Are we not in a hurry? The National Security and Defense Council of Ukraine didn’t approve an economic stabilization plan in one week

Just two issues were discussed at the meeting of the National Security and Defense Council on October 13, where representatives of all branches of the state power were present.

The first question regarded urgent measures to facilitate citizens' rights during the early elections for parliamentarians to the Verkhovna Rada of Ukraine.

The second was about steps necessary to strengthen the financial system and budget, and to reduce the negative influence of the global financial crisis on the country’s economy.

However, the National Security and Defense Council took a decision only on the first matter, which, apparently, is at the top of the state’s list of priorities: the issue of early elections. The Council failed to bring up economic stabilization measures. At the end of the meeting, Viktor Yushchenko stated, “The impression is that the government, the National Bank of Ukraine and the banking system have not yet formulated their position concerning this issue, though their position is a key factor in a successful economic stabilization program.”

According to ZN sources, several consultative meetings with representatives of different state structures were held last week. The main participants were: Minister of Finance Viktor Pynzenyk, Minister of Economy Bohdan Danilishyn, Head of the Council of the National Bank Petro Poroshenko and his First Deputy Anatoliy Shapavalov, First Deputy Head of the Presidential Secretariat Oleksandr Shlapak, and Deputy Decretary of the National Security and Defense Council Andriy Pyshny. They approved a final list of economic stabilization strategies.

Incidentally, the expert economic council organized by Arseniy Yatsenyuk [speaker of the Verkhovna Rada] on October 14, presented proposals on economic stabilization measures. According to the press service of the Verkhovna Rada, the economic council included the director of the Institute for Economic Studies and Political Consultations Ihor Burakovskiy, Chairman of the Board of the joint stock bank Ukrsotsbank Borys Timonkin, President of the PFTS Irina Zaria and representatives of the insurance business. Additionally, specialists from international economic organizations and experts from the International Monetary Fund and the World Bank were invited to the meeting.

At the same time, Prime Minister Yuliya Tymoshenko partially distanced herself from the economic stabilization process, saying on Tuesday, October 14, “The prevention of the consequences of the world financial crisis on Ukraine is up to 90% dependent on decisions of the National Bank of Ukraine and the National Security and Defense Council. The government only carries out local tasks that are required today. However, the most necessary thing today is for the parliament to be able to work, adopt laws and correct the budget.”

As announced at a press conference on Thursday, the Cabinet of Ministers was supposed to hold a meeting that same day to discuss proposals to stabilize the economy in order to pass them at the National Security and Defense Council on Friday.

However, the meeting of the National Security and Defense Council scheduled for Friday, October 17 did not actually take place. It was rescheduled for Monday, which makes us doubt that the matters on economic and financial stability are actually important our leaders and are not being used simply as a part of their political PR campaigns.

ZN received a draft decision for the National Security and Defense Council that was prepared for its Friday meeting. Considering the seriousness of the problems in the national economy, we would like to present a list of the main, in our opinion, measures proposed in that draft. We are sure that under the current conditions, society should be well-informed of the decisions being considered by our leaders.

1. The Cabinet of Ministers of Ukraine is recommended to:

— develop and implement within one week a series of measures to reduce consumer goods imports;

— prepare within one week a series of measures to support banks under threat of bankruptcy, including the possibility for the state to become a shareholder in such banks;

— develop and implement within one week a series of preventive measures to protect the banks from possible mass defaults, including prohibiting borrowers who have overdue payments and borrowers that must repay collateral from going abroad;

— pass within three days decisions necessary for simplifying the pre-trial resolution of problems connected with recovering collateral in case of a borrower default;

— approve the main figures and guidelines for using funds from a single treasury account until the end of 2008 with the National Bank of Ukraine;

— pass within a one week a decision banning purchases of imported goods (except goods of critical importance) with state budget money;

— introduce temporary additional restrictions on imports according to Article 12 of GATT 1994 that concerns the regulation of the international balance of payment;

— strengthen control over cash accounting by enterprises, especially commercial ones, and ensure that businesses comply with regulations on cash limits, propose more strict cash limits and more serious responsibility for failure to comply with regulations on cash limits;

— review macroeconomic and the 2009 state budget figures in order to:

а) achieve a deficit-free budget;

b) increase social payments to low-income citizens to protect them from inflation and to other categories of citizens in an amount not exceeding forecasted growth of nominal GDP or productivity of labor;

c) increase financing of infrastructure projects (road construction);

