National Bank of Ukraine is Kaput
"Systemic political pressure" forces Yakiv Smolii to resign
(Yakiv Smolii in front of the National Bank of Ukraine building in Kyiv)
Students of macroeconomic theory and practice in Ukraine were treated this week to an unnecessary and counterproductive display of disruption and stupidity following the shock resignation of National Bank of Ukraine chief Yakiv Smolii, who said his reason for quitting was “systemic political pressure” put on the central bank.
“I’ve submitted my resignation appeal to the President. This decision has been taken as an answer to systematic political pressure that denied fulfillment of my duties as the Governor. Let it be a warning for attempts to undermine institutional independence of the central bank.,” Smolii said in a Tweet on July 1.
Most foreign journalists who cover Ukraine are based in Moscow and don’t understand Russian or Ukrainian. So far, they have had a difficult time understanding what Smolii actually said on Friday, July 3, from the rostrum of parliament during an extraordinary plenary session.
What follows is an English-language translation of his speech. The full transcript of the session is here.
Ladies and gentlemen, I have made a difficult but necessary decision to resign, because the National Bank has been under systematic political pressure for a long time. There has been pressure to make decisions that are not economically justified, that focus on short-term simple victories and can cost Ukraine’s economy and Ukrainians dearly in the longer term.
As the head of the National Bank, I have been guarding the institutional capacity of the central bank for more than two years. Together with the members of the board, we are a shield that protects our ............... apolitical institution from the influence of politics. There have been constant attempts to break this shield over the last year. There has been pressure through the courts, paid rallies outside of the central bank building and homes of National Bank board members, information attacks based on manipulation and lies, unfounded political assessments of the NBU policy and my activities as the head of the institution, the use of the NBU Council to create corporate conflict within the institution. This complicates the efficient operation of the central bank also because the National Bank is not an island. Although some try to equate the independence of the NBU with the desire to distance itself from other government agencies, in reality we do not work in isolation. We work in the economy and with financial markets, which depend not only on the policy of the NBU, but on the ability of all state institutions to find a common language. We at the National Bank strive for this. However, pressure is the antithesis of effective dialogue. A conversation with one participant speaking professionally about economics and finance and his interlocutor thinking only about his political interests is doomed to failure.
Does my resignation mean that the NBU's independence has been broken?
No. It is a protest. It is a signal. It is a warning. It is a red line.
With my resignation, I seek to warn against further attempts to undermine the institutional foundations of the Ukraine’s central bank. Currently, the management team and several thousand high-class professionals remain at work at the NBU to maintain macroeconomic and financial stability and preserve the institutional capacity of the central bank. However, it is crucial the president, the government and politicians finally start working effectively with the central bank. After all, the National Bank has done a lot for the development and economy, financial markets and the well-being of Ukrainians. It can do much more if it’s work is not hindered.
I will focus only on what has been done during my term as head of the NBU since March 2018. We have finally curbed inflation, we have broken records every year, bringing inflation closer to the optimal level for the economy, and now it is below 2%. We have shown we are capable of achieving targeted stability, despite political cycles. Last year, we received the Transparency Award (from by the Central Banking Journal, a publication that covers issues concerning the operation of central banks and financial regulators).
For the first time in the history of Ukraine's independence, the interest rate was reduced to 6%. Two years ago, when the parliament appointed me chairman, the rate was 17%. Today we have a monetary policy aimed at reviving economic growth.
We did not stop there and went on. We have introduced completely new tools to support the economy, in particular, financing loans for banks up to five years and an interest rate swap for banks and a currency swap with international organizations. We have made unambiguous interest rates on loans a reality. Yes, for a while, as long as low inflation, low discount rates will affect the cost of loans. But it will definitely happen.
We strictly adhered to the market flexible exchange rate formation and at the same time ensured the stability of the hryvnia. We were criticized for strengthening the hryvnia last year, with critics saying the NBU's policy in the foreign exchange market was too passive. However, we attracted a record amount of $8 billion from the market to the reserve. Today we have gold and foreign exchange reserves at the level of $25.5 billion. In two years, the volume of gold and foreign exchange reserves has increased from $18 to $28 billion. At the same time, our critics ignored the fact that our reserves were growing, not least due to the inflow of foreign currency from non-residents. Thanks to this, we overcame coronavirus turbulence in the foreign exchange market in March quite painlessly and quickly.
In 2019, we began large-scale currency liberalization. It was a real revolution that Ukrainian business and citizens have been waiting for for a quarter of a century. We have already lifted about 40 currency restrictions. The banking system is healthy, highly liquid and profitable. Ukrainians vote for it with money when they carry it on deposit. Since the beginning of 2018, hryvnia deposits of the population have increased one and a half times. Moreover, thanks to the relentless long-term preparation of banks for potential problems, the banking system has entered a coronavirus crisis stronger than ever. Now it is an outpost of financial stability and a lifeline for the economy.
Cashless is gradually becoming commonplace in the lives of Ukrainians. Thanks to numerous initiatives of the NBU during my term, the share of non-cash payments among all transactions using payment cards has increased from 39% to 55% percent. The National Bank has become even more transparent and open.
Today our policy is based on dialogue with business, banks, non-bank financial institutions. Our achievements have been recognized by the international central bank community for transparency. All this is very easy to cross out. A step back is much easier to do than the three steps forward that we have been taking for years.
The National Bank still has a lot of work to do. Do not forget, the coronavirus crisis continues. We need to maintain financial stability and help Ukraine resume economic growth. We need to complete what we started - to continue currency liberalization, make a market of non-banking financial services, which came to us for service the day before yesterday and ensure consumer protection.
