Monetary system of Ukraine

    Since September 2008, net sales of NBU foreign reserves amounted to $16 billion. However, as can be seen from the chart below, the scale of the NBU interventions has notably declined in recent months. Since the end of March, the NBU has initiated special auctions selling foreign currency to households to serve their commercial banks’ debt liabilities in foreign currency at a preferential rate. The regular auctions have decreased the population’s demand on the retail foreign exchange market. To a significant extent, stabilization on the forex market should be attributed to a number of administrative restrictions on commercial banks’ forex transactions and exchange rate volatility. In particular, the NBU banned forward operations with foreign currency, modified the methodology of calculating the open forex position of commercial banks, excluding credit risk provisions for foreign currency denominated loans, and took other measures that restricted exchange rate flexibility. While these measures helped to stabilize the market, they may increase commercial banks’ exposure to exchange rate risk and worsen the already difficult financial situation of commercial banks. According to the revised IMF program, the monetary authorities have committed to remove the majority of the exchange rate restrictions. Moreover, at the beginning of June, some of them had already been relaxed (in particular, alleviated requirements regarding an open forex position).

    Weaknesses in the banking sector are the major risk for the country at the moment. Rapid growth of domestic credit in the previous years came at the expense of the quality of bank assets. There is growing evidence of rising non-performing assets. In particular, the share of doubtful and loss loans (but excluding sub-standard loans) grew from 2.5% at the beginning of 2008 to 6.3% at the end of 1Q 2009. The total share of non-performing loans (sub-standard, doubtful and loss) may reach 25-30% in 2009. The solvency risk coupled with large deposit outflow (about $13 billion during October 2008-March 2009) and high external indebtedness are now the main challenges for the Ukrainian banking system. The increased solvency risks, tighter NBU regulations and restrictions, the flight in deposits and the need to repay both domestic and external liabilities continued to affect the ability of the commercial banks to provide credit to the private sector. Indeed, the stock of commercial banks credit portfolio declined by 3% from January to May 2009.

    At the same time, April-May revealed signs of stabilization in the banking system. In particular, in April households ceased to withdraw deposits from the banking system. This trend continued also in May, supported by an increase in legal entities’ deposits. As a result, the total stock of bank deposits grew by 0.3% mom in May, for the first time since October 2008.

    An increase in commercial banks’ deposits should be primarily attributed to the stabilization of the foreign exchange market as well as attractive deposit programs developed by the commercial banks. The latter not only raised deposit rates but also proposed flexible withdrawal conditions. At the same time, the restoration of public confidence in the banking system will depend on the success of the bank recapitalization program for troubled banks. Although its implementation was delayed, the government finally approved the recapitalization of the first three banks at the beginning of June. Foreign banks have confirmed their plans to raise $2 billion for the capital of their Ukrainian subsidiaries. Some of the Ukrainian banks have also committed to inject additional capital. If the current recapitalization plans are successful, systemic issues may be under control, though a number of medium and small banks may fail.

    Although the above-mentioned causes played a vital role for positive developments on the foreign exchange market during the last few months, we believe that the main reason was that the two main financial vulnerabilities of Ukraine (large current account deficits and large repayments of short term debt) were substantially reduced. First, due to Hryvnia devaluation and weak domestic demand, helped by import restrictions and low world commodity prices, the value of goods imports was more than twice as low over the first four months of 2009 as in the same period last year. Imports of transport vehicles, machinery and equipment as well as metallurgical products fell the most, by 82% yoy, 69% yoy, and 62% yoy respectively. Imports of energy resources, the weightiest commodity group in total imports, declined by almost 40% yoy in January-April. A much lower value of energy imports in April compared to March is primarily explained by lower natural gas imports. The later was the product of both a lower price for imported gas in 2Q 2009 ($271 per 1000 m3 compared to $360 per 1000 m3 in 1Q 2009) and volumes (due to both contracting real sector activity and postponement of the gas imports to be pumped into gas storage).

    Exports continued to suffer from weak demand in the main trading partner countries and low world commodity prices, contracting 41% yoy over January-April. However, due to a more considerable decline in imports, the trade deficit narrowed sharply to less than $2 billion compared to more than $7 billion over the same period last year.

