The last eighteen months of pandemic disruption has been a time of transition for the whole world that has also brought rapid changes in financial ecosystems. The Ukrainian banking sector is now adjusting to this new reality, as well as the entire Ukrainian business community.
Undoubtedly, the main factor determining the future development of Ukraine is the path towards further European integration. Ukraine chose this path in 2014 when it signed an association agreement with the EU.
Among other things, this Association Agreement provides for the implementation of EU regulations on the Ukrainian financial market. This process is long and difficult, but we remain committed to moving forward, no matter how many obstacles we encounter.
Integration into the EU is at the heart of the updated strategy of the National Bank of Ukraine until 2025, which identifies three priorities and 12 strategic objectives.
The first priority is the promotion of economic recovery and development, which includes initiatives aimed at maintaining macro-financial stability, restoring lending to the economy and developing the financial services market as well as the capital market infrastructure. .
Priority number two is the development of digital finance as a driving force for the further digitization of the Ukrainian economy. We will continue to promote an innovative and cashless economy, increase financial inclusion and ensure that the financial sector is protected from cyber attacks.
The third priority is institutional development and operational excellence, which involves strengthening the institutional capacity and independence of the NBU, implementing the digital transformation of the central bank and promoting green policies at the support for sustainable development.
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One of the key foundations of sustainable development is macro-financial stability, which lays the foundation for all other changes identified in the NBU strategy. To ensure this stability, we commit to keeping inflation within its target range of one percentage point above or below 5% over the medium term.
Inflation recently exceeded its target range, reaching 9.5% in May 2021. What is behind this increase? This reflects the fact that the Ukrainian economy is recovering.
It’s good news. However, this recovery has accelerated the growth of consumer prices, both in Ukraine and among the country’s main trading partners. Rising global food and energy prices, the recovery of the global economy, the effects of poorer harvests, and continued growth in consumer demand through higher wages are all driving up prices. .
To counter this trend, we raised our key rate from 6% to 7.5%. Central banks still face a trade-off between restrictive monetary policy and economic development. On the one hand, raising the key rate slows down inflation, but on the other hand, it increases the cost of credit. The priority today is to bring inflation under control. It is important to understand that if inflation got out of hand, cheap loans would no longer be available, as banks always include inflation in their interest rates.
We expect that over the next few months, inflation will start to decline and reach 8% by the end of the year. In the first half of 2022, it will fall within its target range. This will ensure that the interest rates on the loans are low in the long run.
Another good news is that the banking sector has remained strong. In the first quarter of 2021, 66 of the 73 creditworthy Ukrainian banks were profitable, while others suffered losses of only 0.1 billion UAH. Meanwhile, hryvnia deposits increased for the second year in a row. This is proof that public confidence in the Ukrainian banking system and in the national currency is currently high.
Banks are gradually accumulating resources that can be used for loans. In the first 5 months of 2021, the business loan portfolio grew by 1.3% to reach UAH 747.2 billion (USD 27.2 billion as of June 1).
In order to strengthen the role of the Ukrainian banking sector in financing the national economy, the share of public banks should be reduced. In the EU, for example, public banks rarely play a key role in the financial sector. This is why we are supporting the government in its plan to reduce the market share of these banks from the current level of more than 50% to 25% by 2025.
Work towards this goal is already underway. The International Finance Corporation (IFC) and Ukrgasbank recently signed an agreement with the possibility of further converting loans into authorized capital of the bank. The EBRD and Oschadbank are in talks to reach a similar deal, while PrivatBank has also included privatization in its strategy.
The key to the success of the privatization of Ukrainian state-owned banks is to reduce the ratio of non-performing loans. In line with the new NBU strategy, the NPL ratio of the banking system will fall to 10% by 2025. We are gradually progressing towards this target. As of May 1, NPL’s overall ratio was 39.6%, compared to 41% at the start of the year.
In order to avoid the accumulation of new NPLs, we have requested the creation of a specialized financial court. This would help save the Ukrainian financial market from the current quagmire of court hearings.
Last year Ukrainian courts dealt with 563,000 lawsuits, of which 138,000 were financial disputes. The disputes with the borrowers concerned a debt of UAH 144 billion. In 2020, the number of cases pending judgment for more than a year increased by 31.6%, leaving almost one in five cases pending. The establishment of a specialized financial court will considerably improve the situation as regards reimbursement discipline.
A key priority of the NBU that has the potential to transform the landscape of the Ukrainian banking sector is green finance. Financial markets can play a key role in mitigating the negative effects of climate change. Some European central banks already provide a favorable environment for green bonds. Ukraine is not left out and is currently considering launching a green bond market.
We have all the assets to lead the way in the region in terms of sustainable development. In recent months, the central bank of Ukraine has joined the World Bank‘s Sustainable Banking Network (SBN) and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which brings together dozens of central banks, including the Bank of England and the Deutsche Federal Bank.
The NGFS aims to strengthen green finance and develop recommendations on the role of central banks in tackling climate change, while membership in SBN commits Ukraine to improve the management of ESG (environmental, social and corporate governance) and promote increased capital flows to activities with a positive climate impact.
Climate investments have enormous potential. IFC estimates this potential at 23 trillion USD in emerging markets for the period up to 2030. The funds raised in this market will be channeled towards the implementation of national projects covering renewable energies, energy efficiency and other environmental initiatives.
An important step in this direction was the signing in April 2021 of a cooperation agreement between the NBU and the IFC, which is part of the World Bank Group. The roadmap for sustainable financing, which is a key element of this agreement, presents the planned actions of the NBU and summarizes the main changes that the regulator intends to make in the near future.
Kyrylo Shevchenko is the Governor of the National Bank of Ukraine.
The opinions expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff or its supporters.
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