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capital markets are closed for Ukraine; at the internal capital market, the Ministry of Finance is unwilling to sell debt at new higher interest rates which distort monetary transmission).
This situation is not sustainable. Although the NBU can provide direct support to the government, this comes at a cost of burning foreign exchange reserves at a fast pace. In June alone, the central bank sold approximately $4bn of its reserves to support the hryvnia and the NBU predicted a decrease in international reserves in the second half of 2022 by 8.6% – from $22.8bn to $20.8bn by the end of the year.
With limited resources and instruments, the central bank is caught on the horns of a dilemma, but cannot simultaneously defend the exchange rate, print money (UAH225bn, or $6.1bn, since the beginning of the war) to cover fiscal deficits, and support the stability of the financial system. Something will have to give – and the value of the currency is probably the first thing that will go. In the past few days the NBU has forbidden exchange kiosks from reporting the exchange rate, in an effort to “shield” the population from the rapidly collapsing currency.
A financial crisis is already upon us. The projected funding from the international community for the second half of 2022 is about $18bn. With monthly foreign exchange interventions of about $4bn and external debt payments (principal and interest) of $3bn in the rest of 2022, more defaults are on the cards, otherwise foreign exchange reserves could decline to a dangerously low level of $12-15bn, say experts – far below the level needed to support the value of the hryvnia.
Some of that pressure has been removed after the Paris Club of sovereign creditors gave Ukraine a one-year delay on payments in July, but the private creditors have not been as forgiving, and on July 26 the state-owned gas company Naftogaz defaulted on a $335mn bond redemption, despite having the cash to meet its obligation. The government has ordered the state-owned banks to delay their payments to “preserve cash.” In addition to the debt another big call on the budget will be the need to buy more gas for the winter. Ukraine currently has the lowest level of gas storage in all of Europe, with the tanks only 22% full as of the last week in July. Naftogaz says it needs to buy another 5bn cubic metres of gas in an extremely tight market at an estimated cost of $7.8bn. It is not clear where the companies will find either the gas or the money to buy it with.
But there is some good news. Economic activity has begun recovering in Ukraine after a significant drop at the beginning of the full-scale invasion, according to Deputy Chairman of the National Bank Serhii Nikolaychuk. This does not mean that the GDP is growing but that the depth of the fall is decreasing, he said in July.
The economy's recovery can be seen in the following indicators: revitalisation of trade networks, increase in restaurant turnover, and a drop in the number of non-working businesses. In addition,
10 UKRAINE Country Report XXXX 2018 www.intellinews.com