    Correspondingly, this caused a sharp adjustment of the current account balance. According to preliminary NBU data, the current account deficit constituted $0.6 billion in the first four months of 2009, ten times lower than in January-April 2008. Thus, the current account gap is projected to be reduced from a record high $13 billion (7.2% of GDP) in 2008 to about $3.5 billion (3% of GDP) in 2009.

    Second, the resumption of the IMF stand-by agreement for Ukraine along with the likely financing from the World Bank, the EBRD and other financial institutions will reassure foreign creditors that Ukraine should be able to serve its large short term obligations in the near term. According to various estimates, the private sector external debt financing needs may amount to $36 billion in 2009. At the same time, trade credits and liabilities of the Ukrainian subsidiaries of foreign banks represent a substantial portion of the debt obligations due.

    However, even adjusting for the likely rollover rate, the total external financing gap is estimated at about $10 billion. Although this gap will keep pressure on the balance of payments this year, it looks quite manageable given the level of the NBU international reserves, which stood at $31.5 billion at the beginning of 2009. Actually, the NBU reported an increase in the stock of commercial banks’ deposits during November-December 2008. However, the increase was mainly attributed to valuation adjustments due to sharp Hryvnia depreciation at the end of 2008. In May 2009, despite appreciation of the Hryvnia, the stock of foreign currency denominated deposits grew by 0.7% mom. 
 
 
 
 
 
 
 
 
 
 
 

3.2.          Problems in monetary system of Ukraine and ways of their solving

      A lot of difficulties in economic building arise because of the imperfect money system. One of the sharpest problems of the Ukrainian economy is the payment crisis which paralysed an economic turnover and economic life, and disfigured relations between enterprises. Enormous capitals, which must move a production through investments are “canned” in debts and are in the inactive state. Payment crisis in Ukraine is created artificially by disfiguring mechanisms of money creation, deprivation of debts of property status, liquidation of trading with money and trade credit and other. In countries with the developed market economy enterprise have not a single trouble with the penalty of sums of monies from their buyers. As soon as the firm ships product to the buyer, it passes documents to the bank and lays anxieties in relation to the receipt of money on the bank. In case when enterprises apply faktoring, thay sell the debts of their buyers to commercial banks or faktoring offices, they pay for services of banks 1-2%, and in Ukraine - 80% or even 300%. And a money capital in developed countries carries out 200-300 turns for a year, instead of 10, as for Ukraine.

      Despite the fact, that in Ukraine, as well as in the whole world, the credit money system functions, on Ukrainian legislation, debts do not have rights of properties. That is why enterprises can not convert them into money, which predetermines a destructive payment crisis. In countries with the developed market economy 3/4 calculations between enterprises are carried out due to the motion of papers, different sort of promissory requirements (bills of exchange, checks). In Ukraine power defined that calculations must be carried out only with “living” money and foremost cash, motion of which between enterprises is not represented in reports, and that is why operations with it are not assessed a tax and are uncontrolled. Through imperfection of the system of payments the enormous capitals - UAH 10 millions - which must be sent in an investment are laid in calculations. Capital investment due to the internal resources of enterprises, in essence, is convolute.

      Overcoming the payment crisis is possible with uninflationary methods. Inflation does not spread on creation of money on the base of bill of exchange, and consequently, and NBU refunding of commercial banks is secured for the bills of exchange, because every money sum is responsed to the certain volume of commodity mass. As it will be to extinguish the bills of credits of debt, money is demonetized and does not correct pressure on the amount of money, instead of its artificial narrowing smothers a production and blows up his market. However, bill of exchange, unfortunately, in Ukraine did not gain the widespread use.

      Thus, through government prohibition of the use of bills of exchange, and the unsettled relations with the use of trade credit bursts base of the money system of country, and enterprises are without liquids. They are bankrupts, which is made artificially. This approach is not only paralyzing for calculations but for pertaining to national economy turn and process of recreation on the whole.

