BANK I KREDYT sierpieƒ 2006 On Invitation 3 History of Monetary Development in Ukraine Historia przemian monetarnych na Ukrainie Oleksandr Petryk* Abstract Streszczenie The aim of the article is to provide an impartial analysis of the Celem artyku∏u jest przedstawienie analizy zmian monetarnych monetary and economic developments that have taken place i ekonomicznych, które zasz∏y na Ukrainie po uzyskaniu przez since Ukraine gained independence in 1991 and to answer the nià niepodleg∏oÊci w 1991 r., oraz odpowiedê na pytanie: jaki question: which monetary regime is optimal now from the point re˝im monetarny jest teraz optymalny dla zapewnienia wzrostu of view of ensuring sustainable economic growth and preventing gospodarczego oraz zapobie˝enia mo˝liwym kryzysom possible financial crises. finansowym. The first part of the paper describes main events that took place W pierwszej cz´Êci opisano g∏ówne wydarzenia, które wystàpi∏y during the last fifteen years. There was a hyperinflation period w ciàgu ostatnich pi´tnastu lat: okres hiperiflacji i stagnacj´ and stagnation of the economy in the early 1990s, economic and gospodarczà na poczàtku lat 90., reformy gospodarcze currency reforms in 1994-97, the financial crisis of 1998 and a i walutowe w latach 1994–1997, kryzys finansowy w 1998 r., period of real economic growth and moderate inflation in 2000-05. okres wzrostu gospodarczego oraz umiarkowanej stopy inflacji The second part of the paper discusses possible exit strategies to w latach 2000–2005. a more flexible exchange rate regime from the current de facto peg W drugiej cz´Êci omówiono strategie odejÊcia od wiàzania kursu to the US dollar. It is argued that the inflation targeting approach hrywny z dolarem amerykaƒskim w kierunku bardziej is best suited to the needs of the Ukrainian economy and will elastycznego re˝imu walutowego. Twierdzi si´, ˝e strategia provide a new “nominal anchor” for the economy. It allows bezpoÊredniego celu inflacyjnego lepiej odpowiada potrzebom increase in the credibility and transparency of monetary policy gospodarki ukraiƒskiej oraz idei „kotwicy nominalnej” dla and maintenance of low rate of inflation in the long run to gospodarki. Pozwoli to na zwi´kszenie wiarygodnoÊci support sustainable economic growth. i przejrzystoÊci prowadzonej polityki pieni´˝nej oraz utrzymanie niskiej stopy inflacji w d∏ugim okresie celem wspierania wzrostu gospodarczego. Keywords: Ukraine, monetary development, exchange rate, S∏owa kluczowe: Ukraina, pieniàdz, kurs walutowy, strategia inflation targeting. bezpoÊredniego celu inflacyjnego. JEL: E31, E42, E52, E58, E61 * Director of Economic Analysis and Forecasting Department of the National Bank of Ukraine. 4 Na zaproszenie BANK I KREDYT sierpieƒ 2006 1. Introduction separation of the Ukrainian banking system from the post-Soviet one and the formation of the banking Ukraine, like many other emerging and transition system the newly independent state. The main economies, has to solve the following dilemma: either problems of economic development, structural to continue to support the current de facto peg to the reforms and banking in Ukraine in the first stages of dollar or to start to proceed to a more flexible independence were discussed in Sundakov et al. exchange rate regime. In the case of the latter option, (1994), IMF (1996) and Voronova, Petryk (1998). the monetary policy would need another “nominal Notwithstanding the fact that the Soviet banking anchor”. In our view, inflation targeting could provide system was an integral part of the planning process, such a nominal anchor. banks did not act as financial intermediaries as they This article presents a brief history of monetary, do in the market economies. Their main function was banking and economic developments since Ukrainian that of financial controllers in the planned economy. independence in 1991 with the view of making policy Credit flows were determined by the centralized plan recommendations about the future course of of goods and services production and was handled by Ukrainian monetary policy. state administrative methods. In the absence of credit The first part of the paper describes past and capital markets, the banking system was the developments and the main macroeconomic and channel which allocated the money in accordance monetary events since Ukraine gained independence with the “real plan”. in 1991. In particular, in this part we describe the The movement of capital to enterprises was hyperinflation period and stagnation of economy in regulated by “credit plans” of the USSR State Bank. the early 90s, as well as the main features of They were similar to quantitative production plans: a economic reforms in 1996, the financial crisis of credit to any enterprise was based on its production 1998, cooperation with international financial output plan and its needs for long-term capital institutions (IFIs) and the current economic situation. investments. A credit, given as short-term working The second part discusses possible exit strategies capital, was determined under the plan for short-term to a more flexible