National Bank Doing So Well it Makes One Nervous
Once during the 1918-20 Civil War in Ukraine, anarchist warlord Nestor
Makhno put banknotes into circulation reading: "Secured by the head of
the person refusing to accept it." However, even this severe admonition
did not help: the money became worthless and vanished.
This historic precedent looks funny and does not seem to have anything
to do with today's hryvnia. So far the populace likes it and uses it willingly,
but there is something in common with the historical and current authorities
responsible for keeping the national currency valid: fear of the money
becoming worthless. Of course, Makhno did not have professional bankers
in his army and had to play it by ear. Our leadership has no such problems.
In fact, they are so well equipped as to deliver a virtuoso performance,
even better than the music written. Actually, the higher the virtuoso technique
shown, the more suspicious one should be about the original music.
Not many of our learned readers seem to have paid special attention
to the fact that the National Bank has been behaving rather inconsistently
the past several weeks. First, it announced the possibility of lowering
the discount rate (affecting the cost of credit resources), promising the
banks lower reserve quotas (i.e., that from now on less "surplus" money
would be sucked out of them), pointing to the good market situation. This
was also used to explain NBU's lifting previous restrictions on its customer
banks' access to the foreign exchange market. This was followed by a series
of surprise moves which, against the declared favorable market situation,
could only be regarded as ill omens.
"The National Bank considers it expedient to establish a maximum amount
of payments in cash: not more than 3,000 hryvnias," reads its Resolution
249 On Strengthening Control over Cash Transactions. And this ceiling is
the same for legal entities and natural persons. All goods worth over this
amount are to be serviced using clearing transactions, either by remittances
from bank accounts or using customers' bank cards. The official opinion,
voiced by NBU's second-in-command Yaroslav Soltys, has it that cash flows
outside the banks are "fertile ground for financial abuses, bribery, and
growing crime in society." There are several dozen other reasons why Ukraine
should make broader use of clearing transactions, including the exorbitant
costs of printing and protecting banknotes, collection, and laundering
of budget funds. It is generally known that the money laundering process
will grow stronger during the presidential campaign, added Mr. Soltys.
These NBU innovations must have alarmed rank-and-file customers, as
a week later the NBU press service explained that the restrictions to be
imposed on cash transactions will not affect payments made by natural persons.
"These restrictions have nothing to do with payments made in cash by the
populace," reads the statement, adding that the National Bank will impose
the 3,000 restriction on cash transactions during a business day between
legal entities and natural persons with the business entity status, and
that "drawing from business entities' accounts will not be limited and
payments between them can be made using both money received from banks
and proceeds."
National Bank spokesmen, however, did not comment on the reasons behind
these restrictions, while an anonymous Cabinet source told The Day that
the role the election factor played was key, not in terms of measures geared
to curb the expansion of shadow business, but in order to keep inflation
under control. The source pointed to an upsurge of pie-in-the-sky promises
capable of transforming into a growth of the monetary stock outside banks
on the eve of elections. In particular, the President instructed the Cabinet
last week to allocate UAH 1 million as a loan to the Pension Fund and secure
100% financing of current social disbursements. In other words, reaching
the campaign's loftiest goal, paying debts due the electorate's most active
sector, will cost at least UAH 2 billion.
Earlier, analysts predicted a change in money flow from the non-cash
to cash veins, from the recipient of government subsidies and loans (in
non-cash form) to pensioners, teachers, and doctors (in cash form). Note
that given the current restricted access to the money-printing machines
- guarded by the law On the Budget System and IMF demands - the money market
is willy-nilly starting to operate in accordance with the law of the conservation
of energy: nothing comes out of nothing or vanishes without a trace. In
other words, if the cash market expects an inflow, the non-cash market
has to run a deficit, encouraging the owners of various kinds of money
to cooperate with each other, but only in one direction: from the market
to the bank.
On June 15, NBU Governor Viktor Yushchenko declared that the NBU Board
instructed the Emission-Credit Department within two days to analyze the
possibility of lowering interest rates. Two days later, director of the
emissions and loans department Natalia Hrebenyk had to tell her boss that
she thought lowering the rates was premature, considering excessive spare
bank money and rather high inflation. Another six days passed and a similar
diagnosis was made regarding bank reserves. "The National Bank is currently
unable to lower the amount of compulsory commercial bank reserves... Today
and for the next ten days there will be no such opportunity. The amount
in reserve currently tallies with the status of bank liquidity. If reserve
requirements were lowered, this would have a negative effect on the market,"
Ms. Hrebenyk stated. Previously, however, NBU did not rule out the possibility
of easing up on bank reserves sometime in July.
NBU's tactical maneuvering is hard to comprehend by an outsider, but
it gets even more confusing in light of Economy Ministry moves, particularly
its forecast of "still waters" on the money market. According to Economy
Minister Vasyl Rohovy, the hryvnia rate will not even reach the upper mark
of the present currency trade band and will range between UAH 4.20 and
4.40 to the dollar. True, this forecast does not allow for political risks.
"There are several factors that could affect market stability. In particular,
the political situation this fall (i.e. presidential elections); if it
becomes destabilizing, making the market operators unsure, could make it
quite difficult to foresee the subsequent course of events," Mr. Rohovy
said.
The National Bank probably has no right to disregard political risks.
Rather the contrary, it constantly allows for them, 10 days, a month, or
a quarter ahead. Economic risks are a different story. Here the realities
considered in prognosticating are different. Tamara Shyhayeva, an economist,
writes in the weekly Zerkalo nedeli: "So far we all buy products
from the previous harvest and prices on the consumer market remain unchanged.
However, in the autumn the economy will have to adjust prices, and this
will result in either a fall or an increase in quasi-money, especially
in terms of arrears long overdue. It should be noted that every fall has
seen a price increase, because while harvesting one has to pay for it at
new prices, adjusted to the costs of all non-seasonal goods that have grown
during the year. The fall has thus always been the most trying period economically.
The coming fall, however, will make us face a crisis on the largest scale
ever."
By Iryna KLYMENKO, The Day






