Ekaterina Rozhkova on the economy and budget during the war/Collage 24 channel
The Ukrainian economy has been hit hard by the war and has already lost $100 billion. Despite this, it is gradually recovering, there are no problems with cash for a long time, and banks are fully working. However, the war continues, so the financial losses will increase. How the situation will change before the end of the year – read in the second part of the interview with Ekaterina Rozhkova.
- 1Interview with Ekaterina Rozhkova in video format
- 3Is there enough cash in Ukraine?
- 4What is the Russia wants to introduce rubles
- 5How much money does Ukraine need per month and where does it come from
- 6Why did the NBU turn on the “printing press” of the hryvnia
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- 7How badly will Ukraine's economy suffer because of the war?
- 8About the most severe blow to the banking system
The First Deputy Chairman of the National Bank, within the framework of the Interview24 project, told us that the NBU and banks had been preparing for work in emergency conditions for several years. Therefore, the banking system withstood the brunt.
About whether there is enough cash in Ukraine now, what is the situation with the hryvnia in the temporarily occupied territories, how many billions the state spends a month and where these funds come from, why the economy has already lost $100 billion and how much it could lose before the end of 2022 – read on .
Interview with Ekaterina Rozhkova in video format
How has the work of the National Bank changed since the beginning of the war
How has the work of the National Bank changed since the beginning of the war, did you manage to keep the staff in the labor movement in the first days?
We have been preparing to work in emergency conditions since 2015. The war in our country began back in 2014, and after the relative normalization of the situation in 2015, we began to prepare all the necessary internal documents and processes in order to be able to work in case the situation worsened. Last year, we additionally updated our business continuity plans.
We were also helped by the covid lockdown, when not only the National Bank, but the entire banking system switched to working online: from customer service to meetings via zoom . Therefore, processes are already configured in a certain way to be able to work remotely.
We have simplified a lot of procedures for banks regarding customer identification, electronic submission of documents, etc. That is, the banks were operationally ready for remote work.
The main efforts at the beginning of the war were aimed at ensuring that the banking system did not stop for a day. That is, to continuously serve business, the population, the state, which is also very important in terms of making payments, paying wages, pensions, and financing the needs of the army. It is clear that this is a huge set of questions.
Already now, looking back at the first weeks of the war, I can say that we all did it together.
Of course, it was impossible to take everything into account. We understood that there was a threat of attack and it was high, but none of us expected such a full-scale war. However, I think that the system worked perfectly.
Is there enough cash in Ukraine
In the early days of the war, Ukrainians rushed en masse to ATMs to withdraw cash. However, later, when they were convinced that the situation was stable, they began to return the money to the accounts. How has the situation with deposits changed now?
It is natural when people in such situations try to protect themselves. I remember the first days very well, maybe even the first week. Almost everything stopped working, people stopped walking the streets, shops closed, not all bank branches worked. In addition, chain stores, gas stations, not understanding whether the banking system would work, stopped accepting cards. They demanded cash. Of course, people went to withdraw this cash.
But we worked with banks and with our large retail chains, explaining to them that non-cash accounts are safer. Indeed, the situation has changed.
When people, shops, and gas stations were convinced that the banking system was working, payments were going through, they calmed down and the reverse process began.
Since the beginning of the war, balances on deposits of individuals in the banking system have grown by about UAH 74 billion. To a large extent, this is due to the significant social payments that the government makes today: assistance to internally displaced persons, wage increases for the military, doctors, etc. Business also provided support to its employees at the beginning of the war, paying financial assistance and advancing the payment of wages. And in part, these are also funds that have returned to the system.
Today, cashless payments prevail. People are more likely to use remote banking services. With the digitalization of the banking system, we all became cashless ambassadors, because, it seems to me, it is very convenient.
What is the situation with cash in Ukraine? Are there enough of them in the NBU and other banks?
The banking system remains very liquid. If you look at highly liquid funds, today the real money of banks exceeds UAH 230 billion. This is a very large amount. Thanks to this, banks freely operate both non-cash payments and operations related to the issuance of cash. There are no interruptions.
In the first weeks of the war, there were indeed difficulties with the physical delivery of cash. This is primarily due to active bombing and fighting in many regions, which made it very difficult to physically bring cash. This issue has now been resolved for most regions.
At the same time, we still have the issue of cash delivery to the regions that are temporarily occupied. I mean the Kherson region, individual settlements of the Zaporozhye region and other cities. The situation there is very complicated. Unfortunately, we cannot deliver cash there, so people and banks operate with hryvnia in cash. However, if there is a connection, then online services are available to all clients.
Of course, we understand that there is not always a connection there. Literally a few days ago, communication in Kherson disappeared. And this is really difficult, because in this particular case, we cannot do anything.
At the same time, if there is no direct threat to the life and health of bank employees and customers, banks continue to work, trying to meet the needs of the population and entrepreneurs as much as possible.
