We welcome the NBU’s initiatives regarding the liberalization of the foreign exchange market for businesses. This step is a positive signal for entrepreneurs, banks, and foreign investors. But let’s take it one step at a time.
Why NBU made this move now
It seems that we owe thanks for their courage. The current situation in the foreign exchange market is controlled but not stable, as it was throughout 2023.
And reducing foreign exchange restrictions could potentially carry risks for the currency market. However, the regulator has taken targeted steps that will not lead to mass speculative demand for foreign currency. Moreover, such an initiative is consistent with agreements with the IMF regarding the gradual liberalization of foreign exchange restrictions.
The National Bank justifies its decision by achieving a certain level of macroeconomic stability. Indeed, we also see the resilience of the national economy to military and trade risks. We forecast a 3% GDP growth for Ukraine in 2024 (a downgrade from our 3.3% forecast in November 2023 due to energy risks, significant inflation slowdown, decreased consumer demand, and lower than expected financial support from partners).
A legitimate reason for liberalization could be considered the business’s need to expand its export potential, as well as openness to attracting capital on the external market.
Possible effect for Ukrainian business
Exporters have the opportunity to negotiate more favorable logistics contracts for themselves, and pay for intermediary or distributor services without the need to transfer capital abroad. These restrictions complicated the export of goods to Europe, for example. And they additionally created demand for currency within the country.
For manufacturing holdings, the option to pay for leases/rent abroad became available. This potentially allows for the purchase of equipment or other long-term use goods with less financial expenditure. Considering the improvement in the mechanism for paying interest on international loans, this will open up more banking products for Ukrainian borrowers.
A separate important point is the ability for businesses to repatriate dividends from corporate rights or shares accrued from January 1, 2024, abroad. Firstly, large corporations with foreign capital will be able to resume profit distribution from this year. Secondly, attracting foreign investment into Ukrainian companies becomes more realistic and transparent.
For example, companies like Defense Tech, which need funding to expand their business and create new products for the defense industry, are a very interesting niche for foreign investors. However, due to existing foreign exchange restrictions, such investors are rarely willing to invest specifically in Ukraine. The dividend mechanism will potentially facilitate agreements between Ukrainian companies and foreign investors.
What is still lacking
Liberalization is good. However, the NBU’s initiatives are very limited, with no improvements for individuals who remain outside the global financial market. While inside the country, the hryvnia depreciated by 7% in 2024, and the yield on government bonds decreased from 18% to 16% annually; in foreign markets, stock indices are reaching new highs.
Businesses still face restrictions on foreign currency transfers, including paying salaries to relocated employees. Bans remain on capital investments abroad or on purchasing a business there (M&A). Such restrictions hinder the development of Ukrainian business, which is already ready for active expansion.
What’s next…
If the current pace of Ukraine’s economic recovery and reduced security risks are maintained, the NBU will revisit the issue of lifting foreign exchange restrictions. It is not possible to predict specific steps at this moment.
An important stage in improving the investment attractiveness of Ukraine and local business must be negotiations between the IMF, international investors, and Ukraine regarding the restructuring of debt from external borrowings. A clear agreement will allow understanding the real cost of external resources for Ukrainian business, as well as a fair discount rate considering all risks.
