Rising electricity shortages, fuelling inflation and emigration, are making economic conditions in Ukraine even harder to manage, Andriy Pyshnyy, the country’s central bank governor, has told GlobalMarkets.
Hoping to stimulate the economy, the National Bank of Ukraine has cut interest rates from 25% in 2022 to 13% in June. In May, it made its biggest move yet to liberalise the currency controls it put in place after Russia’s full scale invasion. But Pyshnyy said the energy situation and the effect of the move to a managed flexibility exchange rate system were limiting the ability to ease monetary policy further.
“We see an increase of business expenses caused by Russia’s energy terror,” Pyshnyy said, through an interpreter. “Raw material supply is shrinking, and we also see the impact of currency depreciation because of the managed flexibility. The totality of these factors has caused pro-inflation dynamics. It requires prudence, and it significantly narrows the room for further easing of monetary policy.”
Pyshnyy pointed out that around 7m of the 16m people who fled the country in 2022 were still abroad.
He said the country was not going back to the monetary financing it used at the beginning of the war. International aid, tax increases and tweaks to banks’ reserve requirements to encourage them to hold government bonds — at the same time as higher taxes on bank profits — were all part of the effort to avoid that situation.
Nevertheless, Pyshnyy warned that the military situation would be decisive.
Every dollar counts
Commenting on the International Monetary Fund’s reform of its borrower surcharges policy, agreed earlier this month, he said it would save the country $130m in 2025 and $500m over the course of its IMF programme. “Each dollar — each loan, each source of finance made available to Ukraine during this war — matters,” he said.
Electricity shortages were getting harder this year, Pyshnyy said, because Russia had realised it would not be able to quickly take over the whole country, and so had switched to targeting power stations rather than distribution infrastructure.
“I admire our power engineers, who manage to ensure power supply despite such a huge deficit in power generation,” Pyshnyy said. “However, the winter is going to be tough.”
The country is trying to decentralise its generation capacity, including using renewable energy. The central bank has also tried to bring the commercial banks together in a new agreement to finance new power generation capacity.
Still, Pyshnyy acknowledged, this was a lengthy effort and coping with the attacks on generation was “not going to be an easy journey”.
“The demand for imported products that are key for the recovery of power generation capacity is growing,” he said. “There is negative impact on the general perception and comfort of the population, of households, because there are regular power cuts.”