For the first time in the history of Ukraine, the National Bank (NBU) head has in fact begun a media briefing with a complaint. At about 5 a.m., October 6, 15 men attacked the house of this country’s chief banker Valeria Hontareva, pelting it with eggs and paint-filled packets. “This really hurts me, a person who has become a civil servant to carry out reforms,” she said, adding that the National Bank was now “under essential pressure.” In Hontareva’s view, one of the causes is that the bank “has stepped on the toes of oligarchic clans that can no longer draw National Bank resources without having adequate sureties and capitalization.”
NBU ex-deputy head Serhii Yaremenko set the tone for Hontareva’s opponents. His main accusation was that the current NBU management’s policy had nothing to do with stabilization and what the bank had been doing since last February looked like rocking the boat.
Naturally, Hontareva could not accept this. Like many of her colleagues before her, she emphasized that the National Bank “is not an exchange-rate-making instrument” – under the Constitution, it is responsible for price stability only. She said she had known Yaremenko since 1998 and their discussions had always revolved around today’s subject. “I’ve been saying there should be a market-based, not a fixed, [exchange] rate,” she stressed. Hontareva pointed out that the National Bank is not an exporter or an importer and the balance of payments does not depend on it. She requested her opponents to “rise to a higher level” and not to confuse rate flexibility with panicky sentiments and free fall.
“Rate flexibility and inflation targeting are the mandatory instruments we are going to use because there is no other way out,” Hontareva says. “It is inflation targeting that will bring about low interest rates and a controlled inflation. This is what the National Bank is responsible for.” She also suggested that the debaters ponder over what is to be done in the economy and what measures could correct foreign trade imbalances. And while this is being done, the National Bank should be given a task to work out measures that can be taken until these imbalances are redressed.
Unfortunately, this call largely remained unheeded. Yet Andrii Kyrylenko, a professor of financial practice at the MIT Sloan School of Management, watered down his criticism of the National Bank with some realistic suggestions. In his words, the NBU, as one of the institutions of statehood, “is rapidly losing its creditworthiness.” “This may have been caused in a way by the fact that the July stabilization of the foreign trade balance was followed by military operations and aggression, which resulted in what may be called a trap, when negative expectations and some fundamental processes keep spurring one another,” he said.
“It is not clear today where the bottom [of the crisis] is,” the professor notes, “and it is terrible when ‘jolting’ begins. The world experience says that in this case negative expectations should be suppressed by means of administrative methods. I do not support such measures in principle, for the currency rate should be formed on the market. But, in the extraordinary situation of a trap, the currency rate must be corrected with some big structural measures, with a certain jump, rather than with small non-administrative steps to change the currency rate formation. Reforming Naftohaz can be a jump like this – it will be clear in this case that there is no way back.”
Will Hontareva propose this solution during her visit to Washington? She is going to discuss the prospects of Ukraine’s cooperation with the International Monetary Fund and the World Bank as well as to take part in the yearly autumnal sessions of these organizations to be held on October 10-12 in Washington. Curbing the “currency-related passions,” the NBU chairperson pointed out that cooperation with the IMF would help us redress the imbalances, “so that we can restore our industrial potential within six months.” “Once we restore it, we will be surely able to project a rate of at least 11.7 hryvnias, not 12.95, hryvnias per dollar,” she assured the audience.
After the roundtable, Hontareva decided to check the effectiveness of the NBU’s monetary policy and buy, just in front of TV cameras, $200 at the nearest bank. Unfortunately, she failed to do so, and nobody explained the cause to her. The nearest bank happened to be the Saving Bank of Russia.