Residents walk the streets of the heavily damaged city of Bakhmut, Ukraine, on Jan. 19, 2023. Bakhmut has become the site of one of the most intense battles in the nearly yearlong war with Russia.
In response, the NBU was forced to raise its interest rates significantly, adjust the exchange rate and tighten currency restrictions.The set of these measures, together with the reduction of issuance volumes and the increase in foreign aid inflows improved the situation in the foreign exchange market and laid the foundation for the restoration of international reserves. This had a positive impact on inflation, which slowed down at the end of the year.
With access to the central bank’s resources, the Ministry of Finance lost interest in the development of the domestic debt market and actually refused to place domestic government bonds on market conditions. For example, in the second half of 2022, the volume of Ukrainian domestic government bonds owned by banks decreased by 53 billion hryvnia.
What do we witness instead? As a consequence of the NBU’s dependence on the Ministry of Finance and the unwillingness to work at attracting resources on market conditions, we have a slow monetary transmission, which resulted from the increase of the discount rate in June. , monetary issuance financing will be possible for the Ministry of Finance only when external financing is less than proposed and the rollover in the domestic market exceeds 100%.In other words, the Ministry of Finance will be able to count on the NBU funds only if it exhausts all the possibilities of the domestic market in the absence of the proposed international support.