      Hard monetary policy, imposed from outside also makes large harm for Ukraine. Progress of monetarists recommendations in adjusting of economy only by the amount of money is not used in the world. Rates of money growth in most countries of Europe were considerably higher from those recommended (3-4% on a year, taking into account the increase of real GDP). For example, in France for proper period rates of average annuals of money growth were 5,9%, and average annual growth of real GDP rate - 2,2%, inflation - 2,4%. The proper indexes in Germany were 7,3%, 2,6%, 2,5%, in Italy - 6,4%, 1,6%, 4,8%, in Large Britain - 9,9%, 2,25%, 4,45% correspondingly. Growth of money amount rates appeared in 2-2,8 times higher, than those offered by modern monetarists, and in 2,6-4,4 times exceed growth of real GDP rates. It is important to underline that the difference between money amount growth and growth of real GDP rates considerably higher, than average inflation rates in these countries, that predetermines real growth of the economy saturation with money.

      Nowadays Ukraine still does not have the real program of exit from the crisis. An oversea advisers recommend us as the most progressive economic course, which in actual fact is the set of positions from out-of-date conceptions of ХVІІІ-ХІХ centuries, humiliating requirements of IMF, other international financial organizations, and highly developed countries. They are not interested in Ukraine’s success. Ukraine does not have good internal market as the base of national economic development. The most successful on Ukrainian market are multinational corporations of industrially developed countries - USA, Germany, Great Britain, and France. For this purpose they apply such instrument, as international financial organizations. Collaboration with them is forced by an enormous external debt of Ukraine.

      An export overgrew superfluously. 60% of GDP are taken out from Ukraine, mainly raw material. In chemical and petrochemical industry volume of export is 80,2%, in black metallurgy - 75,4%, in woodworking and cellulose industry - up to 62,2% of production volume. In the colored metallurgy and light industry as a result of the use of import raw material this index is 103 and 135,7% of production volume.

      An existent production in Ukraine on 90% is related to external trade turnover. It is almost twice as much as in Germany and Great Britain, in 5 times - than in Japan, in 6 times - than in the USA . A large orientation to the oversea market makes the economy of Ukraine dependency upon the state of affairs of world market and narrows possibilities of the country in relation to the permanent economy growing.

      In Ukraine is almost not considered potential reserves of revival of national economy, in particular to internal market development. Activity of internal market is an indicator of economic development of country. In a summarizing kind it appears through correlation of such criteria of markets, as demand and supply. In a scarce economy a supply has always been a problem. In the conditions of open market Ukraine faces the problem of demand, more faithful with the absence of demand. It is necessary to create the terms of passing ahead growth of internal consumption and increase of its particle in the structure of GDP and providing steady development of economy of Ukraine on this basis. Overcoming structural deformations and passing to activation of internal market development is possible only on condition of maximal mobilization of internal resources of country, increase of efficiency and competitiveness of production, growth of labor, creative an enterprise initiative of citizens.

      There are a few key positions which will determine strengthening of the monetary system not only in a short-term but also in medium-term prospect. First of all, it is strong course policy. It has been already specified the tactlessness of attempts to devalue hryvnya artificially. Stimulation of export with the use of the noted tool, the use of devaluation as a compensating instrument of export losses can give only temporal benefits.

      Unlike devaluation, strengthening of national currency position is more preferably for Ukraine. The question is, firstly, about reduction of prices of power mediums import, which takes very important place in our balance of trade. Secondly, Ukraine reduces the price of technological import of machines and equipment which fully respondes innovative development of the Ukrainian economy on the next decade. Thirdly, gradual revaluation of hryvnya, which takes place presently, reduces the price of maintenance of external debt. Fourthly, a stable rate of exchange is reliable basis of decline of inflation. Fifthly, revaluation is the factor of increase for not only the real incomes of population but also cost of assets of enterprises and financial institutions. Finally, strong hryvnya is pre-condition of investment strengthening potential, which is important, bringing in in the national economy of foreign capitals in particular. Ukraine must rely exactly on such results.

      Certainly, in any case the question is not about artificial revaluation. There is a necessity of substantial liberalization of currency market and introduction of policy of flexible rate of exchange, which must be determined by co-operation of market factors, free of administrative limitations. This position is logicly responsed of Ukrainian eurostrategy, in fact this exactly currency mode balances the real demand on foreign currency with its supply. It counterbalances balance of trade and results in the economy growing. In the last two years the monetary policy of NBU gained greater definiteness. However, Ukraine would assume a dangerous mistake, if it will began to suppress existing in this sphere problem.

