A Shortage of Capital And Confidence

“All indicators suggest that we have no right to stimulate exports, all the more so as our constitutional duty and daily business is to ensure the stability of the national currency,” National Bank of Ukraine (NBU) governor Volodymyr Stelmakh told a news conference late last week. According to him, all rumors about the Ukrainian economy becoming less competitive in connection with such a decision are absolutely unfounded. However, it is not yet known how strong the Ukrainian currency will get, as this limit will be determined only after the government finally approves the 2005 budget and its economic development program. The NBU’s monetary policy will primarily depend on the inflation rate and the country’s domestic capacities for effectively stimulating inflation.

The country’s chief banker has called Ukraine’s future WTO accession a major challenge for undercapitalized Ukrainian banks. Moreover, the social standards proposed by the new government also require the banking system to contribute heavily to the state budget. Stelmakh doubts that the banking system will be able to shoulder such a burden, first, because of the high costs involved and profits that are not enough to maintain an adequate pace of capital growth, and, second, because of the low level of public confidence, as citizens are reluctant to deposit their savings in banks. In this connection, Stelmakh has proposed making banks highly transparent by requiring them to publish their balance sheets with good and bad performance indicators several times a month, so that people would be able to select a truly reliable bank and regain confidence in the banking system in general. As it usually happens, foreign investors will have to compensate for the lack of confidence in Ukraine. The NBU chairman places high hopes on investments, especially considering that Ukraine has launched the Year of Open Doors to Foreign Investments.

Stelmakh is not overly enthusiastic about the current state of the banking system, laying the blame for this on the previous team. He expressed surprise that the operations of the National Bank were not used to the fullest extent. He cited figures suggesting that the instability of the monetary system has significantly increased in the past two years (from 2.29% in 2002 to 6.28% in 2004). The new team has a chance to undo all the harm, since Stelmakh plans to work with the people who stood by him during his first stint as NBU governor in 2000-2002. He believes in working with reliable people. It is therefore possible that there may be more dismissals than just those of Yatseniuk and Shlapak. Asked about what provoked former President Leonid Kuchma’s statement about a banking system crisis in November 2004, Stelmakh said that the NBU management had provided inaccurate information.

According to Stelmakh, the volume of private deposits, which shrank in the final months of 2004, has now exceeded the pre-revolutionary level. Commenting on the goal of bringing down loan rates, which is part of the new government’s program, Stelmakh said that everything depends on deposit rates. Aside from being an impediment to numerous projects, high rates are also a burden to the economy. If the government develops and parliament passes a realistic and balanced budget and measures to offset the budget deficit, if the economy is brought into the open and the judicial functions as it should, we will then be able to speak about a 5% deposit rate and loan rates that will be reduced accordingly.