The International Monetary Fund (IMF) has proposed to the Ukrainian authorities to increase discount rate, toughen bank refinancing policy, bolster the independence of the National Bank of Ukraine (NBU) and increase protection of creditors' rights.
The proposals are stipulated in a draft memorandum on the economic and financial policy, which was published by the Ukainska Pravda online publication. The publication said that IMF experts drew up the document.
"We’ll reorient monetary policy so that it would focus on the key rate of politics and the flexibility of the exchange rate and be in line with our monetary program and inflation targets. We will increase discount rate," reads the document.
It is expected that the NBU’s deposit certificate rates would grow too.
The draft says that interest rates should be a key instrument of monetary policy. The NBU should announce board meetings at which decisions on key rates were made and ensure the economic reasons for making the decisions are published.
"The primary goal of the monetary policy would be a cut in core inflation to single-digit figures and a cut in the general consumer price index," reads the draft memo.
According to the document, it is expected that core inflation in 2001 would fall lower than 10%, while general inflation would be around 12-13% partially due to energy price adjustment. It is expected that inflation will fall to some 5% by 2015, and the deficit of the current account in 2010 would narrow to 1% of GDP, although it would slightly grow in the medium term. The state of the financial account would improve, as short-term capital outflow would be significantly contracted and direct foreign investment would resume flowing into the country.
The document also says that authorities will be ready to revise the monetary policy if pressure on inflation or the exchange rate appears.
It was proposed to strengthen the NBU’s independence. The primary target of the central bank should be provision of price stability, while the secondary target is financial stability.
The document proposes to establish a greater role of the IMF in making decisions in the monetary policy sphere of Ukraine.
"We would desist from changing requirements to reserves and using administrative tools without preliminary consultations with IMF experts," reads the draft.
The document says that the NBU Council would be reformed into an oversight body consisting of people who are not involved in a conflict of the interests. In addition, the NBU board could be trimmed, and persons with certain political and business ties would not be board members.
The draft says that some legal acts issued by the central bank are to be adjusted –stabilization loans are to be provided in excusive cases and only to systemic, solvent and viable banks for a certain period, without a possibility to prolong them.
"We would restrict the issue of financial aid to carry out banks recapitalization to UAH 20 billion… We’d cut the size of rehabilitation and refinancing loans, which complicate the realization of the monetary policy and banking supervision," reads the draft.
The document says that if a systemic deposit outflow did not repeat, the NBU would not issue new refinancing credits and prolong them to insolvent banks.
As for the currency market, the draft memo says that the pension fee on currency transactions would be canceled and requirements for registration of capital inflow would be relaxed.
The reform of the financial sector would concentrate on solving problematic issues at banks, and the recapitalization of systemic banks.
