The first quarter of 2024 was characterized by quite positive processes in the economy – both in Ukraine and in the world. The growth of inflation slowed down, its level was somewhat lower than expected, and the situation on the market began to stabilize. Such favorable conditions made it possible for the National Bank of Ukraine to proceed to the next steps in reducing currency restrictions. In particular, it is about more liberal conditions for importers.
Also, at the end of April, the financial regulator lowered the annual discount rate by one percentage point (from 14.5% to 13.5%). The foreign exchange market immediately reacted positively to the signal – the dollar rate against the hryvnia decreased somewhat.
The National Bank was prompted to reduce the interest rate by receiving decisions on aid from international partners – the USA and the EU, because tranches from these countries are new foreign exchange revenues on the Ukrainian market.
“The results of our delegation’s visit to the Spring Meetings of the IMF and the World Bank in Washington dispelled concerns about the place of the Ukrainian issue on the international agenda. It remains important. We very substantively discussed the continuation of external financing at a high level with representatives of the IMF, the US Treasury, and the European Union. Now there is confidence that this year we can count on receiving the full amount of the promised financial assistance,” the head of the National Bank explains Andriy Pishnyi.
What concessions did the National Bank make regarding currency circulation?
Among the business requests regarding currency liberalization, the removal of import restrictions on the payment of services and the possibility to resume the repatriation of dividends (return of invested funds to foreign investors) were most often heard. According to the results of the survey of the European Business Association, 88% of Ukrainian entrepreneurs consider the first aspect to be up-to-date. Returning interest to investors was called “very important” by 71% of respondents.
The National Bank of Ukraine took into account the needs and wishes of business in the process of making decisions regarding liberalization. From now on, absolutely all restrictions on payment for the import of services have been removed.
The financial regulator took a more cautious approach to the issue of returning interest from investments to foreign partners. The National Bank relaxed the restrictions, but set a monthly limit: 1 million euros per month for the repatriation of “new” dividends and 1 million euros for servicing overdue payments on “old” debts.
Establishing a threshold limit for the return of investments will help to avoid a rapid outflow of capital from the country. Although the delay in payments to foreign depositors has a somewhat negative effect on the investment attractiveness of Ukrainian business, the National Bank cannot yet make greater concessions. An increase in the amount of repatriation of dividends will lead to an excessive demand for foreign currency, as the country’s currency resource is currently quite limited, this will lead to significant fluctuations in the market and may collapse the hryvnia exchange rate.
What will happen to inflation and lending?
Lowering the discount rate is a positive signal for business, because this step contributes to the appearance of “cheaper” money on the market (reduced loan rates) and the inflow of investments. As we can see from the chart below, the positive trends in the economy led to the fact that in the second quarter of 2024 the real rate of interest rate reduction was better than previously forecast (13.5% vs. 13.7%).
A realistic scenario predicts that by the end of the year, loans will become even more affordable. The accounting rate of the National Bank will decrease to 13%.
Due to a number of factors, including the reduction of the discount rate, the inflation rate will continue to rise during the next year. However, already in 2025, the situation will level off. According to forecasts of the National Bank, the inflation rate will decrease from 9.2% in the first quarter of next year to 6% in the fourth quarter. Price growth in Ukraine will slow down significantly.
Under a realistic scenario of the development of events, by the end of 2026, inflation will decrease to 5%, and under more favorable conditions – to 4% in general.
The effectiveness of currency liberalization depends on the responsibility of business
Will the National Bank’s steps to ease currency restrictions help restart the country’s economy and become an impetus for accelerating growth depends on several factors? First, the removal of currency restrictions should be gradual and “delicate” so as not to lead to noticeable fluctuations in the market.
Secondly, Ukrainian business should take a responsible approach to the opportunities that are provided to it, and not “fly over” the currency and take it out of the country, while a small gap of opportunities has opened up. Money, on the contrary, should flow into the Ukrainian economy and work for it, and not be taken abroad.
If there is no investment inflow, and the economic situation becomes less stable, the National Bank will be forced to return restrictions on the foreign exchange market.
The formula is quite simple: responsible business = economic growth.
