FY 2023 Q2 Report: USAID FSR Activity in Ukraine

The report highlights the activity's progress in improving the financial sector in Ukraine. The activity is organized into four thematic areas: Improved Market Regulation and Supervision, More Efficient Financial Infrastructure, Financial Intermediation and Facilitation of Private Sector Services, and Enhanced Transparency and Communications about Financial Sector Reform. Improved Market Regulation and Supervision is the first thematic area, which focuses on preventing the adoption of a draft IOSCO law by Parliament that would have undermined needed legal and regulatory reform of capital and commodity markets. FSR, with the support of the IMF, successfully prevented the adoption of this draft law. Additionally, FSR completed legal work on draft laws on Virtual assets and their taxation in compliance with European draft standards, which will be submitted to the Parliament in April. The second thematic area, More Efficient Financial Infrastructure, focuses on improving the financial infrastructure in Ukraine. FSR completed an IT and information security audit of the Settlement Center of the NBU and will present its analysis and recommendations in April. FSR is also working with the NBU on tenders to procure a software system for supervision of non-bank financial institutions (NBFIs) and banks, and software for its business processes. Financial Intermediation and Facilitation of Private Sector Services is the third thematic area, which focuses on facilitating private sector services in Ukraine. FSR presented a draft Concept Note on political risk insurance for Ukraine to International Financial Institutions (IFIs) in Vienna and distributed the presentation and supporting materials to government of Ukraine (GOU) authorities. FSR also continued to support US DFC portfolio loan guarantees for various banks and efforts to advance factoring as a financial instrument for SMEs. The fourth thematic area, Enhanced Transparency and Communications about Financial Sector Reform, focuses on enhancing transparency and communications about financial sector reform in Ukraine. FSR launched its financial literacy activities, partnering with the NBU on the annual Global Money Week to educate young people about money matters. According to the NBU, over 8,000 teachers and students participated. The FSR communications team also supported two FinTech conferences, Digital Lending and FinTech Awards, with a total of 800 participants. The report highlights the activity's progress in supporting the financial sector in Ukraine, including the completion of various projects and the initiation of new ones. The activity's focus on improving market regulation, financial infrastructure, financial intermediation, and transparency and communications is expected to contribute to the stability and growth of the financial sector in Ukraine. The economic context in Ukraine is also discussed in the report, highlighting the country's resilience in the face of the ongoing conflict with Russia. The report notes that the IMF – Ukraine $16 billion Extended Fund Facility negotiated in March uses a base case scenario of the end of hostilities in 2024. The World Bank's March 2023 damage assessment report estimated that the cost to reconstruct Ukraine after the war was now $411 billion, compared to $350 billion in September 2022. The report also highlights the optimism in Ukraine, supported by economic projections. During the second quarter (January – March 2023), economic growth contracted slightly, but the consensus economic forecast for 2024 is that growth will be flat or slightly positive. Unemployment is still high (plus 35%) but stabilizing, and inflation is expected to dip below the 25% rate of 2023. Business activity is increasing, and there are increased expectations of new investments in the real economy. The hryvnia has strengthened from UAH/USD from 39-40 in February to about 37 at the end of March 2023. In the financial sector, many banks are liquid and profitable, with high demand for loans from small and medium enterprises (investment loans and working capital loans). State-owned banks are seeking international risk sharing mechanisms to continue lending to these clients, worrying that the government's budget struggles will limit state guarantee programs. Foreign and private Ukrainian banks appear to be maintaining or slightly reducing lending exposure. Leasing companies are still active but face capital constraints, and factoring is struggling to get off the ground due to legal/regulatory issues, business practices, and the absence of digital solutions (e-invoicing, registries).