By Matthias Williams (NYSE:WMB) and Natalia Zinets
KYIV (Reuters) - The International Monetary Fund urged Ukraine on Thursday to maintain the independence of the central bank after Governor Yakiv Smoliy unexpectedly resigned, citing "systematic political pressure".
The negative fallout from Smoliy's resignation prompted the finance ministry to say it was not going ahead with a planned offering of dollar-denominated Eurobonds.
Smoliy's resignation from the National Bank of Ukraine risks derailing a $5 billion deal agreed with the IMF last month to fight an economic slump exacerbated by the COVID-19 pandemic.
Despite reassurances from President Volodymyr Zelenskiy's office on Wednesday, Smoliy's resignation sent sovereign bonds down by more than two cents and the local hryvnia currency down to its lowest level since April against the dollar.
The central bank has maintained its reputation among investors as a respected institution, in a country where corruption remains entrenched and state bodies vulnerable to vested interests.
"Under his leadership, Ukraine has made important strides in achieving price stability, amply demonstrating that an independent central bank is a key element of modern macroeconomic policymaking," an IMF spokesman said in a statement.
"That is why the independence of the NBU is at the centre of Ukraine's Fund-supported programme, and why it must be maintained under his successor."
Zelenskiy accepted Smoliy's resignation, meaning parliament must now formally vote on whether to dismiss him.
No successor has been named although various names have been floated in the local media, including the head of the central bank's supervisory council.
"It's a big negative given the credibility the central bank has built up in terms of inflation targeting and central bank independence under the IMF programme," said Trieu Pham, EM Sovereign Debt Strategist at ING. "Now everyone is questioning what's going on and the risks attached to it."
The central bank has previously complained of being subjected to pressure, including over its decision in 2016 to nationalise Ukraine's largest lender, PrivatBank, which was formerly co-owned by businessman Ihor Kolomoisky, a backer of Zelenskiy.
Zelenskiy has denied any favouritism towards Kolomoisky and publicly expressed support for the central bank's independence.
Kolomoisky has fought a protracted legal battle against the central bank and the government to win back control of PrivatBank, which was nationalised after the central bank said shady lending practices had pushed it towards insolvency.
Kolomoisky denies any wrongdoing. Kolomoisky's allies in parliament earlier this year tried to scupper legislation, demanded by the IMF, that would prevent him from regaining control of PrivatBank.
Alexander Dubinsky, a lawmaker who was a journalist on Kolomoisky's 1+1 channel before entering parliament in Zelenskiy's Servant of the People party, has pushed for parliament to formally investigate the central bank.