KYIV, Sept 28 – Ukraine’s large 2021 budget deficit target will most likely to restrict lending to the private sector and will slow down economic growth, Dmytro Sologub, deputy governor of the National Bank of Ukraine (NBU), said.

The government forecast the budget deficit at 6% of the GDP in 2021, but this will probably make the government to borrow money at 10-11% and this will further increase interest rates in the real economy.

“There is a lot of liquidity in banks, and they buy these T-bills. But they will issue mortgages at what interest?” Sologub said in a recent interview with Interfax-Ukraine. “This is called the crowding out effect. You have such a large budget deficit. You don't allow the private sector and private lending to develop with such a large amount of borrowing [net borrowing through government domestic loan bonds is planned for UAH 200 billion]."

Sologub said if the NBU entered the secondary government bond market, it would entail the exit of nonresidents and, accordingly, additional pressure on the hryvnia exchange rate.

"In general, we need to work in the secondary market when there is infrastructure, and you either no longer have a "stock" at the key policy rate, or a market dislocation is seen," he said.

Asked about a clause in the NBU's monetary policy for 2021 about the possibility of the NBU entering the secondary government bonds market, he said that there is no such need at the moment.

"If there is a clear market dislocation in the market, which was approximately in March-April, and we see that the curve, for example, does not correspond to where it should be, then we can do it, theoretically. But in practice, I don't see at all when these conditions can be met," he said.

According to Sologub, the large budget deficit that needs to be financed is not market dislocation. "Returning to the "free lunch," I believe that from the point of view of the general equilibrium in the economy, it is correct to have the budget deficit that can be financed," he said.

Sologub also said that the National Bank played a significant role in launching operations, including through the Clearstream platform, for the development of the secondary market. "With the development of the secondary market, we are not its owner, we need to launch a trading platform, and this requires infrastructure. By the way, we have made proposals to the Ministry of Finance about our role in the secondary government bond market more than once," he added.

"In fact, when they say that everyone in the world uses unconventional instruments to support the economy, they are doing the same quantitative easing (QE), and the National Bank does nothing in this regard, this is not the case. The same interest rate swap is a very unconventional instrument, only two banks in the world use it [Hungarian and Mexican]," Sologub said. (om/ez)