Financial Sector Reform Activity Quarterly Progress Performance Report

The program aims to bring long-term systemic changes to Ukraine's financial sector. The activity is divided into four thematic areas: Improved Market Regulation and Supervision, Efficient Financial Infrastructure, Financial Intermediation and Facilitation, and Enhanced Transparency and Communications. In the first quarter of 2022, the focus was on improving market regulation and oversight. The program supported the development of laws, government policies, and policies to advance bank and non-bank reforms. The main initiatives included work on the Bit Assets Law and taxation of digital assets, as well as investment accounts, and stock companies. The program also supported regulators and market regulators to strengthen and modernize Ukraine's financial infrastructure. The main initiatives included an audit of the Settlement Center of the National Bank of Ukraine, drafting the terms of reference and tender for a software system to supervise non-bank financial institutions and banks, and training support for the Deposit Guarantee Fund to store data securely in the Cloud. Financial intermediation and facilitation was another key area of focus. The program pursued activities to provide risk-sharing mechanisms to support bank lending to SMEs, promoted IFI access to finance programs to banks and NBFIs, and researched and wrote a draft paper on political risk insurance for private investment and lending in the Recovery phase. The program also coordinated efforts to introduce factoring as an effective source of working capital for SMEs and developed an Expression of Interest for grants to increase the number and range of finance providers and services for individuals, SMEs, and start-ups. Enhanced transparency and communications were also a key focus area. The program hosted a portfolio guarantee signing ceremony for Bank Lviv and the DFC, with the participation of the US Ambassador and the USAID Mission Director. The program also held a major conference on international financial institution access to finance programs and the needs of Ukrainian banks. Additionally, the Activity launched a weekly newsletter that compiles and disseminates reports on financial sector developments. The program thoroughly reviewed and updated its work plan in response to the challenges of transforming the financial sector and the realities of war. The missile attacks on Ukraine's infrastructure underlined the importance of focusing on financial stabilization and short-term efforts to support businesses to survive the economic war. The war with Russia entered a deadly new phase in October 2022, with Russia attacking civilian infrastructure, including energy and grid systems. The attacks resulted in major and frequent power outages, economic activity and productivity were seriously impaired, and the estimated cost of rebuilding Ukraine's infrastructure more than doubled to $750 billion. Despite these challenges, Ukraine continued to be remarkably resilient, with no significant outflow of refugees, no reports of increased capital flight, and no financial panic. The National Bank of Ukraine and Ukrainian banks adopted measures to keep ATMs open and functioning, allowing citizens to withdraw cash to pay for basic goods. The currency exchange rate was relatively stable in both the official and informal market. The National Bank's discount rate remained at 25 percent, and the decision to ease standard financial reporting and capitalization requirements remained in place. However, an assessment of the health of bank portfolios is scheduled for February-March 2023. At the macroeconomic level, GDP declined an estimated 36 percent in 2022, inflation was in the range of 20-25 percent, and unemployment was approximately 30-35 percent. Exports of critical agricultural commodities, including grain and edible oils, were off by 15-25 percent compared to 2021. Lending and investing in Ukraine is seriously impaired due to the risk premium, and there is a huge need for loan portfolio guarantees and war risk insurance.