Ukraine central bank and parliament rift threatens banking sector reforms

Ukraine central bank and parliament rift threatens banking sector reforms
To defend itself the central bank relies mainly on Ukraine's Western backers and donors.
By Sergei Kuznetsov in Kyiv October 27, 2016

The National Bank of Ukraine (NBU) and the country's parliament, the Rada, have found themselves in a bitter dispute, which – according to the central bank –threatens to block the regulator’s reform efforts.

On October 26, the NBU published its appeal to the parliament's speaker requesting to replace the head of the parliamentary Committee on Financial Policy and Banking, Serhii Rybalko, because of his "incompetence, political bias, inability to ensure the effective work of the committee", alongside his attempts "to undermine confidence in the credibility of the NBU and block the regulator’s efforts to rehabilitate the financial sector and put it back on the path to growth".

De facto, the central bank's appeal was its tit-for-tat response to the committee's mid-October request to Ukrainian President Petro Poroshenko to ask the parliament to dismiss the NBU's governor Valeriya Gontareva "as a result of the loss of the impeccable business reputation of the NBU head".

One week before this move, the committee appealed to the Ukrainian Prosecutor General's Office and the head of the National Anti-Corruption Bureau (NABU) to open criminal proceedings against Gontareva for allegedly ignoring the committee's meetings.

Liashko & Co

According to the regulator, Rybalko is disseminating "blatant lies about the NBU’s activities". Specifically, the regulator describes claims that Gontareva and other central bank representatives ignored the committee's meetings as unfounded accusations, which "hamper efforts to maintain effective cooperation between the committee and the NBU, which is required to move the financial sector reforms forward".

"Furthermore, the undermining of confidence in the credibility of the NBU leads to the erosion of public confidence in the banking system and the domestic currency," the regulator underlines in its appeal to the parliamentary speaker.

The NBU and the committee did not confine themselves to tit-for-tat accusations. Recently, a group of lawmakers, including Rybalko (the MP is considered by political experts as one of the sponsors of Oleh Liashko's Radical Party) initiated a bill, which strips the NBU of its institutional, political, and financial independence.

The move could trigger complaints from the country's main donor, the International Monetary Fund (IMF), as the central bank's independence was one of the multinational lender's recommendations under its $17.5bn support package to Kyiv agreed in 2015. After months of delay due to policy squabbles between the government and the lender, the IMF in September resumed the funding and approved the disbursement of a $1bn tranche.

Specifically, according to the bill, one of the NBU's main objectives will be artificial control over the exchange rate. However, the regulator believes that this will lead to the build-up of macroeconomic imbalances, which will eventually trigger a surge in inflation. The central bank considers inflation targeting as an essential monetary policy strategy.

The NBU already urged Poroshenko to support the central bank's stance towards the document.

"Given that the disbursement of the second tranche of the IMF loan of $1.7bn [in 2015] was conditional upon the passage of amendments to the law on the National Bank of Ukraine, the reversal of these amendments will pose risks of the loss of confidence in Ukraine on the part of the international community and could result in the termination of cooperation with the IMF," the NBU's statement reads.

Tymoshenko & Co

Meanwhile, the NBU is facing even more serious opposition in the parliament. The Batkivschyna (Fatherland) party leader Yulia Tymoshenko and Ukrainian independent lawmaker and oligarch Serhiy Taruta launched a critical campaign against Gontareva earlier this month.

"The level of confidence in the NBU top managers is the lowest in the whole history of Ukraine," Taruta said in an interview on Ukraine's Shuster Live television programme on October 21, adding that there are grounds for Gontareva's dismissal due to the loss of the bank's impeccable business reputation.

Earlier, Taruta proposed to include the issue of Gontareva's dismissal in the agenda of Ukraine's Verkhovna Rada parliament. One resolution is a petition to the Ukrainian president to dismiss Gontareva and the second is to create a temporary investigation commission.

Political experts believe that Liashko and Tymoshenko's populist rhetoric is aimed at increasing the popularity of their political forces. Gontareva could be considered as a perfect target of the critical campaign due to the fact that a significant part of the Ukrainian population blames her over the hryvnia meltdown and banking sector crisis.

Meanwhile, Taruta, the former governor of Donetsk, who was appointed by Kiev in March 2014 in the hope that the city would avoid a pro-Russian military uprising, may either start his own political project with Gontareva's criticism or he has his own business interests in the possible resignation of the NBU's governor, Kyiv-based political experts believe.

The critics of the central bank also slam the regulator for the allegedly non-transparent nature of the bank refinancing loans, which in some cases were siphoned off by their owners to offshore jurisdictions. In a recent counter-attack, Gontareva said that UAH84.9bn ($3.3bn) had been allocated for bank refinancing during the premiership of the Batkivschyna party leader, when the FX rate was UAH5 per US dollar vs the current UAH25.6 per US dollar.

"When I came to the NBU, refinancing debts were estimated at UAH104bn ($4.054bn). During my tenure, the NBU recovered UAH37bn ($1.44bn) from the market, including UAH25.9bn ($1bn) in 2016 alone," Gontareva said an interview with the ICTV television channel, Interfax news agency reported on October 24.

According to Gontareva, delayed repayments of refinancing currently total UAH74bn ($2.885bn), including UAH44bn ($1.7bn) deposited with struggling banks. These banks had been refinanced before she took charge of the central bank in June 2014.

Western backing

To defend itself from this infighting in Kyiv, the NBU's management relies mainly on Ukraine's Western backers and donors, who praise the central bank's efforts in the banking sector transformation.

On October 21, Gontareva held a working meeting with a newly-appointed US ambassador to Ukraine Marie Yovanovitch. "We strongly support the NBU governor's efforts to clean up Ukraine's banking sector," the NBU's media service quoted Yovanovitch as saying during the meeting. "Ukraine requires a well-functioning banking system capable of financing businesses, which would enable the country to unleash its full potential and take its rightful place among prosperous EU countries."