Policy Papers

  • 22.04.2010

    Credit Crunch in Ukraine: Facts, Causes, and How to Restart Lending


    The provision of bank credits to the private sector has slumped in Ukraine. As of February 2010, outstanding loans to the private sector were in real terms 15% lower than one year before. The picture is much worse if we focus on new loans only. The total amount of new loans provided in 2009 was on average in real terms almost 40% lower than the respective amount in 2008. The decline is particularly strong in the household and SME sectors.

    Without doubt, this dramatic decline can partly be explained by demand factors. The appetite of companies and households for new loans is not particularly strong in a depressed economy with significant problems for debt repayment. But as it looks, also supply factors play a major role in the decline in lending. Banks seem to have tightened their lending standards to a large extent, making it very difficult for creditworthy companies to obtain loans. Thus, Ukraine seems to be facing a sizeable credit crunch.

    The causes for this credit crunch are multiple: Dwindling capital as a result of higher non-performing loans, lack of refinancing in the form of deposits and of foreign loans, as well as a crowding out by state borrowings to bridge the growing gap between public revenues and expenditures. The effect of the limited access to finance is very strong, especially during the current depressed situation. Companies need funds to finance working capital and investment; this is an important precondition for economy recovery.

    But what to do about the credit crunch? In our view, there is no quick fix to the problem. In particular, any schemes involving credits of the central bank to companies are doomed to fail and to create inflationary pressures. Thus, the Resolution No. 47 (long term loans via NBU) is definitely not the solution to the problem, but might aggravate it. The role of the NBU is to establish monetary stability and increase confidence in the hryvnia and in the banking sector, a task it cannot achieve in case of government interference and directed lending.

    Nevertheless, there are several measures, which can contribute to an alleviation of the problem in the short-term. First, banks with insufficient capital should be forced to be recapitalised, in order to restart lending. Second, banks should be allowed to provide loans in foreign currency to all economic agents, since otherwise they cannot secure long-term funding. Third, the state budget deficit needs to be reduced dramatically and its financing secured though foreign lending, for e.g. in the form of Eurobonds. To sum up, the credit crunch can be combated effectively through the use of market compatible measures in the fields of banking regulation, monetary and fiscal policy.

    Attached file  (104.3 kb)
    Authors:  Kravchuk Vitaliy, ʳ , г
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