Finally, I would like to thank everyone at the National Bank, all our partners and clients who have followed the path of reform with us. These are financial market participants, business, expert and scientific community. The correct decisions were born in our discussions, and your support was inspiring.
I thank our like-minded members of parliament and colleagues in other state institutions who promoted reforms together with us. Thank you to our financial partners and colleagues from other central banks. You supported us not only with finances. You, first and foremost, gave us knowledge and had faith in us. I also thank the journalists who persistently helped the NBU to become more transparent and clear.
I am infinitely grateful to the entire team of the National Bank. You were my support, and what the National Bank achieved, what we achieved together. I thank all Ukrainians who trust the professionalism of the National Bank. Trust for the central banker is the most important recognition. It makes us proud to have it.
I leave the National Bank as an integral institution, one worthy of a reputation among the world's leading central banks. I leave with my head held high, leaving the NBU under your responsibility.
Responding to a question from Servant of the People MP Oleksandr Kachura following his address, Smolii explained what he meant by “systemic political pressure.”
“I did not, as you said, say during my speech that the President’s Office pressured me. However, I did say that at all meetings, at most of the meetings attended by MPs, government representatives, the prime minister, the president, and also their representatives, appeals were made to the National Bank, to National Bank officials to flood the economy with money, abolish principles of regulating the banking system and set an exchange rate that would make the country’s exporters feel better, i.e. to set the inflation target to 11% at the UAH 30/1 USD rate, because such a parameter was proscribed in the state budget,” Smolii responded (original below).
The prequel to Smolii’s resignation came in mid-January when a lengthy unedited recording of a macroeconomic policy brainstorming breakfast, attended by Smolii, then Prime Minister Oleksiy Honcharuk, NBU Deputy Chairwoman Kateryna Rozhkova, NBU board member Dmytro Solohub, then Finance Minister Oksana Markarova and other officials, including then Minister of Economic Development, Trade and Agriculture Tymofiy Mylovanov, was leaked.
The quality of the unedited 90-minute long audio recording of the meeting, which took place a month earlier on December 16, 2019, is excellent. It documents an attempt to enhance coordination of monetary and economic policies under the framework of the memorandum on cooperation to achieve sustainable economic growth and price stability, an agreement between the central bank and government signed in October 2019 to coordinate macroeconomic policy.
Ukrainians have known for years that foreign experts pick up on much less in conversation than native speakers. However, few expected that the time would come when the standard of competency turned out to be the ability to agree balance of payments (платёжный баланс) should not be confused with balance of trade (торговый баланс), about the difference in meaning between разбрат (a falling out) and разврат (debauchery) оr how best to explain macroeconomic policy to a Ukraine’s president, who obviously does not know the difference.
Contrary to most local and international media reports, the recording does not reveal Zelensky’s financial illiteracy per se, but what what Ukraine’s macroeconomic policy was then and should be in the future.
All participants appeared to understand what they were saying. They struggled politely, always audibly and at times incoherently, to agree on how best to explain to Zelensky why low inflation and a strong hryvnia was the correct policy for the economy.
Three unflattering and misleading excerpts of the discussion were first posted on January 15 to the “How to Deceive the President” YouTube account (какобманутьпрезидента). Honcharuk resigned two days later.
Honcharuk acknowledged in a video posted to Facebook on the eve of his resignation that he himself is an ignoramus about economics (якщо це не гарні новини для країни, то я повний “профан” в економіці!). The next day in parliament, he said whoever made and released the recording of the meeting was trying to sow discord within Ze!Team and create the impression that someone does not respect the president, who also is an ignoramus about economics.
Industrial production in Ukraine in November 2019 decreased by 7.5% compared to November 2018 after a decrease of 5% in October and 1.1% in September, according to Ukraine’s State Statistics Service. This explains why the country’s leading industrialists and exporters were outspoken critics of the government’s macroeconomic policy.
Neither Ukraine’s industrial slump nor macroeconomic policy were on the agenda during the 10-minute meeting between Zelensky and Honchaurk on January 17. At the start of their one-on-one meeting posted to Facebook, the president said the scandal had created “a very unpleasant situation.” He then added that Honcharuk and his team would be given another chance.
On the same day, IMF Managing Director Kristalina Georgieva gave an hour-long speech at the Peterson Institute in Washington about the importance of financial literacy.
Ukraine on December 7, 2019 agreed with the IMF on a preliminary $5.5 billion loan. The staff-level agreement included policies to be carried out by Ukraine’s government to underpin the three-year program.
“Work is ongoing. staff continues to be engaged with Ukraine. Once these conditions are met, that would be the moment for us to go to our board of directors,” Georgieva said. She did not elaborate what exactly the conditions were.
Ukraine’s top economists agree that prudent macroeconomic policies under Ukraine’s previous government and central bank contributed to the strengthening of the country’s economy since 2015. No one argues that the low fiscal deficit, a falling debt ratio, low inflation and accumulation of international reserves are all the result of these policies and are important preconditions for economic stability and growth.
It was Ukraine’s current and future macroeconomic policy, based on the continued revaluation (strengthening) of the hryvnia under the pretext of so-called “inflation targeting” by the central bank, that worried Ukraine’s president and exporters.
Critics of the central bank argued that a strong hryvnia would further suppress exports, leading to a further decline in production, layoffs, a decrease in household incomes and purchasing power, under-fulfillment of the budget, increased public discontent, outflow of bank deposits, recession, economic crisis and, ultimately, the decline of the president’s popularity.
This is exactly the scenario participants in the recording were brainstorming about pushing Zelensky to support.