I guess with National Bank of Ukraine Governor Valeria Gontareva’s term drawing to a close, it is perhaps worth reflecting on her performance during her now close to three-year-term in office.
Gontareva has come in for a huge amount of criticism, being ravaged in the largely oligarchic controlled Ukrainian media – which tend to throw lots of Kompromat around, and focus on her close historical business ties to President Petro Poroshenko. I cannot really comment on that – it’s not my sphere of expertise.
However, I tend to think that history will judge Gontareva relatively well for the reforms she instigated at the NBU and in the banking sector more generally.
Just to recap, she joined the NBU as governor in June 2014, when the Ukrainian economy was still reeling (on the brink of collapse, to be fair) from the impacts of the Russian annexation of Crimea, military intervention in Donbas, collapsing economic activity (double digit real gross domestic product collapse), a fast depreciating exchange rate, and a marked uptick in inflation (peaked around 60 percent year-on-year).
Her first “win” in my mind was in hiring talented technocrats into the NBU. I think Gontareva would likely accept that her CV was not that of a typical central bank governor or monetary policy guru, but more of a commercial banker. But as is important for a good manager, she recognized her own weaknesses and hired talent into key positions, and then delegated. The standard of the NBU bench was raised beyond recognition – hiring and promoting talent. In the Ukrainian context – of hands-on management – Gontareva’s ability to delegate was commendable.
The second win, was the drive to reform the internal structure of the NBU. Its operations were streamlined, reducing the headcount from over 11,000 to less than 5,000, with non-core operations such as a TV station, university, health clinic farmed off. The operations of the NBU were focused in on classic central bank operations – banking regulation and supervision, monetary and exchange rate management. And in these areas the institutional strength of the NBU was augmented and the performance and functional efficiency of the NBU increased beyond recognition. As someone who has interacted with the NBU continuously over the past twenty years I can confirm that there was a seismic improvement in the professionalism with how the NBU dealt with foreign investors.
Third, the NBU, assisted by the International Monetary Fund and other international financial institutions, rolled out a credible monetary and exchange rate policy reform. The NBU tried to step back from foreign-exchange interventions (the prior policy had seen the loss of $30 billion+ in foreign-exchange reserves over the four years to mid-2015 with few benefits), allowed the hryvnia to weaken, and then tightened monetary policy, hiking policy rates. Administrative controls were imposed/tightened around foreign exchange, albeit this was largely the result of extreme selling pressure on the hryvnia amid the deteriorating security situation in the east in 2014-2015, and lowly level of reserves, which dropped below $5 billion in 2015, providing only a few weeks of import cover. As the security situation stabilized after the Minsk II peace agreement and the IMF lending program took hold, with the hryvnia stabilizing, these controls were gradually relaxed. The NBU, under Gontareva, has made clear its desire to move to a fully floating currency regime, targeting inflation, and hence to remove these administrative controls as soon as is possible. We have seen more reforms in this regard this week.
Fourth, the NBU has been instrumental in cleaning up the banking sector, with the number of banks operating in Ukraine cut from over 180 when Gontareva started in office to just over 90 now. Professional stress testing has been conducted with asset quality reviews rolled out, with weak banks identified and either closed, or with restructuring/resolution plans put in place. That such a landmark cleaning up of the banking sector has occurred without a generalised run on deposits, across the sector, or resulting pressure on the exchange rate, and a systemic crisis ensuring, is in no small part to the professionalism of the NBU under Gontareva.
Meanwhile, this restructuring of the banking sector has been conducted with a much lower hit to public finances than had been assumed – albeit let’s see how the latest nationalization of PrivatBank pans out. It should I think also be noted that this bank restructuring process rolled out across the sector came at no small personal risk to NBU staff, given the obvious sensitivities in dealing with bank owners, many of whom were politically connected. I would add that a number of components of the Ukrainian bank reform program are now seen as “state of the art” and models for other countries to follow.
Fifth, I think the NBU under Gontareva should take some credit for the current macroeconomic stability, where the economy appears poised for real GDP growth of 2-3 percent this year, inflation has moderated, and the hryvnia stabilised, with FX reserves now rising above $15 billion to provide over 3 months of import cover. The economy is now much more durable than was the case at the start of her term and again that is in no small part to the credible and orthodox policies rolled out by the NBU.
Understandably Gontareva made some errors along the way. Therein I think communication was not always perfect, but sometimes the extremity of the situation, and the acute challenges faced by the NBU management at times, gave this a lower priority than perhaps should have been the case. Some might argue that the nationalization of PrivatBank, clearly a systemically important bank, should have proceeded more rapidly, albeit the NBU was therein partially hostage to the domestic political process given the importance of this particular institution. But the fact that the state take over happened smoothly, with little market dislocation or run on deposits, in the end is testimony to the fact that the NBU’s cautions in proceeding methodically with the nationalization was appropriate.
Gontareva will be a hard act to follow, and Ukraine will need a person who is well qualified, has utmost integrity, but also brave in order to complete the reforms set in motion by the current incumbent. And there remains much still to do.