What is the situation with the hryvnia in the temporarily occupied areas where Russia wants to introduce rubles
In the temporarily occupied territories, the invaders are trying to impose on our people the use of the ruble and limit the use of the hryvnia. How critical is this situation?
This is a 2014 tactic. Of course, Russia is trying to oust the Ukrainian hryvnia from circulation and uses various mechanisms for this. In fact, it prohibits, for example, accepting hryvnia in stores, forcing people to change hryvnia for rubles.
And it's completely illegal. This is contrary to all international conventions that say (and this is very important): if the circulation of the currency of this territory, that is, the Ukrainian hryvnia, is ensured in the temporarily occupied territory, then another state does not have the right to introduce its own currency. We draw the attention of international financial organizations to this. Attempts to introduce the ruble on the territory of Ukraine is a crime committed today by the central bank of Russia.
Therefore, we call on banks and try to help them stay as long as possible in the temporarily occupied territories and provide services to our citizens. In particular, so that people can pay in the national currency and not be forced to switch to payments in rubles due to lack of funds and the ability to purchase food and necessary things.
Our main message is that you should work in these regions and serve customers as long as there is no direct threat to the life and health of employees and, of course, bank customers.
How much money does Ukraine need per month and where does it come from
Where does the money come from in the country's budget now, during the war? And are they enough?
The first is war bonds,provided by the government. Of course, their main buyers are commercial banks. But in the last month, the population and business have become more active. Already 76 thousand citizens and business representatives (at the time of publication 89 thousand legal entities and individuals – Channel 24) have purchased these bonds. Funds from their placement go to cover the budget deficit.
The second source, the main one today, is the help of our Western partners, international financial organizations, governments of countries. Since the beginning of the war, we have received almost 7.4 billion dollars from them (data updated after the recording of the conversation due to the receipt of additional assistance – channel 24). Again, all these funds go to the budget.
Moreover, I can say that the G7 countries announced a support package for Ukraine in the amount of almost 20 billion dollars, and the EU will allocate 9 billion euros.
Third– given the gradual recovery of business and business activity, taxes and duties that have been canceled should be returned. Primarily import taxes.The government has already made such a decision, we are waiting for the adoption of the bill by the Verkhovna Rada. Tax revenues will serve as a source of budget replenishment.
These are the main sources in a war that can help us finance our expenses, without taking into account emission financing, which we strive to minimize.
How much money does Ukraine need to spend per month – for pensions, salaries, subsidies, etc.?
About 5 billion dollars a month – such a figure is voiced by Finance Minister Sergei Marchenko. This, in fact, is the amount of spending that is not covered by budget revenues, and this need must somehow be covered.
It is clear that spending in Ukraine during the war is much higher than it was before 24 February. How does this affect the budget?
It is necessary to recall the beginning of the war, when almost everything stopped, and only then enterprises gradually began to resume their work. Of course, this directly affects budget revenues, because they are nothing more than taxes: profit tax, value added tax, excise taxes, rents, personal income tax. We, as a country, use these revenues to finance our expenses. If income is less than expenditure, there is a budget deficit that can be financed by loans.
A significant reduction in economic activity, that is, the volume of work of enterprises, has led to the fact that classical taxes have been reduced, since the volume of production has become much smaller. According to our estimates, the workload of enterprises that have fully or partially resumed their work remains 40% lower than before the war. Consequently, taxes will indirectly be lower.
Now the tax on personal income is relatively stable in the budget, because enterprises are trying to pay wages. However, unfortunately, we see a downward trend: someone does not work full time due to underutilization of capacities, someone is in forced idle time.
Of course, given that the war has been going on for more than three months, more and more enterprises are reviewing the size of salaries in the direction of reduction. This will also affect the level of state budget revenues in the future.
In addition, at the beginning of the war, in order to somehow support business, the government and the Verkhovna Rada abolished a number of taxes, allowed businesses to switch to a simplified taxation system – then there is not to pay value added tax, but to pay turnover tax. This also affected the reduction in budget revenues.
Instead, the costs, and you quite rightly noted, have increased. A large amount of budget spending goes:
- for defense,
- for maintaining public order,
- for social benefits, support for people forced to move to other regions,
- people who have completely or partially lost their jobs.
Of course, all this leads to the fact that the budget deficit is growing.
Why did the NBU turn on the “printing press” of the hryvnia
NBU still had to resort to an additional issue of the hryvnia, that is, roughly speaking, to launch a printing press. As you know, the consequences of such a step under normal conditions are inflation and a decrease in the purchasing power of the population. What are the consequences of such a step in a war? Was it justified and did it bring the desired result?
I believe that this step was justified. We all made this decision, realizing that this is an extreme measure. We took it together to ensure the defense capability and social protection of the population. There was no other source.
Huge announced amounts of international aid do not come quickly. Partner countries and international financial organizations need time, because there are internal procedures – something must be approved by the parliament, the senate, and other bodies. Although they announced this assistance from the first days of the war, it took time to go through all the necessary steps. And we had to help the country from the first days of the war.