exchange rate regime from the credit. On the other hand, long-term investments current de facto peg to the US dollar. It is argued that were financed under the plan for long-term credit. inflation targeting approach is best suited to the Therefore, size and types of credits extended to needs of the Ukrainian economy. enterprises did not depend on the factors which, Some important “pros” support this statement. under market conditions, determine credit decisions Under a flexible exchange rate regime the central in a market economy, in particular a borrower’s bank should be able carry out a more independent creditworthiness and investors’ right to chose the monetary policy, which helps mitigate the negative level of risk and interest rates. Thus, the Soviet influence of foreign and domestic shocks on the system ensured a certain indirect financing of the economy. Other arguments for changing the current budget by the central bank. In addition, in order to monetary regime are avoiding possible financial finance budgetary capital expenditures long-term crises in the process of financial market liberalization government bonds were issued. and the maintenance of a low and stable rate of Long-term credits were extended through a inflation in the long-run. centralized long-term crediting fund formed to finance the budget. The USSR State Bank’s relations with the state budget were based on the 2. History of monetary and economic uninterrupted financing of state needs in accordance developments in Ukraine since its with the approved expenditure plans. independence Whereas the credit plans provided for the amounts and direction of credits in the banking 2.1. The Soviet banking system and the start of banking system, another plan, namely a plan of money reform before 1991 emission or “the cash plan” of the USSR State Bank determined cash supply for the population. Without understanding the banking system history Enterprises were forbidden to have cash, except and conditions prevailing in the period before money to pay salaries. Citizens received their Ukraine proclaimed its independence, and the remuneration in cash solely and bought almost all process of collapse of the Soviet economic and goods and services for cash; credit possibilities for the banking system, respectively, it is difficult to population were strictly limited. Savings banks (later understand the processes which took place in the Savings Bank) accumulated deposits and Ukraine in the period following the official transferred this money to the central bank which establishment of the National Bank of Ukraine, the placed it at the disposal of the state. Consequently, BANK I KREDYT sierpieƒ 2006 On Invitation 5 the main task of financial policy was to attract cash continued to perform its previous functions. The from the population to the banking system, where it savings banks of the USSR State Bank were given the was turned into the resources used by the state to status of banks and were reorganized into the USSR finance its operations. Savings Bank. Before the reforms of 1987–88, the USSR State At the same time, in 1988, a law on cooperatives Bank performed central banking functions in the was adopted. It permitted creation of cooperative Soviet financial system (except the function of banks for servicing the needs of cooperative international reserves management), as well as the enterprises which were not served by the state majority of commercial bank functions. As the central specialized banks. In addition, state enterprises bank in a planned economy, the USSR State Bank was gained the right to create their own banks. These responsible for distributing cash and credit resources commercial and cooperative banks differed greatly (the cash and credit plans). The State Bank was also from the specialized ones. First, their activity was the banker of the state and the creditor of enterprises, much less limited: they could extend both short- and and it executed settlements between economic long-term credits, take payments and deposits and entities. handle foreign exchange operations. Second, their During this period, the payment system served customers did not need to come from a specific the need in refunding manufacturing costs to economic sector. These banks enjoyed the freedom of enterprises, i. e. in repaying the cost of all listed servicing both population and enterprises in any resources and payments, which also included salaries industry. except taxes. Consequently, the enterprise received Before the Soviet Union collapse, one more payments for its goods from the bank (local branch of significant event occurred that had negative the State Bank) after submitting documents consequences for monetary development in almost confirming the delivery of goods. Then, those all post-Soviet countries. An administrative increase documents were sent to the State Bank branch at the in prices was arranged with a simultaneous change of buyer’s location, where the latter’s account was banknotes of large denominations, more known as the debited. However, because of mailing delays the “Pavlov reform” (Mr.