Ukraine’s Central Bank Sterilizes Liquidity: Money Supply Contracts as Deposits Grow

According to the NBU, during the past week (from January 20 to 24), Ukraine’s monetary base contracted by 400 million hryvnias, and the broad money supply M3 decreased by 300 million. At the same time, corporate deposits continued to grow, while lending rates remain high at 19.4%.

Statistics from the National Bank for the third week of January show signs of tightening money supply. The monetary base, which is the foundation for creating the money supply, decreased to UAH 29.8 billion. The broad money supply M3, which includes cash and all types of deposits, contracted to UAH 62.2 billion (~USD 11.63 billion*). Most notably, the volume of cash outside banks (aggregate M0) decreased by UAH 800 million, which may indicate a seasonal return of funds to the banking system after the New Year holidays.

Week’s Paradox: Money Leaves Cash Circulation But Settles in Deposits

Despite the overall contraction in the money supply, interesting structural changes are occurring. Corporate deposits grew by 3.1%, reaching UAH 17.6 billion. This suggests that companies have free funds which they are not yet in a hurry to invest in expansion, preferring bank accounts.

Household deposits in hryvnia remained at the level of UAH 11.4 billion. The average deposit rate is 7.1%, and for term deposits it is 8.4%, which, given low inflation (0.8% in 2002), looks quite attractive.

“To maintain the liquidity of the banking system, the National Bank of Ukraine refinanced banks for UAH 5.7 million from January 20 to 24,”

the regulator noted.

Credit Market: Growth in Nascent Stage

Bank credit investments increased by only 0.2% over the week, reaching UAH 40.1 billion. Of these, loans in the national currency amount to UAH 23.1 billion. The key problem remains the high cost of borrowed funds: the average loan interest rate is 19.4%. This level makes loans inaccessible for many enterprises in the real sector and restrains investment activity. For international investors, this high cost of local currency financing, coupled with a relatively stable exchange rate of about 5.35 UAH/USD, presents a mixed picture of risk and opportunity in Ukraine’s credit market.

Budget Channel: Domestic Bond Auctions Break Records

The activity in the domestic government loan market deserves special attention. Through auctions for the placement of domestic government bonds (OVDP), UAH 29.2 billion (~USD 5.46 billion*) was directed to the State Budget this week, with a weighted average yield of 8%. These enormous volumes indicate two things: firstly, banks have excess liquidity which they willingly place in reliable government securities; secondly, the Ministry of Finance is actively financing the budget deficit through domestic borrowing.

What Does This Mean for the Economy?

Overall, experts I interviewed highlight three main points:

1. The NBU’s Restrictive Policy. The contraction of the monetary base may be a targeted step by the regulator to control inflation expectations and strengthen the hryvnia.
2. Accumulation, Not Investment. The growth of corporate deposits alongside meager lending growth speaks to persistent business caution and high perceived risks.
3. The State Crowding Out Private Borrowers. The colossal volume of placed government bonds (UAH 29.2 billion) effectively “intercepts” bank liquidity that could have gone to lending to the real economy.

The week’s results paint a picture of an economy where money exists, but it does not reach end producers, getting stuck either in deposits or government bonds. The task for the National Bank and the government in 2003 is to find a way to break this circle and direct financial flows into investments.

* Exchange rate as of 27.01.2003: ~1 USD ≈ 5.35 UAH. Calculations are based on an average rate and are not a financial recommendation.