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The National Bank of Ukraine, NBU, has increased the central interest rate to battle inflation, but it might be too late, says Kristian Andersson, the head of the Swedish bank SEB in Ukraine. He also says that Ukraine is facing problems with the IMF loan, partly because NBU hasn’t convinced the IMF of its independence. 

The National Bank of Ukraine, NBU, recently increased the country’s key interest rate from 7.5 percent to 8 percent to battle inflation. NBU stated that they will raise the interest rate by another 0.5 percent in September, but it is not enough and maybe too late, explains Kristian Andersson, the head of the Swedish bank SEB in Ukraine, to Ukrainenu. 

“It is good that they are raising it, but it is too small and they should have done this in June,” says Andersson, “A 0.5 percent raise will not have a big effect.”

The National Bank of Ukraine said that it is increasing the key interest rate due to “underlying inflationary pressures”. Inflation has been rising in Ukraine for several months, reaching 9.5 percent, which is higher than expected and third highest in Europe – only after Turkey and Belarus, according to Tradingeconomics. NBU says that inflation is driven by higher global energy and food prices, but that the bank will take measures to keep inflation in check and reach its goal of 5 percent inflation in the second half of 2022.

“My problem with that is this; it is impossible to say how things will look in the second half of 2022. They expect lower energy prices, but we don’t know how they will look like in 2022,” says Andersson, who would have increased the key interest rate to 10 percent. 

“I would have increased it to a little higher than inflation to prevent the risk of inflation increasing even more. That is my view,” says Andersson, who, however, points out that the economic situation in Ukraine generally is good and that the economy is recovering.

Ukraine’s inflation level over the years:

Statistic: Ukraine: Inflation rate from 1996 to 2026 (change compared to previous year) | Statista

The National Bank of Ukraine’s central interest rate over the years:

The uncertainty about NBU

The actions of the NBU are attracting a lot of attention in Ukraine and abroad because of trouble in 2020. Yakiv Smolii resigned as the head of the NBU in June last, which made waves. Back then, he cited political pressure from the Presidential Office as the reason for his resignation. That brought the attention of the International Monetary Fund, IMF, which had just approved a new 5 billion dollar loan to Ukraine. The loan has since been stalled. 

Up until that point, NBU had been a poster child for the reform movement in Ukraine. It had been reformed successfully and had helped to carry out essential reforms of the – at the time – ineffective banking sector in Ukraine. However, following Smolii’s resignation, the board was slowly replaced as contracts ran out, and the top management is now replaced by a new group of people. Former National Bank of Ukraine deputy governor Dmytro Sologub recently spoke to Kyiv Post about leaving and his time in the NBU.

Sologub says that the NBU and the banking sector are in much better shape than in 2015 when the new management took over and cleaned the Ukrainian bank sector. But now, he says that things are again moving in the wrong direction. 

“When the IMF voices concerns about the central bank’s independence and governance 12 months in a row, in political circles, there’s a growing understanding that things at the NBU are not going well,” said Sologub to Kyiv Post, “Whether it’s shared by the governor, I don’t know. His public position remains very much the same; he is very upbeat and very defiant.”

Sologub points out that the decision-making process in the NBU, which used to be shared and done by a compromise between departments, is now taking solely from the bank’s governor. Sologub is not the first to say this, and Andersson sees it is as a worrying sign. 

“There are a lot of signs that this is not moving to the better in the NBU,” says Andersson, “But on the other hand, we have not seen a real effect yet, but the reports say that there isn’t a very good atmosphere in the bank now and that it is a one-man show now.”

Kristian Andersson, leader of SEB Ukraine. Foto: SEB

Linked to IMF loan

The dealings of the NBU are important. Ukraine has only received 2.1 billion dollars of the 5 million dollar loan program from the International Monetary Fund, IMF, which was agreed upon last year. IMF has withheld payments to Ukraine due to the slow reform progress in the country. Kyiv Post writes that the deadline for the next payment of the remaining 3.8 billion dollars is approaching in September, but that there is no deal in sight. 

Time is running out: Ukraine might not get the second IMF tranche

Among other things, the IMF has said that Ukraine needs to guarantee the independence of the NBU. The IMF got worried when the former head of the NBU, Yakiv Smolii, left and stated political interference as the reason. Experts got even more worried when Ukrainian President Volodymyr Zelensky later noted that the NBU should keep the currency rate around 30 hryvnias to a dollar and the key interest rate low to help businesses. 

While the Ukrainian government says that the negotiations with IMF are progressing and that Ukraine has met all conditions to receive the next loan payment, the IMF has had another view. The IMF previously pointed out that Ukraine needs to work with the independence of the NBU, the country’s anti-corruption bodies, and that Ukraine needs to make more reforms such as of the judiciary. 

“The IMF is still worried about the independence of the NBU,” says Andersson, “The IMF is also still worried about the restoring and strengthening of the anti-corruption bodies, so there is a lot of work to do for the Ukrainian parliament. Work is underway, but I don’t think that Ukraine will get the second tranche.”

The Ukrainian government hopes to reach a staff-level agreement with the IMF in July, which will only need final approval by the IMF leadership. Ukraine has to pay state debt of almost 3.8 billion dollars in September and more later on. Ukraine will eventually need the money from the IMF. The deadline for reaching a deal for payments of the second tranche is soon running out and is, according to Andersson, unlikely to happen. 

“The current program expires by the end of the year in autumn, and I think that Ukraine and IMF will try to focus on making a new program, probably a longer three-year program, instead,” says Andersson, “Here, it will be interesting to see what will be the demands of the IMF, but they might be getting a little bit tired with Ukraine. They made a program last year, paid one tranche. But Ukraine then did not meet any more demands. So, I think that the next program will be with less money upfront and will clear demands.”