      It is well known that the action of monetary policy is determined by ability of the National bank to regulate the streams of money and structure of money-market. Our problems in this sphere also is not a secret. At first, it is clearly, that monetary policy can not be effective, when over 40% of money amount is turning behind banks.  These money actually is not added to the regulative actions of NBU. Secondly, monetary policy can not be effective, when the mechanisms of the discount adjusting do not actually operate. The question is about the mechanism of registration rate which so far does not execute a regulative function. During 2001 registration rate went down from 27 to 11,5%, and lending rates of commercial banks - on 7,7 percent points. Nowadays the  registration rate is 10%, and in Russia - 23%, however lending rates of commercial banks in Ukraine are at 2,5-3,0 time higher, than in Russia. Thirdly, a monetary policy can not be effective in the conditions of existent dollar, when hryvnya executes the function of store of value and measure of cost only partly. Foreign currency in large quantities remains a basic commodity at the money market. Part of deposits, nominated in foreign currency in 1997 was 29,9%, in 2001 - 42,7%. It is well-known that citizens also keep money in dollars.

      There is a problem of prices reduction for mechanisms of the money stabilizing. It is, again, a multidimensional problem. One of aspects is credits of IMF which is sent exceptionally in support of national currency. From 1994 to 2000 they made $3368,5 million. Almost $2 milliards of the proper borrowings were spent only on preparation of money reform of 1996. As it is known, NBU which settles accounts on debts from IMF, does not create the equivalent of cost of money. It only prints the signs of cost which is created by living labour in the real economy. Buying currency by the proper aims, NBU serves the external obligations due to an inflationary tax. Last year practically all emission was directed on calculations with creditors. An about $1 billion of promissory payments is carried out. It is also cost of stabilizing.

      There are other sharp problems without the decision of which it would be prematurely to talk about reliability of the money stabilizing. In the context of a problem which is examined, the improvement of non-monetary instruments of the money stabilizing is very important. Nowadays it must become the main anxiety of government, its economic block. Here are a lot of positions, stopped however only for determining. At first, saving of self-supporting policy and at the same time balanced budget. We do not have an alternative to it. A self-supporting budget is not only a basis of stability of hryvnya but also main instrument of decline of the promissory loading on the economy. Secondly, perceptible decline of tax load is needed. A tax constitent is in the structure of charges, and consequently in a price dynamics remains extraordinarily high. Thirdly, creation of effective antimonopoly competition environment and above all things is overcoming the self-will of natural monopolies which artificially set too high tariffs. That it is the weakest point in the policy of reforms. Again, the question is about organic combination of tool of monetary and non-monetary antiinflationary policy. Realization of the perceptible deepening of stability of hryvnya is possible only on the basis of such complex approach. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Conclusion 

      The monetary system is not an arbitrary creation of state power, it depends on really existent economic relations. Taking into account the extraordinarily important role of relations of money relations in economic life of society, in entire countries, regardless of their mode, forming of the monetary system is executed only by central organs of power. In the research project on theme „Monetary system of Ukraine” I considered the analysis of theoretical bases and practical aspects of functioning of the money system of Ukraine and its elements, whish were conducted on the modern stage of development.

      It was examined, that a lot of difficulties in economic building arise up through the imperfect monetary system. One of the sharpest problems of the Ukrainian economy is a pay crisis which paralysed an economic turnover, disfigured economic life and did

relations between enterprises unreliable. The imposed from outside hard monetary policy makes a large harm to the Ukrainian economics. Internal market as base of national economic development is not formed in the country. The most successful enterprises on Ukrainian market are multinational corporations of industrially developed countries. Potential reserves of revival of national economy, in particular to internal market development, almost not involved.

      There are a few key positions which will determine strengthening of the money system not only in a short-term but also in medium-term prospect. It is first of all a course policy. Unlike devaluation, strengthening of national monetary item positions is of more advantageous for Ukraine. The NBU is ready to active co-operation with Ministry of Economy on questions of improvement of functioning of the monetary system of Ukraine and its elements. The question is about organic combination of monetary and non-monetary antiinflationary policy tools. Realization of the perceptible deepening of stability of hryvnya is possible only on the basis of such complex approach. 
 

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