— develop a draft law on increasing excise tax rates (on transport, oil and gas products) in order to earmark received funds to finance infrastructure projects (road construction), and attract funds from international financial organizations (IFO) for these purposes;

— hold urgent consultations with IFO’s on options for receiving support for stabilization of the financial system and development of the economy of Ukraine and implementation of infrastructure projects;

— take state external loans only under the condition of favorable rates and develop, in two weeks, a series of measures to reorient to the domestic debt market;

— work toward the immediate cancellation of the moratorium on the sales of agricultural land;

— along with the Council of Ministers of the Autonomous Republic of Crimea, regional administrations, Kyiv and Sevastopol city state administrations, provide free sales of land at tenders for the implementation of investment projects;

— prompt state companies operating as monopolies to set prices and tariffs on their goods and services at economically reasonable levels in 2008-2009, considering the price of imported natural gas in 2009;

— instead of the free transfer of housing to citizens to improve their housing conditions, introduce initial installments for purchasing housing by earmarking necessary funds to activate mortgage lending;

— promote hosting international sport competitions, exhibitions, scientific conferences, cultural socials in Ukraine in order to attract more foreign tourists;

— track the development of the situation in the financial sphere and economy of foreign countries, their government’s measures to stabilize their economic situations as well as analyze influence of these factors on the financial system and economy of Ukraine.

2. The National Bank of Ukraine (NBU) is recommended to:

— organize weekly speeches by the chairman of the board of the NBU and the head of the Council of the NBU and publish their reports in the press to explain to the public the current situation on financial markets, what the NBU is doing to control the situation, and inform about the state of affairs within the banking system;

— implement efficient policy for refinancing banks and supporting their liquidity;

— harmonize growth in the money supply with growth of nominal GDP;

— establish a temporary moratorium on the withdrawal of term deposits from accounts that earn interest;

— establish temporary limitations on the amount of cash available for withdrawal by individual entrepreneurs and businesses from their accounts in banks;

— consider practicability of establishing a temporary ban on pre-term repayment of loans received by residents abroad and temporary prohibit Ukrainian residents from investing into the economies of foreign states;

— review standards of obligatory reserve funds necessary for the settlement of debt capital including funds in foreign currencies;

— consider practicability of lowering discount rates and rates on surplus operations of the NBU as well as simplifying requirements on reserves necessary for the settlement of loans with banks under the lowest level of risk;

— implement measures prompting the population to keep savings in banking metals and state securities;

— temporarily limit banks’ surplus operations at their current level on a specific date except for transactions in securities, deposit certificates and on the interbank market;

— develop mechanisms to limit the upper level of the cost of resources attracted by banks on the domestic market.

In order to stabilize the situation in the foreign exchange market of Ukraine:

— implement a mechanism of hedging exchange rate risks;

— establish a maximum 5% deviation between bid and ask exchange rates;

— implement a transparent mechanism of the National Bank’s interventions on the foreign currency exchange market;

— postpone adoption of Resolution #153 of June 2, 2008, which allows any entity to participate in the foreign exchange market of Ukraine without intermediaries;

— establish temporary limits on the sale of cash by banks and strengthen financial monitoring of these operations.

3. The Cabinet of Ministers and the National Bank of Ukraine are recommended to:

— provide the Fund guaranteeing deposits of individual persons with necessary resources;

— make an inventory of external debts of the state sector of economy and define the size of debt repayment in 2008-2009;

— propose mechanisms stimulating the residents of Ukraine, who keep their capital in foreign banks, to return their money to Ukraine, including mechanisms for securing these funds in Ukraine and providing tax amnesty.

4. The National Bank of Ukraine, the Cabinet of Ministers of Ukraine, supervisory boards of the open joint stock company Oshchadbank and open joint stock company Ukreximbank are recommended to decide in one week on strengthening control over state banks’ operation in order to support mortgage lending and exports.

5. The General Prosecutor’s Office and the State Security Service of Ukraine are recommended to institute criminal proceedings against persons employing illegal methods to destabilize banks.

6. The National Bank of Ukraine and the National Security and Defense Council, along with the heads of the largest banks, are recommended to create a working group to analyze the situation on the financial markets and inform the President about the state of affairs on lending markets and currency exchange markets twice a week.

Р.S. On Friday, ZN received information that the President was not satisfied with the proposed economic stabilization program. That was one of the reasons for rescheduling the meeting of the National Security and Defense Council of Ukraine until Monday. The President of Ukraine considered the proposed measures insufficient and required improvements in the program.