NBU Chief Squares Off With Prime Minister

KIEV, Ukraine -- Ukraine’s foreign exchange reserves will be depleted and the hryvnia will face downward pressure if the country fails to resume borrowing from the International Monetary Fund, the National Bank of Ukraine warned.

Serhiy Arbuzov

Serhiy Arbuzov, the governor of the NBU, in a letter to Prime Minister Mykola Azarov, directly accused the government of policies that have undermined cooperation with the IMF.

The sharp wording used in the letter, dated May 19 and leaked to media on Thursday, shows the extremely high level of concern at the NBU with the government’s economic policies.

The criticism from Arbuzov, a close confidant of President Viktor Yanukovych, may explain why the president had made repeated attacks against Azarov and his government over the past seven days.

The letter shows that Ukraine’s robust economic expansion and the hryvnia stability may be jeopardized by the end of the year if the government fails to resume borrowing from the IMF.

The negative scenario would lead to the failure to receive an estimated $9 billion this year, including $6.2 billion from the IMF and $850 million from the World Bank, but its final implications may be far greater, potentially leading to economic disaster.

“In conditions of continued current account deficit, this may lead to a considerable reduction of the foreign exchange reserves,” Arbuzov said.

The NBU’s foreign exchange reserves are currently estimated at about $35 billion, but may be soon start shrinking as Ukraine is due to repay debts, both state and corporate, by the end of the year.

The failure to resume cooperation with the IMF would “worsen Ukraine’s sovereign credit rating, increase foreign borrowing costs, reduce foreign direct investments, and increase demand for the hard currency,” Arbuzov said outlining the negative scenario.

Yanukovych on Wednesday sent the most serious warning yet to Azarov and his government to start painful reforms by dismissing three top government officials, including a deputy prime minister.

Azarov himself was given time until the end of July to hike housing and utilities tariffs, one of the key demands from the IMF needed for the resumption of lending.

The IMF postponed its $15 billion lending program to Ukraine earlier this year after the government had failed to hike gas prices for households and failed to implement pension reform that increases retirement age for women.

In a sign of desperation, the government re-submitted the pension reform legislation to Parliament on Tuesday, hours after it had been rejected by lawmakers, indicating the government wants the measure to be approved quickly.

At stake is $3 billion that the government may – or may not – receive from the IMF before the end of July as downward pressure is building on the country’s currency, the hryvnia.

Meanwhile, Azarov, asked on Thursday to comment on the prospects of the hryvnia, denied that there is any threat to the local currency.

“Right now the hryvnia is stable as never before,” Azarov said. “It will keep being stable.”

Source: Ukrainian Journal