If we talk about the impact on inflation, since the beginning of the war, the National Bank bought 190 billion hryvnias from the Ministry of Finance (the data was updated after the conversation was recorded due to the additional redemption of government bonds – 24 channels).
What does this amount mean? In fact, so far budget financing has a very limited impact on inflation. I will explain why: on the one hand, we gave this hryvnia to the Ministry of Finance, which financed all the necessary expenses. On the other hand, when our importers, who buy critical imports for the needs of defense and the state, bought the currency, we sold them the currency and took this hryvnia back.
That is, in fact, the hryvnia did not remain in circulation on the market, because and had no effect on inflation. The rise in prices is now driven to a greater extent by other factors.
At the same time, funding the budget through emission is an extreme measure for the central bank. And this cannot be a systematic source of replenishing the budget deficit.
Therefore, work with our international partners and revision of taxes, especially on imports of goods, should be in the first place among the sources. And again, market borrowings of the Ministry of Finance, which, in our opinion, can be activated by raising rates on domestic government bonds.
What good thing do I want to say? The Ministry of Finance made a preliminary assessment of the state of budget execution for May and records that revenues from the payment of value added tax on domestically produced goods have increased. This indicates a certain recovery in demand for the economy.
The economy is gradually adapting. Of course, it has not reached the pre-war state and will not reach it so quickly:
- due to the destruction of infrastructure,
- due to the destruction of industrial facilities,
- due to the fact that a very large number of our citizens were forced to leave the territory of Ukraine. On the one hand, they are a labor force, and on the other hand, they created demand in the domestic market and accelerated the turnover of the commodity-money.
We understand that the economy in terms of volumes will remain at lower levels, but it gradually began to work.
The demand of the people has changed. If in the first months of the war, people from shock had demand only for essential goods – food, medicine, some very simple things, now the demand for manufactured goods, clothing, services is recovering.
Also we see that the demand for imported goods is recovering, especially for long-term use – washing machines, cars, etc.
In such conditions, it is necessary to return taxes that have been canceled. Reducing the tax burden is a very important issue, but it should be considered together with a clear understanding of budget revenue compensators. Otherwise, it will lead to devastating consequences for the economy, business and citizens.
How much Ukraine's economy will suffer because of the war< /h3>
Summing up our conversation about the economic situation in Ukraine. How badly has the economy been affected by the war, and how long will it take for the country to reach pre-war levels, or even improve?
The economy has been hit hard. We have already talked about the loss of infrastructure, industrial facilities and human casualties. This is very scary.
According to our estimates, direct losses to the economy already exceed $100 billion. These are assessments of what has been destroyed: there was a factory – there is no factory, there was a bridge – there is no bridge, there was a house – there is no house. But the war continues, and every day we live in the usual air raid alerts and we understand that our losses, unfortunately, are growing every day.
If we talk about economic recovery and how soon it can happen. I am sure that with the help of investments from our partner countries, business and private investments, we will be able to recover quite quickly.
The key issue today is that we really need to develop a quality plan for the resumption of the country's development after the war. This plan should include not only the restoration of what was destroyed or destroyed, but also the institutional reconstruction of the country. That is, we must not only overhaul everything that is destroyed, but also build something new – a new economy, new relations, new institutions, transparent relations between the state and business, between the state and the citizen. We must build all this, focusing on the standards of the European Union, of which we want to become members.
This will take time and cost a lot of money. But I am sure that if this plan contains a set of measures to manage the state, develop the economy, improve the domestic business climate, including the work of institutions, then private investment will come to us faster. And this, in turn, will give impetus to the rapid recovery of the economy and its development.
And, of course, a normal macroeconomic basis is needed for a quick recovery of the economy. Therefore, we sometimes have to make difficult decisions, which, however, will allow us to create this basis.
How much can GDP fall in 2022?
According to our estimates, this year we will lose at least a third of GDP. What this exact figure will be will depend on how long the war will last and how many territories it will cover.
At the beginning of the war, active hostilities were fought in territories that produced more than 50% of GDP. Today, hostilities are taking place in areas that in pre-war times produced about 20% of GDP.
Glory to the Armed Forces of Ukraine, we thank them and believe in them. They liberate our territories, and in these regions the economy begins to recover.
About the worst blow to the banking system
Do you think the hardest blow to the banking system was in the first weeks of the war, or is it still ahead?
I think that our banking system has a large margin of safety. Of course, there will be capital losses. In just 4 months of 2022, the banking system has formed almost UAH 33 billion of reserves, because there are loan losses. And these losses will grow because it loses business.
The banking system is part of the economy, it practically serves it. Therefore, the way the economy works is the way the banking system works. Of course, there will be losses of assets, collateral, but the main thing is that it remains very liquid.
Money is the blood of the economy, when the banking system has a lot of this “blood” and it is ready act as a donor for the economy, then everything will be fine.
