Autor: Michał Kozak

Dziennikarz ekonomiczny, korespondent Obserwatora Finansowego na Ukrainie.

more publications of the author Michał Kozak

Hryvnia is falling again

KOZAK exchange rate of hryvnia

Rapid devaluation of hryvnia, in spite of relatively stable macroeconomics, is a phenomenon puzzling Ukrainian economists. The IMF warns that deeper devaluation will lead to an increase in debt, which could leave the country on the verge of bankruptcy.

The official exchange rate of the Ukrainian currency fixed by the National Bank of Ukraine went from UAH24.8 per USD1 in August 2016 to almost UAH27.5 per USD1 in mid-January. The exchange rate on the interbank market was almost 30 kopeks higher than the NBU rate in January. On the black market (which currently services the majority of Ukraine’s currency exchange transactions) the average price was UAH25 per USD1 in August, and already over UAH29 in January 2017. Meanwhile, the budget for 2017 assumed an average annual exchange rate at the level of UAH27.2 per USD1.

Currency exchange points are popping up like mushrooms, and Ukraine is slowly moving towards the dollarization of the economy. This is especially easy as billions of dollars and euros earned by economic emigrants in the West are flowing into the country.

It is very easy to cause swings in the value of hryvnia – the Ukrainian currency market is currently very shallow – the daily turnover on the interbank market only reaches USD200-300m.

The devaluation of hryvnia will benefit the oligarchic corporations exporting low-processed products – mainly metallurgy which uses its own resources and is not dependent on the supply of imported components. Hryvnia-denominated costs of production fall in direct proportion to the devaluation of the national currency (the devaluation precedes price adjustment on the internal market), while profits calculated in foreign currencies remain at the international level. The devaluation also benefits Russian banks admitted by the management of NBU to the narrow circle of entities privileged on the interbank market, who resell the relatively cheaply acquired dollar with a solid margin on the open market.

On the other hand, devaluation ruins small and medium-sized enterprises operating on the internal market, and also negatively affects the pillar of Ukrainian exports – the agricultural and food sector, which currently brings in 42 per cent of all export revenues.

According to the analysts of the agricultural market, a decline in the value of the national currency will mean an increase in the cost of purchase of the imported seeds and plant protection products. In the long run this means an increase in the prices of the crops, which will hit the food processors by lowering their margins.

“In these conditions, some companies will not be able to remain competitive and there is a risk that the number of producers will decrease,” says Bohdan Shapoval from the Ukrainian Food Export Board (UFEB).

The NBU is still calm

The National Bank of Ukraine is providing reassuring explanations. In November, it said that the sharp devaluation of hryvnia was the result of increased demand for the currency before Christmas.

“I don’t think that it’s a big risk. In any case we have increased demand for foreign currency, but at the end of the year this trend should change because people usually sell foreign currency to buy gifts and to get ready for the New Year,” said Oleg Churiy, Deputy Governor of the NBU.

Despite the assurances of the central bank, the situation continued to deteriorate. In mid-January the exchange rate on the interbank market came near the level of UAH28 per USD1, and on the black market the dollar was sold for UAH29.

So the NBU found another explanation. According to the officials responsible for the condition of the Ukrainian currency, this time he blame laid with the Americans, who were celebrating Martin Luther King Day.

Without any consequences

In mid-January the NBU finally admitted that the problem with hryvnia is increasing. On January 17th the council of the central bank issued an ordinance in which it claims that the continuous devaluation of hryvnia is a “temporary phenomenon” and emphasizes that “there are no fundamental factors which would be conducive to the stimulation of devaluation processes”. However, the council issued a number of recommendations to the NBU Board that are supposed to stabilize the situation:

  • to monitor the foreign exchange market and the risks to the stability of the national currency, in particular concerning the achievement of inflation targets and financial stability;
  • to carry out a thorough analysis of the impact of changes in seasonal factors on the level of supply and demand of foreign currencies in the interbank market and to develop defense mechanisms in order to reduce currency exchange rate fluctuations related to seasonal factors;
  • to utilize various forms of currency interventions;
  • to conduct an active information policy that will clarify the reasons for fluctuations in the foreign exchange market.

The government and the NBU should jointly:

  • strengthen coordination during the forecasting of budget revenues and expenditures, and during parliamentary discussions of draft laws concerning banking activities and foreign exchange regulations;
  • take action to ensure the steady refunding of the overpaid VAT to companies in order to evenly distribute in time the influx of hryvnia on the market.

Almost at the same time, however, the central bank announced measures which will hit the national currency even harder. Instead of supplying the market with dollars and in this way supporting the falling hryvnia, the NBU will hoard the foreign currency in the vault, further increasing its shortage in the market.

“The tasks are the same – the capitalization of banks, the accumulation of foreign exchange reserves, the liberalization of the foreign exchange market. Last year we purchased USD1.6bn from the market, completely fulfilling the NBU’s obligations contained in the program of cooperation with the IMF. In 2017 we want to accumulate no less than USD1.5bn,” informed the Deputy Governor of the NBU Oleg Churiy in an interview with the Agency LigaBiznesInform.

There are no reasons for devaluation

“The devaluation of hryvnia in Ukraine is artificial in nature,” believes the chairman of the Committee of Economists of Ukraine Andriy Novak.

“The artificial devaluation is intended to cause an inflationary effect, which will help to nominally replenish the State budget and the local budgets. It also meets the expectations of the exporters – the major financial and industrial groups and the “owners” of the political forces represented in the parliament,” he comments.

In his opinion there have been no economic grounds for the devaluation of hryvnia for more than a year. This is the result of significant macroeconomic support from the West and the currency transfers flowing from the economic emigrants, as a result of which individuals sold USD2.5bn more on the market than they bought.

In the assessment of Oleg Ustenko, from the Blazer Foundation, the fault for the decline in the value of hryvnia lies with the NBU, which is making tactical mistakes and is purchasing foreign currency rather than calming the market and stabilizing the exchange rate.

“The weaker hryvnia is the easier it is to cover the expenditures of the budget, to buy dollars from exporters and to repay the debt towards the IMF. In such conditions there is no chance for development,” commented the economic newspaper Delovaya Stolitsa.

The authors of the analysis point to the inflationary and devaluationary model used to fill the Ukrainian budget. After the overthrow of former President Victor Yanukovych, inflation and devaluation have been used by the government as the only way of patching the leaky State budget. The accounts are balanced, but such actions are destroying the Ukrainian economy and consequently fuelling further need for devaluation, because more money is required to cover expenditure.

IMF: things could get worse

In its autumn analysis, which accompanied the draft memorandum between Ukraine and the International Monetary Fund, the IMF suggested that in the absence of real economic reforms in 2017 the exchange rate of hryvnia to dollar could even reach the level of UAH45.9 per USD1, and then Ukraine’s debt would reach 116 per cent of its GDP. In their view the resulting shock to the economy would lead to a situation in which one year later Ukraine would become completely bankrupt – its debt would rise to 160 per cent of its GDP.

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