Ukraine Central Bank Draws Red Lines for Its Bond Purchases

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Ukraine's central bank warned that its financial lifeline to the government has its limits and urged the finance ministry in Kyiv to lean on outside help in efforts to shore up the economy as Russia presses forward with the invasion.

The monetary authority, which began direct purchases of Ukrainian government bonds after the war began in late February, added 50 billion hryvnia ($1.65 billion) to its debt portfolio in April, bringing the tally to 70 billion hryvnia. The central bank financing is the third-biggest source of funds behind war-bond proceeds and International Monetary Fund assistance.

“Printing money is justified now, as it helps stimulate the economy amid general slack, depressed demand, high unemployment and lower wages,” the National Bank of Ukraine's deputy governor, Serhiy Nikolaychuk, said in an interview. “But once we see a threat of overheating, it will be a signal for us to stop.”

The Ukrainian economy has been ravaged by the Russian military invasion, with critical sectors such as agriculture disrupted by occupying forces and exports being cut off. The central bank said Monday that the government needs to fill a budget gap of as much as $5 billion a month because of the war, revising down a previous estimate Nikolaychuk made of $7 billion.

The central bank said its direct financing only goes to “critical” government needs. The extent to which the bond financing continues depends on the bank's $28 billion in international currency reserves and the threat of soaring inflation, Nikolaychuk said.

The deputy governor said that about two-thirds of the hryvnias the central bank raises with government bonds go to the foreign exchange market through conversions, which in turn prompts the need to sell foreign currency from reserves.

Seeking to ease pressure on its reserves, the central bank adopted a series of measures last week, including scaling back lenders' limits on trading on the foreign exchange market, which takes effect May 4.

Ukraine is benefiting from international lenders and allies providing it resources. U.S. President Joe Biden on Wednesday asked Congress to provide $33 billion for military, economic and humanitarian aid. Some $8.5 billion will be earmarked to help support the government in Kyiv, with White House officials saying the funding should cover costs through the end of the fiscal year on Sept. 30.

The main source of funds so far has come from war bonds. Auctions for those securities have helped Ukraine raise the equivalent of $1.5 billion as the invasion triggered a wave of international support for Kyiv and a raft of sanctions against Russia.

But the Ukrainian government has struggled to open up the bond sales to a broader pool of investors and is looking for ways to enhance its funding efforts. It's in talks with the European Union and the U.S. to establish a so-called peace bond for retail investors to help fund war efforts and reconstruction, Bloomberg reported on April 21.