Victor Yushenko,
Governor of the National Bank of Ukraine.

A POWER BANKING SYSTEM AS AN IMPLEMENTER OF A TOUCH MONETARY POLICY

The address of the Governor of the National Bank of Ukraine to the parcipants of the Board of Governors of the European Bank for Reconstruction and Development.

MAIN INDICES of ECONOMIC and SOCIAL SITUATION in Ukraine
The independent, democratic state of Ukraine is building up a socially and market-oriented economy. This process is not proceeding smoothly, there are gains and losses, advances and retreats. Nevertheless, in spite of all the hardships, Ukraine is definitely, albeit slowly, coming out of a deep economic crisis (see Table 1).
In the current year the volume of the real gross domestic product (GDR) has more or less stabilised whereas in the previous years it had been steadily and rapidly declining. The volume of industrial production is growing, though at a slow rate. We think that it is very important that last year saw a noticeable growth of the retail trade of merchandise. This fact reflects a certain improvement in the in the life of the average Ukrainian. Now a priority is to achieve economic growth through investment.
Six years of independence have shown that introduction of modern, liberal institutions and mechanisms of economic management mobilises in the best way the potential of an individual and contributes to making the democratic traditions take hold. For example, the financial and monetary stabilisation of the market type has insured the creation of a low-inflation environment which has come to be an indelible part of the economy of our young state (see Table 2).
The main result is the following: beginning in 1997, for the first time in the history of the independent Ukraine, the rates of growth of money supply were several times higher than those of inflation which quickly improved the supplying of the national economy with real money. Thus, in 1997 the index of inflation of consumer goods prises dropped to 110% whereas money (as means of payment) grew at a much higher rate - 143%. "Broad money" grew faster than inflation and reached the rate of 134%. By strengthening the influence of the mechanisms of the market, it insured the slowing down of the decline in real GDR and transition to economic grown. The real volumes of credit to economic entities is steadily growing (index is 134% - higher than inflation) which is built on the foundation of the real money deposits of companies and of the population. Such growth of savings creates conditions for further unfolding of investment processes. We can clearly observe an increase in demand for the hryvnya which, taking into account the first three months of 1998, has been continuing for the past 15 months.
% as to the corresponding period of the previous year
Indices 1991 1992 1993 1994 1995 1996 1997 1998
Real gross domestic product 91,3 90,1 85,8 77,1 87,8 90,0 96,8 99,8
Volume of industrial production 95,2 93,6 92,0 72,7 88,0 94,9 98,2 101,7
Real retail trade 90,3 82,0 65,0 86,4 86,1 94,9 105,9 101,0

Table 1

Millions of hryvnas 1992 1993 1994 1995 1996 1997 1998
Money (cash) as means of payment 20,7 341,9 1 860 4 681 6 315 9 050 9 300
"Broad money" 25,2 481,4 3 215 6 913 9 361 12535 12960
Chain indices of growth of money   1652% 544% 252% 135% 143% 102,8
Chain indices of growth of "broad money"   1910% 668% 215% 135% 143% 103,4%
Credits given by commercial banks to economic entities 27 406 1558 4 078 5 452 7 295 7 776
Chain indices of credits   1504% 384% 262% 134% 134% 106,6%
Consumer price index 2100% 10256% 501% 282% 140% 110% 101,7%

Table 2

Millions of USA dollars 1992 1993 1994 1995 1996 1997 1998
Total reserves minus gold 20,7 341,9 1 860 4 681 6 315 9 050 9 300
Volume of sales of the three main currencies (USD, DM and RUR) currency sales were forbidden currency sales were forbidden currency sales were begun in the end of October 6 913 9 361 12535 12960
Chain indices of the currency reserves   1652% 544% 252% 135% 143% 102,8
Chain indices of growth of "broad money"   1910% 668% 215% 135% 143% 103,4%
Credits given by commercial banks to economic entities 27 406 1558 4 078 5 452 7 295 7 776
Chain indices of credits   1504% 384% 262% 134% 134% 106,6%
Consumer price index 2100% 10256% 501% 282% 140% 110% 101,7%

Table 3

The positive results of the stabilisation of hryvnya stands upon a rapid growth of gross currency reserves and strengthening of the currency market (see Table 3).
The administrative regulation of the exchange rate of the national currency during the years 1992-1994 had as one of its main results an extremely low state of currency reserves. At the end of 1993 total reserves minus gold were only 162 million US dollars. The currency market as such did not exist. The national currency (up to September of 1996 it was karbovanets and later - hryvnya) had been devaluaed quickly. The liberalisation of the currency market which was introduced in October of 1994 insured the change for the better and the currency reserves begun to grow rapidly. The exchange rate of the national currency stabilised before the end of 1995. Today, 27 month later, we can say that the indices of devaluation of the Ukrainian currency in relation to the US dollar (the main currency of the world) do not differ much from the devaluation of the majority of the leading world currencies. In spite of the negative tendencies observed in the global financial markets during 1997, it was possible to strengthen the inter national currency reserves. In 1998 the results thus achieved are being preserved.
The fundamental basis of this positive tendency is a stable exchange rate of hryvnya and lower rates of domestic inflation. We are absolutely convinced that the stable hryvnya is a necessary precondition for sustained economic growth. The National Bank of Ukraine continues to the tight monetary policy. Only such a policy is capable of insuring low-inflation growth of the supply of money in Ukraine, only such a policy can promote real economic.
A powerful banking system, based on the principles of transparency and accessibility, is an implementer of a tough monetary policy/ We can believe that its strengthening is a national priority of especially high importance. That is why we have already introduced the international accounting system into our banking system and we are going to realize a number of other ambitious projects to strengthen it.