percent of the credit portfolio of Ukrainian banks. Without a solution to this problem, active lending to the Ukrainian economy is impossible. We jointly, all stakeholders in Ukraine, should contribute to the restart of lending by lowering the risks of the lenders. Laws have been adopted on lifting the moratorium for collateral, on bankruptcy, as well as on amendments to the tax code regarding credit operations. Infrastructure for NPL operation has to be introduced, and the corresponding draft law has been developed and has been submitted to parliament. When these problems are solved and the necessary macroeconomic conditions are in place, we can expect an increase of credit and a burst of economic growth in Ukraine.
What should international investors know about Ukraine as an investment destination?
The top priority for the foreign investor is to understand that they may direct their investments to Ukraine, and these investments are protected and will produce a return in the expected timeframe that can be safely moved both into and out of Ukraine according to our free capital movement regime. These are the things we’re going to safeguard, and we want investors to know that we are on their side.